Wall Street Week with Louis Rukeyser; 2940; The S.E.C. Chairman

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By the Kauffmann find. A small company. Aggressive growth fund. And by contributions to your PBS station from viewers like you. Thank you. Produce Friday March 30 first. Our panelists are Ralph Acampora. Allison deans and Mary Farrell. Tonight special guest is Arthur Levitt chairman Securities and Exchange Commission. Good evening. I'm Louis Rukeyser. This is Wall Street Week. Welcome back. Some quarter. Heck the three months in the financial world that ended tonight provided at least three times the usual thrills and spills. So it wasn't just a quarter. It was at least 75 cents. And what did it all mean. By almost anything you wanted it to mean. Provided you picked the right two bits you want to believe

that the high flying technology stocks have finally been called to account and henceforth old fashioned companies with solid fundamentals actual earnings and more reasonable valuations will be given the respect and preference they so richly deserve. Are you in tune with Dennis Paik a viewer in Ann Arbor Michigan who thought it would be appropriate for me to open tonight's program by singing. Give me them old time Industrial's give me them old time Industrial's give me them old time Industrial's. They're good enough for me. Well friend if you feel that way. I give you a march. A month when the much maligned Dow Jones Industrials gained seven point eight percent. Their best month in nearly a year. While the broader S&P gained nine point seven percent its best month in more than eight years while at nasty's smart alec the whipper snapper Nasdaq went down by 2.6 percent.

So there indeed as March went out like an anti-Internet lion this week Wall Street did in fact look as if it was at least for the moment rapidly rediscovering that old time religion. But a weirdly different scenario emerges if you look at the quarter as a whole. You find that the Dow Jones industrials are still down about 5 percent for the year. The S&P is showing a 2 percent loss. While several of the more speculative indexes are still way ahead of where they were when Y2K began including better than a 12 percent gain for Nasdaq. Nor is that the only area where the quarter provided some surprisingly contradictory results. Take that soaring oil price which kicked up the gasoline price which kicked up all kinds of 1970s style oratory about imminent inflation and the need for massive government intervention. Gee if we're going to have terrible inflation again that must really hurt bond prices since

the interest those securities pay loses value fast when inflation accelerates. So what actually happened. Believe it or not it was the best quarter for U.S. Treasury bonds in more than a decade with the yield on the 30 year issue tumbling from six and three quarters percent in January to just above five and three quarters today. A lot of things how Bonds first despite all the hype both consumer and producer inflation remain historically tame for a period of strong economic growth. Second with budget surpluses replacing deficits there will be fewer Treasury bonds around. And third when the stock market crumbles as it is so violently at times this week fearful investors run for the presumably safer haven of bonds. So it was quite a quarter. Whatever you want it to prove and the genuine question for the second quarter is. Can you top this. Tonight we'll

seek guidance from our panelists on where we go from here and we'll deal with another touchy question just how honest are these markets with the guy who's paid to know. The chairman of the FCC. But first before we make order out of chaos. Let's visit the chaos and see what really did happen in Wall Street. The week has passed. For most of the week. The Dow Jones Industrial Average was the place to be as NASDAQ underwent its fourth 10 percent correction just this year. But even the Dow couldn't sustain its two week near twelve hundred point winning streak and then with a loss of about 190 points just above ten thousand nine hundred twenty. Most of the broader indexes were worse hit with Nasdaq suffering its second biggest weekly percentage loss of the year. Nasdaq the Amex and the Russell 2000 all dip to levels last seen in February before bouncing solidly on Friday. No bounce for or else will remain that a bullish Plus

8 consensus that the Dow will advance more than 5 percent over the next three months. Since the Dow is off just five percent and three months ago the two who voted neutral then scrape by with Halo's tonight. Scraping down to even greater disappointments than usual were diehard holders of gold and silver which were once actually known as Precious metals. In the course of the week gold filled with lowest price in three and a half months on reports that it might be losing one of its strongest historical friends with even the French government poised to sell some of its gold. And silver futures briefly fell below five dollars an ounce for the first time in nine months as a Mexican producer the world's biggest said it would boost output by 19 percent this year despite what is expected to be a second straight year of fall in demand. And in a week when Supreme Court Justice Sandra Day O'Connor sober as a judge threw around those highly legalistic terms

