business

The Prophet Of Wall Street

The Dow Jones industrial average was up 65 points and seemingly headed for another record close when Wall Street was convulsed by a rumor that Abby Joseph Cohen was about to alter her bullish stock market forecast. Actually, Cohen, the chief strategist for Goldman, Sachs & Co., was sequestered along with a few hundred other senior Goldman employees at a conference center an hour's drive from Manhattan. As Cohen listened to a speech by Goldman Chief Executive Jon S. Corzine, someone tapped her on the shoulder. "There's an emergency," the woman whispered. "You must call the office."

The Dow had already surrendered 60 points of its gain by the time Cohen reached Steven M. Wagshal, who mans Goldman's research "hotline" and serves as the firm's official conduit of stock market rumor. Wagshal quickly patched Cohen through to the intercom system that links Goldman offices throughout the world. From his seat on the trading desk in New York, Wagshal watched in awe as the sound of Cohen's voice brought the cavernous room to a standstill. As soon as it became clear that Cohen had not altered her views, hundreds of traders and brokers noisily hit the telephones as one. The market began levitating and ended the day up 35 points. Says Wagshal: "It was as if the world were falling, and Abby came in and lifted it up again."

That was Nov. 16, 1996--some 18 months and 2,800 Dow points ago. In the interim, Cohen has completed her own improbable rise to full-fledged market guru. In an era of wildly proliferating financial punditry, Cohen's opinions on America's latest national obsession--the stock market--now carry more weight than anyone's, with the exception, perhaps, of Warren Buffett's. "A year ago, when Abby was inducted into our Hall of Fame, I said she was the most influential woman on Wall Street," says Louis Rukeyser, host of Wall Street Week With Louis Rukeyser. "But now I would say that she is the most influential market forecaster, period."

While Cohen, 46, is much in demand as a commentator on PBS, CNN, CNBC, and other networks, she has performed equally well off camera in her essential role: advising Goldman Sachs's high-powered clientele of institutional investors. Cohen ranks first among strategists in the prestigious surveys of market analysts conducted annually by Institutional Investor magazine and by Greenwich Associates. "Abby Cohen is already recognized as the best in her line of work, and [she's] getting better and better," says Charles Ellis, managing partner of Greenwich Associates.

Cohen's chief claim to fame is that she has been bullish on the stock market ever since February, 1991, about three months after the Dow hit bottom at 2,365 and began its epic advance. One by one, many other prominent forecasters have soured on stocks during the last two years--usually during one of the market's short-lived sinking spells. But Cohen has yet to flinch in her belief that the stubborn strength of the U.S. economy gives this bull market more room to run. "It's said that the five scariest words about the market are `This time it is different,"' Cohen says. "But sometimes it really is different."

Abby Cohen is a respected, even beloved figure, in investing circles, but she practices a profession in which esteem has always been a highly perishable commodity. Wall Street history is filled with sorry tales of fleeting preeminence, of market wizards who made every right move until they went suddenly, irreparably wrong. Does anyone out there remember Joe Granville?

To secure her reputation as Wall Street's finest prognosticator, Cohen is going to have to call the end of the bull market that has made her famous. Reversing field after a long, triumphant run would be tough for any forecaster, but Cohen is under intense pressure. As America's favorite bull, she cannot turn negative now without disrupting the market, perhaps severely. "When she switches, the market will be down the limit three or four days in a row," predicts a leading hedge-fund investor, referring to New York Stock Exchange rules that automatically halt trading after sharp drops.

"STAIRCASE PATTERN." Cohen's bullishness rests on the belief that big technology-driven productivity gains across Corporate America have allowed the economy to grow at a healthy rate without creating the inflationary pressures that tend to induce recessions and market sell-offs. Price-earnings ratios, dividend rates, margin debt balances and many other benchmarks of stock market valuation reached worrisome levels long ago. But in Cohen's view, these traditional measures have been of little use in gauging the progress of a market blessed by the rare combination of robust economic growth and anemic inflation.

