Wall Street Week with Louis Rukeyser; 2613; How the U.S. Looks From England

A. For more than a quarter century America's most popular program about the economy people and their money Wall Street Week With the was real is made possible by the Corporation for Public Broadcasting. And by the annual financial support from viewers like you by Prudential Securities with more than 50 600 financial advisers nationwide securities can help you invest your money wisely by A.G. Edwards committed professionals providing a full range of financial services and investment advice. A.G. Edwards trusted advice exceptional service and by Oppenheimer Funds because solid investment performance and sound financial planning go hand in hand.

Produced Friday September 27. Our panelists are Ralph Acampora Elizabeth day here and Michael Holland. Tonight's special guest is Jane Lucas director of U.S. equities Schroder Capital Management. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well it's been a fascinating week in both the American economy as the real one and the one the politicians keep talking about. The real economy is plainly slowing down. A diagnosis that along with a near total absence of genuine inflationary pressures convinced the Federal Reserve this week that the most sensible thing it could do about interest rates was to do nothing and that is precisely what it wound up doing. While some commentators suggested that the Fed was merely being pusillanimous by staying on the sidelines during an election campaign

evidence mounted through the week that the economy has been D-cell operating pretty fast all by itself and that the last thing it needs right now is any more governmental help in stagnating again. The new dissent from the brief picked up earlier this year was evident in an array of statistics most of which as usual got minimal public attention. Orders for so-called durable goods. The expensive stuff that is supposed to last consumers and businesses at least three years suffered their biggest plunge in more than a year. The National Association of Realtors reported the third straight monthly drop in home resales and some of the corporate world's biggest names from AT&T to PepsiCo to whirlpool warned of disappointing earnings reports ahead. It was in short a week in the real economy that only a bond trader could love and so the little ghouls did kiss even hugging every downbeat report and send the long term interest rates down

comfortably below 7 percent. But in the other American economy the one the politicians keep talking about. You might as well have been living in a parallel universe. There the president of the United States explained bizarrely and with a perfectly straight face that the Fed's decision not to raise rates came about not because of all these signs that the economy was already weakening quite significantly but somehow on a perception that the economy was just the reverse that it was and I respectfully quote strong. And not a single one of the Washington journalists who questioned the president this week ever apparently summoned the minimal degree of economic literacy necessary to challenge that Orwellian pronouncement. Not that Bob Dole was exactly getting high honors and economic literacy either. The Republican candidate who became a convert to tax reduction about 20 minutes ago failed effectively to audit the how Louis is coming out of Washington about the first rise in

national income in six years by noting that that simply means that there hadn't been any improvements in household income at all in those long intervening years since Washington started raising US tax rates again. Wow what an astounding coincidence. I'm sure his reticence to exploit this issue couldn't have anything to do with the fact that Dole took active part in the bush increases that started the cycle of national stagnation in the 90s and helped produce what has been in the real world the weakest economic recovery since World War 2. Perhaps it's no surprise then that Dole's own anemic tax cut plan which would amount in fact to only about 3 percent in 1997. Contrary to the sensationalist headlines both from those who support it and those who oppose it has so far so notably failed to electrify the electorate. The likelihood of a continuation of a best sluggish low inflation growth in America may not do much for workers seeking higher

living standards but it looks just dandy that the financial markets which have been the chief beneficiaries of the slow growth economics of the 90s. I just wonder if it was always absolutely clear to the voters that the principal effect of all these tax raising governments Wehling activities would be to please Wall Street because that's another economy entirely. We tonight will get a chance to see ourselves as others see this with a woman whose views of what's happening over here are taken seriously by large numbers of well-heeled European investors who act accordingly with their pounds marks and francs. But first let's see what was happening to the deaf dollars of Wall Street in the week gets passed. The Dow Jones Industrial Average moved to its 24th record of the year on Monday. But as the week wore on and it was caught between the better news on interest rates and the growing concern that a slowing economy might actually mean less than thrilling profit growth for some of its big blue chip companies. For the week the Dow backed off 15 and a half points to

