Worried Waiting on Wall Street

By Kenneth M. Pierce

Stocks get off to a bad start in the new year

"People ask me whether the stock market is bullish, bearish or confused. I think it's confused." --James Moltz, chairman of the Cyrus J. Lawrence brokerage firm

Confusion was indeed Wall Street's theme as the bellwether first trading sessions of 1982 unfolded last week. Like an anxious mountain climber midway up a steep cliff, the stock market cautiously tried a slight advance last Monday. But then vertigo took over. On Tuesday, brokers' telephones lit up with customer sell orders that drove the Dow Jones industrial index down 17 points, the market's worst one-day slide in four months.

Yet while many traders seemed anxious to sell last week, there were still buyers aplenty for one category of stocks--companies whose shares hold speculative promise because they are prime takeover targets. Wall Street's merger mania accounted for some $80 billion in stock market trading during 1981. Some experts believe that takeover speculation by professional arbitragers, traders who try to buy merger stocks low and sell them high, and the takeover adventurists among the general public account for up to 25% of current trading.

Last week the value of shares of Cannon Mills jumped from $29 to $35 after Pacific Holding Corp., headed by Los Angeles Investor David Murdock, proposed to buy Cannon's stock for $40 a share. On last week's weak Wednesday, the most actively traded New York Exchange stock was MGIC, the largest U.S. private insurer of residential mortgages. Though it sold for only $43 five weeks ago, MGIC stock was up to $49 last week because the Baldwin-United Corp., maker of Baldwin pianos, has offered to pay $52 a share as part of a takeover move.

Investors are rushing to buy the stock of potential merger partners in hopes of making a quick market killing. People generally did very well who got into the battle early between U.S. Steel and Mobil for control of Marathon Oil. U.S. Steel last week seemed assured of victory in its takeover bid, estimated to cost $6.15 billion, the second largest corporate coupling in U.S. history. (The largest merger was the $7.5 billion merger of Conoco and Du Pont in 1981.) Workers began to prepare checks for the 17,000 selling Marathon shareholders just hours after Supreme Court Chief Justice Warren Burger gave a green light to U.S. Steel's offer of $125 a share for 51% of Marathon's stock. Two months ago, the oil company's stock was $81 a share.

For all the euphoria, this recent merger activity is really just a result of the decade-long lag in stock values, which has made it cheaper for firms to buy existing companies rather than build new factories. Says Robert Stovall, director of investment policy for Dean Witter: "Adjusted for inflation, the stock market has never been higher than it was in 1966."

Speculative individuals seeking bigger returns have been trying to join the professionals in Wall Street's game of spotting the possible takeover candidates and accurately predicting which deals will be consummated and which will fall through. But the game can be risky. Last year, for example, Southland Royalty, an independent oil and gas producer, announced that it was ready to merge with another company. As a result, its price jumped from $25 to $38 in a few weeks. But when no one was willing to accept the offer, the stock plunged by more than $8 a share in one day.

Wise Wall Street hands urge the unsophisticated to stay out of this part of the market. Says Oppenheimer & Co. Vice President Stephen Kennard: "This business is absolutely unsuitable for the little investor." Arbitrager Jeff Tarr, the managing partner of Junction Partners, says he is concerned about arbitrage's future profitability now that so many unsuspecting investors believe that the field is "sexy." Says he: "The history of Wall Street is that when anything gets sexy like this, you should sell it short. Generally, when something is written up publicly, you lose money on it."

The fact that stock prices have lagged behind inflation for a decade leads some analysts to expect a great bull market to erupt some time in the 1980s. Says Harry Jacobs, chairman of Bache Halsey: "Over a long period of time, the stock prices that HULL we are seeing now will be viewed as cheap."

The only trouble is that this bull market has been promised for a decade. And for the short-run 1982 outlook, many brokers are pessimistic. Last week's sudden market fall on Tuesday was indicative of the nervous and often dour mood along the street. The drop was set off by a downbeat interest rate forecast by Henry Kaufman, the influential chief economist for the investment banking firm of Salomon Bros. Kaufman, who has built up a very good record of interest-rate projecting over the past decade, has developed an almost cult following and a strong influence on stock prices. If he predicts higher interest rates, the market tumbles. Last week Kaufman warned that "a confrontation between the credit needs of the U.S. Treasury and those of U.S. corporations is shaping up for 1982." He said that long-term interest rates will increase from their present levels and "perhaps exceed" their 1981 highs. Top-rated utility bonds are currently yielding 16.75%, down from 18% last year.

Kaufman is not the only pessimist on Wall Street. Felix Rohatyn, a partner of Lazard Freres, an investment banking house, warns that "the next twelve to 18 months are going to be potentially the most dangerous period that I have seen in 30-plus years in the banking business." Rohatyn is wor ried about possible corporate bankruptcies and the failure of some banks or savings and loan institutions as well as rising unemployment. Last week the Labor Department released figures that supported those glum views. Unemployment in December jumped to a near record 8.9%, up from 8.4% in November.

Given the recent volatility of stock and bond markets and the disquieting economic signals, the best financial advice may be that enshrined by Lord Robert Baden-Powell when he founded the international Boy Scouts in 1908: Be prepared. -- By Kenneth M. Pierce. Reported by Barbara B. Dolan and Denise Worrell/New York

With reporting by Barbara B. Dolan, Denise Worrell

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