Wall Street Week with Louis Rukeyser; 1028; Inflation and Investing

Do. A. This program is made possible by a grant from the Martin Marietta corporation and by this and other public television stations. No. Wall Street we.

Produced Friday January 9. Your host for Wall Street Week is Lewis from Kaiser. Our panelists are burnt to death Barto Howard P. Kowloon at Julius Westheimer. Tonight's special guest is Steven loopholed managing director of funds incorporated. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well this was the week when many Americans began taking Joe Granville nearly as seriously as Joe has always taken himself when a toppy stock market cracked on record volume. Many otherwise baffled Wall Street analysts and journalists promptly credited the chains to the Florida phenomenon who was happy to inform them that his timely sell signal was just the latest in the most incredibly infallible series of prophecies in two thousand

years. Well we come not to bury Granville but just not to praise him quite as much as does his greatest fan whom something he encounters every day at shaving time. In fact as we shall see Rambo was not by any means the sole person to detect this top if indeed that's what it was nor certainly WAS HE its sole author. Moreover alas and a lack his actual forecasting record stops as with most human beings several leagues short of perfection. And coolest cut of all. After this week of media veneration Joe's latest calls may even have fallen short of the advice given by would you believe it. Our much maligned els. Let's take them one of the time and see if we can put in better perspective what really has been going on in this extraordinary week in Wall Street. First it's quite clear that a number of savvy investors had been dumping their stocks a day before the big collapse. Notice the Nasdaq Granville at the broad

market was behaving much less impressively than the Dow. For Joe though this meant quite a turnaround for as recently as his market letter written last weekend and received by many subscribers after prices had tumbled. When it was the biggest bull in town. Not just foreseen a short term rise but promising among other goodies some exciting weeks ahead On the upside and for telling a massive upside breakout what a difference two days make. In reality not as was the market looking tired as it might be entitled to be at which two hundred fifty point runup but investors were faced with a discouraging array of economic news notably including an apparent reversal of the recent much ballyhooed decline in interest rates. Oh well as genial Joe admitted on this program when I finally got him to acknowledge that he had occasionally heard in recent years it wasn't serious though. Ready one still convinced that anyone is infallible in this business though

let me tell you two things even Randall may not know. First our elves through their technical market index gave a buy signal three days before he did last April and confirmed it strongly a week later. And second last November 28 when Granville was still hollering buy and every index but the Dow was higher than it ever got this week. The elves brilliantly gave an un Hage to sell signal. You think Joe could have been watching. Incidentally we're planning to invite Joe back on Wall Street Week as soon as possible so he can tell us his side. Meanwhile you might be interested to know the Granville stock recommendations trailed the results last year of more than half our panelists. But despite what you may have heard this week nobody's perfect. And he's one of the most engaging men in the business. Tonight we'll be talking with another successful analyst. But first let's see how Granville's week of glory really did come out. The Dow Jones Industrial Average running ahead of the other indexes for what proved to be an ominous change again found it

impossible to stay above 1000. Despite all the hysteria that accompanied this busiest week in stock market history however the Dow in the first five trading days of one thousand eighty one actually managed to gain a point. And for this week as a whole its loss was a trifling four points and nine hundred sixty eight point six not more significant declines however showed up in the broader composite indexes of the New York and American stock exchanges and the over-the-counter market all of which had reached all time highs on November 28 when the Elves though not quit until said sell. And one of the I'll say now not much of anything. That technical market index is within the neutral range as they rest on their laurels. But enough beating on Joe is forecasting record is indeed above average. And he wasn't the only big winner this week. The brokers for example rejoiced as a record three hundred twenty four million shares changed hands on the New York Exchange and the dollar gained on news of rising interest rates

while gold gave up about $12 for the week. But we've got another winner to recognize now Pete Calhoun. A year ago we got 17 panelists to predict the Dow for nineteen eighty and we got 16 to give us a list of stock recommendations of the 16. You are the change. If someone had bought everything you recommended a year ago sat on it all year round not worried about hysterical buy and sell signals and then sold them on the last day of the year you'd have a gain of 88 percent even before you count the dividends. Now that ain't bad. I also want to point out just to destroy your humility entirely that you are a winner in a couple other categories. You predicted a 970 high for the year that wasn't so sensational in fact we got about a thousand there so we did this week. But you tied for the winning prediction on the low. You said the Dow's closing low in 1980 would be 760. Now that was reasonably close actually it turned out to be seven hundred fifty nine point one three. And this year I hope you come a little closer for the close in

place of the year which actually was nine hundred sixty three point ninety nine. You were predicted 960. Now that ain't bad you think you can do it again if you know you're not infallible. I am not infallible I am not a show Grant and I consider myself very lucky to have come that close. I learned a long time ago in this business that humility is what you learn and it was just pure luck. OK a little more pure love. What do you what do you predict for 1981. Closing high on the Dow closing low on the Dow closing close on the Dow December thirty first the low will be 80 the high will be 10 60 and the close will be 10 10. Your particular year in which we won't really go too far from where we are right now. Right but I'm predicting a lot of volatility within that year Lou. OK now tell us precisely what to buy in order to have a guaranteed 88 percent return on my money. No guarantees but I'll give you a few names that I think right now we're going to shot at right now. My stocks for 81 are Diamond Shamrock Fleetwood

Citicorp DeKalb quote John Deere triangle Pacific Gearhart Owens energy reserves and Ratliff oil exploration. Is there a theme to those talks of the distro companies you like. Now there's something there's some lower priced energy stocks that I think have a good chance of hitting some good reserves. There are some consumer stocks that are way out of favor and I think of the best values in the market and there are a couple of names that I think have a real turnaround. OK let's go to our other parables. Stories Westheimer you didn't do so terribly. You did predict the 975 high which wasn't so bad in fact it was modest and a little bit too high a little bit too low on the pessimistic side. You predicted an a 25 low that was much too optimistic and you predicted a nine fifty close which was within 14 points we can't sue you for that. What do you do this year. Well I feel very humble sitting next to Pete I just hope some of it rubs off. As Graham says if you

touch me I'll make you rich. Touch you. OK my closing low for the Dow Jones for the year I suspect will be 950 my highest 10 90. And I think the Dow will close at ten seventy five. Now everybody in TV land scrambles for their pencils and papers. Here are my stocks those who believe you. Yeah. Again that company newspaper stocks Intel semiconductors Motorola Digital Equipment data points United Technology dome petroleum Federal Express and long term bonds. I think people should buy those at this point and lock them up for this coming year. Do as you are the only broker on the Powells and I guess how much impact did gamble have on your customers. It was widespread and extraordinarily bloody Tuesday night when I'm watching the Johnny Carson Show half awake and half asleep. The phone started jumping off the hook and people were saying I got a telegram from Joe Granville sell me out tomorrow

morning at the opening. I said you're crazy. They said do it anyhow it's my money so I did it. They all live to regret it. They paid commissions out the pay commissions in and they'll be worse off after paying those and capital gains tax than if they had voided listening to what I think is a somewhat irresponsible suggestion. Well it would to give Joe his due if in fact the market goes down 150 points maybe he's right. I'm not sure about that the costs of doing this are terribly terribly expensive and will they get back in at the right time. I suspect most people will get back in 100 points higher than when they jump and most people cannot trade effectively and know they long term people who make money in the stock market are the people who buy and stick with good quality stocks. What can I say. Of all of the 17 who predicted the Dow this year you came up with the zaniest single prediction of the year. You said we would have a high of eleven hundred fifty. I don't know what you were smoking that night. You then said that we would go down to eight hundred twenty it was going to be quite a more exciting year than it

was I suppose not respect and then we were going to close it 900 having touched 11:50 earlier in the year. Now none of that occurred. But. The law of averages is that we've Jeffrey for two. You're obviously going to have everything right for anyone to tell us what to foretell Absolutely. Now I was just a year too early. I expect a Dallow of approximately 65 for the year. And I think it will close around 10 76 and I think that that will be the high for the year as well. Now 11:15 as you know 11:00 a.m. to 2:00 when we buy to make up my go about money. Well I think three blue chips Dow Disney and Boeing three Light Blues PepsiCo Fishback and AMF. And percentage plays LTV Piedmont Airlines and Colgate Parma and the magenta and the human panel it is time now to do some mildly infallible forecasting of your own for our viewers. I think a little Nick Adams of Albuquerque New Mexico observes that the recent rash of tragic fires around the country seems to be prompting

cities to toughen their safety codes requiring among other things extensive spring clean equipment. Do you think this trend has investment significance and if so which companies might benefit. I don't see any investment significance in it. There are several reasons first the fires really haven't caused the change in building codes. It's probably caused more people to check if the buildings are up to the existing codes. Secondly developers are going to put more money into hotels are probably going to put an energy conservation system in rather than a detection system. And third the companies that are in the sprinkler and fire detection system really have very small parts of the business in the area. In essence I couldn't smoke at a good and play on the fires. OK not a recommendation. Various Westheimer. Gerry Phillips of Hawaii has an interest of a small electronics company that he understands will go public early this year. He wonders just what that's going to involve how the opening price will be determined and how he can best put in his bid for some more shares at that price. OK. What it involves is a wider public ownership for the company and the company does well more people will know about it. Got me does badly more people know about it on the minus side.

The opening price is generally determined by the underwriters by comparing the new company with publicly traded companies with the same characteristics they look at the size of the company the product mix the debt structure the profit margins and apply a ratio to the earnings of the new basically unworn public company. As to how we can get more shares we'll in the warm climate of Hawaii Mr. Philip should go to as many brokers as he can with whom he's friendly and ask for more shares. That's just about the only way I know and CFL and they work in Minnesota too right. But of the cartels How would you respond to Ernie and Cuomo of Tacoma Washington writes as follows. I understand the stereo equipment industry is on the verge of producing a new record player that will make conventional systems obsolete. These low powered laser systems will read bits of information from the records convert them to sound with no hiss or distortion. If this breakthrough is a successful is the development of stereo. Are there any particular companies that stand to generate record profits while Mr. and Quinn Shame on you. How far into the future is the marketing of this equipment.

Well I've been interested in that subject myself and have been talking to audio people and analysts about it there. The product will be a great innovation. The delegates will be much improved in fact some people think that the sound will be superb. The Everybody agrees on that. They were obsolete the existing turntables and probably the tape decks as we now know them. However it will be three to five years before they come to market. As far as the companies go Sony has talked about it. Philips has done some work on it but everyone agrees that by the time that product gets closer to market most of the major companies are going to be producing products or developing products and so we have to watch the product. But there aren't any particular companies right now. All right you know if your investments are suffering from slipped disks if you just like to needle your broker sound off with your money questions to hear what Wall Street Week Owings Mills Maryland 2 1 1 1 7 that's Wall Street Week always Mills Maryland 2 1 1 1 7. Now before we meet tonight's special guest let's take a

new look at an old problem. Inflation in America it's a problem of this common I'm gone every time but this one. Inflation previously was strictly a one time phenomenon starting with the period during and after the revolution. And we turn invariably even more vehemently than lightly at the time of the Civil War and World War 1. What was different was the periods of the flourish and always followed. Indeed the compound annual rate of U.S. inflation since 1790 works out to only one point two percent. What's different about inflation in the last 40 years is not its height but its length. What is all this meant to stocks in the centuries since 1872 when modern recordkeeping began. In fact stocks have routinely been a poor hedge against high inflation in the 14 years when consumer prices rose between 8 and 18 percent. Stocks average only a 2.8 percent gain in 20 years of relatively high inflation 47 percent. They turned in a similar

performance. Stocks did best in periods of relative price stability up an average ten point nine percent with mild inflation and averaged thirteen point six percent when the price movement was less than 1 percent and average eight point five percent during periods of mild deflation. Indeed when you boil away the inflation investors actually were best off when consumer prices fell a bit. And even though stock prices declined in periods of severe the deflation they left their holders with what amounted to a gain in constant dollars. So one of the domain. Well for one thing it suggests that stocks never were as much of a hedge against inflation as they were cracked up to be for some war with demolition. Let's go over now and meet the fellow who compiled those figures. Tonight special guest Stephen Sciutto. It worked and we just wanted to have you here. It was good to be here. Stephen who thought his own career was lately been undergoing some interesting inflation itself. After more than

