Wall Street Week with Louis Rukeyser; 1544; 1985's Leader: Can He Do It Again?

World. Wall Street Week With Louis Rukeyser brought to you by public television stations and by Hilton Hotels. America's business address and its subsidiary Conrad international hotels. Competition makes American business Xcel Prudential Securities the investment firm with rock salt of resources that's leading the way to the Future for Investors. And the Sperry corporation providing high technology computer based systems solutions to the complex prob. Business government and defense. Produce Friday May 2. Our panelists are

Elizabeth Mary Pharrell and Carter Randall. Tonight's special guest is Harvey Eisen president of Integrated resources Asset Management. Good evening I'm Louis Rukeyser This is Wall Street Week Welcome back and don't worry about our late start. We had a little technical problem here but we said Let there be light and there was light and we're going to go on. This week the accident was in the Ukraine. But the meltdown was in Wall Street. We may have just seen some of the fallout as a start of the world learn once again that there is no truth in Providence and no news in his vest yet.

That is what those words mean in Russian. The frightening aspects of dealing with a closed society spread fear from Finland to the futures markets. But there is of course no disaster so immense or so terminal that they will not be traders trying to make a few rubles out of it. The stock market which is always said to abhor uncertainty. But alas never finds anything else in this mortal coil. Use the Soviet nuclear accident as an excuse to head south as fast as his little legs would carry it including the greatest single day point loss in its history. On the other hand buyers raced to accumulate agricultural commodities as grain and livestock futures soared on speculation that fallout will damage at minimum the Soviet greenery and stepped up the demand for American products. That same line of at least mildly ghoulish reason in lend support to the recently ailing U.S. dollar though it couldn't in the end do a thing for the gold bugs

whose favorite metals showed a slight loss for the week. This by the global outburst of the kind of fear on which it once used to flourish was there really any logical connection between the Soviets inability to run even a power plant properly and a sell off of such dimensions in the US financial markets. Of course not. But whoever said the hysterics of Wall Street had to be logical. Those searching for more fundamental economic explanations had a barrel full of clues all conflicting. The U.S. economy is still very much a mixed bag with weakness continuing in for example manufacturing and commercial construction. But those who insist year after year that we're about to head straight into the tank had to contend with some more cheerful items including the best unemployment reading in three months a solid overall increase in the government's index of leading economic indicators and the highest level of new home sales in the twenty three years the Commerce Department

has been tracking them all that favorable news can be distressing to the bond market of course it being the appropriate investment for aspiring morticians. But it's ghastly explains the terror among stock investors. That was to be sure one more crude explanation. The price of crude oil is creeping up noticeably by one measure more than 10 percent in a week thereby discouraging those who believed that America's planes cars and factories would soon be running on a dollar a barrel. Petroleum. In the end though the best explanations seem to be that the financial markets after their historic nonstop run ups were simply ready to take a rest take some profits and take any excuse for doing so. It seems entirely relevant that my guest tonight is a man who has studiously avoided passing hysterias while compiling among big investment advisors the single best record in all the land in 1985. But first let's pay a call on the hysterics.

The Dow Jones Industrial Average gave up most of its April gains with the biggest hit come you know on Wednesday when its drop of just under forty two point set a record low in percentage terms it was well short of a record indeed less of a drop than the Dow took in one day in January. For the week the Dow fell just over 60 points to close at Seventeen seventy four point sixty eight and on the lowest weekly volume of trading since March. There were big minuses for all the broader market averages as well. The sell off did mildly Haughton our elves whose technical market index improved two notches and is now showing only minus 2. The concern over the Soviet Union somewhat less than speedy or comprehensive style of journalism may have served temporarily to deflect European hostility toward the United States for having been beastly to Gadhafi. Indeed there were signs that some on the continent might even be beginning to remember why we were allies in the first place. Scientists were

also busily trying to find out how widespread the growth of a new European illness actually is. It's called World timers disease and the symptoms are that you forget the e used to be a Nazi. It's got a mantle in addition to everything else I've mentioned the Treasury has to peddle another twenty seven billion dollars in government securities next week this uncertainty about the Tokyo economic summit. Could there be more selling ahead. I think there's going to be some more selling ahead and for an even additional reason Lou an additional reason is that cash flow going into the market is slowed down you know the big pension fund contributions and IRA contributions all came in in April and that put demand in the marketplace for securities that cash flow has slowed down now. I think we're in for a little period of digestion here I'm not worried about this selloff in the market in fact I can see we'll consider an opportunity to get back in. I would point you start by and well oh I don't think there's a magic point to start buying but I think the shock

