Wall Street Week with Louis Rukeyser; 1133; Defense Stocks: On the Fence?

Well spring we. Brought to you by a grant from the Martin Marietta corporation. And to buy this and other public television stations produce Friday February 12. Your host for Wall Street Week is Louis Rukeyser. Our panelists are Frank happy yellow Elizabeth dater and Robert Stovall. Tonight's special guest is Wolfgang age gimmick vice president Morgan Stanley and Company Incorporated. But even I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well to update the old joke they told you that if you voted for Jimmy Carter in 1980 you'd get record federal deficits soaring national debt and a sick stock market. You voted for Jimmy Carter and darned if they weren't right. Who would have guessed listening to the rhetoric of the last decade that the first full budget

submitted by Ronald Reagan would admit to a 91 and a half billion dollar deficit about which the only real argument in Wall Street right now is over how big an underestimate. Even that unprecedented figure is what would have guessed that the likes of David Stockman and Donald Regan would be busily explaining to anyone who would listen that in an economy our size such deficits don't mean a thing that they may it seems actually be good for you. Since in this case you understand they were produced by Republicans. Well such partisan rationalizations didn't even turn on the partisans this week as the president found out in some stunningly candid sessions with his own congressional leaders and the question at week's end was not whether the Reagan budget would be revised but how how much and by whom. As for Wall Street whose expectations for this administration had already been evaporating like a pan of water spilled in the Sahara. It took one look at the proposed budget and

shriveled up in a whole new panic. In the two weeks the market has had to contend with rising interest rates and ever more specific news about the Reagan deficit. The Dow Jones Industrial Average has been battered for a thirty seven point loss and some broader stock indexes have been even worse hit. What's more Federal Reserve Chairman Paul Volcker who is becoming the Reagan administration's favorite scapegoat is now trying to turn the tables by blaming his woes on Reagan's deficits. And after the despondent stock market closed for the week the Fed delivered a new job by disclosing another larger than expected jump in the money supply. Happy Valentine's Day to them both. Meanwhile back of the economy there was the usual flood of recession reports including a substantial drop in retail sales. But some more hopeful news including continued moderation in producer price increases and signs of a possible bottom in the corporate purchasing survey. One sector

of the economy directly affected by the new budget is defense where amid much controversy the president is seeking an eighteen point one percent spending increase. Will they get it. And who will really benefit. Those are among the questions I'll be discussing with my special guest a proven expert on aerospace and defense stocks. But first let's count the casualties in the shell shocked world of Wall Street in the week has passed. And as the Dow Jones Industrial Average indicates the market began with its second straight Blue Monday and then dipped to 8:30 its lowest close since September before steadying somewhat Amine and the Macleay at week's end for the week the Dow was off another 17 points to eight hundred thirty three point eight one. While this was slightly less damage than last week for the Dow the reverse was true for the broader composite indexes of the New York and American stock exchanges and the over-the-counter market. But never let it be said we have no good news to report or

elles sentiment perhaps that the market is so dispirited it might be ready to go up have come in with a bullish technical market index of plus for the highest reading on that index since May 1980. And yes one not short of an outright buys signal. I can hardly wait I guess. Affirming of interest rates. May discourage stock and bond buyers but it continued to help the dollar and hurt goal which closed the week down seven bucks to around three hundred seventy eight dollars an ounce. One person who has reason to be happy tonight however is Beth David whose stock list of a year ago was up for the year by 7 percent not counting dividends in a down year. He was also the second closest of all our panelists in predicting where the overall market would close. Best take a low bow and come out charging with your predictions for 1980. Ok here goes. I believe that the lows on the market will be at 690 690. I will put a

high of 900 and I will put a year and close of 835. That's obviously pretty barren for years. But you have this close in on the upper end of your prediction. You see a very bad opening in six months. Well I think the market itself probably is poised for a short term rally here but I think we have got an economy that is in definitely a recession and I believe that there will be a lot of uncertainty as to what the administration is going to do in the next several months and so I do not look for a spectacular second quarter and I believe that the market could be in some real trouble around mid year. But I do believe we're in a primary trend for a bull market from that point on. OK. But given your grim 1982 forecast what do you do with your money now. OK I go with large capitalization liquid companies like the drugs and I would use Eli Lilly Merck Johnson and Johnson. I like the financial sensitive stock still I would use Citicorp and marine Midland in that category. I like some of the larger technology companies Perkin Elmer IBM and some of the cyclicals