20 years as a strategist and researcher he is currently managing director of Houston's funds Incorporated where he writes some of the most literate institutional commentaries on the market. So as portfolio manager for two mutual funds and runs a specialized portfolio strategy service his new book is called the myths of inflation and investing. Steve in view of your findings why did anyone ever believe that stocks were a good inflation hedge. That's really a good question Louis I don't know why it. We had a lot of people back in the early 60s when I first entered this business it said the only hedge against inflation is the stock market. And so many people said it that we all believed it and no one checked the numbers. If you would describe recently by Barron's as for now I assume they would talk about your stock market predictions. As are you going to do in my personal life. Why are you so Super Bowl me and all you in fact.

Well I am super bowl ish on some things. Ok I am not terrifically bullish on some others but I am quite positive about the stock market over the next decade and I see a stock market in historic perspective that is very very undervalued in terms of fundamental things like book value and earnings. And to me if we just return to a normal multiple in the next decade which is fourteen and a half times earnings and have only 3 percent earnings growth you'll see the bow in the neighborhood of twenty five hundred to three thousand ten years from today. We've just learned from you that the market can't do that with high inflation that's reacting decreasing inflation and then to inflation what are you predicting in that area. Well. I guess it's partially a prediction. Maybe it's partially a hole. But I think we're entering a new era in terms of political and economic thinking. I think the last election demonstrated it pretty clearly and I think we're in a gradual

process of ratcheting the inflation down because of the change in political thinking not only in this country but in almost all of the Western industrialized world. You have made it even more. Iconoclast it predicts a piece of advice you've told people to buy some bonds and you said 50 percent. Well that's very strange tell us why you want it really is because I normally I'm not much of a fan of bonds but. When I look at long term government bonds where you can lock up rates of 13 percent and the government has to pay that to you through the year 2005 that's a pretty good return. And I think that also within the next decade it's very conceivable that long term bond rates might come down as low as 5 or 6 percent after all the long term average long term bond rate has been about 5 percent. You may not get down there. Let's talk about some other investments quickly. Gold and Silver well. Goal has not been a very good hedge against inflation as last year. I would be

pretty well inside you know it did pretty well in 79 in my book. We feel that in my staff in the work we put on it we feel that the country is moving in the right direction but there still is a possibility that we might ratchet off into hyper inflation about realistic. So I have a little gold. OK real estate. It's double the rate of inflation farmland has for the last 13 years. I think it's too high. I think it's gone too far too fast to cleave and give us some percentages for a typical portfolio. What percent would you have in gold. Conservative investor or middle of the road investor I'd have 10 percent in gold. And I'd hope that I lost money out it's my insurance policy okay and I'd have about 45 percent in common stocks and I'd have 45 percent in long term government bonds. What's going to bring down the inflation. Well we've seen some of the things that can bring it down already we saw the commodity markets start to break. Well it wasn't very long ago about three or four weeks ago. I think you're going to see

a decline in the price of commodities to some degree in 1981. I also think that there's going to be less pressure in terms of the wage contracts. And one of the silly things is I think that eventually we are going to adjust the Consumer Price Index. So it's an accurate measure of inflation. And currently we feel as well as many other academics feel that it's overstating inflation by a severe amount. Let me turn you over now to our incredible or at least occasionally credible panelists starting with Steve. All investors have found out that the rate of inflation is the most one of the most important things to judge in picking a class of assets to invest in. What's more important the absolute level of inflation like it's an 8 or 10 percent or the direction it's moving in from 8 to 10 or 10 to 8 and why. Well Pete both of them are really important. The actual level of inflation has a lot to do with how stocks are priced P E multiple. But the direction of the inflation change is also important for market trend and when

