Securities Firms Dub 1992 Dandy

THE United States securities industry turned out to be one of the big winners in 1992, along with President-elect Clinton, the Toronto Blue Jays, and Walt Disney's "Aladdin." But the industry will have to pull many genies out of its office jars to repeat last year's performance.

Spurred by low interest rates, which drove many investors away from fixed instruments and into stocks, investment houses earned a record $7 billion in pretax profits in 1992, according to Jeffrey Schaefer, chief economist of the Securities Industry Association, the main trade arm for the brokerage houses. That is up from the prior record high of $5.8 billion in 1991. Total revenues for the industry reached a record $62.8 billion, compared to $60.7 billion in 1991.

Mr. Schaefer sees no reason why the industry should not do even better in 1993, so long as "the economy continues to grow."

"For the investment houses, 1992 turned out to be a surprisingly good year," says Perrin Long Jr., a longtime industry observer with First of Michigan Corporation. Now a number of questions are emerging about the performance of the equities and bond markets under the new Clinton administration, as well as the future direction of interest rates. The industry will "be glad if it can finish out 1993" with earnings and revenues "within 5 percent of the '92 results, one way or the other," Mr. Long says.

Many larger Wall Street firms are "slowly starting to hire once again," following the massive layoffs that took place after the stock market crash in 1987, says Rosemary Scanlon, chief economist for the Port Authority of New York and New Jersey.

And increases in pay and other compensation to top Wall Street executives is raising eyebrows in competing financial industries here, such as banking. Within New York, the securities industry employs about 225,000 workers, up about 15,000 since 1990. Industry sources say the average pay is more than $100,000.

Most analysts here attribute the industry's current success to three main factors:

A strong IPO market: Companies issued a record $39.4 billion worth of new stock offerings (initial public offerings) last year, almost double the $16 billion worth of IPO's in 1991; last year's offerings were a record, beating 1987, the previous top year for IPOs, when the IPO market raised close to $27 billion.

Low interest rates. Low rates have made alternative investments, such as bank certificates of deposit and money market accounts relatively unattractive for investors, Long says. Moreover, many US corporations sought to refinance their debt to take advantage of lower rates. Corporate America issued $851 billion in new stocks and bonds in 1992, up 44 percent over 1991.

Small cap stocks. These stocks, issued by smaller companies, were the big achievers of 1992, in terms of market gains. For 1992 as a whole, the Nasdaq Composite Index of over-the-counter stocks shot up 15.5 percent, well out in front of indexes measuring the largest US industrial firms.

THE Dow Jones industrial average, which monitors the 30 largest and most prominent blue-chip stocks in the US, climbed only 4.2 percent in 1992. And the broader Standard & Poor's 500 index climbed only 4.5 percent.

The gains for small cap stocks meant added earnings for many of the smaller investment firms in the securities industry. Still, earnings were widespread throughout the industry.

Not all observers remain sanguine about the future well-being of the industry, given uncertainties about interest rates and economic growth.

"If the industry looked all that good right now, why are a number of major companies, such as American Express and Sears, thinking about selling off their investment houses," asks Lewis Altfest, president of L. J. Altfest & Co., an investment advisory firm.

Sears has proposed spinning off its Dean Witter Financial Services Group later this spring. Meantime, there is speculation that American Express might sell off its house, Shearson Lehman Brothers; Kidder Peabody & Co., which is owned by General Electric Company, and Prudential Securities Inc., owned by Prudential Insurance, might also find themselves on the sales block.

"Industry profits for '93 will be driven by the stock market. And with equities at high valuation levels relative to underlying fundamentals [about the economy and individual stocks], I'm not so certain that the securities industry will end this year on as upbeat a note as many people are now saying," Mr. Altfest says.