pastings and G-strings in a decision that states can ban nude dancing. A New York College was offering a four week course in the art of striptease. The oldest person to sign up. Is 72. And it was not immediately reported what kind of costume he was planning to wear. What's the naked truth about this market. I think we've seen the market come to a day of reckoning. You know we had far too many of those Nasdaq stocks with no earnings selling and astronomical valuations. We had Dow stocks getting very undervalued versus the Nasdaq. So I think what we've seen happening is actually very healthy a correction where the uncertainties and risks are much too high and had been overlooked and some valuation is being realized where there are good quality earnings do those formerly high flying Internet stocks deserve their burial will they not be coming back. I think most of them the vast majority of them definitely deserve the very they're selling at astronomical valuations. Not only do they not have earnings but no prospect of earnings over the next several years.

And I think investors really had fallen victim to too much hype about what is a wonderful technology but if you look at the history of technologies of the early entries tend to fall by the wayside even as the technology is thriving. So in terms of the overall market is worst damage ahead. Or should people be buying some here. Well you were asked wondering whether the second quarter will bring more of the same and I think we will definitely see more of that volatility. And again when you have markets that have had these unprecedented gains of the last five years particularly Nasdaq's performance last year I think that again investors have been overlooking some of the risks and we're going to see I think we'll see more volatility but I think you will also see the companies delivering earnings and getting good valuations for the buyer. Well technology is so controversial in the middle of this correction. But I think if you look at technology is definitely going to lead the economy in growth. And that is one way to play it. Companies like IBM that I think aren't recognized and then I would do some of the retailers that will be using the Internet that I think have been overlooked the Wal-Mart's home depot is you know they somewhat considered of the old economy

but they will be benefiting from technology. And what would you sell. I I know that we've seen a transition and a broadening of the market to some of these heavier industries which had gotten very undervalued. But we are not going back to an old industrial economy. So the heavy industry companies would not interest me here of working poor as a technical guru for the night. Tell us whether these Internet stocks have broken down permanently. Speaking them technically although if you looked at some of these charges literally you get a nosebleed. I'm not surprised what happened. I hope no one is surprised what happened. But what I would hate to see happen is that they throw the baby out with the bathwater. In other words you throw away good looking very very positive technology stocks like the Intel's of the world and as Mary said IBM I mean you don't want to sell those. I think you want to actually take advantage of the weakness and buy the articles and the Cisco Systems. But there definitely has to be a day of reckoning in a cleansing and I don't think that's over. So

in a way without guest tonight it's going to be very interesting talking about squeezing out some of the speculation in the market and I think longer term that's very very healthy. Well let's with you for some specific advice. Yes. Would you buy as well as you know about a week ago I changed my L's reading from neutral to positive. And the reason for that is that I started to see a very healthy shift into. I hate to say that the old economy stocks but the names that really this value back and value that simply stated. I mean the business of the world the Banking Group the Citigroup Chase Manhattan banks I like the white houses of the world the Coca-Cola is the people names along with those big technology stocks that I wouldn't sell. Well how about the point that I was making that she doesn't look too kindly on some of the old cyclical industrials that are tied to the economy. Yeah. Well I did mention the caterpillars or anything like that either imagine a White House. Well yeah. OK. I didn't see the need for paper

and you know even some of the food stocks you know maybe they're not the canticles of the world to kind of stodgy names that. Part of the future. And I think this if you're really a value by my definition of a value by it coming from a technician it's something that is really cheap price and you're willing to hold it for you know a year or two or three and not looking for instant gratification and almost anything falls into that category that was formerly old and I won't wrap up my paper then I'll listen to other people right. Yeah for sure I agree with them that the divergence that has been going on the market seems to be correcting itself although I think there's still more to go particularly in the Internet area and that there are some incredible values in the value group and the incredible values not only because they're inexpensive but if you see what's going on with Nabisco right now I think you're going start to see more leverage buyouts because the cash flow coming out of these companies is so strong relative to their multiples that there's some interesting buy out place and that might start perking a lot of the value names up.