ration is D-cell orating we're typically seeing a very very positive environment for the for the stock market. So even though inflation may be high say 12 percent if next year it comes down to say 10 percent a deceleration of 2 percent. That should be a very positive stock market stimulus. On January the 20th which is about 10 days away we're going to get a new president of the United States. What will Ronald Reagan actually do to follow up on Lou's question to bring this horrible inflation rate down. Well there is a great deal of psychology build into inflation. And I think one of the things that Reagan is going to do is break some of the inflation psychology. If we can move toward a balanced budget and it's going to be hard to get there but if we can cut back some spending and if we can move toward that balanced budget by say 1983 or 1984 this is going to be a powerful not only psychological influence but a monetary influence.

Steve the battle against inflation was abandoned in 1970 and again in 1970. Is there a particular reference or index we should keep our eye on as an early warning system if this administration fumbles the ball. Well when they start wearing wind buttons then. But I think probably one of the things that we can look at is what's happening in terms of the Federal Reserve policy and monetary monetary aggregates because there is some political influence here. And if we see the Federal Reserve backing off and not toeing the tough line it may be indicative that things are changing in terms of the administration's thinking. Stay vision no a number of the doom and gloom people think we may have runaway deflation which the country's economy will resemble in the 1930s and perhaps even make it a tea party if you see a possibility of that. Well it's possible. Look as in the past as we've studied the inflationary past you can ratchet from inflation into deflation in a very very short

order of time it's happened going from one year from say 15 percent inflation to 10 percent deflation. So it is a rather difficult thing to bring down. I think it is entirely possible that we may have a recession in the coming five to six years not necessarily right now recession. Recession Yes recession that's going to be a little bit. More severe than what we've seen in the past 15 years. Do you have an inflation prediction for this year and for the decade as a whole. Well Lewis I think that we have a good chance of seeing inflation come down by the end of 1981 to the about the 7 to 8 percent level on a year to year change that would be down from 12 percent for 1980. I think it's entirely possible when we go into some of the rationale for this in the book to see inflation down as low as 2 or 3 percent before the decade is over. And I think there is a possibility of seeing one or two years of deflation similar to what we saw in say

1955. Steve we only have about a minute left. You've been a statesman and a philosopher and I was making a Wall Street Week. I mean what's going to happen to the Dow this year. Well I'll burn a debt spick from last year I'll say 11:50 on a peak this year which would jibe with an inflation deceleration the average performance low maybe 875 you have to pick the clothes for the year too. You don't have to do anything you don't want to do. Thank you but I want to do it. Well I think is the number. 10 66. And finally we've had a lot of excitement this week. You've been an analyst for a long time ever know anybody was flawless. Well no I think Gerald Loeb said it once I think really well he said when you find the key to the market some as they will be always changes a lot. And I think this thread will have to be aware that well maybe you should enjoy it until the key to the lock is this government. Thanks very much Steve.

An entertaining incisive guest always and thank you to our panelists. Hope you'll be back with us again next week we'll be turning then to a global view of investments. My guest Andrei Sharon thinks successful investors will have to be knowledgeable about currencies and metals as well as stocks to protect themselves against inflation in 1981. And he thinks he has the international answers. Let's call it as the World Turns. Meanwhile this has been Wall Street Week. I'm do it for you guys or good night. To obtain a written transcript of tonight's program. Send $1 to transcript. Wall Street Week Owings Mills Maryland to 1 1 1 7. That's $1 a transcript. Wall Street Week Owings Mills Maryland 2 1 1 1

7. Allow 4 weeks for delivery. Maryland residents include five cents sales tax. Wall Street Week is produced by the Maryland Center for Public Broadcasting funding for this program is provided by a grant from the Martin Marietta corporation. And by this and other public television stations the Maryland Center for Public Broadcasting is Solti responsible for the content of Wall Street Week.