Wall Street Week with Louis Rukeyser; 1717; The Week That Was

Lord. Lord. Wall Street Week With Louis Rukeyser brought to you by a public television station by Hansen trust a 10

billion dollar transatlantic company with 23 consecutive years of growth in earnings and dividends by providing essential goods and services fiber eventually baked securities. The investment firm with rock solid resources that's leading the way to the Future for Investors added by primary the new name in financial services and specialty retailing. A company with the resources to fund growth for tomorrow primary a name to remember produced Friday October 23. Tonight special guests are Steven G Einhorn the cochairman the investment policy committee Goldman Sachs and company. We get a Schreier chairman of the board and Chief Executive Officer Merrill Lynch and Company Incorporated and John M. Templeton founder and principal of the Templeton fund. And even then I'm with you guys or this is Wall Street Week. Welcome back.

OK let's start with what's really important tonight. It's just your money not your life. Everybody who really loved you a week ago still loves you tonight. And that's a heck of a lot more important than the numbers on a brokerage statement. The robins will sing the Crocus is where bloom. Babies will gurgle and puppies will curl up in your lap and drift happily to sleep even when the stock market goes temporarily insane. And now that that's all fully in perspective let me say I watch an EAC and medic. Tonight we're going to try to make sense out of mass hysteria. To look behind the crash of 87 and most perilous but most important of all to look ahead. In that effort our program tonight will be a special one in keeping with the week that was in many ways the most unusual in all the millennia of investing. Our regularly scheduled program on food stocks has been

postponed till December. Instead tonight will try to give you food for thought. About Wall Street's record case of indigestion. In place of our usual format I'll be talking with three genuine titans of investing. The boss of America's largest brokerage firm the greatest mutual fund manager of the past generation and a portfolio strategist whose investment decisions move billions. Meanwhile let's keep the windows sealed and our hearts calm. For in the immortal words quoted by Adley Stevenson. I'm too old to cry but it hurts too much to laugh. It seems as if everyone in America with access to a microphone has been telling us this week with stunning hindsight precisely why the Dow Jones Industrials took a record five hundred eight point twenty two point six percent nosedive Monday. We heard about rising interest rates. We had about the trade deficit we had about the budget problem we had about leadership worries. And if we're to believe last night's

presidential news conference. Most of my colleagues in the Washington press corps appear to be convinced that the root of the problem is that we just haven't raised taxes enough. All fascinating theories to be sure. But the difficulty is that none of these problems was born at 9:30 Eastern time Monday morning. Indeed the only major XTO developments over the weekend were the U.S. attack in the Persian Gulf. And Treasury Secretary Jim Baker with his inimitable sense of time in studying a brief public feud with the monetary authorities in West Germany. It was of course joined in financial expertise by the wizards of Ways and Means who seem to think this was a splendid time to be hitting the market with a new anti takeover taxes. Com alone will tell whether Black Monday enters the history book as the day American confidence was so shaken that a premature recession resulted. Or merely as the day the computers went wild. And through the wonders of so-called program trading turned a

normal correction into an early hollow Wein. But we'll try to give you some early hints tonight. First though let's strengthen our nerves. Remember those puppies and look at the numbers. And as the Dow Jones Industrial Average indicates there's never been another week like it which is OK by me. With record rises following but not matching the record decline. And with trading value more than twice last week's previous record the Dow could not be saved even by fall the long and short term interest rates and close with a loss just shy of 300 points at nine hundred fifty point seven six. And there was similar disasters throughout the broader market indexes all of which are back to levels last seen in 1986. But lookee here are good record for the week for happy change. Elves have moved their technical market index all the way from minus 1 to plus 6.

Not only their first outright buys signal in nearly three and a half years but by far the biggest one week change they've ever reported. While the elves have sometimes been early their long term record has been superb. Let's hope they've got a Bull's-Eye tonight. But they have and in many other places to hide with precious metals interestingly almost unchanged for the week. Now before we look ahead with our star panel of special guests let's quickly seek perspective by seen what has happened in the past. A pattern of ever shortening recoveries after the fall. The Dow Jones Industrial Average had reached the highest point in its history three hundred eighty one point one 7 September 3rd one thousand twenty nine. Before plunging in November to one hundred ninety eight point six nine losing more than half its value it took a quarter century for that damage to be entirely repaired and the Dow to get back to its pre-crash number. Within those years of trying to catch up. The market had a post-war

tumble in 1946 when the Dow fell 20 percent in less than two months. It took two in 1950 to make up that loss. More recently though the Dow dived in one thousand sixty two from an all time high of seven hundred twenty three point five three in March to five hundred thirty five point seventy five in June a 26 percent Bash. But all that was regained within a year. Will the age of compression move even faster this time. From its all time high of twenty seven twenty two point forty two this past August 25th the Dow was down 36 percent of money at Monday's sickening close. Since then it's gained 12 percent. As we wait to find out whether we've now seen the lows and how long the recovery will take this time. Let's seek further perspective by looking at a chart that indicates the jury is still out on whether the great bull of the 1980s is indeed dead. As most commentators seem to assume this week or merely deeply gored This is the trail of the bull that was born in

