Wall Street Week with Louis Rukeyser; 3118; What Happens Next

A. Every week for more than 30 years America's most widely watched and trusted source of economic and financial advice Wall Street Week With Louis Rukeyser is made possible by Boykin too. It's an automated wired digitized push zero for more options world who can help business make sense of it all. For professional services the answer is the people of the void entered by A.G. Edwards committed professionals providing a full range of financial services and investment advice. A.G. Edwards trusted advice exceptional service by Oppenheimer Funds skill experience strength a strategy Oppenheimer Funds uses to achieve long. Term performance Oppenheimer Funds the right way to invest

and buy Occidental Petroleum from exploring for new oil and natural gas resources to striving to protect the environment. Occidental Petroleum is bringing a new energy to energy solutions produce Friday November 2nd. Our panelists are Tom Gallagher Barbara Marson and Liz Ann Sonders. Tonight's special guest is Edward Yardeni chief investment strategist Deutsche of Bank Alex Brown. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well who would have guessed that this year. Hala we would give almost terminal fright to the bond. The ghouls of course are those traitors who delight in News of the economic troubles of anybody else figuring that our rotten economy increases the attraction of government bonds and who absolutely detest any upbeat economic news since they are

convinced against all the evidence as it happens. That prosperity causes inflation and their favorite vehicle for translating those ghoulish sentiments into financial action has been the 30 year Treasury bond since it traditionally responds most dramatically to any perceived change in the inflation outlook. No matter how wacky that perception. Well just look at what this government went and did to those darling little demons. And on the very day of their most special holiday how will we in the Treasury announced that it was going to stop selling the best known of all its products that 30 year T-boned presumably right away and presumably forever. Well you couldn't have done anything crueler to the bungles unless perhaps you taunted them with news that somebody else in America was getting a job and maybe even a raise. Is that how sadistic can you get.

Oh there have been straws in the ghoulish when for a couple of years as the government downplayed its 30 year issues and even began buying some of them back. But holy pessimism the spendthrift government had issued about 600 billion dollars worth of 30 year T-bonds since it began regular sales of them in February 1977 while they were the very heart of the Treasury market. Assuming that is that that market has a heart and the customary initial target whenever any Gould thought there was even the faintest whiff of inflation in the air. So let's shed a tear for the bond ghouls in their moment of loss and turn our thoughts to such alternatives as the presumed new benchmark the 10 year Treasury note as well as to government agency bonds and corporate issues. But it won't be the same. And if the government implements its hopes of returning to big surpluses later in this decade we may never see its like again.

The news sent the Good News Bears scurrying to buy up the presently outstanding 30 year T-bonds for their likely scarcity value and Cent long term interest rates down to levels previously seen only for a couple of days in October 1998 and it was terrible for those who have been betting ghoulishly on higher rates. But it helped to mitigate a severe bout of early week profit taking in the stock market lower interest rates now including a 30 year bond yield below 5 percent helped the stock market two ways. They encourage economic growth by reducing the cost of business borrowing and then make stock buying more appealing because the yield on fixed income investments becomes less competitive. These effects began to be seen as the week was ended especially in areas like retailing which were boosted by hopes that fall in interest rates would spur more consumer spending. Still it was a week of mostly dreary economic news confirming that the economy

is in a deepening slump with unemployment already at a five year high. All of which was enough in turn to convince a majority of Wall Street economists that the Federal Reserve will now cut short term rates another half point to a four decade low of 2 percent when it meets next Tuesday. That would be the 10th cut this year bringing the rate down from six and a half percent. Just think only two more percentage points left to cut. And then they'll have to think of something else. We tonight will talk with a top investment strategist who is trying to prove that he is what many people might think even more improbable. An economist who can actually make use of money. But first let's see how the hobgoblins work avoided in Wall Street in the week just passed. The Dow Jones Industrial Average dove nearly 500 points in the first three days of trading before getting more than half of them back in the final two days as investors figure that the economy while deeply and the mic now had already

been largely discounted in the stock market and would be in much better shape as 2002 unfolded particularly with the stimulus of even lower long and short term interest rates. The Dow still wound up with a loss of two hundred twenty one points for the week. About 2.3 two percent at ninety three twenty three. But the broader indexes which also were down for the week were all hit less punishingly than the Dow. The technology sector improved as Microsoft reached a settlement of its federal antitrust battle and several leaders of the 18 states suing the software titan signaled that they might go along to Microsoft and Intel are the only stocks included in all three major averages. The Dow NASDAQ and the S&P 500. While the dollar weak in the bed in a week of bad economic news falling interest rates and more scary terrorism threats it held up remarkably well. While gold continued to go nowhere and silver fell to an eight year low.