So that's the way the cookie crumbles. Yes. You of course have a value bet anyhow. So do you feel a little better that some of these high fives are coming down. Yes I do. And some of the better companies we didn't value sectors financials being my real bias are starting to show signs of life. It does make me feel as if the market is starting to come rational and it seemed as if they have been so extreme that Internet everything in Internet was going up regardless of whether or not they had a business plan that made sense. And then the financials made sense. Now I'm seeing greater selectivity. Same thing with undervalues the better names are doing better right now if there is any conceivable question that is still baffling you. From how to get ridiculously rich before Tuesday. To the real meaning of life after Wednesday. Some of the world's deepest thinkers are waiting to hear from you here in Owings Mills Maryland. 2 1 1 1 7. And now let's go right over and make tonight's special guest Arthur Levitt. All right. Welcome back.

Nice to be here. After more than a quarter century as a Wall Street insider including 11 years as chairman of the American Stock Exchange Arthur Levitt came to the job of chairman of the Securities and Exchange Commission in 1993 with an unusually profound knowledge of where the bodies are buried. And he is use that knowledge to dig deep in behalf of fairer treatment and plain English for the individual customer. Article last September became the longest serving S.E.C. chairman ever denied making his fifth appearance as my guest on this program. This week your agency announced plans for automated surveillance of online trading. Some people regard this as an invasion of investor privacy. Others wonder if it's a signal that you regard this area as rife with fraud. Who's right. We regard this area at this time in the market cycle as being a pretty fertile area for fraudsters and the commission's effort to automate some of those surveillance procedures really is

not intended to go into chat rooms and invade public privacy but rather to take the place of some 200 lawyers who are out there now going through the net. This will be an automated system not in the chat rooms and it's intended to free up these lawyers to do what they do best which is bring cases rather than surfing the net. They had a case this week of a fella who allegedly planted a false rumor about a stock and profited from it. How prevalent is it happens frequently. We've brought. Over a hundred cases in terms of various kinds of internet fraud and the number is growing the use of the net is growing. And as the markets do well more and more people will be involved in seeing things that really represent some serious potential fraud. You have made education of investors a primary plank in your

platform as FCC chairman. How dumb are investors. I don't think they're dumb. I think America's investors are about as smart as any in the history of our markets. But no government agency can adequately protect. All investors against the kinds of frauds that are out there so to maximize this we spend a great deal of time in helping investors protect themselves. We get nearly a third of our enforcement cases from people who call in and tell us about things. I've got a couple of e-mails today from viewers who said I should put pressure on you to make it easier for small investors to get initial public offerings. I suspect that's not close to your heart. Would you tell us why it isn't. I even when I was a broker I felt customers who were chasing IPO were kind of playing a fool's game that's a bad way to invest it should be maybe only a part of anyone's

portfolio. But IPO is or giving out given out by firms to their best customers. That's probably the way it should be. Investors who want to do that can buy in funds which specialize in an IPO. But I think it's a very dangerous practice to chase IPO and pay any kind of price to go after them. Going back to the discussion we just had with the panel. Does this self corrective action by the market obviate the need for greater intervention by the regulatory authorities when there are excesses in areas like Internet stocks. I think that. The role of a regulator is to keep competition in our markets fierce but fair. It's not intended to intervene in the markets. The role of the regulators to see to it that there is full disclosure. Our markets are the fairest in the world because investors have confidence in them. We're terribly

concerned about the reliability of numbers that are reported to investors. If our investors lose confidence in the reliability of numbers our markets will suffer. It's not our role to manipulate the market in terms of structural changes that we implement. Do you have any new special targets for this year or targets for this year. Our focus this year will continue to be on financial fraud and on seeing to it that U.S. markets remain the most viable and competitive in the world. Our markets are changing dramatically by virtue of new electronic systems within the next five years. I believe we will have a globalized electronic market. It's essential that our major institutions the New York Stock Exchange and Nasdaq reinvent themselves in a way which will adapt to these new electronic markets which are very very competitive. Do you think they'll merge.

