Money Managers Get Jitters As Investor Trust Weakens
Wall Street West
by Benjamin Mark Cole
Money managers are worried about the effects of the thinning public trust in Wall Street. Clients are becoming balky as they talk about buying houses or looking for safe havens. Even gold is getting some attention.
The recent run of accounting scandals and earnings restatements as well as revelations of shoddy analyst practices is harming investor confidence at precisely the wrong time, said William “Bill” Mason, Pepperdine finance professor and money manager with Cullen Fortier Asset Management in Woodland Hills.
“The scandals on Wall Street are driving the public away, just as the dollar is getting weak and there’s talk we might have another spectacular terrorist attack,” Mason said. “Add to that, the market is still trading at record-high multiples (price-earnings ratios), and thus is vulnerable.”
Mason excoriated Wall Street brokerage houses and federal regulators for “seriously underestimating how much the public is losing trust… and that trust is really going to erode if the market drops, which is likely.”
Already, inflows into stock market mutual funds have slowed dramatically. A medium-term bear or sideways market may be in the cards, lasting into the second half of this decade, Mason said. The under-40 crowd might not remember, but the Dow seesawed for 15 years from 1967 to 1982. “It could happen again.” Mason said.
Still, that doesn’t mean investors should abandon equities. True, the elderly and other risk-averse might want to shift into safe, interest-bearing instruments, such as government bonds, Mason said. But those under 40 might want to buy when things don’t look so great on Wall Street, if they plan to stay in equities for the next several decades. “It’s not the worst thing in the world to dollar-average (buy stock) on the way down,” said Mason. “The problem is that people usually lose their discipline, and stop buying when stocks go down.” If there is another 9-11-type episode, young people might want to consider it a buying point, he said.
Investors don’t have to wait until Halloween to be seriously spooked. They can just call up Donald Straszheim, founder of Straszheim Global Advisors in West Los Angeles, and former economist with Merrill Lynch and the Milken Institute.
“There are certain things we know, even if we can’t predict the exact date. We know it is going to be sunny in Los Angeles in July, and the same is true with terrorist attacks. We know there is going to be an attack, with a weapon of mass destruction, B, C or N,” Straszheim said.
For the uninitiated, the foreboding initials stand for biological, chemical or nuclear. Straszheim’s words echo those of famed investor Warren Buffett in his 2001 letter to shareholders of Berkshire Hathaway Inc.
Such weaponry is proliferating and becoming cheaper, while the U.S. has porous borders. It’s only a matter of time before a terrorist group successfully deploys a horrific weapon somewhere in the U.S., but very likely Washington or New York, said Straszheim. “Those are the only two cities that really count,” he said. “They are No. 1 and No. 2, and it is a long way off to No. 3.”
Wall Street has already discounted the bad news, said Straszheim. “What 9-11 showed is just how resilient this nation is,” he said. “We are looking at an improving economy, and thus better earnings. I think the market will look better in 2003 than this year, and look better in 2004 than 2003.”
In between now and doomsday (at least for East Coasters), investors must remember that Wall Street “is in the fashion business,” said Straszheim.
“Sometimes growth stocks are in, sometimes small cap stocks, sometimes financial, sometimes the cyclicals,” he said. “We are in a trader’s market. You have to maintain your discipline. We hate to sell our winners, but when the multiples get high (price-earnings ratios), a lot of these stocks are just an accident waiting to happen.”
If people seem uncomfortable waiting these days, it’s part of a national trend. Long-term borrowing has become so relatively expensive that many major corporations are effectively borrowing short-term, even to fund long-term capital outlays, said Jeff Rollert, manager at ALM Advisors Inc., a bond management shop in Pasadena. “Traditionally, that has been a big no-no. You don’t want to finance long-term debt with short-term borrowings,” said Rollert, pointing out the obvious risk of a big run-up in rates.
That would play havoc with the borrower’s finances. Back in the late 1980s, the nation’s savings and loan industry all but met its Waterloo when short-term deposits fled to safety, but outstanding loans were long term (and went sour).
But everywhere, the emphasis is on short. Many businesses today are signing shorter leases, or paying for opt-out clauses. Employers hire temps, or let regular employees go with even fleeting downturns. Vendors are switched frequently. Auto dealers are offering two-year leases. Residential real estate brokers in Pasadena are selling their houses and moving into apartments.
Long term, Rollert said, if corporations decrease investments in huge capital projects, or if creditors don’t lend long-term except at premium rates, or if governments don’t build expensive infrastructure, Americans are consigning ourselves to a lower standard of living.
Of course, investors have taken several body blows of late, including the dot-com meltdown, the tech wreck, the telecom tumble, 9-11 and follow-up terrorist warnings, and the recent rash of scandals on Wall Street. It’s not the sort of environment to encourage contemplation and patience, and long-term investing. If the bad news lets up, long-term confidence might be restored.
Naturally, the markets reward those who tread where others fear. Investors willing to lend long-term, if they do their research, ought to be able to achieve premium returns, Rollert said.
Brooks Dexter, formerly with J.P. Morgan, is now senior managing director of mergers and acquisitions with USBX, a West Los Angeles boutique geared towards the middle market… The Association of Investment Management and Research, a group of 57,000 stock market analysts based in Charlottesville, Va., blasted the settlement between New York State Attorney General Eliot Spitzer and Merrill Lynch. The “industry needs to do more to foster analyst objectivity,” the AIMR said in a statement… Century City-based Houlihan Lokey Howard & Zukin recently engineered the acquisition by Riverside-based T.M. Cobb Industries Inc., a manufacturer of doors and millwork, of Chicago-based CraftMaster Manufacturing, a similar company.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at