fifty eight seventy two point nine to its first losing week after three straight winners totaling more than two hundred seventy two points. The mixed picture shows in the broader indexes as well with the New York composite closing at a record. And the technology powered Nasdaq which has now been up in 15 of the last 16 sessions showing the strongest gain of all our elves are unmoved at a net plus 2. And as usual we award halos to those who got it right. That is neutral. Three months ago. Interesting though those halos will shift considerably next week if the Dow merely holds even since it would then have advanced more than 5 percent from its early July dip. The dollar was a winner this week benefiting both from turmoil in the Middle East and from optimism that European Monetary Union will proceed on schedule thereby lessening the muscle of the Deutschmark. Gold meanwhile fell into an even deeper sleep down below three hundred eighty dollars an ounce to depths

not plumbed in more than 18 months. And in the continuing saga of the world's newest miracle drug we learned even more this week about chocolate which as we have diligently reported to you is lately been found to have properties that simulate love and may lower the risk of heart disease. Now it transpires that when a moderately high voltage electric field is applied to molten Hershey bars the thin chocolate liquid becomes a stiff gel and may make an excellent shock absorber cushion in people's rides to Heaven knows where. Lock up your daughters mother or at least your chocolates. Now back in power earlier this month you change your vote Gnarls index from neutral to bullish what elevated your spirits I think was the chocolates. I have I am very bullish long term and I have been for a while. And the reason why I went neutral a while ago is because of the problems in May June and July the internal dynamics of the market a terrific and the new highs in the down the S&P

I think is going to be confirmed by new highs and some of the small and mid-cap indicators like the Nasdaq it is broadening out. And it actually really impresses me more than. I would have normally been impressed with these earnings concerns. Yeah I think on an individual stock by stock basis that will be a problem. American Telephone whirlpool are starting to exhibit that. But the leadership still is multinational when its big stocks. You've been doing some traveling this week on the stand where you've been. Well I was in Italy on vacation and one that must go. That's my point really is nothing. Like. What it what did you have an instant appraisal of the Russian economy give us. Well I think the people there obviously are concerned about that. They are their leaders. But I was very very very impressed with the people themselves the very very educated people in very very interested in setting up their markets very much like ours you doing a technical analysis of the Russian market. Yes I am in fact. And what does it tell you. I think a little slower near term but I think if they can get their political problems and you know what I think Markey could do very well. Not permanently in the red.

That's. Opposed to what do you make of what's going on. Well Lou I think that the period of a rising tide carrying all ships in the market is probably behind us and I think we'll just have to be a lot more selective with regard to sectors and and specific stock selection going forward but I think that growth is the place that you want to be in this relatively slow economy. And I also think the other area that's interesting is those companies that have strategic value in a relatively low interest rate value to larger corporations will have to look to them for future growth. Want to give us examples of each of those categories. Okay I guess in the high growth area I think that the substitution of capital for labor high cost labor will continue and therefore I believe very high growth will continue to come from the technology area a name that I'd like very much there is Xilinx in the specialty semiconductor area. I think again there is a huge consolidation going on the telecom telecommunications area. I think a lot of the smaller companies there have been hurt this year because of the telecommunications

legislation that is now passed as I would use a name like paging network which is a low cost provider of wireless services to the telecommunications industry as a as a strategic candidate for Sprint perhaps a larger company at some point. With your fondness for Xilinx as I've just related to the individual company or do you think the bad news is behind us for semiconductors. I think the commodity part of the semiconductor business is likely to be in for some trouble. I think that Xilinx is definitely a value added company. It brings huge productivity increases to engineers themselves and on a specific basis the company is in spectacular financial condition and has one of the best managements in America. So it's really their real fundamentals going for that company at this point. I mean no guarantees from the management. My column was sanguine about what's going on. Unfortunately we almost scares the hell out of everybody I'm sure and probably a little more optimistic than bet not quite as optimistic as Ralph. My guess is that with the Fed talked about this week and decided as you said a few minutes ago is that things are slowing