I think you watch individual securities if you're interested in and if they hit levels at which you think are bargains is the time to buy it. We're halfway there. I think we're halfway there. May I quickly mention one other thing Senator Packwood in his weekly dissertations has finally said that we have some unanimity on a new tax bill that could have both an important and adverse effect on the market for many reasons. If they do what do you make what's going on. Well Lou I tend to think that this has been an interest rate driven market on the upside and it seems to me that people are. The consensus is now moving more towards looking for an economic recovery in the second half and I tend to think that you'll probably have a slight correction here and then a rally and then I'd look for a maybe even a more major correction before the secular bull market continues. It's normal is it not for the stock market to keep going up after the bond market stops going up. Yes. So the fact that the bond market sells off one we doesn't mean that the stock market has been absolutely but I think

my own feeling is that the major gains in the stock market have been had although I still think that you probably could see the market get to 2000 or over in the cycle but I think you're in the third leg of the cycle at this point. If somebody came to you with new money we could almost sit tight for a while. I would probably invest up to 50 percent of it with the idea that I'd be looking to average down as time went on I don't think you want to be totally out of the market at this point. You could be wrong. Yes. Yes that's right. To have that in my file two notes of mild caution what would be your view. I'm going to disagree with both of the prior panelists although I think questions always called for in the stock market. Well for some people. I think that while I agree that some of the demand in the marketplace is slowing a little as Carter mentioned the supply of stocks available is also declining. You've had these massive repurchases by companies these restructurings and mergers and acquisitions that have taken even huge capitalization stocks like General Foods to Biscoe off the market. So at the

same time that you've had increasing demand for stock the supply is dwindling and even the new issues this year attracted by high stock prices have not offset the stock coming out of the market so that's very positive for prices. Carter mentioned some dwindling sources of cash one untapped source of cash. Is the money market mutual fund where individuals have so much stored up. What's going to bring that money out. Well the mutual funds had net declines every year in the 70s and since 1981 in particular the bull market there have been large infusions of capital into mutual funds IRA money is now over 200 billion dollars and only a small portion of mutual funds is in equities very small portion of IRAs in equities. And I believe that money is going to increasingly go in the market as investors are attracted by these rising stock prices. So you know I wait a bit. Not at all well. I agree with what you said initially in your present opening remarks because I think this is what happened this week is unrelated the fundamentals of the stock market low interest rates very poor alternatives for investment in bonds or money market funds virtually dictate that people who want to make money have to come to the

stock market. OK in any event penalises Time now for an enriching experience we hope. And if you know of viewers that is by answering their questions quite a battle Katherine Hardesty of New York City has a gripe against an industry that used to employ you. The banks if you want to know first why credit card interest rates vary from state to state and second why set rates can still be as high as 18 to 21 percent when the bank's basic crime rate has fallen to eight and a half. Why Mrs. Hardesty asked Is the consumer able to be ripped off this time. You would be Do I thought maybe she had a great that the industry used to hire me. First of all the difference in rates in different states is due to different laws in different states and also due to competitive factors within those states. Secondly I have the same gripe she does. I think the banks should have and could have reduced consumer rates they just didn't do it I think they're making a big mistake. They've already ceded the automobile consumer loans

to the captive finance companies. They're going to lose a lot of their other consumer loans through the retail industry unless they bring them down to palatable rates loud Hear hear is heard in 50 states. That datum is Robert Mitchell of kind of with Washington is confused by the variety of energy investments being offered sometimes by the same company. In these days of low oil prices. What is the difference between a gas an oil royalty trust and an energy partnership. Yes which is more advantageous. Well to answer the last question first I think basically the energy partnerships and LPs as they are known is more advantageous and that's primarily for two reasons. You have more options and reason for growth because the trust cannot explore and produce outside of the original trust agreements. And these other companies these other vehicles can in addition to that you have return of capital treatment on your distributions for the MLP. So that that's tax free and your royalty trust you're only partially sheltered. I would only caution that anybody who's going to look at these in these days of low prices ought to look at strong balance

sheets and cash flow retention and the ability to really have good reserves so that the the distributions can be maintained. Ready Mary from Jacqueline Dunning town of Santa Fe New Mexico. So she understands that the field of advanced ceramic technology and products is expanding rapidly led by the Japanese. Can you orient or do some promising investment opportunities there. Well she's right that certainly is a rapidly expanding area although the U.S. it is involved as well although a lot of the companies do it primarily in a research and development phase for their own internal use. And just to explain because it may not be apparent what that ceramic technology is ceramics have very good qualities for the transfer of heat also insulating characteristics and cooling characteristics so that to date they've been used for essentially in the semiconductor industry for packaging but also have great applications for autos and appliances so although it is a big field I'm going to be the cautious one this time. There are some small pure plays in the industry their speculative

