The Market Top Of 1968 Revisited

Line chart of MZM

1968 has been called one of the most tumultuous years in American history:

        . The Viet Cong launched its surprise "Tet Offensive" on Saigon
          and other major cities in South Vietnam.  The attack was repulsed,
          but its ferocity shattered the belief that a U.S. victory was
          imminent.

        . As protests against the war in Vietnam grew and his policy appeared
          to be failing, President Johnson shockingly announced that he would
          not accept the Democratic nomination.

        . Dr. Martin Luther King, Jr. was assassinated in Memphis, Tennessee.
          Following his death, riots erupted in over one hundred U.S. cities.

        . Senator Robert Kennedy was assassinated in Los Angeles, California.
          Kennedy had just won the California presidential primary and was the
          clear front-runner for the Democratic nomination.

        . In front of a national TV audience, hundreds of protesters at the
          Democratic national convention brawled with police.  Vice President
          Hubert Humphrey was the Democratic nominee but the vivid scenes of
          chaos in the streets most likely helped him lose the subsequent
          election to Republican candidate Richard Nixon.

Even with all of the social and political turmoil that occurred during the
year, the Dow was still able to rally and in early December, the index
was up 9% for the year.  At 985.20, the index was just a handful of points
below the all time record it set nearly three years ago in February of
1966.

Unless you are in your fifties, chances are that you would be unaware of
the investment environment in 1968.  What I will try to do in this
series is show how current market sentiment is similar to what it was
thirty years ago.

Excerpts from three separate magazine articles from 1968 will be presented
along with counterparts from 1998 and 1999.  The similarities between the
periods will be very obvious and in most instances, current market
sentiment is much more extreme in its unbridled optimism and complacency.

As you read the excerpts below, try to keep in mind that fourteen years
after the Dow peaked at the end of 1968, it was over 20% below that level
nearly fourteen years later at the market bottom of 1982.  In the short
term, the index dropped 36% over the next eighteen months putting the Dow
back to a level it first reached in 1959.

The Market: Too Much of a Good Thing?
Newsweek, July 15, 1968

Popular legend has long held that Wall Street is paved with gold.  Rick
Shapiro, a former $10,000-a-year advertising copywriter who became a broker
with the firm of Oppenheimer & Co. in New York just four years ago, could
be excused last week for believing the legend is true.  "I made $30,000
last year," said the ebullient but slightly awed 30-year-old, "and this
year I'm going to take home $60,000."

Shapiro is hardly unique.  Out in St. Louis, a 34-year-old electrical
engineer named L. Birt Kellam, who had never even dabbled in the market,
"took some tests" a year and a half ago and then chucked his $12,000-a-year
job with Union Electric to join A.G. Edwards & Sons.  After training,
Kellam cleared $35,000 in his first year as a broker.

Pied Piper Of the Bull Market
Washington Post, January 20, 1999

A similar moment of bewitchment seems to have arrived in American
business, as our best and brightest (and greediest) young people start to
walk away from traditional jobs to seek the instant wealth promised by
today's booming stock market. This is the bull market's revenge -- that
it's sucking talent away from boring but essential work such as law and
banking toward Millionaire Acres.

In the clear vision of hindsight, the experts see several reasons for the
take-off [stock market rally].  There is, for one thing, the rising tide of
affluence in the 1960s, an affluence which has pushed millions of families
across the $10,000 annual-income threshold into the sunny world of
discretionary spending and investing.  One result: there are now well over
24 million individual owners of stock in the nation, up more than 4 million
in the last three years and up 12 million in the last nine years.

Where No Investor Has Gone Before
Washington Post, January 3, 1999

Individuals now hold more than half of all stocks, according to the Federal
Reserve, and another 20 percent in mutual funds.

More than a third of households now have money in mutual funds -- up from a
quarter in 1990 and up from only 6 percent in 1980.