down and probably get some some further earnings disappointments but I think the bull market is intact in the U.S. stock market I think we have higher highs to see in the number of companies. Speculate on what the Fed's going to do is an empty game we've seen as as Alan Blinder the former Fed chairman. But I stripped him and said on this program in July they don't know themselves to wait till they got there. The conventional wisdom is now though raise rates later this year do you regard that as a given. Absolutely not. One of the things we learned and I was happy having be sitting here the night the Adam on the show is that the Fed doesn't know any more than we do because they continue to get numbers as we do they don't have the numbers and in fact is it possible that in the next move would be down rather than up. Absolutely. One thing that he said on that show however that that also caught my attention and you referred to it last week is that he referred to the Fed's no longer looking at monetary aggregates that I think the market probably took some cognizance of my guess is they took some other cognizance is this weak of of things that some of the new appointees have talked about. I think that anything is possible with this man right now. I wouldn't begin to guess what would you buy here

if anything. There are still Beth was talking a second about technology companies and we talked about Intel last spring when the market creamed it. Now you still have companies like Motorola and Texas Instruments this market has continued from its beginning in 1982 to give opportunities or gifts if you will by saying we don't like this company for it wonderful companies. I would I would look at both Motorola and takes group but I also think that sometime we're going to be given a gift I think it started this week I think the energy stocks the international wells are beginning to trade off I think they will trade off dramatically in the next few months if the price of oil goes down and I think we will get further problems in the Middle East and I think we'll make a ton of money in international oils have a favorite of the three that I've loved right through here Exxon Chevron and Texaco I just think you can't go wrong with any of the three three different pumps. All right now if there's anything you've heard so far that doesn't make sense to you. Difficult though that is for me to believe. Don't forget that we're here too and your body will demand. So if you have any questions comments or anguished howls about the world of money it gives us joy to hear

from you here at Wall Street Week Owings Mills Maryland 2 1 1 1 7 0 fax us a 4 1 0 5 8 1 0 9 8 0. Now before we meet tonight's special guest whose advice on U.S. securities is taken seriously by many major European investors. Let's see to what extent foreign investors really are buying American. According to research done by our friends at the Securities Industry Association from a mere 1 percent drop in the bucket two decades ago the share of trading in U.S. markets done by foreigners soared to nine and a half percent in 1988. At which point fears that aliens would soon be buying up everything within our borders were rampant. Since then the overseas share of U.S. trading has settled down to an estimated seven and a half percent. The recently declining role that foreign investors play in the U.S. stock markets is shown even more dramatically when you look at the share of U.S. equities owned by foreigners. From a peak of seven point five percent in 1909. That share fell by nearly half to four point two percent in

the first quarter of 1996 which was the lowest level in 15 years. Interestingly though the relative decline of foreign influence in our stock markets has been balanced by an increased foreign buying of U.S. Treasury bonds after an extended down trend in the 1980s foreign holdings of U.S. Treasuries now exceed nine hundred thirty billion dollars and account for a record twenty seven point five percent of all treasury of privately held. Why do foreigners seem to like our bonds better than our stocks. Why have overseas purchases of U.S. stocks failed to keep pace with the major bull market of the 90s and with the dollar's recent strength. Will foreign investors soon be back in force. For some thoughts on these and other worldly matters let's go now and meet tonight's special guest Jane Lucas. Hello Jane. Well a thank you to have you here. Please welcome.

