MOST OF THE WORLD’S STOCK MARKETS REFLECT A WEAKENING ECONOMY, BUT BARGAINS EXIST
MOST OF THE WORLD’S STOCK MARKETS REFLECT A WEAKENING ECONOMY, BUT BARGAINS EXIST
Bernard Garfunkel says that stock markets are now at their most volatile levels since the early 1930s. Garfunkel should know. Now in his late 80s, the investment analyst began his career as a trader 62 years ago on the floor of the Toronto Stock Exchange (TSE)—a year before the Great Crash of October, 1929. As North American markets spiralled to record lows in the early 1930s, Garfunkel earned his living by shrewd trading on exchanges in Toronto, New York City and Montreal. He persevered through the Depression, and through half a century of market ups and downs. In 1986, however, the markets became too overheated even for him, Garfunkel says, and he sold his remaining portfolio. By doing so, he avoided the massive October crash of 1987, although he continued to advise clients until 1988. And now, even though some analysts say that many stocks are a bargain after a year of steady declines, Garfunkel contends that the market remains unsafe and he is keeping his money invested in high-interest federal government treasury bills. Says Garfunkel, who now lives in a downtown Toronto retirement home: “It’s a pretty gory situation. Who the hell needs it?”
Last week, as the chilling anniversary of the 1987 collapse passed, stock markets around the world surged upward near week’s end. Still, they closed far below their levels of a year ago. Share prices were weighed down by a growing burden of unfavorable economic developments, from the Gulf crisis to increasing signs of a recession. On Bay Street, the TSE’s 300 composite index closed at 3086.64 points, up 38.74 points from the previous week, but still down 882.90 points so far this year. Despite last week’s brief rally, most experts still predict that stock prices will fall even lower in the next few months, and even many sea-
soned professional money managers have moved to the sidelines. As well, last week, Michael Wilson, the relentlessly upbeat finance minister, conceded what many private economists have been saying for some time—
Canada is probably in the midst of a recession.
The bellwether Dow Jones industrial average on the New York Stock Exchange—North America’s largest and most closely watched exchange— closed the week at 2510.40, up 112.38 points from the previous week, but still down 395.05 points since July. Analysts blame the still-looming threat of war in the Persian Gulf
and huge losses on real estate loans by U.S. banks for adding to the downward pressure on stock prices. In Japan, where large banks loaned much more heavily than their U.S. counterparts to fuel Japan’s speculative real estate and stock-market booms in the 1980s, the decline in stock prices has been even more precipitous. Last week, the Nikkei average on the Tokyo Stock Exchange, the world’s largest exchange, closed at 24,367.08 points, up 1,976.92 points from the previous week, but still down an astonishing 14,547.92 points, or 37.7 per cent, so far this year.
Throughout North America, the uncharacteristically quiet trading floors have been the most clearly visible sign of the yearlong market decline. Three years ago, traders crowded the aisles of the Toronto Stock Exchange, shouting out bids and orders at one another. But, last week, orders were so scarce that one trader for Toronto-based Gordon Capital Corp., who returned to the exchange floor after five months of medical leave, complained that “this is the worst I’ve seen it.” Said Carl Christie, chairman of the Professional Floor Traders Association and senior equity trader with the brokerage firm Nesbitt Thomson Deacon Inc.: “There’s a lot more elbow room around here now.”
Bay Street brokerage firms were among the first to feel the punishing impact of the devastating crash of Oct. 19, 1987. If anything, that punishment is getting worse. Over the first six months of this year, the 72 TSE member firms lost a combined total of $128.9 million, compared with a $ 1.2-million loss in the same period in 1989. Nesbitt Thomson president Brian Steck, chairman of the Investment Dealers Association of Canada, says that the brokers’ third-quarter results likely will be just as bad.
In an attempt to limit those losses, almost all the dealers have laid off staff. Total employment at TSE member firms peaked at 26,138 in September, 1987, but the firms have since
eliminated close to 6,000 jobs, almost one in every four. Although Steck says that the markets are bound to turn up again, he adds that “the process of rationalization and consolidation will continue.” Another Bay Street executive, who asked not to be identified, was more blunt: “You’re going to see more brokers going under. There will be more bloodshed.” Brokers who have survived the two crashes are being squeezed harder by their own customers. But now that many small investors have left the markets, the comparatively few powerful institutional investors, such as pension funds, are responsible for most of the trading. Those investors have steadily bargained the traditional 0.75to two-per-cent commissions they pay to their brokers down to 0.5 per cent. Many defend their tightfisted approach. Says Stephen Jarislowsky, president of Montreal-based Jarislowsky, Fraser & Co., which administers close to $10 billion of investments on behalf of university, corporate and government pension funds: “They were getting paid much too much money before for doing nothing. We’ve knocked them back to the point where they’re only getting too much money for doing nothing.”
