Wall Street Recap
Esteemed Market Guru Is One Of A Kind
"Great men, like comets, are eccentric in their courses, and formed to do extensive good by modes unintelligible to vulgar minds." - Charles Caleb Colton
Bob Farrell is the most important market guru never profiled in Wall Street Recap.
For decades, Farrell was the premier technician at the nation's largest brokerage, Merrill Lynch. Although other Merrill Lynch personnel of significance were chronicled in these parts, Farrell was not, maybe because he just seemed bigger than life. You can't telephone an icon, can you?
Four years ago, his sidekick, Richard McCabe, stepped into the chief technician's role at Merrill Lynch, freeing Farrell from the daily grind.
McCabe's stuff is interesting - Merrill Lynch issues a technical report once a week - but it wasn't Bob Farrell. Farrell was immortalized when he said, many years ago, "History repeats, but never exactly." What a perfect testament to brokerage analysis of all types. Or even life.
What resurrected Bob Farrell was CNBC, the financial-news television network. Last week, Farrell appeared on CNBC because McCabe was traveling. Suddenly, the fog lifted. Farrell has a way of explaining markets, and forecasts, that just makes things so much simpler.
Since he had appeared on CNBC, the thought occurred that maybe now was the time to introduce him to Wall Street Recap. So with little difficulty, a call was placed to his secretary.
The request was made. The call was on hold briefly. The secretary came back: You must call Richard McCabe, and she provided McCabe's number.
No, you don't understand. This isn't just about market forecasts. This is something of a biography, a brief profile of an icon for the benefit of both Wall Street Recap readers.
Later, as I sought a way to explain that what you were about to read was what I thought Farrell might have said, elaborating on his TV comments, the phone rang.
It was Bob Farrell. My top three interviews now are Bob Farrell, Bob Farrell, Bob Farrell. Listening to him is like listening to your favorite uncle.
Farrell is 63, a 40-year veteran of Merrill Lynch. He has powerful roots: For the past 58 years, he has lived in five homes - all in a one-square-mile area near Tenafly, N.J.
It is important to differentiate between what Farrell does virtually without peer - technical analysis - and fundamental analysis. Most analysts and brokers subscribe to the fundamental view. Look at a company, its industry, profits, sales, management, the economy, competition, and forecast financial results. The technician looks at a stock's trading history, especially volume, to determine the future path.
In the 1950s, and at many moments since, technicians have been labeled voodoo artists, little more than market timers with a bad compass. Yet as time has evolved, they have gained credibility. The best analysts have blended technical analysis with the fundamental. Studies of both disciplines have shown that neither one has a corner on accuracy. Analysis, at its best, gives investors confidence and, in some cases, a profit.
Unique doesn't mean a few of something. It means one of a kind. Farrell is unique. The cornerstone of his education isn't from the technical side. It is from the fathers of fundamental analysis. Farrell received a master's degree from Columbia University, where he trained under the fundamental masters: Benjamin Graham and David Dodd. Farrell went on to become the most successful technical analyst of his generation.
"In 1984, at an all-day seminar at Columbia celebrating the 50th anniversary of the publication of `Security Analysis,' (Graham and Dodd's bible of fundamental analysis), I spoke on why Ben Graham was a closet technician," Farrell said.
Farrell was at Merrill Lynch three years when, in 1959, he agreed to become the brokerage's technical analyst. He claims he did it because nobody else wanted to do it and because he thought it would separate him from the huge pack espousing fundamentals. Most likely, he was the best qualified.
Farrell knew technicians were not respected. So in the 1960s, he couched his technical comments in fundamentalists' clothing. He found ways of saying things that appealed to fundamental followers but were based in technical foundations.
Before long, a handful of market technicians began meeting. The tongue-in-cheek name they adopted was the Tip & Clip Club, reflecting those who simply wanted to hype a stock they were eager to move. When the Market Technicians Association was launched in 1970, Farrell was the first president.
