Farrell rings New York alarm bell; The Investment Column

Fund managers who are nervous about the prospects for the US market this year will draw inspiration from the thoughts of Robert Farrell, the widely respected investment adviser to Merrill Lynch. In London yesterday to address the UK investment community, Mr Farrell is unrelentingly bearish about the prospects for US shares, predicting a 25 to 30 per cent correction in the soaring New York market in 1997.

He reckons investors will get a foretaste of what is in store in a fast- approaching "interim peak" for large capitalisation stocks, which have led the 33 per cent advance in the Dow Jones Industrials index over the past year. But he suggests the final top could come with earnings disappointments later in the year.

He does not have to look far to support these gloomy predictions. Two key investment yardsticks stand out. The average dividend yield on American shares has hit a historic low of just 2 per cent, while the price/earnings multiple for the smaller capitalisation Nasdaq market has reached a gravity- defying 49.6.

Those two factors alone should set alarm bells ringing, but Mr Farrell points to the equally worrying spirit of euphoria sweeping Wall Street. Instead of paying down debt or making higher payments to shareholders, company managements are using excess cash to buy back shares, which boosts the value of the share options they grant themselves instead of salaries. The increasing value of shares means companies are financing record takeover activity, topping $600bn last year, by issuing paper rather than paying cash.

The obverse of this phenomenon is that when share prices turn down, companies' impoverished balance sheets could be left exposed while managements' motivation will take a dive.

The problems do not just lie with the "real" economy and companies. US stock markets are also crashing through the record book, with New York share volumes hitting new highs in the first half of 1996 and new issues also at a new high. The burst of speculation in small capitalisation stocks which peaked halfway through 1996 usually sees larger companies following suit some six to seven months later, Mr Farrell claims, pointing to his "interim peak" in the Dow any time now.

Among the many pointers to 1997 being a down year, he highlights the unerring record of market declines when the first post-election year is the seventh in the decade. The record $1.45m paid for a seat on the New York Stock Exchange is another.

But the massive flow of money into mutual funds, the US equivalent of unit trusts, looks a more solidly-based indicator of trouble in store (see chart). The only consolation for investors is that Mr Farrell reckons this year will be a four-year cyclical low, rather than the major bear market which occurs every 20 to 25 years.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
The teaser trailer has provoked more questions than answers
filmBut what is Bond's 'secret' that Moneypenny is talking about?
News
Johnny Depp is perhaps best known for his role as Jack Sparrow in Pirates of the Caribbean
peopleBut how did he break it?
Arts and Entertainment
Paul Walker and Vin Diesel in Fast and Furious 5
film
Sport
Lewis Hamilton secured his second straight pole of the season
f1Vettel beats Rosberg into third after thunderstorm delays qualifying
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss