Gee, thanks, guys. Ordinary investors already have enough to be confused about. Despite the sunniest set of economic conditions we’ve seen in years, the bond market has been crashing since October 1998. Corporations are pumping out spectacular earnings–but the stock market has sullenly refused to budge from where it stood on Jan. 1. If even a Republican rout doesn’t excite the markets, is it time to throw in the towel? Here’s the outlook:
Something is seriously wrong with a market that turns up its nose at “Contract With America,” a Newt Gingrich-designed bouquet of promises that couldn’t smell sweeter. The trouble: Wall Street fears tax-cut fervor could produce larger budget deficits-the height of fiscal impropriety in a strong economy-which would damage stocks and bonds. A Republican Congress could certainly generate some good economic results, but the question is: when will they hit the tape? It wasn’t until two years after Reagan was elected in 1,980 that stocks lifted off.
For now the current bull market is staring at the same boring problems it has faced all year: its old age and its increasing unattractiveness compared with the bond market. Stocks are yielding only 2.8 percent on average, whereas a five-year Treasury note pays 7.7 percent. And there are other signs of a peaking market. Inflation fears are mounting, and the Federal Reserve Board is expected to raise interest rates. The stocks that have stepped lively this year are the ones that typically perform best at the end of a bull market: chemicals, paper, metals and other industrial materials producers.
For investors determined to stay in the U.S. stock market, those are the groups to stick with. Robust growth in 1995 will keep factories and plants humming and demand for raw materials high. Also look at technology and heavy machinery, two other industries that should excel amid strong global growth. Fidelity’s sector funds-such as Select Chemicals, Technology and Industrial Materials–are one way to play. Two broader-based funds whose managers are focused on several of these themes: FPA Paramount and Robertson Stephens Value Plus. Because of inflation fears and increased demand, gold stocks also look poised for gains. Consider Lexington Goldfund, or Warburg Pineus Growth and Income, a diversified stock fund with exposure to gold stocks. The safest course, though, is to pare your exposure to stocks and put the money in bonds or cash. “Stocks are expensive, and bonds are pretty darn cheap,” says Brad Tank, a portfolio manager at Strong Funds.
When onetime Clinton strategist James Carville said last year that in his next life he wanted to come back as the bond market, he was joking about its power to intimidate the Clinton administration. Little did he know: making presidents quake was just the beginning. Over the last 12 months, the market’s decline has pummeled Wall Street firms, rolled foreign markets and shriveled retirement savings. The price of a 30-year Treasury bought in October 1993 has plummeted by 25 percent. “This has been the worst bond market in history,” says Joe Deane, at Smith Barney Shearson.
Is the bloodbath over? A lot of pros are counting on it. The bulls love Washington’s tough talk on defending the dollar, signs that inflation remains tame and–most important–clues that the Federal Reserve Board will raise interest rates on Nov. 15. If the economy can be brought to heel by the Fed, they say, bonds could stage an enormous rally.
It may not be that simple. A more realistic prognosis: bond prices may stabilize–or rally–after the Fed’s rate hike, but they haven’t hit bottom yet. Why? First, bond prices are still inflated by speculators who borrowed money to invest in it. As they pay off their loans, or exit the market, there’ll be less money to keep bond prices aloft. More important, though, is bond traders’ inability to get a grip on reality. They’ve repeatedly underestimated the economy’s strength, which hurts bond prices because it portends higher inflation and interest rates. They’ll probably make the same mistake in 1995 when economies around the globe begin to expand simultaneously, boosting U.S. commerce. “It’s not just the industrialized economies-there are 20 or 30 emerging economies out there that are advancing rapidly,” says Gail Fosler, chief economist of the Conference Board. To convince the world that it’s got a bead on inflation, the Fed will have to go overboard, raising rates by an additional 1.5 percentage points, says Wayne Angell, a Bear Stearns economist and onetime Fed official.
