The American investor`s stampede to safety is making money-raising costlier for companies not ranked among the nation`s elite-a situation that could turn them into a cash-starved corporate underclass, according to economic analysts.
Some analysts fear that such extreme caution by investors ultimately could lead to more concentration of economic resources among the 50 or so blue-chip firms in which much of the markets` stock trading has occurred since the Wall Street crash of 1987.
Lesser known but still sizable companies that have not enjoyed the same level of trading action increasingly will find that their stock will be undervalued in the marketplace. Over time, this will put them at a
disadvantage when they try to issue new stock to expand, said Stephen Timbers, chief investment officer for Kemper Financial Services in Chicago.
For every dollar of earnings, their newly issued stock offerings will bring in less money than those of the elite firms.
Some companies will forgo investments. Others will have to raise capital by borrowing, which gives the better-capitalized firms an edge because they have less debt. Then, pinched by relatively higher financing costs, the second-tier firms will have less room to expand and boost employment.
This is not considered a good climate for an unknown company with a promising new idea, analysts say. Investors have become more averse to risk as they seek out prominent, well-capitalized firms for safe, solid returns.
”It just makes it harder to get money for a startup,” said Michael Drury, economist for Boston Co. Economic Advisers Inc., when asked about the ultimate impact of current investing patterns. ”There will be less venture capital. Big companies will be consolidating with smaller companies. More and more, the trend will be that bigness is best. The successful small companies will be eaten by the big companies.”
”If many companies can`t tap the equity markets, some of them will be vulnerable to a slowdown in their industries,” said Jeffrey Schaefer, economist for the Securities Industry Association in New York. ”Something clearly is happening that is not well understood.”
Behind the current cautious mood is the painful memory of several shocks to the economy. They began with the Oct. 19, 1987, stock market crash and include the savings and loan scandal, the collapse of the junk-bond market and real estate prices, and occasional bursts of stock-market volatility.
Ironically, the junk-bond market, which fueled the takeover boom of the 1980s, drove up the stock values of many firms below the top 50. Many of these high-yielding, low-rated bonds were purchased by savings and loan associations. Now that takeovers have diminished and troubled S&Ls have dropped out of the junk-bond market, stock values of many second-tier companies no longer in takeover danger have plummeted.
”They`ve become dull, quiet little stocks,” Drury said.
The opposite is true of the so-called ”Nifty Fifty,” which include the stocks of the 30 large firms making up the blue-chip Dow Jones industrial average. Action in these stocks on a given day can represent more than half the volume on the New York Stock Exchange, said Eugene Lerner, a Northwestern University professor and head of Disciplined Investment Advisers Inc. of Evanston.
One indication of how difficult it is for smaller companies to raise cash is the amount of cash in the initial public offerings-IPOs-floated by companies just becoming public. Schaefer said the value of such offerings has slowed to a trickle since the 1987 crash. After a $20 billion-plus year in 1987, there were $5.9 billion in 1988, $6.3 billion in 1989 and $3.3 billion so far this year.
Lerner said a two-tier market has been created since the crash, but has been made worse by the fact that managers of large institutional capital pools-mutual funds, pension funds, insurance companies-have carried safety to the extreme in investing in the largest companies.
”They are like lemmings to the sea,” he said.
But many individuals also are cautious.
Kalman Shiner, a Chicago certified public accountant and managing partner at Ostrow, Reisin, Berk & Abrams Ltd., said his equity holdings are all ”old- line, blue-chip companies, big companies that have a product, a market and a good track record.”
Because these companies are well-established, Shiner feels confident they`ll bounce back from poor earnings reports and ride out mini-crashes of the market.
”I have faith in the economy and the large companies,” he said.
”They`re going to outlive me, and they`re going to continue to make money.”
Yet that faith is not always rewarded on a temporary basis. Last Monday, for example, the Dow industrial average plunged 107 points before closing with a loss of 56 points.
This drop of roughly 2 percent would look terrible were it not for the fact that the same elite stocks have risen 6 percent since Jan. 1, despite a slowing economy, soft earnings and investor uncertainty. The broader market has been less robust. Since the first of the year, the stock of 6,000 firms tracked by Investor`s Daily have fallen by nearly 1 percent.
U.S. financial markets thus are running in both directions. The bull and the bear are at work simultaneously.
Sweeping changes in the markets in the 1980s, made possible chiefly by deregulation, have made this phenomenon possible. Investors find that they switch back and forth between highly safe liquid debt securities like U.S. Treasury bills and bank certificates of deposit to highly safe liquid blue-chip stocks.
The explosion of mutual funds in the last decade, nothing short of phenomenal, also has concentrated investment decisions in fewer hands, Northwestern`s Lerner said, with the institutions playing the safer stocks.
The number of mutual funds rose to more than 3,000 in 1990 from 527 in 1980, said Erick Kanter, vice president of the Investment Company Institute, the industry`s trade association. Assets of mutual funds during the decade soared to $1 trillion from $94 billion.
Byron Moenter, 56, president of Byron Moenter Associates Inc., a marketing and sales firm in Crystal Lake, believes that the way to make money in the stock market is to ”get in the market and stay there for 10 years. You have to ride up and down, but in the long run you`ll make money.”
Yet, Moenter says, he feels safer with mutual funds, because he lacks the know-how to get in and out of the market at the right time. This turns money over to institutional investors.
”Institutions flushed with liquidity are pushing up the stocks, and it`s harder to find real value,” said Gene Mackevich, senior vice president of Shearson Lehman Hutton Inc.`s Chicago office.
Lerner agrees with this point. Normally, institutional managers like him look to the second-tier ”growth stocks” for higher-than-average returns, he said, but in the last year, they have performed poorly because of lack of action.
”Only a very few stocks have been leading the stock market up,” said Darlene Todd, a Chicago financial adviser. ”They`ve been manipulated by the institutional investors anyway.” She said investors have become more cautious for many reasons, not the least of which is that they`ve become more sophisticated, with more financial information available to them.
Schaefer, of the Securities Industry Association, believes that investors are cautious not only because of uncertain economic times, but also because the total tax bite-federal, state and local-has become so large that individuals are less inclined to risk the precious amount remaining. A New Jersey resident, he says taxes consume more than half his income.
This highly rational behavior has enabled investors to survive the volatile 1980s, said Stephen Roach, economist for Morgan Stanley & Co. in New York. He estimates that since 1982, investors have seen an 8.5 percent after- inflation appreciation in financial assets (stocks, bonds, mutual funds, etc.), compared with a 1.25 percent increase in real estate values after inflation.
Many professional financial advisers are urging their clients to diversify their holdings in order to promote safety. Marshall Front, executive vice president of Chicago-based Stein, Roe & Farnham Inc., a mutual fund management firm, said half of a typical investor`s financial assets were tied up in stock in 1965. Today that figure has fallen below 20 percent. And that 20 percent is, to a large degree, chasing the big-name stocks.
Most financial analysts believe a more stable economic climate will improve the investment pattern dramatically, so that more money is put into the second tier of U.S. companies. Lower interest rates and a lower budget deficit are called for, they said. Many favor a lower capital gains tax.
But for all the trends, not all investors follow the crowd. Robert DeNapoli, president of Chicago`s Advertising Associates Inc., refuses to join the flight to quality.
”I`ve seen so many people who`ve invested in hot trends crash and burn,” he said. ”I think growth stocks are nearing their peak, and the real growth will be in non-big-name stocks.”
