Excerpts from current market commentary by analysts...

Excerpts from current market commentary by analysts at major and regional brokerages, editors of investment newsletters and portfolio managers

John Bollinger

Editor, Capital Growth Letter, Manhattan Beach

In citing “irrational exuberance” [in early December], Federal Reserve Board Chairman Greenspan threatened to tighten monetary policy if the speculative bubble [in stocks] got out of hand. While it is a good threat, it is most likely a case of jawboning. Global deflationary forces are quite strong, and any serious move to quell speculation via a tightening of monetary policy would likely exacerbate the forces behind a deflationary spiral that is only just held in check.

We are all quite familiar with the low interest rates in Japan that have accompanied that country’s struggle to pull itself out of the economic morass. But Japan is not alone. Canada currently sports the lowest interest rates in memory while growth remains elusive. Money market rates in Switzerland hover just over 2%. Indeed, growth is hard to find anywhere in the world.

At home, fiscal policy looks contractionary over the next couple of years as the president and Congress try to balance the budget and shrink government. All told, the idea of the Fed tightening monetary policy is simply not very credible at this juncture.

Bernard G. Schaeffer

Principal, Investment Research Institute, Cincinnati

The upward spike in the Chicago Board Options Exchange volatility index on the December market pullback was exceeded in intensity only by the March and July [1996] spikes, so the “fear factor” in this market that manifests itself even on minor pullbacks is alive and well. The bottom line is that there is some short-term caution warranted, which may manifest itself in a “head fake” pullback [early this year]. But such a scenario would very likely elicit the same negative emotions that have characterized other temporary declines, or perhaps even more fear would result due to the extra emphasis that many place on market action early in the new year. So the ultimate resolution would again be to the upside, as this market will not finally top out until complacency rather than fear rules on the pullbacks, as was the case, for example, in September and October 1987.

Barton Biggs

Chief strategist, Morgan Stanley & Co., New York

Why should there be a bear market? The world is at peace, and the new technologies promise growth and progress in the next millennium. The U.S. economy is healthy, the dollar is rising, inflation is quiescent, interest rates are drifting lower, and the great American multinationals and technology companies are the envy of the world. Furthermore, unless you are bearish on bonds, which I am not, how can you think stocks will decline?

My response to these logical questions is that equity valuations are at sky-high levels, and all the good news is already in prices...*. My instinct is very strong that things have been just too good for too long. As someone once said, “Don’t apologize for acting on your instincts if you’ve spent years developing them.”

I think that in 1997 we will experience a true bear market in U.S. stocks for the first time since 1990. My guess is that this bear will be of the cyclical variety, with a decline of 20% to 30% peak to trough, that will last about six months. A more serious, long-lasting secular bear market is not out of the question, since the excesses of valuation and sentiment are extreme. To be precise, in this century declines of 40% or more have occurred once every 8.7 years.

Daniel Seiver

Editor, PAD System Report, Cincinnati

Many on Wall Street have convinced themselves that all the new money flowing into equity mutual funds is either not new (it is just being transferred from individual holdings) or, if new, will stay for the long haul and not run at the first sign of falling prices. Trouble is, each time this year [1996] we have had just a bit of falling prices (July, December) mutual fund inflows have dried up and turned into small outflows. Actions still speak louder than words, and we say when the going gets tough, this money will run. Any decline will be greatly accentuated as mutual funds sell stock to meet rising redemptions.

In November we were expecting a run to 6,500 on the Dow, and we got it. At that point Alan Greenspan may have joined us on the bearish side, and this spooked the markets as soon as his comments (taken out of context) on “irrational exuberance” hit the wires. Much has been written about what Greenspan said, meant and thought. Here is our take: He is a practical man, and he has observed the damage done to the Japanese economy by their stock market bubble and subsequent collapse. Since he is a better central banker than his Japanese counterparts, he will try to prevent a replay in the United States. But why is such a scenario even on his mind? Because the U.S. market is too frothy given the fundamentals, but increasing interest rates now to cool the market would hurt the real economy. So what to do? Talk it down, gently if possible. Just like the guy on the ledge. Let’s hope he can do it.