Are we seeing the beginnings of a "Kennedy market" that could be good news for investors?
Seems incredible when you think about it. Only a couple of months back, Michael Johnston, the well-regarded investment policy chief of Paine Webber Mitchell Hutchins Inc., one of the nation's largest brokerage concerns, told me he thought the stock market could easily fall a fast 50 to 100 points if Ted Kennedy announced a run for the White House.
Well, Kennedy has all but made it official that he'll challenge Jimmy Carter and the stock market, if anything, has strengthened. Apparently, the enticement of much-needed new leadership is overshadowing concerns about the Massachusetts senator, who has been characterized in the past as an "economic buffoon" because of his penchant for heavy spending. What seems to be emerging is a new and mounting view that Kennedy though clearly not a conservative and still regarded suspiciously by many economic hardliners -- is savvy enough to recognize the growing, worldwide movement to more fiscally conservative, less flamboyant spending policies. And he would act accordingly as president.
This assessment of Kennedy was clearly evident among the top money managers I chatted with earlier this week in San Francisco. Some 400 of them, representing about $350 billion in investment assets, trooped to the West Coast for the annual investment conference of San Francisco-based Montgomery Securities, one of the country's hottest brokerage firms. They came from as far away as England and Scotland to hear some 40 companies -- from Boeing to Bally Mfg. -- talk about their individual prospects.
A typical Kennedy comment was served up by Dick Barker, senior vice president of Capital Guardian Trust Co., a $5 billion asset managing subsidiary of Los Angeles-based Capital Research & Management Corp.
He views Kennedy as a pragmatic politician -- not a go-it-along, insulated individual who's out of touch with economic reality. Barker, along with several other money managers, met privately with Kennedy in Washington a few months back, and he concludes that "Kennedy, the candidate, would present a more balanced economic approach than Kennedy, the non-candidate."
Barker says he found Kennedy well-informed, his answers impressive and said that he offered some sound ideas for coping with the energy problems (such as development of closer ties with both Mexico and Canada). "The growing conservative undertone to this country is something no politician can ignore," says Barker, "and Kennedy, if he runs, does want to get elected . . . "
Adds Barker: "Any market selloff on news of a Kennedy candidacy would be a good buying opportunity."
Interestingly, a top investment executive from one of the nation's largest ultraconservative banks thought the announcement of a Kennedy run for the presidency could kick off a 100 to 150 point market rise in a month or two. "It's not that Kennedy is any savior and he might be as bad as Carter," says the money manager. "But I think Kennedy would get the nomination, probably win. And the market would view that positively since it would signal the winding down of a no-leadership period in this country."
At Montgomery Securities' conference a year ago, most money managers I spoke to were exceedingly cautious. They were worried about inflation, rising interest rates and the depth of the coming recession. Well, they're still worried and their relatively high cash positions -- about 15 to 20 percent as against a normal 5 percent -- reflect their fears, though most think the market is pretty cheap.
A lingering and widespread concern was that a combination of high interest rates and high inflation -- coupled with the Federal Reserve's announced intent to keep credit reasonably tight -- could throw the United States into a deeper than expected recession. Interestingly, one money manager went the other way, commenting that the avoidance of a General Motors strike might spur a step-up in consumer spending. "You could possible see the economy heat up just enough to abort a cooling off of inflation. . .and that's the chief near-term danger," he says.
Several money managers also thought a round of corporate-earnings-cuts by analysts would occur as the recession deepens -- causing some additional market weakness.
Looking beyond the next three to four months, most money managers were bullish. The view was that at that point, both inflation and interest rates should be declining.
The favorite areas of investment; energy, leisure-time, communications, technology and capital spending beneficiaries.
Since many money managers obviously wanted to know what Montgomery Securities thinks, I asked the firm the same question. How would it play the market right here?
"We'd be buyers," says managing partner Tom Weisel emphatically. "We see the market in the next 12 to 18 months going through the old highs of 1,050 in the Dow Jones industrials."
Montgomery's swinging trading chief, John Tozzi, who heads up technical analysis for the firm, sees the DJI, at worst, dropping to 825-850. "But I don't think it'll happen because we're in an up market. . . ."
The firm's research chief, Karl Matthies, tossed in the oft-heard comment that the market is cheap, and sought to support it by pointing out that the price-earnings multiples of stocks (based on fiscal 1980 estimates) are as low today as they were in 1974 when the DJI was around 570.
But can't something go wrong? I asked the trio. "Sure," Weisel replied. "Volcker (Paul Volcker, the new Fed chief) could screw things up by creating a real credit crunch or oil could be cut off from Iran. And the recession could get a lot deeper. But we don't think any of them is in the cards."
Weisel also thought some of the market's recent vigor might, in fact, be directly attributable to the growing view that Kennedy is in the race. "We need strong leadership which we don't have: Kennedy represents that. . .and if you read what he's been saying, like advocating tax incentives for business, you know he's not anti-corporate," Weisel says.
Montgomery Securities, however, is no whiz on economics, not that it doesn't understand the subject, mind you. But its major success stems from its ability to consistently pick winning stocks. For example, in 1976, I asked the firm to choose its 20 favorite securities. Over the next two years, its selection rose an average of 55 percent. In the same period, the DJI fell 13.3 percent. Last October, we went through the same exercise. The results: Montgomery's 20 new picks rose an average 21.2 percent (only three were down), far outpacing the DJI's advance of 5.6 percent in the same period.
Considering the super showings, I asked them to again pick their top 20 from the nearly 300 companies they follow, stocks they thought should outstrip the market over the next 6 to 12 months. (See box for selections).
Granted, the folks at Montgomery -- a firm that has never had a losing month in its 10 years -- are above-average stock pickers, and so their stock selections surely deserve more than passing consideration. But the firm was a strong advocate of both Memorex and Itel. And they both got butchered. I also know one money manager who reluctantly went along with a strong Montgomery pitch on Resorts International. He, too, got slaughtered. The message is clear: Even hot hands turn icy.