Jane look this has come from old Yorkshire to New York to keep an eye on us Yanks. She's been doing so first in London and for the past three years on this side of the Atlantic since 1982 when as a recent Oxford graduate she was assigned the American beat that Kleinwort Benson. Jane has been looking at U.S. stocks for British firms ever since for the past nine years as director of U.S. equities for Schroeder Capital Management. Again from the standpoint of all the world's markets how do U.S. stocks stack up right now. Well I think at this particular moment in time sickly The US is perhaps less attractive in some other developed markets around the world and I think that's one of the reasons why you've seen foreigners selling the U.S. clearly they've been very early. And I think perhaps in selling soberly they've overlooked some of the strategic advantages of the market here. When you say it's late cyclical You mean because stocks are going up so much or because the economy is tiring I think because the economy is at a later stage of its development than is the case in some other of the European markets the far eastern markets to some extent. I don't think it doesn't mean that there are good opportunities here I feel strongly that there are but I think

that some of the cyclical opportunities in those other markets also stack up pretty well. From your standpoint where are the opportunities in the U.S. market. Yes I think they are spread across a wide range of sectors I don't think they're confined to either large or small cap stocks but I think you have to be very convinced at this stage of the cycle that the earnings are going to be that. In the large cap universe I think if you look at stocks which are in the sweet spot of their own economic cycle McDonnell Douglas for example the aerospace sector I think is doing very well at the moment. Demand growth there is accelerating. McDonnell Douglas has very good cash flow it's an attractive situation. That's a company that could benefit from improving economies overseas trip could indeed yes its defense business is well-positioned there. What else do I comment on the company side on the big company side I think companies which will do well internationally I think international earnings growth is likely to pick up as we look out into 97. It's been sluggish so far this year but I think we're now starting to see growth reaccelerate there. People spoke earlier about the technology sector I think that

will do well in 97 I think the capital goods sector as well a company such as Rockwell which soon will be getting over 50 percent of its sales in international markets is interesting. You in fact have been a big fan of our smaller stocks. Very much so. I am indeed yes I think they represent very good relative value because their earnings growth will be faster than many of the big stocks in the market looking forward. Tell us if you have your favorite small stocks. Well I don't think you need to pick anything too exotic. And I think it's very important not to pick too many individual stocks I think you need to spread the risk when you're looking at small stocks and I think you need to buy a pooled fund. But there are certain characteristics of stocks that I think we can illustrate and I think can a company like West Point Stephens for example is an interesting case in point. It makes bed linens and towels they're not very exotic products but it does have a modem. It's got great market share. It's a very low cost producer. Its balance sheet is very strong and I think there are a couple of reasons why it might come in better than expected this year not the least of them

being the cotton prices are falling at the moment. You mentioned earlier that European investors had gotten out too soon. What is powering the overly pessimistic view of the U.S. broad. I think. European investors particularly have been very surprised at the extent to which the productivity improvements in the restructuring that's taken place in the major U.S. companies has continued. I think they thought that it was a cyclical phenomenon that would tie up. And that's not been the case they've been surprised at the extent to which earnings have continued to grow. And I think that that has been something that has continued to surprise them I think it may well be something that in the end draws them back. That's been going on for about 15 years now. It's been going on for quite a while now some of the time over this 15 years. The foreigners were selling to put money into other markets as they opened up. Fifteen years ago it wasn't really possible to invest in Southeast Asia to the extent that it is today. And clearly the other factor that's influenced it I think has been the U.S. dollar and the fact that the dollar declined for a lot of that

time and wasn't a magnet to draw the money in. If the dollar continues to strengthen will foreigners come back in greater force. I think they'll be braver yet so I think it will be a good excuse for them to do so. Clearly many people are worried about buying at the top. I don't think we are at the top in this market and I think the dollar could be a big help. You've been over here too long to turn to an optimist. So let me turn you over to our panel starting with poor Jane are leading averages of the Dow and the S&P 500 made up of multinational companies by and large. What do you think of those companies. I think some of them are very attractive. I think they offer investors the opportunity to get exposure to many of the growth industries and economies overseas without necessarily leaving the U.S. Colgate Palmolive and Procter and Gamble. Very good examples of that kind of company. I think some of the best known ones though are fairly richly valued at the moment and I would think you have to differentiate between a great company and an attractive stock and a stock like Coca-Cola which have really led this move.

