With all the concern about a rate hike by the Federal Reserve Board, we turned to our resident bond and interest-rate experts for insights on probable Fed actions. With the economy in a sustained drive, many national commentators expect Fed chief Alan Greenspan to hike rates this year. But local money managers seem dubious that Greenspan will raise rates much.
Greenspan is facing a world economy that is shaky in Asia and hardly robust in Europe, said Ken Funsten, president of the $150 million-in-assets Funsten Asset Management Co. in Marina del Rey, which invests in distressed securities, mostly bonds.
“Just because we are the only strong economy in the world, you might not want to slow us down. If we aren’t the engine that pulls the train, then who will be?” asked Funsten.
The inflation hawks at the Fed are on the warpath, said Funsten, so Greenspan might allow a small rate increase this year, “but not enough to hurt the long-term picture,” which remains one of low inflation and interest rates.
At Flaherty & Crumrine Inc. in Pasadena, analyst Carl Johns is closely watching industrial capacity, along with other indicators. “This is an economy working on all eight cylinders,” said Johns.
Also in Pasadena, Fred Astman, senior portfolio manager for First Wilshire Securities Inc., predicts that the Fed will stay the course. “I don’t think they can raise rates with a declining stock market (as of April 27). Then you have the Asian situation. Greenspan doesn’t want to destroy the whole world; it’s already half destroyed (in terms of Asian equity values).”
Al Frank, editor of The Prudent Speculator newsletter in Santa Monica, said, “I don’t think they will raise rates. The leaked announcement that they may raise them has probably done the work (of cooling off the market and economy). I think long-term rates may go down. The inflation rate is between 1 percent and 2 percent, and real interest rates should be about 3 percent above that. But real rates on long-term government bonds are stubbornly higher; around 6.5 percent,” noted Frank, meaning long-term rates could come down a percent or so.
Shifting tide
Kit Jennings, managing director of the eight-person West Los Angeles corporate finance office of Cruttenden Roth Inc., is jumping ship to join Freidman Billings Ramsey & Co., according to Cruttendon Roth Chairman Byron Roth. Jennings will set up a Los Angeles office for Arlington, Va.-based Freidman Billings, known for its work in financial industry underwriting and mergers, Roth said. Jennings couldn’t be reached for comment.
In addition, Jay Sherwood, an Angeleno who has been commuting down to Cruttenden’s Irvine headquarters office to serve as the firm’s managing director of corporate finance, will have a considerably shorter drive soon. “He’s going to take over the Los Angeles office, which is growing,” said Roth, whose firm is one of the nation’s most prolific underwriters of small-capitalization stocks.
Sherwood, some may remember, traces his lineage all the way back to Bateman Eichler Hill Richards, the regional brokerage that many moons ago was swallowed up by Chicago-based Kemper Securities Inc.
Free, expensive advice
You can pay through the nose for expensive investment advice, or you can listen to it for free at the Los Angeles County Employee Retirement Association fortnightly sessions, held in Pasadena.
On the second and fourth Wednesdays of most months, the Pasadena-based LACERA, better known as the county employee pension fund, brings in money managers to make presentations, or explain their outlook and performance to LACERA’s board of investments. Agendas of the meeting are public record in advance, so you can know who is going to speak. And, as LACERA now has $24.6 billion in investable assets, the money managers are a lot more earnest in answering questions than when an individual investor calls up.
But no matter how earnest money managers may be, LACERA’s on-staff investment chieftain Ken Shaffer is showing less inclination to listen to managers, or place much faith in their investing acumen. One-third of LACERA’s portfolio of domestic stocks was invested in S & P; 500 index funds last year, and about one-half is now.
“In this kind of market, it has been very tough to beat the index funds,” Shaffer said. “And it’s cheaper to use index funds.”
(That cost consciousness might come in handy in light of the recent discovery that for the past 20 years, LACERA has been using a flawed formula to determine the amount the county pays into the fund. That could require in the county to increase its annual contribution to the fund by $25 million, a shortfall that could turn out to be a mere paper tiger if the bull market continues.)
Time for Times?
New York-based brokerage house Salomon Smith Barney last week upgraded its rating on Los Angeles-based Times Mirror Co. (parent of Los Angeles Times) to “buy” from “outperform,” based on the good price ($1.65 billion) the company received for selling its remaining stake in its legal publishing arm, Matthew Bender & Co., to Holland-based Reed Elsevier Plc.
The sale price was 69 percent higher than Salomon’s original estimate of $977 million.
What does that tell you about prices paid for businesses today when top-flight analysts underestimate the sale price of a corporate asset by 69 percent?
Bonds’ dominance
Wall Street scribes and others tend to become obsessed with stocks and IPOs, but bonds run much deeper. According to the financial printing house Bowne & Co., in first quarter 1998, companies in the five-county Greater Los Angeles area raised $400 million through IPOs, $1.8 billion through secondary equity offerings, $200 million through preferred stock and $3.5 billion through bond offerings.
For all of 1997, L.A. companies raised $3.2 billion through IPOs, $3.9 billion through secondary offerings, $1.1 billion through preferred stock, and $10 billion through bonds. Bonds remain the leviathans of capital finance.
Contributing Reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal.