August 1982 and march with not even as much as a 10 percent stumble left in 1904 to a gain of more than 250 percent by this past August. At Monday's dismal close the Dow still held almost exactly half its below market gain. And since then the market has moved up. Tonight in fact the Dow is actually higher than it was on the first trading day of 1987 and higher in fact. But on every single day but one in its entire history before 1987. It's small consolation to be sure. For those whose pocketbooks were severely wounded this week but useful in distilling the headline hysteria to help further. We have three of Wall Street's giants with us tonight. Those friars chairman and chief executive officer of America's biggest brokerage firm Merrill Lynch and he's also vice chairman of the New York Stock Exchange. Steve Einhorn is cochairman of the investment policy committee at Goldman Sachs. And John Templeton founder of the Templeton Funds

has over the last generation compiled what is quite simply the best public long term investment record in the business. Gentlemen let's begin by asking each of you what's the single most important lesson of this week's debacle in Wall Street. Well Lois I think probably if I could sum it up in two words I'd say don't panic. Whether you be an individual investor an institutional investor or one of the professionals that are there that are that were there working in our business oh and two words don't panic. Steve what would your words be. I think there are two elements that combine to bring about the most important lesson of the week the first one is that there is a tolerance that the market has for inadvisable economic policies but that tolerance is not indefinite. And the economic policy that they found intolerable was the large budget deficit. The second important lesson I think and critical is that the world or industrial countries must cooperate with each other in terms of economic policy.

Confrontation is simply unacceptable in the conduct of economic policy. Cooperation is critical. John Lewis I would say that if you never buy investments with borrowed money you can always be comfortable. Human nature is such we always going to have periods of enthusiasm and pessimism every 10 years they'll be boom markets and their markets. But if you don't have borrowed money you don't have anything to worry about. Bill Hughes told people not to panic. Do you tell them to buy. Well I think it sure I think it's time to. After a week like this it's a good time for everybody to look at it as they are now are doing with American corporations restructure their portfolios good time to take a look at what they have and what what they might take a look at to improve their portfolio and you know in the weeks and months ahead. Why didn't you warn your customers this was coming. Well I didn't know it was coming Lewis. I think if I had to describe

the event and a short period of time we have heard and I kind of somebody asked me about it and I said reminds me of the total eclipse of the sun. All the various negative events that Steve talked about and others have this week off sort of came together at the same time and that led to the incredible activity and the decline on Monday. But like an eclipse of the sun it doesn't happen very often when it's that total and it doesn't last for very long. So at that's kind of my simple analysis of it. Let me speak to the customers. ROWLANDS gained its reputation as the firm that brought Wall Street to Main Street as the champion of the individual investor. These days you've got a lot of other activities in fact you're one of the principal users of this so-called program trading that was so controversial this week. Let me just read you a letter I got this week ends with a question I'll let you answer the question from one of our viewers Barbara Navarro in Chicago. She says what political body or government agency can we write to to suggest that a separate

exchange be created for those not engaged in computer a big block program trading the little guy doesn't have a prayer is evident on Black Monday. It's a shame that the supposed free market system which has always been part of the American dream has to be dictated by computer wars. What can be done for the small investor. I think that's a very good question. And as a matter of fact before I answer that directly or try to answer directly I would say that I don't think anybody should blame that a client on Monday on computerized trading to me it was simply that the match in the gas tank that exaggerated to the extent that it did all the other things where they are all the other certainties where they are and the computerized trading was simply the tool the mechanical tool that caused to go to the extremes of the dead. I think that if she couldn't write to people she could write to the S.E.C. who were asking for a review of it. I know that that's the New York Stock Exchange has had a federal study of computerized trading is going on for a couple of months is due to be released and I think the next two or three weeks but I think before we're too hasty to

jump to a conclusion about computerized trading or program trading that we ought to let a little cooling off period let the dust settle and really find out. Now as for bringing Wall Street to Main Street I think you know how all of us of Merrill Lynch feel about that so matter of fact is kind of ironic. Monday the day of the big decline was a birthday of Charlie Merrill our founder. And he must have been rolling around thinking about some things himself on that particular day. I always remember Stella shepherd of the small investor we there's so many things that are right about it that we just can't let one unusual event. Mara the whole atmosphere. Steve you mentioned that Wall Street's tolerance was not unlimited in these economic areas. The old story is with a mule you stop by hitting with a two by four to get attention. Do we have the governments attention. I think absolutely. I think it's no surprise after a 500 point decline on Monday that President Reagan for the first time opens up the opportunity for tax increases to help narrow the budget deficit. It's no surprise after a day like Monday that the West

