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Hoarse Whisperers

As investment bankers lose their grip on the market, why are so many indie investors obediently reacting to their pronouncements? And why are telco mergers being ignored?

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In a stock market as vulnerable and histrionic as this one has become, it's only natural that soothsayers should gain market share, and for this market the beneficiaries are the strategists at Wall Street's biggest investment banks and brokerage houses. If you're one of these select few, and you speak with conviction, investors will listen. Prudential Securities market analyst Ralph Acampora demonstrated this two weeks ago when his call of a bear market on CNBC sent the already shaky Dow spiraling downward. Acampora, of course, was a one-day wonder, with the market snapping back the next day. But even his momentary influence is telling. In a market dominated by large-cap stocks and program trading, it's the people who offer the big picture that investors are heeding. Forget stock-picking. Market-picking is the only game in town.

When it comes to that game, here are some of your basic brand names: Jeffrey Applegate of Lehman Brothers, Ed Kerschner of PaineWebber, Barton Biggs of Morgan Stanley Dean Witter, Ed Yardeni of Deutsche Bank Securities, and Acampora. In retrospect, the ascent of Acampora -- who has been a raging bull for most of the past three years -- to the front of the stage was a fluke, almost entirely the product of his public change of heart at a moment when the market was looking for an excuse to plummet. His moment in the sun couldn't last, though. Acampora is a technical analyst, which means that he concentrates exclusively on internal market indicators like the advance-decline line and 200-day moving averages. (This kind of entrails-reading is magnificent for explaining what has happened and useless for explaining what will happen, since what a stock has just done offers no reliable evidence at all of what it will do next.)

These guys are not really the true market movers on the Street, Acampora's star turn on CNBC notwithstanding. Which is to say that they're not the Fed's Alan Greenspan or Goldman, Sachs's Abby Joseph Cohen.

That may be overstating the case, but not by much. Just as Greenspan's comments are parsed in exacting detail for signs of what the Federal Reserve may do next, Cohen's utterances are scrutinized for evidence of where the market is headed. Each time the market has tumbled in the past year -- October 1997, June 1998, and two weeks ago -- Cohen has stepped in, reiterated the case for continued bullishness, and helped bring buyers back into the fray. Business Week called her the "Prophet of Wall Street," and she's now influential enough to make her prophecies self-fulfilling -- at least in the short term.

Surprisingly, this mass supplication at the altar of investment-bank oracles, entrenched as it is in the current market, is a relatively new phenomenon. In previous times of market turmoil, investors tended to look for reassurance outside the halls of investment banks. In the twenties, the most important public figures were stock-market speculators like Arthur Cutten and popular soothsayers like "The Old Counselor," a University of Chicago professor with a radio audience in the millions. In the sixties, the key figures were the mutual-fund managers who sparked the go-go market. When the stock market crashed in May 1962, managers of the largest funds made publicly bullish comments and spurred what was then the sharpest rally in postwar history. In the eighties, Salomon's Henry Kaufman did ascend to bond-market guru status, and Shearson analyst Elaine Garzarelli momentarily became a market mover in the wake of her correct call of the October 1987 crash. But investors were as likely to heed the obscure murmurings of Barron's technical maven Joseph Granville and Elliott Wave theorist (don't ask) Robert Prechter as that of investment-bank strategists.

There's something paradoxical about the fact that only now, when more and more individual investors trade without the assistance of investment advisers and when the market is dominated by mutual funds, should analysts for investment banks become such key players. It's likely, after all, that Goldman, Sachs's client list in the twenties accounted for a much higher percentage of stock ownership than it does now. So it's curious that Goldman's chief strategist would be more, and not less, influential today. But individual investors are remarkably hungry for information, and the rise of momentum investing has magnified the impact of all market-moving news. Add the fact that market strategists' pronouncements are now publicly disseminated almost immediately -- you can't underestimate the impact of CNBC, Bloomberg, and the Internet -- and you have a recipe for a major power shift.

And while the concentration of power in the hands of so few people -- even if you include that second tier of analysts -- is troubling, Abby Cohen knows a lot more about the fundamentals of the American economy than Arthur Cutten or the go-go managers ever did. More importantly, you have to remember: In the long run, no one moves the market. The market moves itself.

Lately, of course, when the market does move (especially down), it chews up large chunks of mind- and media-share on an almost daily basis. As a result, news that one might expect to make a big splash is instead causing barely a ripple. Take, for instance, Bell Atlantic's $53 billion acquisition of GTE, which the market has greeted with a gaping yawn. The deal represents yet another step toward the reconsolidation of the telephone industry, and is the third-largest merger in U.S. history. But looking at the business press and investor sentiment, it'd be hard to tell. This deal, in fact, prompts the question: Does anybody care about megamergers anymore?

In buying GTE, Bell Atlantic (which just completed its merger with NYNEX last summer) will end up controlling 63 million phone lines in 38 different states -- one third of all local lines in the U.S. -- and it will also gain access to GTE's nascent long-distance network. The new company will automatically become a 300-pound gorilla in the wireless market and have phenomenal leverage in the exploding market for data traffic. (Not to mention the fact that Bell Atlantic-GTE will be the world's largest publisher of telephone books.) At a time when Bell Atlantic's revenues are barely growing, and when GTE's scattered collection of local markets and tiny long-distance customer base make going it alone a difficult prospect, the deal does have obvious upside potential.

How much potential, though, is far from clear. The companies promise $2 billion in "cost synergies" in the first three years, but this is a song investors have heard before. There's something about the inevitability of these telco mergers that makes them seem singularly unglamorous. It's as if we're all collectively resigned to the fact that there will only be six or seven major players in the industry by the year 2000. When Bell Atlantic and GTE or SBC and Ameritech merge, there's no magic, just a steady accretion of assets by companies that have yet to do anything dazzling with them. Four years ago, the proposed deal between Bell Atlantic and John Malone's TCI was heralded as the opening salvo in the digital revolution. Today, we're more likely to associate the Baby Bells with the broken promises of the Telecommunications Act of 1996.

What's most notable about the Bell Atlantic-GTE deal, in fact, is that the deal is a take-under, which means that Bell Atlantic offered GTE's shareholders less for their shares than their market value. That's a reasonable strategy in a late bull market, but GTE shareholders could hardly have been comforted by that thought. The lack of planned job cuts or restructuring, meanwhile, didn't really satisfy investors who prefer merger partners who bring their axes (or chain saws) with them. Finally, and not coincidentally, the deal was structured as a "merger of equals," which means in part that we're going to see Ivan Seidenberg and Charles Lee try to run the company as co-CEOs (good luck, boys). We've yet to see a case where power-sharing has worked as well as promised.

The fact that the market has treated this merger as almost irrelevant suggests that no longer can you just whisper "synergy" and watch investors swoon. In fact, synergy may now be more of a red flag than anything else, especially in the telco industry, which right now is a collection of quasi monopolies figuring out how to keep competitors out of their own markets while expanding into everyone else's. Merger mania is as hot as ever in a year when $1.5 trillion in deals have already been announced. But the wait-and-see attitude investors have taken toward Bell Atlantic-GTE is something we're going to see more of. Remember: There was a reason we broke up Ma Bell.


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