Financial charts appear to indicate vulnerable market

The Wall Street Waltz, by Kenneth L. Fisher. Chicago: Contemporary Books. 211 pp. $30. The process of ferreting out and publishing 90 provocative financial charts has left Ken Fisher with two essential observations: ``I'm more pessimistic than I thought I would be about the financial markets. And, I'm much more optimistic about the federal deficit.''

The Woodside, Calif., money manager commented in a recent interview that one of the wisest maxims on Wall Street is to avoid overpriced stocks. And thumbing through the first 39 charts in his latest book, one cannot avoid the conclusion that stocks may indeed be overpriced now.

The opening charts on price-earnings ratios set the tone by showing that rarely in the last 115 years have market p-e's been as high as in the last year. And from such p-e pinnacles, stocks have tended to take precipitous tumbles.

Farther along, one finds comparisons of 1929 to today, price-to-book ratios, initial public offerings, and details of 30 years of earnings yields compared with corporate bonds.

The last is paired with the comment: ``It would take a dramatic decline in interest rates and steeply rising earnings ... to justify current stock prices, much less fuel the fires of a hot stock market.''

Of course, value-oriented investors have been shouting about this for a couple of years now as the bull market continues to charge higher. Still, to see it graphically, page after page, gives one a clearer understanding of just how historic this rise is and some indication of the course ahead.

Mr. Fisher's picture book also aims to shatter the myth that economies and stock markets worldwide have only recently become closely linked. A chart of stock prices on exchanges in London, Paris, Berlin, and New York shows tandem lines between 1927 and '29. Other charts show similar patterns over the past 30 years.

Consequently, Fisher calls safety through overseas diversification ``balderdash.'' He expects that if one of the major markets should collapse, stocks everywhere would follow.

``The thing that would scare me the most now would be a major hit in Japan, one on the order of 10 percent or more,'' he says.

On a more positive note, Fisher no longer worries that the United States government's deficit is the source of impending doom. Opening his book to the chart of net public debt as a percentage of gross national product, Fisher declares, ``The deficit is a misnomer. The government is managing its finances well - within the realm of normalcy.''

The chart shows federal debt as a percentage of GNP pushing the 40 percent mark now. But from 1940 to 1960 it was over 45 percent and as high as 120 percent during World War II.

Fisher allows that the current trend is in the wrong direction but believes ``we're probably 10 to 15 years away from a crisis environment.''

Fisher also argues that if the state and local surplus of $100 billion were added into the equation, or if the federal government followed the same accounting rules that corporations follow, the deficit debate would die.

Fisher, also a Forbes magazine columnist, won some acclaim a few years back with the publication of his first book, ``Super Stocks,'' which championed the analytical value of price to sales ratios.

He vociferously denies that this book of charts represents an endorsement of market timing and technical analysis. In fact, he pokes fun with some charts that purportedly support such ``wacko theories'' as stock timing based on wheat harvests and leather prices.

Each chart is accompanied by an explanatory page. Fisher's stated hope is that, in total, these long-term charts will give investors some perspective on market trends and cycles, perhaps preventing them from forking over too much for stocks at the end of a rally.

This is because, Fisher wryly observes, ``The stock market is the only marketplace where people tend to get more excited about buying something at higher prices.''