I think look relatively expensive compared to some other opportunities. What do you think the overseas investor would like to see as the outcome of this election here in the United States. I think the overseas investors probably like the domestic investors are discounting a return to the status quo. I think they are comfortable with that I think obviously they've seen markets prosper in that environment until now. I think either of the alternatives either a Republican sweep or a Democratic sweep would would worry them for many of the same reasons that worry people here the fiscal outlook and perhaps some spending getting out of control. Let me pick up on Ralph's question from before the largest U.S. companies an article in The Wall Street Journal this week referred to the fact that many of them which were 10 years ago totally U.S. dominate in their managements are now run in large part by non-US people Alcoa was an example with the Brazilians. Is that part of your view of the positive results from these companies that the international portion of their

results will be so much better than people suspect. I think it may well be yes in our contacts with European companies and Asian companies now we're starting to see signs of a pickup in activity there. And I think that given that about 30 percent of the endings of the S&P 500 come from international economies it's very important to keep an eye on that and I think that could be a surprise. Then I want you to put your mind into what may be something of a stretch and assume for the moment that sort of being a pompous American that I'm a sophisticated European investor and I come to you and I say what percent of my portfolio should be in the U.S. Now what do you tell them. You're an overseas investors Yes. Well if you really do you have to look at the circumstances of every individual investor you can't generalize. Well I think you want to make some money. OK. I think if you take a balanced world index I would be slightly underweight the U.S. in the context of that index for the reasons that I said at the start I think that the cyclical opportunities in some of the developed markets are more exciting and I think that in

some of the more emerging faster growth markets of the world there is a reason to have strategic investment that. But I think that it's very important to identify the role that the U.S. has to play in that kind of portfolio. There are many many exciting growth industries hidden in this mature market in the U.S. the software industry in the entertainment industry. Examples where the US companies dominate. And so if you want to be in those areas you have to be in this market. If you would overall be slightly underweight in the US where would you be overweighted. Which emerging markets. I think the Southeast Asian emerging markets of the most attractive at the moment we've seen growth moderate a little that this year in the markets frankly haven't performed very well relative to some others. But I think that if we look at a little bit father you can see growth sustainably higher than you can here. And I think that they have a role to play. It's a different role but it's an important one. I mentioned that the European fervor for bombs have not diminished in this country. Will that continue what your assessment.

From the European standpoint of the U.S. bond market I think the equity market here is currently probably more attractive than the bond market. I think if we do see the dollar rally and draw money into the U.S. then both markets will benefit as a result of that. It's extraordinary that the U.S. has had such a good inflation performance relative to Europe. Absolutely a turnaround from what we got used to for a generation. Yes and I think people are expecting it to continue I think it will continue but clearly there in lies a risk. That's the consensus view. You always have the consent if you do know that you know it. Thank you very much Dan Lucas for that to me as long. Until it is seen ourselves as others see us. That's a great gift the gift he has just tonight thanks to our panel. Grateful to you for your gift is to. And I hope you'll all be back with us again next week when my guest will be a man who not only has given his name to one of the nation's leading mutual fund complexes but continues to be hands on as a fund manager himself. He's Dick Strong and will be talking about both his current investment thinking and his view from the top on the next battles in the mutual fund revolution.

Meanwhile there's a been Wall Street Week. I'm Louis Rukeyser. Good night. Wall Street Week With Louis Rukeyser is a production of American Public Television made possible by the Corporation for Public Broadcasting. And by the annual financial support from viewers like you by provincial securities with more than 50 600 financial advisors nationwide Prudential Securities can help you invest your money wisely by A.G. Edwards providing a full range of personalized financial retirement and estate planning. A.G. Edwards trusted advice exceptional service and by Oppenheimer Funds because of solid investment performance and sound financial planning go hand in hand. For a pretty transcript of this program. Send $5 to transcripts wall

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