Even more important, however, is the growth in influence of the
institutional investors--mutual funds, personal and pension trusts,
philanthropic foundations, insurance companies--and the fact that these
once-staid institutions have all but abandoned their traditional
conservative emphasis on dividends and are aiming instead at rapid capital
gains, or "performance."  Led by the high priests of performance, the
"go-go" mutual funds, institutions of all kinds are plunging into small
Amex and over-the-counter stocks in electronics, scientific research and
other industries that promise quick capital appreciation.  Equally vital to
boosting volume, the go-go managers don't hesitate to trade shares with
the speed of speculators when an investment temporarily goes sour or they
see a better place to put their available funds.  Institutional trading now
accounts for more than a third of all NYSE transactions.

High-turnover Fund Investing Strategy Increasingly Attracting Fire From
Critics
Associated Press, May 1, 1998

Quite a few prominent funds, especially those in the most aggressive growth
categories, have turnover ratios in     the 100 to 200 percent range. A 100
percent ratio means that the typical stock the manager buys is held for 12
months. If the ratio is 200 percent, the average holding period drops to
six months.

The widely publicized institutional interest in Amex and over-the-counter
shares also has helped trigger a vast, volume-building speculative spree on
the part of the public.  "Honest to God," says Oppenheimer's Rick Shapiro,
"I had a lady customer call me with a hot tip that she got from her
chauffeur, who got it from another chauffeur, who overheard his boss
talking on the radio phone in his car.  And the lady insisted I swear
secrecy because she said she was afraid I would get the original chauffeur
in trouble!"

'Little Guys' Running With Wall St. Bulls
USA Today, January 22, 1999

"My computer repair guy was touting a stock the other day. He got it from a
another repair guy who works with a printing supplier who said the company
was undervalued," says Dean Koocher, chief financial officer at itsy bitsy
entertainment. The New York toy marketer is responsible for the U.S.
invasion of Teletubbies, the toy industry equivalent of what famed mutual
fund manager Peter Lynch would call a Wall Street "ten-bagger." "The
market has become everyone's personal lottery," Koocher says. "I've even
got artsy friends who own galleries talking about e-Bay and Yahoo."

The case of a 60-year-old Chicago widow, Mrs. Ella Kupfer, is typical.
Mrs. Kupfer grew tired of heard her friends boast of making enough in the
market to vacation in Florida.  On a tip, she drew $2,000 of her life
savings from the bank and invested in Northwest Industries, Inc.  She made
a quick 50 per cent profit and is currently taking the sun at Miami Beach.
"If I'd known it was so easy," she says, "I'd have been hear years ago."

Amateur Hour On Wall Street
Forbes, January 25, 1999

Nicholas Birbas, a 25-year-old former waiter from Queens, N.Y., has a
Pro-Star 300-megahertz Pentium laptop patched into E-Trade via America
Online. With those tools, trading in and out of stocks like Navarre and
Netscape, he turned $1,100 into $100,000 in two months. "Before, I was
investing for the long term and I found out that it was not smart.
Now my goal is a 1,000% return by 2000," he says.

Dorine Essey, 70, and her husband Herb, 79, are retirees in Miami Lakes,
Fla. They used to be loyal customers of firms like Merrill. Now the pair
spend ten hours a day on-line, much of it browsing the Silicon Investor Web
site. He uses a Toshiba laptop to trade on E-Trade. She has a
400-megahertz Hewlett-Packard with a 12-gigabyte hard drive, and trades via
DLJ Direct. In one week in December they made a dozen trades in stocks like
SkyMall, Egghead.com and Genesis Direct.

Across the nation, the speculative story is the same, with hundreds of
little stocks soaring along like so many miniature IBM's.  One of the hot
new issues in the Miami area is the stock of an over-the-counter brokerage
house called Executive Securities, Inc., which came out at $3 a share eight
months ago and is now selling for $60.  Another popular Miami play, Zion
Foods, is popular at least partly because, as one broker puts it, "it's the
last listing, alphabetically, on the American Exchange."  "I've gotten to
the point," said president Richard Bertoldi of Chicago's Swift, Henke &
Co., "where I just have no opinions at all on this market...It's extremely
dangerous.  When it breaks, I'm just going to put my hands over my ears."