The U.S. economy may have set a reassuringly steady pace in the 1990s, but the stock market has traced what Cohen calls a "staircase pattern"--a series of explosive upward thrusts bracketed by longer periods of sideward movement. From mid-January to late April, the Dow soared a breathtaking 21%. In the last few weeks, though, the market has vacillated between 9000 and 9200. Are we witnessing the formation of the next stair step in the market's advance or the beginning of the end of the great 1990s bull market?

Cohen's advice to investors at this nervous juncture can be summed up in a word: relax. Yes, she acknowledges, the engine that powers the stock market--corporate profits--has lost a bit of momentum; her prediction is that the companies in the Standard & Poor's 500-stock index will post an 8% gain in earnings in 1998, compared with 10% last year. "But what matters most to investors right now is not the rate of change from year to year but the durability of the profit cycle," contends Cohen, who sees earnings growth picking up later this year and in 1999. The U.S. is the "supertanker" of the global economy, Cohen says. "It may not be the fastest ship, but it's hard to knock off course."

This view underpins a moderately bullish stock market outlook. Cohen sees the Dow rising slightly from current levels to about 9300 by the end of 1998 and continuing its ascent next year. How high might the market go? Cohen will not hazard a 1999 prediction until later this year, but does say that at this advanced stage of the bull market investors should expect annual returns of 8% to 10% instead of the 20% to 30% to which they've recently become accustomed. The lesson of history is clear, she says: Eventually this bull will turn into a bear. But Cohen does not see this metamorphosis happening within her "forecast horizon," which extends through the end of 1999.

Not everyone buys Cohen's bullish case. In fact, some pundits argue that she and other so-called New Paradigmists are leading investors up the garden path to a stock market crash. Even Edward Yardeni, chief economist of Deutsche Morgan Grenfell and a superbull throughout most of the 1990s, recently has parted company with Cohen and begun forecasting a steep decline in corporate profits beginning next year. "Abby has done a great job, but with all due respect, now I disagree," Yardeni says. "I think Supertanker America becomes Titanic America in 1999."

SENSIBLE SHOES. Events may prove Cohen's upbeat forecast wrong. But her only real shortcoming to date during this long bull market is that she has consistently underestimated--not overestimated--the pace of its rise. The Dow was about 6500 in late 1996 when Cohen predicted 7050 by the end of 1997. The market actually closed the year at 7908, exceeding Cohen's target by a good 12%. Says Laszlo Birinyi Jr., of Birinyi Associates, who has been more bullish in degree than Cohen: "Abby is a nice person and all, but her reputation for walking on water is overdone."

Cohen would be the first to agree. From the demure business suits and sensible shoes she wears, to the grueling work schedule she keeps, to the firm but measured views she holds, Cohen has established a reputation for professionalism that sets her apart from many self-styled investment sages of the past; she is the guru as anti-guru. "It's not like I have a crystal ball sending out signals," says Cohen, who holds a master's degree in economics and routinely puts in 13-hour days at the office and works at home on Sundays.

Aside from her punishing work regimen, though, Cohen has little in common with the stereotypical Wall Street big shot. She lives with her husband, the director of employee and labor relations for Columbia University, and two teenage daughters in the same middle-class Queens neighborhood she grew up in and is still active in the same Conservative synagogue she began attending as a girl. She moved back to Queens from Baltimore in 1983 to be near her recently widowed father, her only sister, and other relatives. "We are not a Wall Street family," says Cohen, who commutes to work by city bus. "A Wall Street career is not the end-all and be-all for us."

Says Gabrielle U. Napolitano, a Goldman colleague who is also a close friend: "Abby is part of a very closely knit extended family that keeps her grounded in reality. She often comments, `When I go home, I still have to do the cleaning and the laundry."' And she means it. "I don't do it all, but I do quite a bit," Cohen says. "I actually like doing the laundry. It's cathartic."

Although Cohen travels relentlessly, she has been able to arrange her schedule so that she has missed very few major school events over the years. When needed, relatives have filled in. "It has been so nice to be able to call a grandfather or a grandmother, or an aunt or uncle," she says. "It has worked out wonderfully well to have family close by, even if it's just to have them come over on a Friday night and sit around and chat." Cohen also used to amuse herself on weekends with trips to the local bowling alley and billiards parlor but has had to give up both pastimes because of a neck injury four years ago.

