Conference nyoss1::market_investing

Small cap stocks have been booming for over a year now.  Tons of $$ has been
entering small cap funds such that some funds have something like 40% cash
(Fidelity). 

John Piekos

In the latest Barron's (or the week before's) there is an interview with the
manager of Strong Common Fund (ex of Stein Row). His prognosis was that it
is time for mid-cap stocks now and that small-caps will not do as well as
they have done in the last 2-3 years. 

    I'm not clever enough to be a "trader", so I like to try to benefit 
    from the longer term trends.  If history is a reliable guide, small cap
    stocks should outperform the general market for a few more years.

    It isn't clear to me whether Clinton's economic policies are likely to
    reinforce or counter this prospect, so I'd like to hear opinions
    on this.

    One investor's point-of-view.....
    
    Normally, small companies lead an economy out of a recession.  When the
    pump has been sufficiently primed, business picks up in the larger
    companies, everything gets back to "normal" and the cycle begins anew. 
    Now, however, the big companies are finding that much of their market
    place has changed and they are not really rolling again as many
    economists had predicted. (Kind of like the quarterly Real Estate Board
    pronouncements since 1988 telling us that the housing market had
    bottomed out.)
    
    The "market" place has changed.  The larger companies (we know one) are
    "downsizing"; if you cannot recover revenue, you must reduce costs. 
    Eventually, they will realign their "paridigm" (sorry, but the word
    fits) to the new marketplace.  Until then, the smaller companies will
    continue to attack opportunities.  And they will grow.  
    Obviously, astute money managers will sieze opportunities and reward
    their investors.
    
    Opportunities abound for small companies and will continue to do so for
    quite some time;  I have never been impressed with the (in)ability of
    large corporations to change directions in time to stay healthy.  When
    the PE average of the S&P500 gets back down to something close to its
    historical norms, it will be because EARNINGS in the 500 largest
    corporations have increased, not because prices have decreased.  That
    will be an indicator that the larger companies, in general, have gotten
    their collective act back together and are efficiently using their
    resources.  In many cases, the small companies will not be able to
    compete. Some of them -statistically, 80% - will fail within 2 years of
    starting up. As the PEs begin to trend back down, I, personally, will
    begin moving out of small stocks & small stock funds.
    
    As always, For What It's Worth....
    
    Dave

>    The "market" place has changed.  The larger companies (we know one) are
>    "downsizing"; if you cannot recover revenue, you must reduce costs. 
    
    I agree, but think of this not as an, um, "adjustment" but rather a
    fundamental sea change in progress.  It's known as the declining scale
    of industry.  With rapid communications and transportation of goods and
    services, large companies no longer enjoy economies of scale.  Yet
    their traditional problems (slow to adapt, entrenched interests, etc.)
    remain.  We are going to see a permanent shift (at least for the next
    century or so) away from big monoliths and towards the smaller companies.
    
>    historical norms, it will be because EARNINGS in the 500 largest
>    corporations have increased, not because prices have decreased.  That
    
    That's certainly how the market sees things.  But the market has made
    some amazingly stupid forecasts in the past, such as $100/bbl oil by
    1976 (predicted in 1974), $1000/oz. gold (predicted in 1981), huge jumps
    in farmland and commercial real estate prices (1981), not to mention
    legions upon legions of analysts recommending IBM all the way from 80
    to 160 and back down to 80 again.  When "everybody" is bullish,
    "everybody" is wrong.  I think they're wrong this time.  Bad news
    for big caps.
    
    One problem with small caps is that if interest rates rise and the
    economy goes into recession again, they'll find their access to credit 
    cut off just as their revenues fall.  I fear this is just what will
    happen because nobody expects it.
    
    That leaves mid-caps as the "safe" choice -- small enough to respond
    quickly to changes in the marketplace, big enough to weather hard times 
    nobody sees coming.
    
    At least, that's what's in my crystal ball.
    
      John

    re .5
    
    John's observations are valid.  Remember, when you start putting money
    into MANY stocks and funds, you are moving out of the investor category
    and into the speculator category - unless, of course, you can spend all
    of your time in research.
      
    When you sepculate, you are gambling. Prudent gamblers cover their bets.  
    Putting all of your investments into ANY category is kind of like working 
    at DEC, these days.  As long as everythig goes ok, you do well.  When the 
    fan gets dirty, however, you lose big time.  Although I am making more
    than my fair share of ROI from small caps, I am also invested in mid
    and large caps, Growth & Income funds, individual stocks and tax free
    bond funds.
    
    As for $$$ flowing into the small caps (and the rest of the market, in
    general),.... right now, the stock market is the only game in town for
    those who prefer anything over 6% ROI or so - even that requires lowish
    grade bonds.  In late 1987, those pundits who claimed the market was
    about to crash (not the Chicken Littles, but the "respected" analysts)
    were observing that they could not find any reason to support the high
    PE ratios.  People were not buying stock to gain an investment position,
    they were buying stock speculating that other people would buy it from
    them at a higher price later on. Today, we have a recession that has
    kept down earnings and a severe reduction in the interest rates by
    banks and other institutions. That has kept prices, in general,
    highish.
    
    When you see bank savings account interest starting to rise, even 10ths 
    of a %, pay attention.  That may be the first indicator (for those of
    us who are "outsiders") that companies are looking away from the stock 
    market and into banks for financing.  If you subscribe to John's caveats 
    on interest rates, and they are valid caveats, that will be the time to
    reasess your position - quickly.
    
    Of course, I could be wrong :-)
    
    But then, my fees are reasonable :-)  :-)
    
    As always, For What It's Worth,
    
    Dave

I offer the following arguments:

1. Earings of the S&P500 have been artificially depressed because
   of FASB 106 ruling for the past year.  As a result, earnings
   should accelerate much faster in future years.

2. Corporate America has gotten the message on profitability.
   Two years ago, I would have agreed with Dave's conclusion
   regarding the inability of large companies to change directions.
   Look at Digital, GM, Sears, Westinghouse, and Amex.  The boards
   of the SP500 companies have gotten the message.  Shareholders such
   as pension funds, etc are no longer seating idly by.

3. The market for large cap stocks is relatively efficient and 
   brutal.


Gim

re .4:

>                In many cases, the small companies will not be able to
>    compete. Some of them -statistically, 80% - will fail within 2 years of
>    starting up.

What does your 80% figure apply to?  Just publicly owned businesses,
or all small businesses (e.g. mom-and-pop retail businesses, restaurants...)?