German finance minister and central bankers allow for lower interest rates. No surprise that Alan Greenspan suggests that he will provide all the liquid in the system needs to grow. We have the attention now of the policymakers in 1982 the big bull market started right after they passed a big tax increases that all you Wall Streeters want more and more tax increases. No I think rather than a tax increase what Wall Streeters want so to speak is a sound economic policy and an element of that sound economic policy would be a balanced budget or at least a budget deficit that is moving to a lower number. You're talking about a 23 billion dollar increase in revenues is that really going to turn around this multi trillion dollar economy. No I don't think anybody expects it will but it's a move in the right direction. I think all Wall Street would like to see is progress made on the budget deficit progress made on that deficit will help us improve our trade deficit and will also make us less

reliant on foreign savings to fund our financial markets. When you were here in April you predicted that the Dow this year would get to 20 700. It did was it just tired right it out. I think it was more than just tired there were some underlying fundamental deterioration and that deterioration began in the summer months of this year. First and foremost interest rates began to rise and the level of interest rates became competitive with common stock returns. Second stocks had achieved a terribly unusual level of value relative to earnings dividends and book value. Third liquidity in the system money available to buy common stocks had declined. All of those things were going on underneath the market. It took something to bring investors to focus on them. John Templeton the newspaper Variety recalled its famous 1929 headline this week they said Wall Street lays an egg the sequel. You were around in 1929 although you weren't as active as you are today. What's the comparison.

The panic this time was much greater much larger. But at that time the stock market would have recovered within a year. Except that the panic spread into general business conditions and that I do not expect this time. Things are so different at that time there was no one employment insurance is no guarantee of bank deposits and no insurance on brokers accounts there was no Social Security and many other factors so that this time I think this is simply a stock market but a bear market in the stock market and will be reflected in little if any decline in general business. President Reagan last night seemed to be at pains not to say we would not have a recession. He said if we lost confidence in Wall Street its mood spread to the country that we could have a recession earlier than we might. Does that worry you. No that is about the same thing as was said in 1929. But it's also said with every other bear market which has not increased and spread to set in the bear market of

1937 in 1902 in 1974 and usually it's true that nothing will happen this time except a temporary decline. I would do it for Louis to say that I would be very surprised if there is any decrease at all in the amount of dividends paid out. I'd be very surprised if there was any decrease in the book values of corporations. I don't so be surprised if there was even a decrease in disabled spot in with corporations. You have always taught that the successful investor looks for bargains. You must have some bigger bargains than a few days ago do you not. Yes indeed Louis you might say that we have being offered a great opportunity for those who weren't quick enough to get in on the ground floor when the bull market started in 1982. I'm now being offered a chance to get in on the ground floor of the next bull market your own industry the mutual fund industry has had a rocky week massive redemptions people told they couldn't redeem for seven days in many cases do you find in your own operation that people are

panicking and trying to get out. All redemptions this week have been less than one tenth the 1 percent on it. Switching from common stock funds into others overall of all the funds together there's been a net increase not a redemption. What's your advice to people in terms of the stock market. Patients be a long term investor. Be prepared financially and psychologically to live through a series of bull markets and bear markets because in the long run common stocks will pay off enormously. The next bull market will be carried prices far higher than this one. Why. The cost of the whole nation is growing more rapidly. Gross National Product of the nation will double in that at least the next 10 years. We think the gross national product of the nation 40 years from now will be sixty four times as high as it is now and that will be reflected in sales volume and profits and share prices. So that from a long term investment standpoint it's a question of when should you put your money into stocks.