Net IPOs Post Another Extreme Year
CBS MarketWatch, December 31, 1998

...some investors were so eager to buy new Internet IPOs, they bought the
wrong stocks. A company called Temco Services (TMCO) briefly benefited when
a news story on Ticketmaster Online (TMCS) went out with the wrong ticker
symbol. Meanwhile, Zoom Telephonics (ZOOM) more than doubled on
heavier-than-average volume in anticipation of Xoom.com's (XMCM) IPO.


purple line is 200 DMA

Why Stock Prices Stay Strong
U.S. News & World Report, October 28, 1968

The stock market, on some broad indexes, recently has moved to new high
ground despite many uncertainties in business and in politics, and in the
outlook for war--or peace.

Why?  What is keeping the market active and prices high?

When you seek answers to these and other questions from those whose
business it is to analyze and forecast market trends, you find a measure of
agreement.

For one thing, you are told, business is good and is likely to remain that
way in the foreseeable future.  With business good, the outlook for profits
is regarded as moderately favorable, despite the impact of the income
surtax on corporate earnings.

Wall Street Breaks New Year's Resolution; Devours Stocks
Reuters, January 11, 1999

The market is being propelled by a mix of positive factors such as low
inflation and steady economic growth.

The experts in the world of big money say Wall Street is also betting on a
brighter outlook for the economy and corporate America, even after eight
years of strong growth.

Then there is a trend toward investment in stocks by ever-growing pension
funds, mutual funds, investment trusts and institutions.

The 401(k) Fuels Rise In Stocks
Chicago Sun-Times, January 24, 1999

Americans continue to pour their retirement money into stocks, buoying the
U.S. equity market.

The flood of capital also helps explain why many analysts remain optimistic
about the market's long-term prospects even though the Standard & Poor's
500 index has gained at a seemingly unsustainable annual clip of 31 percent
since the end of 1994.

It now seems taken for granted that price inflation will continue. In that
situation, professional investors prefer common stocks to fixed-income
securities.

Other things mentioned as tending to push stock prices higher are continued
activity by traders and speculators, and some buying of U.S. shares by
foreign investors.

. . .

At the same time, many market authorities are forecasting a "correction" in
stock prices after the sustained advance of recent weeks.  Then, they
believe, stocks will go to even higher levels.

Here is the view of Ragnar Naess, senior partner in the
investment-counseling firm of Naess & Thomas:

"Business is holding up better than a lot of investors expected.  Sales and
earnings haven't declined to the extent that many feared, and the way
things look now, severe declines are not likely.

"Profits held up better than anticipated in the second quarter, and
probably will make a good showing for the third and fourth quarters."

. . .

Looking further ahead, Mr. Naess forecasts "much higher" stock prices.  In
his view, "stocks are still low in relation to prospective earnings over
the next three to five years."

. . .

"The industrial average is selling at something like 16 of 17 times
earnings.  That is not excessively high in terms of expected growth in the
economy and of corporate earnings in years ahead."

The Trader
Barron's, January 18, 1999

...Thomas Galvin, decided to boost his stocks recommendation on Monday
because he remains convinced that the U.S. economy will remain strong
despite the turmoil in international markets.  He points out that U.S.
companies, especially those in technology, health care and financial
services, have above-average margins, competitive advantages and are
gaining market share around the world.  All this makes them worth of their
high market multiples, he says.

From Armand G. Erpf, partner in Carl M. Loeb, Rhoades & Company, comes the
comment that the sustained rise in stocks has brought back into the market
people who had taken to the sidelines.

"The heavy buying lately has been quite obviously the rectification of an
error many investors had made earlier this year," he suggests. "That error
was in assuming business would cool off, and that the political outlook was
so complex it would be difficult to forecast what might happen.  People now
realize this was a mistake."

Mr. Erpf expects stock prices to move to "much higher levels" in the years
ahead.  Real economic growth plus inflation will mean higher profits for
many corporations plus inflation will mean higher profits for many
corporations, he says, and "that really tells the whole story."

Lawrence R. Kahn, senior vice president for investments, National
Securities & Research Corporation, notes: "The heavy trading volume
indicates broad public support."  He adds, "Two important forces are at
work--heavy trading by amateur speculators, and some European buying of
stocks that began when the market started upward last May."