Not because Farrell was the best, the remarkable self-effacing man persists, but because he was with the influential brokerage house. Of course, Institutional Investor, a trade publication, named Farrell the top technician so often - 16 times - they might as well name the trophy after him.
This stuff is so interesting we ought to just forget about the forecast, but the forecast pays the bills. So what does Merrill Lynch's senior investment adviser (a title he crafted after turning over his daily duties to McCabe) believe?
"We're very late in a secular bull market," Farrell said. "There's a speculative peak that precedes the quality peak."
The speculative peak, when investors were eager to buy almost any new issue or humdrum stock, came in May. Using the 1961, 1968 and 1983 market tops as examples, Farrell said the quality peak, when the Dow Jones industrial average makes that final high, should land in the November-January time frame. If the 1929 and 1946 tops are indicators, the quality peak could stretch to 10 months from the May top, or around next March.
After the May peak, conservatism moved in. Professionals shunned smaller stocks because the market became less liquid.
"I think we're way overdo for a corrective process," Farrell said. As a result, the payback will be more severe. Farrell said he expects a sharp drop to start the downturn. Because so many investors enrolled in the "buy-and-hold" school of investing, he expects rally attempts. When a significant rally falls short, investors will become disillusioned. Gradual attrition will ensue. If the sharp reversal in 1987 was like a guillotine, in this one the investor will be sandpapered to death, Farrell said.
Farrell said the theory that investors will hang in, no matter what, brought to mind a quote he recently saw: "Never have people been so well informed and little tested."
The potential is scary, Farrell said. But he remains occupied four days a week - he takes Fridays off - fashioning an analysis of market sectors that will do well in a downturn and lead the market higher after the fall.
Farrell conceded he's not always right.
"It's one of the more excruciating times in life, when you have to eat crow," Farrell said. "Generally, I don't stay on the wrong side too long, just because I can't stand it."
That isn't often - and we're not making this stuff up.
Stocks and bonds
The Dow Jones industrial average of 30 blue-chip stocks last week rose 49.94 points to 5,888.46.
The Murphey Favre Northwest 50 of 50 stocks weighted by their regional economic impact gained 39.28 points to 3,492.47.
The U.S. Treasury's 30-year benchmark bond fell $11.25 per $1,000 of face value to close at $963.75. That was priced to yield 7.04 percent, said Cynthia Wells, Seattle-Northwest Securities vice president.
The big news is Tuesday's meeting of the Federal Reserve. Will the independent governor of the nation's interest rates raise rates? A leak surfaced that eight of 12 Fed governors supported a boost in rates.
Worries over the Federal Reserve meeting clipped $10 per $1,000 of face value off municipal bonds, reported Judith Cochrane, Seafirst Bank vice president.
On a kinder note, order-taking begins tomorrow for the state's annual sale of zero-coupon bonds designed, but not limited, to paying college expenses.
Wall Street Recap appears Sunday in the Business section of The Seattle Times.
READERS PORTFOLIO. 10 NW STOCKS PREFERRED BY READERS.
. Alaska Air +23.8 . Boeing +21.1 . Eagle Hardware +235.0 . Micron Technology -30.9 . Microsoft +57.4 . Nike +79.4 . Redhook Ale -15.9 . Sierra On-Line +44.3 . Starbucks +68.5 . Washington Mutual +22.1 .
. Average: +50.5% .
. What $1,000 invested in those stocks would be today: $1,505 .
. READERS' NON-PORTFOLIO. 10 NW STOCKS PICKED RANDOMLY, EXCLUDING READERS' TOP 10.
. Airborne Freight -22.1 . Cascade Bancorp +17.6 . Crown Pacific +16.6 . Integrated Measurement +18.6 . InControl -38.1 . Mackie Designs -17.8 . Physio-Control Int. +17.5 . Royal Oak Mines +14.3 . Tera Computer +2.8 . Visio +48.7 .
. Average: +5.8% .
. What $1,000 invested in those stocks would be today: $1,058 .
Copyright (c) 1996 Seattle Times Company, All Rights Reserved.