that I think will start to perform better towards the end of the year in that category I would use Delta Airlines and General Electric and wire house or why given your forecast do you pick any stocks. Well actually well I would like money and invest. I would like to have the option of timing when I put my money in to the market. Didn't think you were going to but I would be probably only about 50 percent in equities at this point and in fact I would probably not be prepared to go significantly into the market until after this after the middle of the year some time when I think Frank Caprio Do you agree with what you just heard. I think I'm going to Switzerland. I think that it's a very tough year that we have to go through. I don't agree obviously. Why do you disagree other than Well I think in a delicious. Oh I think it's obvious we're in a recession. It's not innate. And the funny thing that's occurring is economists are getting more pessimistic as the economy starts to unwind and this is sort of like market advisors getting more pessimistic as the stock market goes down this

is a whole new aberration. I think what's happening is economic policies now are more important than the statistics and the policies are less inflation. We've really got a Federal Reserve that's fighting. Recurrence of inflation and we've got interest rates will eventually come down. So I I think the values are there to buy rather than the worry about where the markets will base that money supply known as M1 has been rising in recent weeks that rate in excess of 14 percent. What convinces you that we have a tight money policy. I think it's a tight money policy Lou because interest rates are high and when interest rates are high you are curbing the economy. The numbers M1 M2. I would worry too much about when the Federal Reserve can count them anyway. OK Bob Stovall What do you make of what you've heard so far tonight. I'm not taking anything away from Beth because she's had a good record but people do tend to forecast the present. I think if you drew a line through the various panelist projections since Frank and I were on the first of the year you'd see a line of

bottoms for the Dow going straight down right up until today which is the last thing any panelist predicts would you revise your own forecast given the opportunity. I don't think I would have a lot of 785 and I think that's about right. I'm not surprised by anything that's really going on on Capitol Hill. The president doesn't want to give in on his tax policies and the opposition is attacking them as is the media. I think he's going to allow a tax increase for natural gas and perhaps an importer of oil but you don't ask for increases on fuel during the heating season. You wait for the in-between mud season. You know last for during the air conditioning season you know be foolish if you will. You have a way with words. Let's get back to the technical condition of this market the elves have suddenly become their most optimistic in nearly two years do you see any of the same things they look at the elves might be right. We have almost universal pessimism or caution. The market has taken a series of body blows that hasn't really even broken under the last year's low. I think the market's getting set up for a near-term revival and it may be too soon but

I'm starting to buy some cyclical stocks the General Motors Ford to type idea looking to the next business cycle but I view a custodian of among other things the General Motors market segment what is it telling us these days. It's telling us that General Motors can keep from selling below 33 and seven eighths between now and the 19th of March. That will get a buy signal from the GM indicator the indicator was not very helpful last year but it could be giving us a signal by next month. And it might be pretty good already in any event panelists It's time now to help our viewers hibernate in this bear market. IMO wells of Charlotte North Carolina would appreciate an assessment of the advantages and disadvantages of investing in pools of government National Mortgage Association issues or Ginnie Mae is now being advertised by brokers as a safe source of high interest returns. OK Lou first just let me reiterate the definition of a journey may for some of our viewers who might not know this is a debt instrument that basically represents

government guaranteed mortgages. And both interest and principal payments are guaranteed by the government. As far as the unit trusts are concerned there are several advantages. First of all they are very high yielding. They have about a 200 basis point advantage over their treasury equivalents which are about 10 years. Secondly the cost of entry is very low you can start to play for about a thousand dollars a unit and that is vs. minimum investment of twenty five thousand dollars on buying the straight Ginnie Mae. Thirdly there is very high liquidity. You can go in. There's a big market for this you know you do pay a commission going in but you pay no commission on the liquidation of the security. And then fourthly you receive your income monthly rather than semi annually as is the case in a in a regular bond. I see no disadvantages I think they're quite attractive however I would warn our viewers that they are not tax exempt as some investors often think that they are. Already below how would you respond to count on all of the Portland Oregon writes as follows.

I've heard of the Vaughn's must make a comeback before stocks can make a comeback. What is the reason for this. Is there a cause and effect relationship. If it is true how much will Bonds have to increase in value before stocks start to increase. Well there is a direct cause and effect relationship because if bond prices go up it means an interest rates are coming down and when interest rates come down it cuts the cost of financing for corporations allows them to finance and expand. And both are good for earnings and earnings are good for stocks. So there is this direct relationship experts tell me that the bond market would have to advance 20 percent before we would have a stock market that would begin to go up. In other words the 20 percent advance after that stocks would be attractive from a dividend and potential appreciation standpoint. I just don't know. I don't believe it. You don't believe the experts. You know I always do. Bob Stovall Elliott Boswell a berk would genuinely like your explanation and appraisal of the new universal life