And in case you thought that political correctness was running out of targets I know that a group of Belgian activists has come out against cruelty to pumpkins. Steely and 53 jack o lanterns from gardens in the town they announced that they would turn them into soup for poor people and would fight vigorously from now on against what they called improper use of pumpkins. There was no immediate comment from the patch itself. It was in some of those words lighten up your life. You know the news is certainly nothing to get excited about could you when you opened you mentioned some things that I think are very important which is a lot of the structure related to the profits the cost side of prophecy is starting to prove and prove quite measurably we've cut inventories quite a bit energy prices are down commodity prices are down. When the only good things you can get out of today's employment number is that wage wages are likely to be doubted so all of the inputs into the close work

exactly but it's good for business will eventually result in good news again for workers. So come and inventories are coming down and that's how you get it done. Absolutely and I think you know the stock market is the ultimate leading indicator it is the discounting mechanism it likes to anticipate the turn and I don't think it's going to be any different this time I think we are building a base and I think the market will move in anticipation of the turn. We've been waiting for this term for a long time. Why are you convinced that this is the real one. Well as tragic as the events of September 11th were it certainly brought about a lot of stimulus that was lacking prior to that. Not only has the Federal Reserve continued to lower interest rates but they pump liquidity into the monetary base. We're going to have probably nearly unprecedented fiscal stimulus and there is a tremendous amount of cash that has been built up on the sidelines that I think because of the very low yields will find its way back into the equity markets. You're still an advocate for technology. Yes I think you know technology was very monolithic in the 90s you only had to make the

decision to buy technology I think now it's company by company. But I think some of the big dominant companies make sense right now like an EMC or an Intel but I think you stick with the quality companies not the time for rough speculation. No probably not. But I'm going to have a few words indicate you think Wolf we've gotten ahead of itself. Is that your view. Well yes it is. I think that there's this kind of tug and pull in the market some days there's an emphasis on the stimulus that Lizanne was talking about other days there's a concern about the terrorism risk and everything related to that and I think I think the stock market hasn't shown as much risk as say the bond market the spreads over junk bond spreads are emerging market spreads suggest there's more risk in those areas and I think that's probably a better measure than than the stock market. What are your friends down in Washington going to do about fiscal stimulus what kind of a tax bill we're going to get. I think if you asked everybody who's following the tax bill the list what the top four elements are going to be. They're almost unanimous agreement that

there's going to be a speed up in some of the already enacted tax cuts they'll be at some time some of them but not all not probably not all of them. Tax relief for low income workers some additional investment tax incentives and they'll be on the increase in unemployment benefits as well. But getting from here to there is going to be a tricky thing and it's going to take probably longer than most people would like. How about the thought of cutting or even suspending for a while payroll taxes. There was some talk of that at the outset but that doesn't really have much life right now I think people are still nervous about touching Social Security. And it's probably more costly than most lawmakers want to approve. But what's your assessment will this be enough to turn this economy around that year. I think you I think it will I think that you do have the combination of monetary stimulus the Fed's going to continue cutting rates for a while. The total fiscal stimulus really is going to be a record. And so I think that that you are going to produce you're going to see a V-shaped recovery that most economists are talking about. But I think the risks are higher which is why I think the market should be probably be a little bit more cautious right now on the terrorism

front could prolong a recession or make the recovery a little bit weaker. Marshall you were one of our most cautious panelists a couple years ago and that was a good time to be cautious so you know I am not at that cautious as Tom is and have been saying there are a number of dynamics in place now that will come to work in 2002 and will probably stabilize the economy and earnings will start to grow at some point. I don't think that what's happened has derailed long term profit growth of 6 to 7 percent. So over the next three to six months could feel pretty miserable with prices being back to the market indices in 1998 levels. I think there's a good upside for investors from here. You've been looking at the area of technology. Yes I have. Perhaps a little too early and certainly I think that recovery has been pushed out a bit but I think that technology is again pushed out a bit but a year from now I think that these companies will start to look cheap. What are your favorites now. I like Lucent. I still think Compaq has upside although the merger with you the Packard is presenting some longer term difficulties.

And Motorola. Well let me go and documents from the management. But in any event it is time now for a round of viewer questions. LIZ ANN SONDERS Steve know all of Rogers Arkansas is Notice that while Nasdaq stocks tend to be fully traded from the opening bell it can be 10 to 15 minutes before all the Dow Jones Industrials docs have opened in the US before the Dow accurately reflects all 30 of its stocks. He wonders why this is so. Well the Nasdaq and the primary's of the Nasdaq is an electronic marketplace. So the dealers are constantly updating and monitoring prices. So it's done fairly quickly and very effectively. Now many of the stocks in the Dow are indeed over-the-counter stocks and trade on the Nasdaq. But many are also trade on the New York Stock Exchange which is an auction market and the market makers essentially funnel all orders to the floor there's a single specialist for each stocks of the fact that there's a single point of contact is why it takes a little bit longer. All right Tom Gallagher a number of viewers are send us questions about the so-called national savings rate