technological stocks so I feel a lot more comfortable really going far afield. IBM has a big idea for it it's much too small to ever have any impact on IBM but I'll be real cautious and say IBM is how I'd play that. We don't even guarantee IBM right now if you are interested in ceramics I guess the art of investing we've got some advisors around here who don't have feet of clay so mold your hardest questions and fire them to us here at Wall Street Week Owings Mills Maryland 2 1 1 1 7. That's Wall Street Week Owings Mills Maryland 2 1 1 1 7. Now before we meet tonight's special guest let's take one of our periodic looks at how the Dow Jones Industrial Average really is doing when you take the reported figures and shake off the pattern of inflation. Which always makes the current numbers seem larger than they are with us get a far more relevant answer to that perennial question how high the Dow. First let's take a look at the official Dow.

The one we talk about each week our chart begins in 1913. The Dow that year hit a peak of eighty eight point five seven. Moving up to a nine hundred twenty nine high of three hundred eighty one point 170. From there it tumbled nearly 90 percent in three years and it wasn't until the 1950s that the records of the 20s were surpassed. The Dow began its latest bull market in August 1982 and 11 days ago reached an all time peak. It's 21st record day of the year at eighteen fifty five point nine zero. But when you compare this number to the inflation adjusted Dow you find that there was considerably less than met the eye to all those records. Indeed when you ring out the effects of inflation and adjust the Dow into constant 1913 value dollars you find that it was actually lower in 1982 than it was in 1913 and even at its recent 1986 nominal record actually stood only at an inflation adjusted one hundred sixty seven. That's the best in 10 years to be sure but it's a level from which the Dow would have to still nearly double

to break the authentic all time record set in January 1966 at current prices in fact to make a genuine new inflation adjusted high the Dow would have to close next week at three thousand three hundred ninety seven point to six. Don't hold your breath. And now for some thoughts on altitudes and attitudes let's go over and meet tonight's special guest Harvey Eisenberg. In. Our view welcome we were briefly in the dark of the opening but I'm sure as I noticed some light in this. Harvey Eisen is a quiet man whose record speaks loudly of all the big money investment advisors in America his performance last year was rated number one with his stock selections up a sizzling sixty eight point six percent. But Mr. Aizen who is president of Integrated resources Asset Management where he controls about half a billion dollars in individual accounts pension accounts and mutual funds claims he does it all with an

old fashioned conservative business man's approach. Harvey if it were that simple why didn't any other old fashion conservative businessman or a businesswoman and that you reckon. Well I think the answer is that what we do is somewhat different than what most other managers do. I think the concept of identifying the investment themes that we look for is really the key. What does that mean identified at the end that something comes give you a good story. Sometimes it works that way. Actually a theme would be deregulation. An example of that would be the change in interstate banking. This week there were two deals that were announced. Marie Medland and Chemical Bank banks are being the choir at two to two and a half times book when many times are trading in the marketplace at one or 1.1 times book. Are you saying that the banks are still a fertile area for new investment. Yeah we think so and basically we always say in the final step would we want to own this entire business at the price that it's trading. That's the business man's approach. Absolutely.

So you pay a lot of attention to balance sheet. If you have any rules of thumb balance sheets income statements. We're big fans of cash flow. We always look for high quality balance sheets. We look for return on equity. We look for big amounts of cash. We look for undervalued assets. What do you think of a market this tumble the way this one is double if you pay any attention to that in your approach. Honestly we try not to. We think that the key for our approach is to find outstanding areas that we're comfortable with investment values so the fact that the Dow is up or down is of little significance frankly. The theme you just mentioned is an example of deregulation that's not an unknown thing and we know the financial industry has been deregulated. Would you buy any financial institution at this point how do you find the ones that you really want to buy. No quite the contrary I mean we spend a lot of time visiting these companies we visit every company that we invest in personally. We see a number of competitors in the interstate banking thing what we've done for example is to try and identify some of the states that are very

close to Interstate banking for example New Jersey has been one of our favorite areas look banks feel like they're. United jersey bank Howard savings bank Commerce Bank of New Jersey. I mean other things media media media there's a theme for our times. Are you pro or con very very pro deregulation. Cable television the end of 1984 and a law was passed by the Congress saying that table TV would be deregulated and in fact beginning January 1 of 1997 we're going to see free pricing competitive pricing. So we're very optimistic about cable television many people who have bet on cable television have lost. Why. It's a highly leveraged industry you have to have staying power. But over the longer term cable has turned out to be one of the boom areas in our economy. Where are you making your cable investment. United cable television. Rogers cable. Warner Communications. I have another thing in Forth. Yes.