insurance policies which have been touted to him as a better method than traditional annuities for beating inflation on the IRS. What's your view on them. It's a complicated question for Mr. Boswell. I think inflation beating is a little easier as the rate is down. These universal policies are essentially term insurance policies plus an investment program. And the insurance companies currently invest in high yielding government bonds. As far as the tax benefits the Internal Revenue Service says not yet given a ruling as to whether or not the cash value build up is is tax free even though they are sold as tax shelters. I happen to stumble across an article in last month's Consumer Reports magazine and I suggest you read that many. Know where there's life there's hope. At least that's our policy around here so insure that your premium money question reaches by sending them to Wall Street Week Owings Mills Maryland 2 1 1 1 7. That's Wall Street Week

Owings Mills Maryland 2 1 1 1 7. Now before we meet tonight's special guest let's take a look at the Group E covers aerospace stocks and see how they've done over the last couple of years. For comparison stocks in general as represented here by the Standard Poor's 500 stock index have climbed in dips since the start of 1980 and stood at mid week just 5 percent above where they began. Meanwhile the S&P composite index of 8. Aerospace stocks after some high flying in 1980 with zoom into the stratosphere in December after the Reagan election started to lose speed in 1981. And since last June has consistently underperformed the market at midweek the stock group Boeing General Dynamics Roman Martin Marietta McDonnell Douglas Raytheon Rockwell International and United Technologies have fallen 9 percent below where it ended 1979.

Are aerospace going to stay grounded this year or will the president's boost in the defense budget shoot these stocks off again. For some views on that let's go over now and meet tonight's special guest Wolfgang H dimension. Welcome to nice to have you here again. Quickly as we hear Wolfgang diminish who is just made a vice president of Morgan Stanley is making his fourth appearance in four years on this program which shows what we think of his consistently highly rated analyses of aerospace and defense stocks. On his last appearance as my guest in May 1980 I asked him what further events might be anticipated on the international security scene and he replied and I quote. Well God only knows Iran invading Iraq Libya trying to bump off President Sadat. Various things which affect our interests fairly directly. Wealth that kind of precision in public forecasting is rare anywhere on any subject. What is your crystal ball tell you now about the international scene.

Well I hope for peace will break out as we proceed during the course of the year. Well what encourages you to believe that the unexpectedly happy event will occur. There are currently arms limitation talks going on in Geneva and the man representing the United States Paul Nitze is about the best guy that we have. He's 70 plus years old he has nothing to apologize to for anybody. And I don't think he'd be there if he didn't think he could do some good. If you expect a substantial and by the way you suggested a surprisingly substantial improvement in arms limitation talks does that suggest that the projected increases in defense spending will not occur. Yes. OK the president has asked for two hundred sixteen billion dollars for defense and eighteen point one percent increase over last year. What do you think is going to get. I think the Congress is going to kick up a fuss Anyhow about putting up that kind of money I think you'll get maybe two hundred five billion dollars out of that. But the question is not so much how much do we actually spend this year. It's weird with this

sums go in the out years and the projections go up to Will God only knows four hundred billion dollars about five years from now. And I think we won't get that is what you're suggesting that that we are talking very tough in order to improve our bargaining position when we make the agreement we're going to make we in fact will spend much less than people think on defense and I think that's probably the plane. Obviously if the Russians don't want to come through then we might have to actually do what we're saying what we're saying we're going to do. What does all this suggest for the defense stocks which as we've noted have been quite mediocre performers lately. Well I think that they're still under pressure and are likely to stay that way during the course of this year relative to the market. The problem is that we face a politically difficult difficult climate in the Congress and the industry is doing very well. Where is the rest of the economy is doing poorly. So if as and when the economy recovers I think the stocks are not going to perform as well as the average investor.

Why have they underperformed lately as an addition to the solution with Reagan. A Well I don't think there's been disillusionment with Reagan but you saw in 1980 one what the president wanted to do and once you can put your arms around the package then you know how much it's worth. And people started to decide sometime around the middle of last year that it wasn't worth as much as the markets thought it was. You think that's still true in general. I suspect the actual stocks won't go down too much more. I'm more concerned that they're going to nag the general market. Are there any that you think are exceptions that might outperform the government still do. Yes. Companies were just strong in the categories of Defense intelligence communications strategic weapons smart weapons and spare parts. Can you give us some examples of other. Well most of them are defense Model-T unknowns for intelligence what is that is that's not a video game that is going to win. These are companies that have a big

defense presence but also other have presence in other parts of industry. Companies like for strategic arms. Rockwell with the B-1 and a piece on the AMEX Martin Marietta with the peace with most of the Amex. Both of these companies build the space shuttle together which happens to be our CIA launch vehicle for the nineteen eighties in intelligence also TRW which does much of the data crunching some of the suppliers to this service called for the solid fuel boosters East systems for tactical intelligence companies of that ilk. I think I'd like you to continue to do well. You have said you thought the CIA would be the growth industry of the 80s. What you mean by that. Well I think that we're living in a very dangerous world. Not because of the Russians but because the 30 or so countries who by the end of this decade will have nuclear capability and most of them don't like us.