for example Eliot Sternberg of Carlisle Pennsylvania would like to know how the rate is calculated and what its actual components and Alex Jones of Seattle Washington writes economists to forever be moaning the fact that Americans don't save enough. But at the same time economic alarm sound whenever consumer spending dips doesn't decrease spending mean increase saving and should not be cause to rejoice. Yeah for starters Lou there are no components because the government doesn't actually measure savings. They start with after tax income. They calculate personal consumption and the difference is considered savings when the saving rate is measured that way the trend is pretty alarming it was 8 percent a decade ago last year it was almost zero but there are a lot of problems with the way they measure that including the way they calculate capital gains and capital gains taxes so the actual trend isn't as alarming as the numbers as to whether or not we should rejoice. I don't think anything in economics is that straightforward. People who do start to cut spending in order to save more are better prepared for the future but in the short term it does mean less economic growth.

You wouldn't want to have to change its name from the dismal science if it got that name for a reason. Barbara Morrison how would you respond to Steve Orlando of Dayton Ohio who emails me as follows with all the craze about Harry Potter and the November movie coming out what stock should I be looking into to possibly get some of the wizardly profits. Harry Potter the boy wizard will certainly create some magic for the media and entertainment company AOL Time Warner and that movie is scheduled to open November 16th. And because of the tremendous popularity of the book series with children and adults it's almost guaranteed a blockbuster opening. And then there will be DVD sales and video cassettes and probably sequels so I think that's pretty good for AOL Time Warner. Another company which will benefit is Mattel which has a toy line based on the Harry Potter series so they'll benefit from movie opening as well. OK now if you'd like to be as rich as the Malfoy is you don't have time for the folkloric you limit Hogwarts.

Don't just fly around on your broomstick playing Quidditch. Try going for the golden snitch here in the supernatural world of Owings Mills Maryland 2 1 1 1 7. And now let's go over and meet tonight's special guest and your identity. And welcome back. Thanks very much Lou. Always a pleasure. Thank you. Like every other economist I've ever known Ed your identity is not always right. As he demonstrated famously in his prediction that the Y2K changeover would produce economic disaster. But unlike most of his brethren he is unfailingly independent and provocative. Perennially rated among the world's top economists and tonight making his eighth appearance as my guest on this program at last year broadened his reins. But being promoted to chief investment strategist for Georgia Bank Alex Brown for which he had worked as chief economist for a decade following similar stints at C.J. Lawrence with actual securities and E.F. Hutton.

And how much has the economic outlook changed since September 11. Well I think one of the surprises is that maybe it hasn't changed all that much at the beginning of the year we had a profits recession. We had a capital spending recession but the consumer really stayed remarkably strong and we just saw these October car sales which are literally off the charts. Consumers still very strong. Profits are probably now even weaker and the outlook for capital spending technology spending is probably weaker right into early next year. The government reported that we were in a narrow decline in the third quarter. But I think it will be a deeper decline in this quarter. Do you share that view and when do you think we might be out of it. It's hard to really get a down phase to this V that everybody's in been expecting when you have the consumer spending so well look at that. The Fed's been providing very low interest rates mortgage rates are down under 7 percent. Consumers are also enjoying lower energy prices. When you put it all together consumers are really benefiting from everything that the government's trying to do to stimulate the economy.

So I wouldn't get too negative about the consumer but they're going to be some slowdown inevitably when you can't keep car sales the strong. U.S. is out of the recession in the first three months the first six months and I think I think for investors the issue is the profits recession and we may actually have an economic slump a mild economic slowdown right through the first quarter. But the profits recession is really quite nasty and I think that'll bottom out around April or May. So what's your translation of this economic analysis and do investment advice. Well you know after the attack investors embrace the V scenario they said that the economy is going to be weaker we're going to have a recession. But then next year we'll have a recovery the comparisons will be easier. I think that the market has already recovered quite nicely as we've seen the past few weeks. I think it's already discounting some pretty good news I would say the market may actually continue to drift in a sideways fashion through the first quarter maybe the second quarter before moving to new high ground in the second half of next year.

You think we've made our lows. I think we may very well I mean that was the that week in September and then when we got back in the market was opened things looked awfully grim and they were awfully grim. But I think we've gotten a little bit of our confidence back. Bad things can happen. What would you buy here. Well I would continue to underweight technology but I would overweight health care health care a thing actually now has a bit of a national defense characteristic to it. But it also has demographics going for it. And then when somebody's favorites there. Well I think you buy some of the medical equipment the Guidon for example Johnson and Johnson there's a lot of good news in there now but an Abbott Labs. What would you sell. Well I guess my feeling right here is some conductors are awfully expensive I mean they're selling at 70 times forward earnings. I hate to say someone because they've been awfully strong but the index is in for some connectors on 65 percent since the beginning of last year we've had five rallies of 35 percent.