You know regular conduct an orchestrated Well let's stay with the financial thing. We're very very optimistic about stockbrokers and money managers. We think that the bull market that has occurred has been very profitable for them. And they typically have brokers that they like but another study is actually wonderful guys. Actually the ones we like have been not among the best performers. The three national firms that remain Merrill Lynch E.F. Hutton and PaineWebber we're very optimistic and we think those are franchises that would be very hard to duplicate that would make incredibly logical acquisition candidates for major insurance companies for example so we're very high in them. With our usual warning that even the number one performer has some losers. Let's move to a three part thing. Starting with quite a bit. Thank you Lou. Just to be devil's advocate here you talk about value and asset value. And then on the other side you talk about the growth of sales and presumably earnings and then the two really are different if you took

the financial company selling at a small premium to their asset values you could take the cable companies and say they really don't have asset values or certainly the brokerage firms they don't have as advisers just have earnings potential. Do you feel that's a little bit of a conflict in much you're saying. Well you're exactly right by the classical definitions of our industry. But frankly we try and find companies that not only have asset values but have growth potential. In the case of the cable companies as you know the key is cash flow and particularly free cash flow which is booming in that business in the case of the brokerage business you're right the assets leave every night at 5 o'clock or 6 o'clock. But I think the brand names have finally been instilled in the mind of the consumer. And I think there are values there along with a growth are the two areas that have been somewhat battered over the last couple of years that seem to at least be cheap for to some extent have you done any work are you doing any work needed to technology or any of the energy areas as merging seems keyword there is work.

We're doing work in both areas but we really haven't made significant investments we have done some technology because technology is one of the more exciting areas. Energy we think is something which will be at some time very very good that we've done nothing there at the moment. Harvey you've been talking primarily about stocks and even said earlier it doesn't matter whether the Dow is up or down. There's market timing play any role in your decision making process. Very little hopefully. As a matter of fact as I said a couple of weeks ago in a newspaper article when I think about market timing I usually take two aspirins and lie down and hope it passes. The problem with market timing is you tend to miss good investments at times when the world looks very very bleak. The key to making money from our point of view the key to really good investments is to find outstanding companies and stay with them. Typically how long do you stay with your investments. Hopefully for a long time usually a minimum of 12 to 24 months. Do you set a price target when you buy it. Absolutely. And we hope we're wrong on the upside. So you don't automatically sell when you get there. Now we review the

position we get there there's a little euphoria at the end then sometimes. Generally yes. How often do you pick a clicker. More than I'd like. But we do it. What do you find the mistakes that you have committed and I want to avoid. Biggest mistake is well what we do is we monitor the fundamentals through the company and when something that we're looking for doesn't occur we realize we're wrong and if we can't figure out why the odds are very high that we'll sell the position. We really try not to stay with mistakes once we recognize we've made one key for us is to sell it and move on. I would have mentioned your stock picking skills you also had a good record with bonds. What's your position on bonds now. We think that interest rates have probably gone to points that are in line with our best thinking. We have been small net sellers of bonds and we're basically using bonds as a source of cash. If rates them are going to stabilize which seems to be what you're saying is that they would go in

Fable for the stock market. Well we think it's favorable. And again that's a businessman's assumption that we're making I don't want to imply that we can predict what rates are going to do. We think that rates will stabilize at this level might even go a little bit lower but I think the key point is we really don't see any reason for rates to rise dramatically from here. Many people say the hardest decision is when to sell a stock. What are your criteria. I think they're right. The best thing we can do is we said earlier to set some pre-determined points when it's reached instead of simply selling the position we review it. If we think there's more left in it or something is change will stay with us but if not we'll tend to sell it. I think the key is discipline I think the key is having an approach that you stay with and using it. Suppose the stock goes down then when you sell any position that we own that goes down 10 percent gets a full scale review. If we're right we'll stay with it much below that. We tend to get very very concerned because our first rule in our business is to protect the client's capital first and foremost. So we really don't like to stay with mistakes.

Well it was no mistake to have you had night Harvey Eisen thanks very much for being with us and telling us what sounds like such a simple approach I don't know why everybody thought up 68 percent bad here. Thanks to our panelists for being with us and I hope you will be back with us again next week. Then we're going to take a look at the troubled world of banking in an area decimated by my guest I guess next week Harry. He is a leading analyst of America's banks and he'll be giving us his inside view on how sound the U.S. financial system really is where the danger is law now and in the future and where he thinks the money can still be made. I hope you'll bank on being with us. Meanwhile as have been lost we I'm with you guys on the night. Wall Street Week With Louis Rukeyser has been brought to you by a public television station. And by Hilton Hotel America's business address and its subsidiary Conrad International Hotel competition makes American business Excel. Prudential Bache securities the investment

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