WHERE TO LOOK IN '96

By JOHN ROTHCHILD

AFTER A 30% YEAR IN STOCKS, WHAT NOW? I POSED THIS question during the annual portfolio-management conference at our dining-room table. This is the time to weed out unproductive assets, of which we had several. As my wife pointed out, if stocks had a 30% year, what happened to ours? Don't blame me, I said; blame the Turkey Fund.

If we had been long in corn instead of Turkey, we would have been up 59.8%, as corn outperformed the Dow Jones industrials by nearly double in 1995. Zero-coupon bonds did even better, up 63.1%. At least we avoided coffee beans, down 43.8%, and Taiwan equities, down 30.6%. So there are some reasons to be thankful, and just as many to be sorry.

A lot of the talking financial heads who failed to predict the big rise in U.S. stocks last year have resurfaced to forecast a modest rise in 1996. The expert consensus seems to be that stocks will advance 10% this year. That is not exactly a startling bit of augury: a 10% annual gain is about average for stocks in this century.

The best guess of the analysts is that the 30 companies in the Dow Jones industrials will earn a combined $347.50 per share in 1996. If these 30 stocks sell for an average of 171/2 times earnings, we might even see a 20% gain in stocks and a 6000 Dow in 1996. But this is where the doubts creep in, owing to the sluggish economy and the silence at the cash registers.

Jim Grant, the puckish editor of the Interest Rate Observer, is a doubter. He observes that people are buying too many mutual funds and too few suits. This explains why Wall Street had a great year while malls had a lousy Christmas. After pouring $100 billion--plus into stock funds last year and having been maxed out on their credit cards to begin with, investors had nothing left for clothes, says Grant.

Lousy retail sales lead to disappointing earnings, which sooner or later lead to lower stock prices, so Grant expects that the owners of stocks will have less to show for their investment than the owners of suits. Wall Street money manager Marty Zweig, a chronic pessimist, sees the current situation more optimistically. He thinks the sluggish economy will keep interest rates low, which in turn will drive stock prices higher, at least for a while.

Here are a few suggestions from Wall Street luminaries as to where money can make the most of itself in 1996:

Foreign stocks, with Japan, Europe and the Far East leading the pack (source: Michael Metz, Oppenheimer & Co.). The U.S. market did better than most foreign markets in 1995, so a turning of the tables is widely anticipated. Japan is stimulating itself out of a long depression with interest rates near zero. What could be more stimulating than that? Japanese companies missed the personal-computer bonanza, but they may be catching up with new products that turn the dumb TV into a smart PC.

Gold. A sluggish U.S. economy won't do much for gold, but billions of Asians are heading for the jewelry stores. They have cash in their pockets and not many places to spend it, and they do not necessarily trust the local currency. So they are buying gold, which will tend to drive up the price.

Housing and home-furnishing stocks. The theory here is that lower mortgage rates will put more people into houses, and they will have to fill the rooms with rugs, lamps, chairs and couches.

U.S. brokerage stocks (source: Shelby Davis, manager of the New York Venture Fund). Last year ended badly for the brokerage stocks, and Davis says they are cheap. If the U.S. stock market in general does poorly, the brokerages will suffer with the rest, but if U.S. stocks do O.K., the brokers should do particularly well. Among others, he likes Morgan Stanley, a player in the global market selling at 12 times earnings.

As to where money might have a less prosperous new year, here are three locales:

Technology shares. The tech stocks have risen from the ashes before, but right now they seem to be sinking into deeper ash. There is no shortage of merchandise in the computer stores, with more gizmos coming off the assembly line every day. Today's high-tech marvels may be obsolete tomorrow.

The U.S. bond market. Thirty-year U.S. Treasuries did almost as well as stocks last year, giving investors a 30% total return. If the Fed lowers interest rates, bond prices may rise a corresponding amount, but there is more risk on the downside than potential gain on the upside.

Retailers' stocks. When millions of people fund their retirement plans this year, more money will flow into mutual funds, leaving even less for suits. Also, retailers that had a lousy Christmas in 1995 won't have until Christmas 1996 to prove themselves.

According to Melissa Brown at Prudential Securities, 86% of the most popular mutual funds did worse than the Standard & Poor's 500 index in 1995. This is more proof that the national pastime of picking the winning mutual fund is a wasted effort. Most people will do better buying the so-called index funds that give them a guaranteed average return.

In our family I have been put on notice: perform or resign. Recent gains by Islamic fundamentalists in Turkish elections do not bode well for oddball investors in Turkish equities.