The financial markets haven't been this challenging since 1974.

More than 70 years ago, George Murphy's immigrant parents named him for our nation's first president. So it is especially appropriate that every year on the Thursday before Memorial Day Murph gathers his entourage of Wall Street veterans at Fraunces Tavern in lower Manhattan, where Washington bid his officers farewell. This is a venerable assembly of a dozen portfolio managers, traders, economists and analysts that dates back to the 1974 bear market. Six core players have attended since the beginning, but each year they invite a few other professionals to help keep the dialogue open and provocative. I was lucky to be included this year.

The meeting starts with lunch and goes as long as it takes. Everyone is inside the private dining room by noon, the beverage and sandwich orders are quickly dispatched, and Murph calls the group to order.

"For the benefit of first-time attendees," he began, "this is the 30th annual gathering of this ragtag army of capitalist mercenaries. Our purpose has been the same for three decades, to stake out and defend among very smart friends any money-making idea you feel strongly about. You can recommend a stock, attack modern portfolio theory, fight for market timing or tax efficiency, or tell us how you'll get your supply of apples to sell in the depression. Have at it, boys."

A pretty unceremonious introduction to a meeting with such a fine pedigree, I thought. But Murph's "have at it" was like tossing a torch on a gasoline-soaked woodpile at a pep rally. Kaboom. Three or four separate animated conversations erupted simultaneously around the big round table.

Strong Opinions

Charlie, to my left, is a research director for a Midwest mutual fund. "Mike, I am really concerned about the delayed impact of the '90s technology boom on productivity. Despite Greenspan's enthusiasm, it has a dark side; 4% productivity gains in a 2% GDP world means that companies can keep trimming their workforce. Half a million net jobs have been liquidated in the last quarter. Obviously bad for consumer spending. And with so much excess capacity, companies use cost savings to cut their prices in the hopes of staying competitive."

Wow, what a Gloomy Gus, I thought to myself. "That's interesting, Charlie," I said. "If you think this phenomenon has legs, how do you make money on it?" "Well," he replied without hesitation, "we're launching a new long-short fund." "Aren't you late to the party, Charlie?" asked Greg, a floor trader. "I see the hedgies on the floor every day; they account for about a third of the trading volume.

"Really!" I piped up, wanting to contribute. "My big concern is valuation of stocks, especially after this powerful spring rally we've had. I've been wondering how much impact the growth of short-selling has on volatility and on valuations." My question interested Greg. "I'm not sure what's the best way to analyze their impact, Mike, but I see the panic when the shorts are getting squeezed by good news or a technical breakout. They can move a stock 20% in an hour. And, of course, bad news can do the same in reverse. With the number of hedge funds growing, volatility is here to stay."

Across the table, Marvin, an international economist, had heard me mention valuation. He leaned to one side to maintain eye contact as a waiter reached in front of him and announced, "Turkey club, extra mayo, extra pickle." "A lot of Americans are worried about valuation, but I think we have to keep P/Es in perspective. With the ten-year Treasury at 3.3%, should we really be spooked by a 5% estimate earnings yield on the S&P?"

"I know," I said. "But that estimated earnings recovery keeps getting pushed out. First quarter profits were barely up 1%. That's less than the 1.9% GDP gain. Do economists have an opinion about which earnings figure to use: operating, GAAP or S&P's new 'Core' earnings?"

But someone on the other side of the table had already buttonholed Marvin on another subject. I enjoyed a bite of my New York strip steak, medium well, and listened for another chat I could eavesdrop on.

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