A prolific speechmaker as well as television commentator, Cohen seems to enjoy the spotlight and has perfected the art of presenting erudite views to all sorts of audiences without condescending to any of them. Unflappably cheerful, she spices even her professional conversations with words like "funky," "crummy," and "stuff" and with playful, often facetious remarks. After recounting how she met her husband, Cohen said: "We got married after graduation. I was 12." But that's not legal, came the reply. "It is in Arkansas," she retorted.

Cohen is an accomplished analyst in many respects, but what has set her definitively apart from rival market soothsayers is the sheer tenacity of her belief in the durability of the bull market. She has been at her best when the market has been at its worst, often to dramatic effect. Last Oct. 27, a rout in the Hong Kong stock market sent a jolt of panic all the way to Wall Street, knocking the Dow down by 554 points, or 7.1%, to 7,161. The next morning Cohen shrugged off the dire predictions of many commentators and urged investors to boost their investment in U.S. stocks. The Dow rebounded to post a 334-gain that day and topped 8,000 within a few weeks.

While Cohen's sure grasp of economic fundamentals gives her an advantage over some other forecasters, Wall Street is filled with economists, and some of them possess what she does not--a PhD. By most accounts, however, Cohen tends to dig deeper in her research than does the average strategist, and she is ideally positioned to do so at Goldman, home to one of Wall Street's largest and most adept investment research staffs.

CRUCIAL EDGE. Assisted by Napolitano, a former high school math teacher turned Wall Street quant, Cohen even builds her own projections of corporate earnings from scratch. Every quarter, the pair examine in detail every quarterly earnings report by every company in the S&P 500. This is an enormously laborious and time-consuming task, but Cohen feels it has given her a crucial edge in an era in which the rising frequency of outsized writeoffs and changes in accounting rules have complicated earnings forecasting as never before.

Then, too, Cohen has had a healthy skepticism for investment dogma ever since she began her career in the mid-1970s as a research assistant at the Federal Reserve Board in Washington. "Parts of the economic model the Fed used had stopped working because they hadn't been adapted to reflect changes that had taken place in the economy," Cohen says. "This was a fabulous lesson to me to be flexible in my analysis and to look beneath the usual rules of thumb to the underlying dynamics."

Applying this lesson in the mid-1990s, Cohen was among the first Wall Street forecasters to argue that what by historical standards were high p-e multiples were not excessive once adjusted for low inflation, surging returns on capital, and other unusually favorable economic trends.

Cohen's forecasting success is no less a function of what she does not do. Wall Street is crowded with pundits, all of whom have access to essentially the same data. In their desperation to be heard amid the din, many substitute showy writing or radical shifts of opinion for solid analysis. Throughout her career, Cohen has proven herself to be more interested in getting it right than in getting attention. "Abby doesn't change her mind just for the sake of changing her mind, which a lot of people do on Wall Street," says Linda B. Strumpf, chief investment officer of the Ford Foundation. "I have an enormous amount of admiration for her ability to stick to her guns."

The higher the market has risen, the more Cohen's resolve has been tested. By no means the only bull left on Wall Street, she is, however, the most prominent. Variously lauded as the stock market's "icon" or "spiritual leader," Cohen knows that she will have to make the most important call of her career with the whole world watching. She allows that she may well err in her forecasting as this bull market nears its end but insists that it won't be because she lost her nerve or compromised her discipline. "I continue to sweat the details because I always want to give clients the right analysis for the right reasons," she says. "But I don't feel any more pressure to be right than I ever did."

Without exception, Cohen's friends and clients say they have seen nothing to indicate that she is buckling under stress or that success has gone to her head. "Abby is a courageous person, but it goes deeper than that. She has inner peace in a world of turmoil," says Martin L. Liebowitz, chief investment officer of Teachers Insurance & Annuity Assn.-College Retirement Equities Fund (TIAA-CREF). "It is an interesting question how a person like that is formed."

