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WALL STREET : Expert Failed to Follow Instincts Before Crash

December 06, 1987|John Crudele | JOHN CRUDELE is a financial columnist with New York magazine

Michael Steinhardt has long been considered one of the smartest investors on Wall Street. And if he had followed his gut instinct to stay out of the stock market this past summer, his reputation might still be unblemished today.

But Steinhardt, a professional money manager who heads the incredibly successful Steinhardt Partners, succumbed to the stock market's charms and thus became one of the biggest losers in the crash. By some estimates, Steinhardt and his partners took a $250-million drubbing when the market collapsed.

Steinhardt wouldn't discuss the matter. But documents he regularly files with the government and other information provided by sources tell a story of how even a seasoned stock market pro like Steinhardt, 47, was no match for the rampaging market.

Steinhardt first expressed doubts about the state of the stock market last March 27. He was so concerned, in fact, that he wrote a special letter to his limited partners that day to tell them how the market's risk-to-reward balance was "more difficult to gauge."

"One guideline," Steinhardt said, "is to seek opportunities where the downside risk seems manageable. This is not the case now in my judgment." Citing a long list of other potential problems that could hurt the stock market, he added: "I am inclined to be far more cautious in these circumstances."

But Steinhardt got the urge to buy stocks during the summer months, when the market was staging what was to be its final rally of the five-year bull market. By the end of September, Steinhardt Partners was again holding $1.55 billion worth of stock, according to a recent filing with the Securities and Exchange Commission.

Then Steinhardt made a bigger blunder. Just one week before the market's Oct. 19 collapse, Steinhardt Partners went even more voraciously into the market. "We had maintained a cautious stance toward the market for a number of months," Steinhardt explained to his limited partners in a letter dated Oct. 26. But in the week beginning Oct. 12, "we began building a position (in stocks and futures) expecting that the market would hold in the 2,200 area. On Monday, Oct. 19, that assumption was torn asunder."

Making Steinhardt's situation even more risky was the fact that he bought heavily into speculative stocks, which were soon to get clobbered. The partnership, for instance, held large positions in Allegis, Gillette, Hospital Corp. of America, ITT, Lockheed, and J. C. Penney.

What's Steinhardt thinking these days? "At the present time, uncertainties surrounding both the financial markets and the real economies of the major Western nations are probably as great as they have ever been in my lifetime," Steinhardt told his partners.

Little Hope for '87 Economic Summit

If Wall Street had a wish list, a December economic summit meeting would probably be at the top of it right now. But the stock and bond markets may have to wait a bit for representatives of the seven major industrial nations to get together in an attempt to solve the world's economic woes.

A meeting of the so-called G-7 nations (the United States, West Germany, Japan, Italy, Canada, Great Britain, and France) will probably take place in January at the earliest, according to a foreign central banker whose country would take part in the meeting. The only thing that could make it happen earlier, he believes, is another crisis in the financial markets. Otherwise, look for the meeting to take place no earlier than Jan. 9--when the holidays are out of the way.

The world financial community has been hoping that a federal budget accord in the United States might bring the seven nations to the bargaining table. And Wall Street is hoping that a meeting of G-7 in December would bring a quick fix for many of the world's economic ills.

Getting the seven countries into the same room, experts say, could turn out to be the smallest hurdle. The other six countries, they believe, will expect the United States to come to the meeting with a plan to stabilize its dollar. So far, however, Washington does not seem interested in coming up with such a plan.

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