When you do that to the upside so I think you really have to be able to trade those. Traditionally one of the earliest movers that as we've covered is going traditionally one of the earlier moves that's correct but I think they're already discounting a recovery. Well let's not discount the power that's been in them and starting with his own son. That's from one of the things you have been discussing lately is the relationship between capacity utilization and unemployment and with capacity utilization is low and it is it really signals close to a 9 percent unemployment rate and we headed that I don't think so but I do think we'll see a 6 percent unemployment rate. I wouldn't dismiss the possibility of seeing a 7 percent unemployment rate. A lot of companies extrapolated the boom of the 1990s and they hired a lot of people. We know that maybe there was too much capital spending but maybe there's also a little bit too much hiring. But look even if the employer gets unemployment gets to 6 percent just leaves 94 percent of the labor force employed enjoying low interest rates enjoy maybe lower energy costs and not doing too badly after all. Had an impasse stock market bottoms the price earnings ratio was quite a bit lower than it is today 10 to 12 over 20. Does that limit how much of an advance you can expect in the stock how I sort of agree with I think the market

already incorporates a fairly high valuation measure and it also incorporates an earnings recovery next year so that's why I'm not really that bullish on the on the way up on the other hand I do think we've made a low down one of the groups which has really taken a hit is the travel related sector. How long do you think it will be before consumers get over their fear of traveling. Well that's one of the biggest problems we have for the economy right now and that's the fear factor. And it's good to see that people have gone back to the stores and they bought lots of cars. But we do need to see some some pick up in the travel industry that would be a clear sign that we've got over our fears. And I think you know assuming that nothing terrible happens that it could take another six months nine months and then I think you'll see people traveling again. Let's talk for a moment about the rather counterintuitive development you mention which is that car sales been so good when the consumer as well as we heard in our dealers that with the rebates and low interest deals steeling future sales I think they are and

that's why I think what the rebates have done what the incentives have done is they've moderated the recession. It's certainly going to be much less severe than was feared after the attacks. So it's moderated for the rest of the year but it's probably a stretch that slump into next year because we are going to see weaker car sales. So you see a relatively mild recession but not one that will end quickly. Exactly. Fairly mild recession very similar to what happened in the early 1990s we had a mild recession. We had a severe profit slump. But there was a recovery the market came back. We had some great performance by small mid-cap stocks which I think could happen again. If you were the policy maker what would you be doing in Washington. Well I think the Fed's heart is in the right place I mean Fed Chairman Greenspan has been very very aggressive in lowering interest rates I think they are going to give us another half point cut 2 percent and then you know it's just going to take some time. It's it's simply going to require some time as it did in the early 90s to keep the Fed funds rate down to revive the economy with bond yields as low as they are what's your recommended asset allocation.

Well bonds aren't as interesting as that as they were even a few a few days ago but I'm still at 70 30 I think that it's possible we'll see that the 30 year bond gets back to maybe forming a half percent. I don't see any inflation up ahead here and stocks are not cheap. I think you have to be a stock broker you have to get the right stocks might be 70 30 right now. You don't see any inflation are you concerned about the possibility of deflation. I am concerned about deflation. You know the very same week that. But the attacks occurred China joined the World Trade Organization and they have the potential to produce a lot of goods and our economy and the global economy and a very low cost basis. So I think there are some real deflationary pressures out there absolutely. Every time we talk about deflation of this problem I get a lot of letters from people who say the price of this is going up to rise that's going up. How do you respond to that. Well I think they're right. It hasn't been outright deflation and it hasn't outright deflation largely because the central bank the Federal Reserve has lowered interest rates so far so good but as you point out the way things are going to mean we have 200 basis points left between the Fed funds rate and zero so I think it's a risk it's not the reality yet.

Would your forecast change if we had another attack in this country. I think certainly bite to depends on the nature of the attack and I'm encouraged by the fact that we responded very quickly we woke up to the threat of terrorism and we certainly have rounded up a lot of folks that might have created some damage. Thanks very much Ed your identity always clearly understandable and clear cut thanks to our panel. Hope you'll be back with us again next week when my guest will be the man who succeeded Hall of Famer Jack Bogle as head of the world's largest no load mutual fund family Vanguard is Jack Brennan. And after five years as Vanguard CEO he has some strong opinions of his own about what lies ahead for the business and for those who invest in his products. So come join our family. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Good night. Wall Street Week With Louis real geyser is produced in association with Ruth Kaiser television incorporated by Maryland Public Television made possible by

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