Like many noteworthy Americans, Cohen is the child of immigrants. Although she describes herself as "a first-generation American," only her mother, nee Shirley Silverstein, was born abroad. Silverstein left her native Poland with her parents in the 1920s and resettled in Brooklyn. Cohen's father, Raymond Joseph, was born in Brooklyn in 1913, to recently arrived Polish immigrants. Bright and industrious, Joseph earned two degrees, including a master's in finance from New York University, while working full-time. In 1946, he married Silverstein, who had graduated from Brooklyn College.

The Josephs soon moved to Queens and a newly built, bustling neighborhood of single-family homes and quality public schools. They began as a two-career couple. Mr. Joseph worked as an accountant with the firm of J.K. Lasser, now part of Deloitte & Touche, and Mrs. Joseph was employed in the controller's office at General Foods Co. But in 1948, after the birth of her first child, she left General Foods and became a full-time housewife and mother. Not long after Abby was born in 1952, Mrs. Joseph founded a summer camp for the neighborhood kids.

Raymond Joseph soldiered on at Lasser until the late 1960s, when his career took an unusual twist. Joseph, who had developed a specialty in publishing-company accounting, took a job as controller with one of his best clients, Essence, the African-American monthly. Says Cohen: "In our family, we call him `the sweetest man.' My father has the loveliest disposition and is extremely open-minded. He was just so attracted by the enthusiasm of the Essence people." Napolitano says that Abby and her father have strikingly similar temperaments: "They both have the same calm, even-tempered approach to life."

Abby Joseph came of age during the 1960s but was not defined by that turbulent era. "I felt no need to rebel at all," she says. "My parents were very aware of the times and willing to bend." At Martin Van Buren High School, Abby participated in a half-dozen extracurricular activities, was elected "girl leader" of the honor society, and ranked 12th in the 1969 graduating class of 1,636. Her forte was the natural sciences (she won two Future Scientists of America awards), planting the hope in her parents that she would become a doctor.

Young Abby may have been a straight arrow, but by no means was she docile--thanks mostly, she says, to her mother. "My mother was a very bright and opinionated woman who studied a situation, made her mind up, and then proceeded," she says. "Like her, I am willing to go against conventional wisdom. If I've done my homework and I believe that I'm right, I really don't care if people agree with me or not."

In 1969, Joseph enrolled at Cornell University, one of the few Ivy League colleges that admitted women at the time. Even so, women were in the minority at Cornell, and Cohen made herself even more conspicuous by her choice of studies. She was a physics major until she discovered economics and the fledgling field of computer science, a male bastion if ever there was one. In her junior year, Joseph signed up for a graduate level computer science course. At the end of the first class, the professor told her not to return because she was not in engineering, not a grad student, and not a man. She ignored him. "I was no computer geek, but I was just as good as anyone else," she says. "I made it my business to finish that class."

"SIREN CALL." As soon as she graduated from Cornell in 1973, Joseph married David M. Cohen, a labor relations major she had met in freshman economics and dated throughout college. The Cohens moved to Washington, where David attended law school and Abby worked on a master's in economics at George Washington University while working full-time at the Fed as an assistant to Ben E. Laden in the research division. "She was impressive technically and had a very strong intellectual capacity," Laden recalls.

After getting her master's degree, Cohen considered pursuing a PhD in economics but realized that her budding interest in the financial markets was more practical than theoretical. In 1976, Cohen left the Fed's cloistered halls for T. Rowe Price Associates Inc., the Baltimore-based mutual-fund company. Laden had joined T. Rowe as chief economist, and Cohen was his first choice as a second economist. In her seven years in Baltimore, Cohen not only was schooled in economic forecasting but also helped build econometric models to help securities analysts forecast demand in the semiconductor and other high-tech industries.

In 1980, Cohen gave birth to her first child. She did not ponder long before going the working-mom route. "The culture had changed since my mother's day," Cohen explains. "She was content with her choice, but I still wonder how far she could have gone." (Shirley Joseph died in 1982, after a long illness.)

In 1983, Cohen "answered the siren call of Wall Street," joining Drexel Burnham Lambert Inc. as a portfolio strategist. She was 31 years old, and the first of the baby-boomer bull markets was just coming into its strength. "I loved the strategy role right away," she recalls. "Everybody in this business has a view on the markets. Now I got to spend my entire day working on mine."

