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Visiting futures trader believes conditions are disturbingly similar to those preceding the October 1987 share market crash

ELLEN FANNING: Tomorrow marks the sixth anniversary of 'Black Tuesday' - the day on which the world's stock markets collapsed. Six years on, it looks like everything has changed. Australian and US stock markets are buoyant. The stocks most in demand in Australia are the so-called 'quality stocks' - Woolworths, BHP, and the Commonwealth Bank, but on the eve of the October 19th anniversary comes a warning. US shares futures trader, Don Evans, is touring Australia, delivering a lecture called 'Market meltdown: surviving the coming bear market'. He told our economics correspondent, Peter Martin, that what's happening now is disturbingly similar to what happened in the United States stock market six years ago, in the build-up to that crash.

DON EVANS: In 1987, prior to the crash in April of '87, there were 240 stocks at over 2,000 on the New York stock exchange hitting new highs. We had a correction on the Dow. The Dow went to new highs in August of '87 and you only had 85 stocks making new 52-week highs. Now what's happening is the blue chip sector - the select and highest quality sector of the market - is hitting new highs. Fewer and fewer stocks are participating. This is characteristic, this thinning process, a sign of thinning, a thinning of liquidity is a characteristic of a major market top. It happened prior to the '29 crash; it happened prior to the '73-'74 decline; and virtually every major major in the last 50 years, and that's occurring right now.

PETER MARTIN: The US stock market is going up. Are you saying that people shouldn't concentrate just on the overall level of the index and the fact that it looks as if it will continue to rise?

DON EVANS: I don't know quite how to answer that other than to say this: the US market is making periodic token new highs. In the last two years, I've seen around a 10 per cent increase in the SP 500 Index - that's all. That's taking a heck of a lot of risk for very little reward in my opinion. We think the US stock market has between 50 and 70 per cent downside and maybe 5 per cent upside.

PETER MARTIN: The thing to be alarmed at is when fewer and fewer stocks hit those new highs?

DON EVANS: That's correct. The nature of the beginning of a good rally is when breadth is powerful. It's like a green plant shoot shooting up. The limbs of that plant are turning brown. The leaves are dropping. It's a cycle and we're in the topping phase of the cycle.

PETER MARTIN: When will the leaves start falling in big numbers?

DON EVANS: I don't think anybody can predict that. We use charting techniques to help us. We refer to this as pattern recognition. We think it's very close.

PETER MARTIN: One of the arguments which is used in Australia to support the stock market is that things are totally different now to 1987. In 1987 we had a situation where interest rates were very high; yields on shares were very low so people weren't buying shares for income from dividends. Here we have a situation where interest rates are very low, inflation is very low, shares are paying real dividends. Shares are now worth owning in their own right. They're being bought, obviously, for purposes in many cases other than speculation. Should that not protect the market? We have a situation now especially where our good shares are actually paying money better than you can get in the bank.

DON EVANS: The problem with that argument is this: there is precedent for interest rates being low, as they are now, and then rising and destroying a stock market. That happened in 1972-73. The treasurable rates in America were a little over 3 per cent, as they are now, in 1972. The result over the next two years as those rates rose is the decline of 50 per cent in stock values. What if interest rates were to drop? - let's say not rise but continue dropping. Is there precedent for interest rates to drop and the stock market to go down? In fact there is. From 1931 to 1932 Treasury Bills dropped from 2.5 to one-quarter percent in America and the stock market fell 70 per cent. There are flaws in those correlations. I have never seen, in 100 years of studying, a flaw in the interest rate correlation that I described and market breadth. Our work in that area goes back about 70 years.

PETER MARTIN: Well, why should people believe what you're saying? What's your record?

DON EVANS: I have traded since 1978 using what are called 'no load funds' in the United States, which are mutual funds in which we're switching out of a money market fund into a stock market. It's a timing function. My compounded rate of return doing that from '78 to 1989 was approximately 20 per cent. I never had a down year. Now my question for you is this: if tomorrow morning you hear that they stopped trading in America and the people on the wrong side of the market couldn't get out, and you heard it would open two days later with a thousand-point change, which direction you think it would be - up or down?

PETER MARTIN: If they stopped trading I guess it would be down.

DON EVANS: I agree with your answer. If you had a .. the risk here in trading is if I'm wrong working the short side of this market, I have an escape route. The people on the long side of this market, if they're wrong, are like an army that's lost their battle, trapped against a river, and they could get destroyed. And you could have situation here in this market with all the speculative money in the stock market, with all the leveraged money in the futures exchanges of meltdown.

PETER MARTIN: Exactly six years ago on this very program, on this very night, on the eve of the stock market crash, we interviewed the man who styled himself as the highest-paid investment adviser in the US, Dr Harry Schultz. And just hours before the biggest stock market crash for 50 or 60 years, he said that there was no danger whatsoever of a crash, and he said it with the same sort of confidence that you're speaking now. Now, he turned out to be wrong. Why should people believe you?

DON EVANS: Well, I don't know if that gentleman is the highest-paid adviser. I guess he says that about himself and I admit perhaps he is. I don't know. There is no reason for somebody listening on this radio program to believe me more than somebody that's going to sell soap in an advertisement. Maybe I should rephrase that. There's no reason for anybody listening to what I have to say to believe me more than anybody else, other than I would urge them, if they are in the markets, to go back, go to their library, look up old Wall Street journals, look up old newspapers that they can get at a university, and they'll realise, if they read history, that they are in the midst of a mania.

You have presently average people that have never been in these markets, leaping into these markets. And who's selling to them? I'll tell you who's selling to them - corporate insiders. You have record levels of corporate money being sold in the form of new issues and secondary offerings. So, you have uninformed people being sold to by highly-informed people. Now there's no bell or guarantee on a stock market top or bottom, but I've done this for 20 years and in my opinion all the classic signs of overvaluation, non-confirmation by that poor market breadth and the wrong people buying stocks, the losers buying stocks, I think they're going to be very sorry.

ELLEN FANNING: US shares futures trader, Don Evans, with Peter Martin.