We can't give you the exact day but some time the market will start again and you want to be in on it. Those who are in 1974 when we had a very bad bear market. Instead of being bullish on America your firm was emphasizing all the other products it had to offer this time you seem to be much more positively upbeat as a phone. Is there a change in attitude there. Well no I think the we just saw it was a very timely as you may know we ran some commercials in the World Series last night where a Jag made them out to play tonight so they're going to buy it and I that's that's correct. But nevertheless we swear I'm very bullish on American American corporations and this is a story we're trying to get across. But you also sell bonds the bond market had a terrific rally this week against the stock market that's right people sell stocks and buy bonds. Yet there were some gas there were people selling stocks and buying bonds might affect the bond markets where it had such a such a decline that there were some very good buying opportunities particularly in long term bonds and that seemed to work out which

looks better to you right now I think is a balanced approach and I think it's each individual investor has to look at his own situation. If you're conservative you ought to have a balanced portfolio. And you can get some good long term bond purchases and certainly get some very attractive long term common stock purchases. A balanced portfolio and an on balance market balance market this is the time to make about a study of what your portfolio look like now and what would your advice be. Well my advice would be to emphasize bonds at the current time relative to common stocks and one reason for that is I believe that the decline in stock prices that we have had in the last several weeks will bring about a weaker economy later this year and early next year and that will initially be to the advantage of the bond market. Explain how that will occur. The decline in stock prices we have had since August of this year is about a trillion dollars. And that is net worth to the consumer. Consumer spending should be lower to the extent their net worth has been reduced and lower consumer spending

will bring about a weaker economy. How would you answer the question I gave Bill in terms of a balanced portfolio. We would now have approximately 30 percent of a balanced portfolio in short term debt instruments. Call that 2 year US governments. We would have 30 percent of the portfolio in long term government bonds which for us is the maximum representation and we would have our minimum representation now 40 percent in common stocks. The Federal Reserve Board Chairman Alan Greenspan indicated this week that it might be shifting emphasis from worrying about inflation to worry about recession. Might that change your perspective. No I think that the concerns about recession may be appropriate given what has happened to common stock values. And I think that Mr. Greenspan and his colleagues would be well served watching the economy very carefully watching how consumer spending responds in the months ahead to the decline in common stocks. Since August of this year John Templeton you were one of the earliest

global investors the market seemed to be tightly interlinked this week one falls they all fall because of any safety or safety in diversification this way. Some but not as much in the old days when economies were more separate. We have found that by being world diversified there we have been able to make more been able to do better than the market in their markets much better than in bear markets and that's still true this week also. Barely two months ago you were here with me and you were totally optimistic about the future. Have you changed that attitude a little. No militia the out outlook is so wonderful that none of us really understand or the world is progressing more and more rapidly. Half of all it's been discovered in science in the last 50 years half of all discovered medicines in the last 20 years. There are 10 times as many shareholders now as they were 40 years ago. The pension funds of individual retirement accounts and all growing so rapidly and that

the quantity of shares available to buy is shrinking so that in the long run share prices are likely to be much higher than they've ever seen before. You and I may believe that but what do you tell the individual who sees a market crash in the way this once crashed thinks he's at the mercy of computers and big money managers. How can he have any assurance that this is a reasonable way to prepare for one's future. By looking at history there's never been a time when you could have invested but never in the last 40 years been a time when you could have invested it you own common stocks that you would in the made money over a five year period. Or to say it differently. The great bull market did in two months ago on August 25th. We are already in now well into a bear market. It is possible the bear market has already ended. But if it hasn't ended yet the chances are it will end by the end of next year. So all of us should start focusing on when can we get in in order to share in the next bull market.

Would you race to buy stocks Monday morning or would you wait let the market settle. I would later wait and let this market settle. We have not increased our total holdings of common stocks this week and it may be several weeks before we do. And there unfortunately we do have to stop I want to thank these three distinguished gentlemen Bill Schreier Steve Einhorn John Templeton for bringing us their wisdom tonight. They didn't the great but that's what makes markets. Neither they nor any other human not even a newsletter writer or a computer analyst can tell us precisely how low or how high this market will go. Those who tend otherwise turned out eventually and invariably to be wearing only the emperor's new clothes and not very elegantly either. Happily though we don't have to know the unknowable to make money as long term sensible and patient investors who believe that whatever our political and economic problems America is still a fine and resilient and promising country and that we want to own a part of its future. That's how I see it. However bruised and battered most of us are feeling tonight and will be back next week to what passes for normal around here. Tracking America's shaken financial

present. But more important keeping faith with its future and going along for the ride. I hope you'll join me on that ride in while this has been last week. I'm with the guys at the Knight. St. Louis Rukeyser that's been broken by public television station finance interest. Daughter transatlantic company with 23 consecutive years of growth in earnings and dividends by providing essential goods and services by Prudential rate securities the investment firm with rock solid resources that's leading the way to the Future for Investors and to buy a primary the new name in financial services and specialty retailing. A company with the resources to fund growth for tomorrow primary got a name to remember.

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