Still, the harsh investment climate is, in large part, the product of powerful economic forces originating far from the trading floors. For over a year, central bankers in North America, Japan and most other Western industrialized countries have maintained high-interest-rate policies to try to contain inflation. The high rates, in turn, have slowed economic growth and made it more attractive for investors to shift their money from stocks into such government debt-financing instruments as bonds and treasury bills. Says Robert Boaz, chief economist at the Toronto-based brokerage firm of Deacon Barclays de Zoete Wedd: “Where would you put your money—in 13-per-cent government treasury bills, or in a stock that could go down even further?”
Several other factors are pushing down the markets. According to John Ing, president of the Toronto-based brokerage firm Maison Placements of Canada Inc., the oil-price shocks following Iraq’s invasion of Kuwait have “switched the soft landing of the economy to a hard landing.” As well, investors around the world are voicing fears about the deteriorating health of U.S. banks. Last week, several major U.S. banks, including Chase Manhattan Corp. and First Chicago Corp., issued third-quarter results showing huge ^ losses on their real estate § loans. Over the past year, 20 y major U.S. banks, including Chase Manhattan, have slashed or eliminated their dividend payments to shareholders. Says David Dreman, president of Dreman Value Management Inc., a New York-based pension-fund management firm: “There’s a near panic in the banking and financial-services stocks.”
For Garfunkel and other observers who are old enough to remember the Depression, the U.S. banks’ difficulties and the recent collapse of hundreds of U.S. savings and loans institutions are disturbing reminders of the widespread bank failures in the early 1930s. Says Garfunkel: “The whole financial system revolves around the banks. It horrifies me.”
The distinguished economist John Kenneth Galbraith, now professor emeritus at Harvard University and author of more than two dozen books, also sees similarities between today’s weaknesses and those in the early 1930s. “We’re in the aftermath of a speculative period that ran through the 1980s, as it did the 1920s, with one slight difference—more of the damaging speculation then was in securities,” he said. “This time, it’s been in corporate mergers and acquisitions and, enormously, in real estate.”
But Galbraith and other experts say that numerous regulatory and other safeguards developed since the Depression are cushioning the economic impact. Insurance for depositors, for one, prevented the U.S. savings and loan crisis from creating a run on the banks. As well, governments in Canada and the United States now account for a far greater proportion of economic activity than in the 1930s. As a result, it is easier for them to increase their spending to strengthen the economy. Moreover, programs such as social secu-
rity, the Canada Pension Plan, unemployment insurance and farm price supports are limiting the impact on individuals. Declares Galbraith: “I see the prospect as considerably more prosperous, considerably more secure, than after the insanity of the 1920s came to an end.”
In Japan, however, the speculative stockmarket and real estate booms of the 1980s were far more spectacular than those in North America. As a result, the decline in the Tokyo
market over the past year has been much steeper. Moreover, because the Japanese permit banks to channel a higher percentage of their deposits into stock-market loans and real estate loans, many are experiencing greater difficulties than their U.S. counterparts. Michael Metz, managing director and chief market strategist for the New York-based brokerage firm Oppenheimer & Co. Inc., says that if the Japanese banks’ difficulties continue to multiply, “it could be a very negative influence. The world, to a significant extent, is still addicted to Japanese capital.”
Indeed, there are still many dark clouds hanging over the world’s stock markets. Because they expect markets to fall even further, most market strategists are advising investors to keep more of their holdings in cash. Jarislowsky, for one, says that “there are some hellishly good bargains around.” But he also says that he sometimes offers 10 per cent below the current market price for stocks, ¡2 adding that “if some damned fool is o crazy enough to sell to me at that £ price, I buy.”
" For the moment, however, most individual investors like Garfunkel, who says that he is content earning 13-per-cent interest on his treasury bills, appear to be pursuing cautious strategies. But he adds that, eventually, “we should be getting some bargains, because we’ve had a hell of a good bust.” Still, now that a prolonged economic downturn has arrived, it will likely be some time before the sobering legacy of the stock market’s decline fades in investors’ minds.
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