DATE: Sunday, Aprill 20, 1997               TAG: 9704190821

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

TYPE: Interview

                                            LENGTH:   99 lines

Q&A INVESTMENT STRATEGIST SEES SHORT BREAK IN MARKET'S BULL RUN

The license plate that Don Hays ordered in late 1991 seemed daring.

The message, ``5M in 96,'' was his shorthand forecast for the Dow Jones industrial average. The widely watched measure of stock prices had surpassed 3,000 in early 1991. He figured the Dow would surpass 5,000 in 1996.

It hit that mark in late 1995, a bit ahead of Hays' expectation.

The chief investment strategist at Richmond-based Wheat First Securities still attracts attention with his forecasting.

Known for his generally bullish outlook, Hays has been much more restrained this year. In February and again in March, he advised Wheat First clients to cut back on the percentage of their stock holdings. Hays, however, expects a recovery in stock prices late this year.

He was in Virginia Beach recently to talk to clients. During his visit, Hays spoke with staff writer Tom Shean about his forecasts and recommendations.

Why did you take up market forecasting?

When I got into the brokerage business several years ago, I came from an engineering background and tried to dissect what made the market tick. I went down the path that a lot of people go: chasing headlines and thinking about the news of the day. They hear today's news and think, ``This is the effect on the market.'' The stock market, I found, looks ahead six to 24 months, so I started trying to build models.

What indicators do you use when making your forecasts?

I found there were three main criteria that affect the direction of the market. The two most important were monetary conditions and investor psychology. Psychology is the biggest enemy of most investors because people tend to invest when they feel good and tend to sell when they feel bad. It's exactly the opposite of what you have to do. You have to invest when conditions are tough and there's a lot of room for improvement. When things get so good that everybody is jubilant, you have to back off.

What's your third important indicator?

Valuation is very important, but we had a hard time developing a valuation composite that works. We look at the price/earnings ratio and then blend that with cash flow.

What have you recommended to your clients?

On Feb. 3, we changed our asset allocation to 45 percent stocks, 45 percent bonds and 10 percent cash. This was the smallest amount of stocks that we've had since November 1990 when the bull market started. On March 24, we upped our cash position to 30 percent. A year ago, we were 90 percent in stocks and 10 percent in cash.

What prompted you to recommend that clients cut their holdings of stocks?

Our valuation discipline was a little bit over-valued, and monetary conditions had turned restrictive.

What advice would you offer individual investors who are not routinely buying and selling stocks?

They should hang in there. It depends on your perspective. If you're an investor who holds stock for five to 10 years, I'd say raise a little bit of cash, maybe 8 to 12 percent.

Federal Reserve Board Chairman Alan Greenspan has expressed concern about investors' exuberance for the stock market. It sounds like you don't share his view.

No. At Wheat, we have 117 offices from Connecticut to South Carolina, and a lot of our business is dealing with the private investor. We've got good business, but they're not knocking our doors down to buy stocks. What we're doing is asset allocation and financial planning. To get somebody to buy a stock in today's world takes a real effort.

Last Tuesday's report on the Consumer Price Index for March indicated that inflation was negligible last month. What was your reaction to the CPI numbers?

I was delighted, but these month-to-month statistics can be distorted. They can cause such a wild oscillation in the market that you always hold your breath until they come out. If you're living by the headline mentality, you were convinced on Friday, the 11th, that inflation was coming back. Four days later, you were convinced that inflation's not a problem. We believe there's no chance of inflation coming back.

How long do you expect this period of volatile stock prices to last?

We think it's a six-month consolidation, correction or bear market - whatever term you want to use - that will separate one bull market from another. We think another one will start in the very last of this year. We're staying fairly cautious just in the short term.

How far could stock prices drop before a sustained recovery begins?

Back on March 24, we said the minimum risk was 6,200 on the Dow. It could go as low as 5,800. We don't think every stock is going down. Many stocks have been in a bear market since May 28 of last year. Technology stocks, by and large, have been in a bear market since then. There's some evidence that semiconductor stocks and some retail stocks may have made their final lows.

Are you buying any stocks now?

We've been buying some semiconductor stocks and retailers. Retail stocks have been in the depths of despair for two years.

It sounds like you haven't lost your optimistic bias for rising stock prices.

I won't lose that until we see the seeds of inflation planted again. Those are definitely not planted. We think conditions are in place so that inflation will remain very modest until at least the year 2010. That has to do with demographics: we have all these people entering the very productive part of their life cycle. ILLUSTRATION: Color photos by BILL TIERNAN/The Virginian-Pilot KEYWORDS: INTERVIEW INVESTING

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