Bulls Drive Dow Past 9,600; Bonds Take Fall
New York Post, January 9, 1999

[Ralph] Acampora said yesterday said he expects the Dow to crack 10,000
"fairly soon" adding that he views the renewed confidence in the stock
market as "just the beginning" of a new rally that will send the market
higher for as much as two years without any major correction.


Why Stock Prices Stay Strong
U.S. News & World Report
, October 28, 1968

Monte J. Gordon, first vice president and director of research for Bache &
Company, sees an "excellent chance" that the industrial average may reach
1000 before the end of this year, with an annual growth potential over the
next two years of 10 to 15 per cent.

"The reason is the incomparable growth thrust of our economy," Mr. Gordan
says.  "It may be temporarily distorted or blunted by political or economic
developments, but as long as that basic thrust continues there is no
question that stock prices will respond."

See No Barriers to New Highs
Joe Battipaglia, January 19, 1999

"...concerns about the economy are overstated. Earnings are definitely on
the mend from the trough in the third quarter, and the market is now
poised, in my judgment, to make a run towards Dow 10,000."

Anthony Gaubis of Anthony Gaubis & Company, an investment counselor who
bases much of his long-range forecasting on historical patterns, in recent
months has had a cautious outlook.  But he now expects the Dow-Jones
industrial average to reach 1200 within 15 to 18 months.

"Probabilities favor an erratic stock market over the next six to seven
months," he notes, "but the underlying trend should continue upward until
the end of 1969."

Indicators Show Continued Bull Run
Elaine Garzarelli, January 23, 1999

A correction would be healthy and is necessary in order for interest rates
and earnings to catch up with stock prices and increase our indicator
reading.

We believe that interest rates will decline and that this, in turn, will
help the higher valuation levels for the stock market, even with the
slowdown we see in earnings this year. Our forecast remains for a Standard
& Poor's 500 level of 1400 and a climb to approximately 12,200 by he Dow
within six to 12 months. 

We believe corrections, as measured against the S&P 500, will be limited to
a decline of less than 10 percent from that index's all-time high of
9643.32.

Edward Merkle, president of Madison Fund, Inc., believes the
better-than-anticipated outlook for corporate profits has brought buying
into the market lately.

"There have been enough price increases, in general, to take care of the
rise in wage costs," Mr. Merkle says.

Mr. Merkle's expectation is for a rise in the Dow-Jones industrial average
to about 1200 to 1300 within the next two years.

From Ralph Rotnem, senior vice president for research with Harris, Upham &
Company:

"The long-term outlook for stocks is bullish, since the projected level of
the U.S. economy by 1975 could produce corporate earnings that would
justify 1500 to 1600 for the Dow-Jones industrial average at that time.

William Stenson, executive vice president and chief investment officer of
Bank of New York, expects stocks to sell at higher levels over the long
run.

"That will be true," he comments, "for the same reason as in the past--a
combination of inflation and a managed economy that make other types of
investments--bonds, mortgages, preferred stocks--less attractive than
common stocks."

Mr. Stenson also notes that there is a shortage of quality stocks in
relation to the heavy demand, and this has tended to put a floor under
prices.

Views on '99
Barron's
, January 4, 1999

Thomas Galvin -- Year end target for Dow: 11,000

Technology, and the growing use of the internet by consumers, is the next
major inflation-fighter.  Inflation can stay at 2% or less.  Real GDP can
grow by 2.5%-3.5%.  Most people think the earnings train has been derailed,
but earnings can average 10%-12% a year from 1999 to 2002. 

Dr. James J. O'Leary, chairman of the board and chief economist of Lionel
D. Edie & Company, says, "Our projections indicate that by 1980 the real
output of the American economy can virtually double.  If we can achieve
this, it will certainly pay to own a piece of the equity in our industrial
system."

Thus among professional stock-market watchers, a clear consensus emerges.
The next few months, they agree, may provide enough uncertainties to bring
a mild setback from present levels.

For the longer run, the experts agree, prices of common stocks are likely
to move considerably higher than they are today.



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