There are several strategies for coping with bottoming bond prices. The first: sell your bonds to reduce your taxes. Losses are applied against capital gains on your income-tax return, thereby avoiding or reducing capital-gains taxes. (If you have stocks that have risen, this may be the time to match your stock gains to losses from bonds.) Excess losses of up to $3,000 can be used to reduce ordinary income on your return. If you believe the bond market will revive soon, you can take a second step-immediately buy bonds that are similar to the ones you just sold. This is a “bond swap.” To count as a tax-advantaged swap with the IRS, two out of three key features of the new bonds must differ from the ones you sold: the coupon, which is the rate of interest: the maturity, which is when the bonds will be paid off by the issuer, and the description, which refers to the issuer.
Swaps work with bond funds, too. But why let a fund manager make your interest-rate bets? Be conservative: buy two-year Treasuries, which are notes issued by the U.S. government and available directly from your regional Federal Reserve Bank. Then gradually buy longer-term issues over the next 12 to 18 months. The safest choices while the markets sort themselves out are short-term certificates of deposit or money-market funds. It may not sound sophisticated, but it’s the strategy that won 1994’s investment derby, hands down.
title: “The Morning After” ShowToc: true date: “2022-12-27” author: “Grace Johns”
Bronfman and Ovitz were destined to become partners, or so it was scripted in the Hollywood gossip mill. Ovitz, majority owner of the powerhouse Creative Artists Agency, and a Bronfman buddy for almost a decade, was the Seagram CEO’s top choice to head MCA. The beverage company had bet $5.7 billion that MCA could become a global entertainment juggernaut–and Ovitz was the man who was going to help get the job done. But the agent pushed and pushed Bronfman to sweeten the deal. And in the process, said several sources familiar with the negotiations, Ovitz blew a one-of-a-kind package that was valued at about $250 million. Neither Bronfman nor Ovitz would talk last week about what derailed the deal. For now, each has refocused attention on his respective empire.
For the next six months or so, the scion of Seagram’s founding family is the man in charge of MCA. “Finding the future leader equal to the stature of MCA is a high priority, but my first priority is to understand our MCA businesses fully,” Bronfman wrote to MCA employees on Thursday. He also said in the letter that CEO Sid Sheinberg has decided to leave that post, but would stay for the time being to help the New York-based Bronfman, who will spend up to four days a week in Los Angeles. Bronfman will begin a slower search for an MCA chief.
He has already plunged into the job at MCA. On Thursday, he went to Washington to preview MCA-owned Universal’s upcoming film “Apollo 13” at the White House. This week, Bronfman plans to delve into the nuts and bolts of MCA’s various businesses, which in addition to Universal include MCA Records and two major theme parks. MCA insiders say Bronfman also has held preliminary talks with David Geffen, Steven Spielberg and Jeffrey Katzenberg of the upstart entertainment company Dream Works SKG. MCA wants to forge a deal to distribute DreamWorks films abroad.
Another job? A few miles away from MCA’s headquarters in Universal City, Ovitz is back to work at CAA’s Beverly Hills headquarters. He flew off to New York last week for a board meeting of Tele-TV, the interactive television venture by three of the Baby Bell phone companies. (CAA is a consultant to the venture.) What’s next for Ovitz is something few insiders would discuss. Many Hollywood executives believe it’s only a matter of time before he seeks another job. Some insiders also say that his failure to leave for MCA disappointed some of the younger CAA agents, who happily anticipated becoming the new owners of the agency. And CANs rivals expect that Ovitz will have to work harder to prevent some of his prized clients from switching agencies, partly because Ovitz seems preoccupied with his own future.
What isn’t entirely clear is what ultimately forced both men to leave the negotiating table. The most unbiased accounts strongly suggest that Bronfman finally said no to Ovitz’s escalating demands, rather than Ovitz rejecting Bronfman’s offer. The most charitable view: each man expected the other to close the financial and other gaps that existed in the last days of their negotiations. In the end, Bronfman and Ovitz seemed to have achieved one goal-preserving their friendship. The two are said to have talked several times since the collapse of the deal, though neither brought up reopening the negotiations. But this is Tinsel-town: stay tuned.