By all accounts, she thrived at Drexel Burnham, which really was two firms in uneasy combination: Michael R. Milken's junk-bond money machine in Beverly Hills and a fine, old-line brokerage in Manhattan. Drexel rewarded Cohen with a promotion to chief strategist in mid-1987--just in time for the ordeal of Black Monday.

Cohen and Richard Hoey, Drexel's chief economist, had been consistently bullish throughout the stock market's ascent. But in August, they and the other members of Drexel's investment policy committee began debating whether stocks were overvalued. The consensus view, which Cohen shared, was that the market was indeed a bit frothy but that because there was no threat of recession, any correction would be minor and short-lived. They got the short-lived part right. On Oct. 19, the Dow fell by 508 points, or 22.6%, the biggest one-day drop ever.

But if Cohen failed to alert her clients to the downturn, she made it up to them on the upswing. By her analysis, stocks now were a good 15% undervalued. Hoey concurred, in part because he thought falling interest rates would lift bond prices. Early the next morning, Drexel advised its clients to use all available cash to buy stocks and bonds in equal measure. It was a gutsy, prophetic call that left Cohen both exhilarated and humbled. "The experience showed that my kit was missing a tool," she says. The crash, she believes, had been precipitated not by any sudden change in the economic fundamentals but by structural defects in the financial markets themselves. "This is an aspect of risk that I've paid more attention to ever since," Cohen says.

Enfeebled by a massive fraud case brought by the Justice Dept., Drexel Burnham collapsed into bankruptcy in early 1990. Cohen unwisely took the path of least resistance, joining 40 of her colleagues in Drexel's research department who went to work at Barclays de Zoete Wedd (BZT), a London-based merchant bank. But BZW's push into U.S. equities quickly foundered, and Cohen put herself back on the job market within a few months of joining the firm. In leaving BZW for Goldman Sachs in the fall of 1990, she salvaged golden opportunity from career mishap.

Goldman has few peers as a stockbroker to institutions, and its market-strategist post arguably was the most prestigious on the Street. Leon Cooperman, who had created the position in the mid-1970s, was named best strategist in the Institutional Investor poll nine years running. He was succeeded by Steven G. Einhorn. Like Cooperman, Einhorn was a rigorously analytical thinker focused on the economic fundamentals of investing. Einhorn, who was familiar with Cohen's work at Drexel, saw her as a kindred spirit. "Whether consciously or not, you are attracted to people who approach markets in the same way you do yourself," Einhorn says. "We thought she would be the best fit."

Even so, Cohen had to serve what amounted to a prolonged apprenticeship. Einhorn had just been promoted to global research chief but continued to act as chief U.S. strategist for three to four years after hiring Cohen as his successor. Officially, Cohen and Einhorn were co-heads of Goldman's investment committee. But Einhorn acknowledges that he retained sole authority to alter the firm's model portfolios and also continued to take the lead in publicizing Goldman's market views.

As a newcomer to Goldman, a proudly self-contained and conservative firm, Cohen was expected to crawl before she was allowed to walk. But she didn't help her cause by getting off to a shaky start. When Cohen joined Goldman in October, both she and Einhorn were bearish. But the Dow bottomed out during Cohen's first week on the job and had climbed 13% by the time Goldman moved into the bull camp in early February. Einhorn and Cohen recall that they were in agreement on the shift. But, according to one well-placed Goldman source, Cohen went along reluctantly: "Abby was still so bearish she couldn't see straight."

In addition, some of Goldman's investing clients were disappointed at first by Cohen's reports, which were at once narrower in scope and yet lacking the detail of Einhorn's. Cohen did not even rate a mention in the Institutional Investor poll until 1993, when she was one of four runners-up to the five "All Americans," one of whom was Einhorn.

All the while, though, Cohen was laying the groundwork for her leap to prominence in a series of prescient reports and speeches. In 1992, Cohen had an epiphany of sorts as she played with a wad of Silly Putty that her younger daughter had left near her desk. Cohen pressed the stuff onto a pencil-drawing of the standard boom-and-bust business cycle, which looks like the letter S resting on its side. The S was transferred to the Silly Putty, which she stretched horizontally. It struck her that this elongated image foretold the future: a long, rolling wave of muted and thus sustainable profit growth--and a gloriously protracted bull market.

