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Investors Have Good Reasons to Stay Cool

October 18, 1987|JAMES FLANIGAN

The trick, as Rudyard Kipling put it, is to "keep your head when all about you are losing theirs." And if you did that last week when stock prices collapsed amid fears about U.S. trade and the economy in general, you might have noticed a few exceptions to the widespread decline.

As the Dow Jones industrial average fell 150 points on Wednesday and Thursday, the stock of Deere & Co., the farm equipment outfit, hit new highs for the year. And the stock of Caterpillar Inc., the construction machinery maker, stayed up near the high levels it has reached in recent months.

Both stocks got caught in Friday's historic down draft, but the earlier strength in those heavy industry companies, headquartered about 100 miles from each other in Moline and Peoria, Ill., indicated that investors knew U.S. industry is in better shape long-term than it is given credit for.

Short-term, meanwhile, it indicated that the market's tumble was caused by more than the August trade figures. Rising interest rates--the 30-year U.S. Treasury bond going above 10%; a leading bank hiking its prime rate--discouraged investors by threatening the business recovery, and lured investors away from common stocks. Carrot as well as stick.

Security Pacific Corp., for example, offered one-year notes at 9.57%. That is, the holding company of Security Pacific Bank, with a double-A credit rating, was offering 9.5% when the history of the stock market since 1926 says that 9% a year is the average gain you can realistically hope for in common stocks. Selling stock was economically rational, in other words, and not a sign of despair over U.S. competitiveness.

Shrinking Deficit

The trade figures, meanwhile, needed perspective. In agriculture, the August report said the U.S. trade surplus was shrinking. But August was down only because earlier months were extraordinarily high, thanks to Russian grain purchases. For the full year, the Agriculture Department says, the surplus in grain trade will increase.

The trade deficit in manufactured goods is shrinking, too, as the lowered value of the dollar helps U.S. manufacturers win business at home and overseas, as Caterpillar has been doing against Komatsu of Japan, its challenger on construction sites worldwide.

The fact is, productivity in agriculture and manufacturing is rising faster in the United States than just about anywhere. In agriculture, says Robert Paarlberg--author of "Fixing Farm Trade"--output per unit of labor or land or capital has been growing 1.5% a year since 1970, and soon will grow 2.4% a year, thanks to biotechnology.

Farming long ago became a "knowledge industry," Paarlberg says, "with well-trained farmers backed by research in universities and big companies." And now the same thing is happening to U.S. manufacturing as new methods and machines have boosted productivity 4% a year in this decade.

But why not talk in specifics? In Deere and Caterpillar, you have companies that have weathered the storm. The last time their stocks sold at today's levels was 1980-81, the boom times when Caterpillar was selling bulldozers in the oil-rich Middle East and Deere was selling tractors to prosperous farmers. But as Deere and Cat and the nation were soon to learn, the times were more inflated than good. And the companies endured massive losses and cutbacks in their wake.

Rising sales and profitable operations have returned for both, although full prosperity has not yet come back. But when it comes this time it will be real.

Caterpillar has invested all through the bad years in modernizing its operations, is now making good gains everywhere--as its nine-month profit report out Monday will indicate. Analyst James McCann of Drexel Burnham Lambert predicts that Cat will report strong earnings growth.

Deere, meanwhile, has cut its break-even point so low that it is making money operating its factories at 40% of capacity. And reports from the Farm Equipment Institute in Chicago that tractor sales are rising promise significant improvement next year for Deere.

Deere and Caterpillar are but two indicators of the economy's fundamental strength, two of many reasons to stay calm while most of the market loses its head.

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