The Baltimore Sun June 17, 1997 Market on verge of collapse, analyst says When the stock market crashes, it'll be like an earthquake leveling a city. That's what Thomas H. Eichler says. And he feels the rumbling. Eichler, who is the president and chief investment officer of Eichler Magnin Inc., a Los Angeles-based investment management firm, says that within the next 12 months the stock market will plunge by 50 percent. "Within the next year we expect one of the major financial crashes of this century. We feel there will be an economic depression. We don't think people will have a chance to get out," he said. Eichler is a member of a small group of experts that is bearish on the stock market. Those who have made negative predictions over the past three years have been baffled and embarrassed time and time again because stocks keep driving higher. The Dow Jones industrial average -- a closely watched barometer made up of 30 large companies -- has more than doubled in the past 2 1/2 years, closing Friday at 7,782.04, up from 3,838.48 on Jan. 3, 1995. But the 35-year-old Eichler believes that the stock market has peaked and that it is on the verge of a crash that mirrors 1929. Here's why: Eichler argues that there are gaping imbalances in the U.S. financial system. While corporations are making big profits, incomes of consumers have stagnated, the savings rate has slipped, debt levels have risen, and taxes as a percentage of income are at their highest levels this century, he said. "That type of mix is very worrisome," he said. With debt levels rising and incomes barely growing, consumer spending is bound to slow, he said. That will filter through to companies that produce goods and services. Less money to spend means that fewer people will buy lawn mowers or take the family out to eat. He argues that investors are paying unrealistic amounts for stock, more than twice their normal value. "If you went to normal valuations, we are talking about 3,300 to 3,500 on the Dow," Eichler said. "Investors are not prepared for this type of decline. People are really in a vulnerable position. This financial speculation has almost been like a steroid. Be assured, it is nothing more than just a steroid." Some key market indicators buttress his views. Stocks in the S&P 500 are selling at about 22 times average earnings, the highest price-to-earnings ratio since World War II except for 1987. The market was hit with a 35 percent correction that year. Stocks are selling at more than four times their book value. At the market's August 1987 peak, before the crash, they were selling at just over two times their book value. The dividend yield, which goes down when the price of stocks goes up, stands at a record low of 1.73 percent. In August 1987, it was 2.54 percent. Another reason the market will fall, Eichler says, is that investors will pump more money into foreign stocks as economies around the world recover at the expense of U.S. companies. "It seems to me absurd that somebody wouldn't accept my scenario," Eichler said. "It is backed by 100 years of history and reasonable economic analysis." Richard Cripps, chief market strategist of Legg Mason Wood Walker Inc., agrees that stocks are over-valued, but he doesn't see a 1929-type crash. "Making that type of analysis is 100 percent looking in a rear-view mirror," he said. "History adds a lot of perspective, but we have a dynamic environment right now." Eichler is a student of history, and much of it has come from his father and two grandfathers who ran their own brokerage firms. His grandfather Henry believed that people helped companies raise capital by buying their stock. They were rewarded through appreciation and dividends. "They were very traditional and very conservative," he said. Eichler manages the company with the same philosophy. The firm oversees $30 million for wealthy clients. Thirty-eight percent of the assets are in cash; 24 percent are in stocks, which include closed-end bond funds and utilities; and the rest is salted away in gold, bonds and other fixed-income instruments. Eichler Magnin returned 8.5 percent last year, far off the pace of the S&P 500's 20 percent return. "We have clearly been wrong based on what people out there expect," he said. "The easier way out is to do what everybody else is doing. We want to preserve assets." But Eichler doesn't think he's wrong about the crash he feels rumbling. "It's almost like an earthquake coming from Los Angeles," he said. "It's scary."