In early 1993, Cohen seemed to suffer her only bout of skittishness. After President Clinton's first State of the Union address, Einhorn and Cohen issued a downbeat assessment of the economic impact of Clinton's budget proposals and urged investors to scale back their stock market exposure, to 55% from 70%. However, Cohen says now that it was Einhorn who flinched, not her. "Steve was very concerned at the time, but I was not," she says. Einhorn says that he did indeed instigate the change in the model portfolio.

Cohen kept the faith throughout the market's 10.7% correction in the spring of 1994 and became even more bullish during another sharp dip in the fall, amid fears that inflation would resurge and drive up interest rates. Convinced that the stock market now was significantly undervalued, Cohen went to Einhorn and argued that it was time to take a more bullish stance. This time, Einhorn deferred to his co-strategist in what amounted to a belated passing of the torch.

Cohen thrived in her new role as chief strategist. By late 1996, as Steve Wagshal witnessed, Cohen's standing was such that her views--even rumors of her views--were moving the market. However, in the judgment of Goldman Sachs's partners, she had not demonstrated that she deserved admission to their select circle. To the surprise and dismay of many of Cohen's clients, she was not among the new partners Goldman elected in the fall of 1996.

The last of investment banking's great private partnerships, Goldman long has set lofty barriers to ownership. Today, the firm has 11,000 employees but only 190 of them are thought to be partners. (The latter figure has been widely published, but Goldman will neither confirm nor deny it.) This select group receives 76% of the firm's pretax profits, which in 1997 amounted to a staggering $3 billion. Once every two years, the partners meet to choose new partners; the next election is scheduled for October.

PARTNER PENDING? Cohen's star shines much more brightly than it did two years ago. Indeed, Goldman now is probably best known to the average investor as "Abby Cohen's firm." While her celebrity has raised hackles at a storied investment bank that has produced Treasury Secretary Robert E. Rubin and a long line of other grandees, the firm's senior executives seem to have jumped aboard the Cohen bandwagon with both feet. In recent months, Goldman has featured her as keynote speaker at many events, from the opening of a new branch office in Atlanta to a hush-hush conference in the Middle East. Says CEO Corzine: "Abby is an incredible professional strategist who enhances our position in the financial marketplace and also gives us a sense of confidence internally about our strategies."

Corzine won't comment on Cohen's prospects for partnership. But insiders say that Cohen is a lock in the next election--if there is one, that is. Says one of her senior colleagues: "Abby is so bright and so famous now that the only way she doesn't make partner in October is if the firm goes public first--or the stock market crashes."

Cohen's friends and associates say that while she would love to be admitted to Goldman's lucrative partnership, she is on Wall Street more for the intellectual challenge of forecasting the markets than for the money. "Not everyone who is a media star in this business is who they seem to be, but Abby is the real thing," says former Drexel colleague Dick Hoey, now chief economist at Dreyfus Corp. "What's most important to her is the work itself. She's got the attitude of a craftsman."

Cohen's craftsmanship has not been flawless. More than once, she has errantly predicted that small-cap stocks would outperform blue chips, and she has made poorly timed recommendations to put money in commodities. But even when Cohen has been wrong, she has made her case insightfully. "Abby does not have to be right on the market to be of great value to me," says the Ford Foundation's Strumpf, who has been a client of Cohen's for 15 years. "I can't imagine ever not wanting to know what she is thinking." And surely investors who have taken Cohen's advice and have remained in the market through thick and thin have profited hugely.

In her spare time, such as it is, Cohen has taught finance seminars at Cornell, Wharton, Harvard, Dartmouth, and other top business schools and found the classroom much to her liking. After she delivered a lecture at Cornell University, the acting dean of the business school in all seriousness offered Cohen a job on the spot. Cohen turned him down flat but says that she can envision leaving Wall Street one day for academia. Not now, though. "I'm having too much fun to even think about it," she says. And, besides, there is a bull market that may again need lifting any day now.

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