So Much For The Experts...
Who knew that 1998 would bring what it did? That the Dow Jones Industrial Average would take a stomach-churning ride from 9338 down to 7539, then back up to 9734, between July and November? That the economies of Asia, Russia, and Brazil would all crater? That Japan would sink deeper into the abyss and Malaysia would slam the door on foreign investors? That Bill Clinton's lying about sex would threaten the Presidency? It was easy to make a bad investment call and hellishly difficult to make the right one. And some folks were right for the wrong reasons--like those who predicted low interest rates but figured the economy would be on a stretcher. Herewith, BUSINESS WEEK's picks for the worst bloopers and best calls of 1998:
HALL OF SHAME
BETTING ON CONVERGENCE. A year ago, Long-Term Capital Management, the elite investment firm based in Greenwich, Conn., was turning away investors eager for mouth-watering returns. In September, on the verge of ruin, the company had to be salvaged by a group of Wall Street firms.
Former Salomon Brothers Inc. executive John W. Meriwether and the other finance whizzes who owned and ran LTCM had figured that over time, global interest rates had to converge--that is, the differences between them had to narrow--and they had leveraged the firm's assets to the hilt betting on convergence. What these refugees from Wall Street and academe didn't anticipate: a marked and prolonged flight to quality among investors as Asian, Russian, and Latin markets tanked, which widened spreads and kept them wide. How to unwind such positions? Very carefully.
BETTING ON RUSSIA. Boris Yeltsin's government liberalized the economy but never really had regulatory or supervisory control. The reformers appointed by Yeltsin were no match for the oligarchs and the gangs, and by last summer, the fissures in the economy were deepening as taxes went unpaid and capital kept fleeing.
Some pretty smart money thought the picture could improve, though: Goldman, Sachs & Co., in a prospectus for a $6.4 billion Russian Eurobond deal it was lead-managing, averred that "significant progress" had been made in Russia's economic-reform program. Financier George Soros, who in 1997 had sunk new money into Russia through his eight investment funds, last summer argued that a modest devaluation and fresh international assistance could help the shaky economy. And in July, the International Monetary Fund approved yet another multibillion-dollar bailout and lent the Russians the first $4.8 billion installment. Everybody should have known better. In August, the Russian government said it was suspending debt repayments, and the economy went into free fall.
BETTING ON ASIAN MARKETS. There's no question that the Asian economies looked wretched enough a year ago, and a number of observers figured they were ripe for a turnaround. In December, 1997, Barton M. Biggs, the global strategist for Morgan Stanley Dean Witter, boldly predicted in a BUSINESS WEEK survey that "Tokyo and Hong Kong could have substantial rallies in 1998" because most of the bad news had been discounted.
No dice. The bad news just kept coming as Japanese banks staggered under delinquent debts, Hong Kong battled speculators, and the markets got hammered. Instead of climbing to 18,000, as
Biggs figured, the Nikkei 225 got as high as 17,264 in March, then plunged to a low of 12,879 in October. As of mid-December, it had recovered to 14,000. Meanwhile, the Hong Kong index hit a low of 6660 in August and as of mid-December traded around 10,000--well shy of the 14,000 mark Biggs had predicted.
BETTING AGAINST THE YEN. Julian Robertson Jr. had been having a great year--his $20 billion hedge-fund group, Tiger Management Corp., was up 17%, after fees, through Sept. 30. Then a big bet on the dollar and against the yen pummeled his funds. According to publicly available figures for the offshore Jaguar Fund, which mirrors the performance of Tiger's other funds, the yen trade helped push the fund's value down 18% in October and an additional 3% in November. Earlier in the year, this bet might have made sense. But lower rates weakened the dollar against other major currencies in October. As of Dec. 10, Robertson's funds were off 7.5% for the year.
STROKES OF GENIUS
TIMING MONETARY EASE. Credit Federal Reserve Board Chairman Alan Greenspan with getting it just right in the autumn when he cut short-term interest rates for a second time on Oct. 15 to calm markets. Coming as it did between meetings of the Fed's rate-setting body, the Federal Open Market Committee, the quarter-point move was a big surprise to the markets--and a welcome one.
Some people groused that the first rate cut should have been a half-percentage point rather than a quarter-percentage point, and that the Fed could have sent the markets a message in one fell swoop. But splitting the action into two steps proved savvy. The ability to confound expectations should be part of every central banker's tool kit, and Greenspan has honed that skill to a fine art. The Fed's one-two punch, followed by a third cut on Nov. 17, demonstrated a strong commitment to ease and helped pave the way for other central banks to lower rates.
BETTING ON STOCKS. Abby Joseph Cohen got a well-deserved elevation to partner at Goldman, Sachs & Co. in October, but her real reward was being vindicated by the stock market's recent rebound. Throughout the late summer and early fall debacle in the market, she stuck to her guns, insisting that the Dow Jones industrial average would reach 9300 by yearend and increasing her recommended stock allocation to 72% from 65% when the market was at its nadir in September.
Cohen likens the U.S. economy to a large, steady ship that has remained stable in rough seas and whose long-term economic prospects are very good. Taking the longer view, she says, "allows us to ignore some of the shorter-term noise in the marketplace." A stickler for thoroughgoing and reasoned analysis, she has shown herself to be the best of the bulls.
BETTING ON CHEAPER OIL. Truth be told, almost nobody figured oil could go as low as $11 a barrel. A year ago, no less knowledgeable a person than Sheikh Ahmed Zaki Yamani, former Saudi oil minister and chairman of the London-based Center for Global Energy Studies, predicted $18 as a benchmark price for 1998, with $15-$16 as an extreme low. But consulting group Cambridge Energy Research Associates started the year saying that at the extreme, oil could crash to as little as $8 a barrel in 1998. And Ann-Louise Hittle, director for world oil studies at CERA, predicted last February that oil prices could sink to $12.50 a barrel if the world financial crisis worsened.
DOING NOTHING. Sometimes, inertia really is the best policy. Consider this: The odds are that you, like millions of other Americans, were worried by the summer's bad economic news. But not worried enough--or nimble enough--to do anything about it. So that 401(k) money kept sitting in the index fund, and when you looked at those poor third-quarter results, you thought: "Gee, maybe I ought to do something about this." But inertia got the better of you. Well, with hindsight, go ahead and call it wisdom. Because today, with the market back up, doing nothing turns out to have been one of the best calls of all.
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