It is so hard to tell. The notion of Nasdaq acquiring the American Stock Exchange to me when I was running Amex would have been like merging Syria and Israel. So I've gibbets with which I've given up predicting whether major markets are going to emerge it's not impossible. You've been part of the movement for the decimals in stocks as opposed to fractions there's been some kickback lately. People complaining that it's too early they can't handle it now. When are we likely to see decimal trading. I think decimalization will be a major benefit for America's investors. Spreads will continue to shrink. The individual investor will be a significant beneficiary but not at the risk of doing systemic damage. We were surprised to learn that Nasdaq will not be ready by July 3rd. The original target date that they had agreed to sign on to the commission intends to see to it

that the system is ready for decimals. My best guess is that the delay will be more than several months. One of the remaining points is to what level we trade what we trade dependent is what we paid to Nickols what we reveal. I think that within a short period of time there's very little we can do to keep the markets from going to pennies. Initially it's the hope of the Commission to see to it that trading doesn't go below nickels so that we can phase this in in an orderly systematic way. Let me turn you over to a panel that badly needs regulation from time to time. At all this unprecedented bull market has attracted a lot of investors but based on the margin debt numbers it looks like a lot of them are investing and even more so lately borrowing stock they already out. Are you concerned about this if anything be done. I am concerned about it. I think too many investors have not experienced a down market and are borrowing not just against their stock but against other

assets. And I think that's very dangerous. I think it's essential that American investors understand the risks involved in borrowing as well as the opportunities. I'm not sure that it would do very much good for the Fed to raise margins. But I do think that for the New York Stock Exchange and Nasdaq to raise margins would send a signal that might be useful in terms of curbing margins that you find any problem with there's an occasion where stuck my open down dramatically is the system as they say lacking liquidity. Is the system standing up and doing what it's supposed to do. I think the system has adequate liquidity. I'm troubled by the openings on Nasdaq and we're urging Nasdaq to do something about that. But I think the system is handled the tremendous surge in volume with great effectiveness.

My prior role as a securities analyst I've visited companies different members of management and learned a lot about the company which help me predict future earnings and I'm just wondering you've been focusing a lot on selective disclosure. What is it that the company should or shouldn't say when Alice goes to visit or do you think those visits are becoming inappropriate. I don't think the visits are inappropriate. This commission has an almost obsession with the importance of protecting individual investors. We want to be certain that managements don't have favorite analysts that they tell something to before they tell it to the general public. That's called selective disclosure and that's something we simply will not permit. And we also believe that the media should be allowed to access a lot of analyst meetings and road shows and there are ways that this can be accomplished. America's investors cannot get enough information. We want to see to it that they get it. At the same time as anybody else gets it. And if companies

observe that we'll have no problem. All right. One of your other concerns is accounting fraud. Is there a problem with the big firms the big firms are superb firms well-managed and honorable people. However there have been. There is a tendency of American business to compete in any way they know how and if companies a and b stretch the interpretation of the numbers CD and ear soon to fall we have empowered audit committees to look for this. We have asked the accounting profession to be very circumspect about what they do. The whole question of independence is an issue that we have been actively discussing with the profession. And I'm hopeful over the course of coming months we will see certain changes which again will reassure the public that the numbers that they see are

reliable and trustworthy. Finally I ask this with some trepidation. Are we really going to see 24 hour trading. If so then. I think we probably will see 24 hour trading. I think individual investors have to be so careful today about after hours trading because of a lack of liquidity or lack of understanding exactly what's going on there. But I'd be very surprised if we didn't see 24 hour trading sometime over the course of the next several years. Ok I'll stop rolling the coffee now. Thanks very much Arthur Levitt. Thanks very much panelists. Hope you'll be back again next week with my guests will be the most influential man in the world of bonds. PIMCO Bill Gross and this multibillion dollar investor gives views on the outlook for interest rates and fixed income securities market movers listen all over the globe and it will be coming to you first from Owings Mills. And while this has been wall street week I'm Louis Rukeyser tonight

Wall Street Week With Louis Rukeyser is produced in association with Rukeyser television incorporated by Maryland Public Television made possible by Deloitte and to. You know our clients by name. We know them by heart. For professional services the answer is the people of Deloitte Touche by A.G. Edwards providing a full range of personalized financial retirement and estate planning. A.G. Edwards trusted advice exceptional service by Oppenheimer Funds. Every year millions of Americans place their financial futures in the hands of one mutual fund company. Oppenheimer finds the right way to invest.

By the Calphalon fund. A small company. Aggressive growth fund. And by contributions to your PBS station from viewers like you. Thank you. For a printed transcript of this program. Send $5 to transcripts Wall Street Week With Louis Rukeyser Maryland Public Television Owings Mills Maryland to 1 1 1 7. PBS