And under those circumstances being able to blow up Moscow several times isn't worth much but knowing what these guys are thinking and hopefully being able to get there one step ahead of them is worth a lot. And so I think the CIA is still you know if it if it were a stock I'd buy it. Well you've suggested that peace may break out this year meaning better relations with the Soviet Union specifically arms in Europe but in fact you don't say that that's a reason for us to relax that in fact we know we're going to have problems all over the world and I think the world is becoming still a nasty a place and that hasn't changed from where we were two years ago. OK my defensive intelligence tells me about it. Give our panel a chance to get in. Let's start with that. Are there any small companies government defense subcontractors with proprietary technologies that have very very interesting growth prospects as you see it. I mention for example easy systems which is a company down in Texas which does lots and lots of telecommunications stuff and snooping on tactical

work for the hostiles they build the Sinai listening posts for example. That's a nice company. It's not inexpensive but I think it will do quite well. I mention fire call which is a company down in Newtown Pennsylvania that makes solid fuel rockets and specialty chemicals. There earn about $3 and 20 cents for the year just ended they're selling at around $30. This is the type of company I feel very comfortable. There's many many others but most of them are not really dirt cheap. Keep in mind the S&P is selling at seven and a half times earnings. So. They're good but you know they're not going to blow your socks off. And we've talked about the domestic market related to our budget. But how about the export market for American arms are there any companies in the next year or two that could have large export contracts. Raytheon has made a wonderful living selling Hawk surface to air missile. And next generation systems are coming on. Litton has done well in this area

so has Lockheed to a certain extent Northrop has historically been very successful in the new aircraft thus far isn't selling. It lacks the prestige of an F-16 if you're a dictator and you want to sort of impress the peasants then you buy the better grade product. It's an F-5 worth the F-5 of Northrup's is having trouble selling against the F-16 reality wouldn't creep in however eventually or terms of pride in aerospace however are turning against us. The foreign governments the French the British the Germans and others are starting to settle more aggressively into this country. And although a surplus is still very large in the last five years it's our exports have doubled our imports have gone up six fold. Central America South America may be a trouble spot to take the place of what you see happening in Europe. In case a lot of tactical weaponry would be required and in Central America what companies do you think might be involved or people who should be

exploiting things there would be people like fear child who make a very simple very crude ground attack airplane. And of course you know you have the usual people Excello who make armored cars and perhaps Chrysler for tanks and such like. But I'm not sure the U.S. public is that interested in rushing into Latin America or sending in the Marines. So it's not clear to me that that's going to be a big source of profit for anybody. Well if you're an expert on this industry but you're also an intelligent sensitive human being many Americans are deeply concerned about the emphasis being placed on defense in this budget in a time when social spending in many areas is being curbed. What's your view on that. Well the U.S. today is living in a nastier word then we were 20 years ago. And as a percent of GNP we're spending about 6 percent today and we were spending about 10 percent back in the 1950s. I don't think that we are spending grossly too much. The main

question is is this really being spent intelligently. And that is an issue which is still subject to debate in the Congress. Well let's put it the other way around are we spend enough on defense to defend ourselves amply to defend our interests in the rest of the world. I'm not sure but I'm also not sure that some of our friends are doing their bit relatively speaking. Well I was going to put pressure on some of our friends I wish somebody would. We're going to get results from people at the West Germans or the Japanese. I assume we will because if we don't I'm sure the Mansfield amendment is not dead but only sleeping. You think we may bring our troops home. Well I think that that's a risk yes. Would you advocate that. Oh no I think that we have more to lose by doing that now in terms of defense spending and if the general outlines that you have suggested for the world to occur that way what will happen to the will. Will the Reagan plan

subside to where we in fact be spending an increasing proportion of our gross national product on defense. I would think that we will spend slightly more probably going up to maybe six and a half percent over the course of the next four years. Other stocks in this area that you would be selling are selling short at this point. I've never made any money selling short frankly and these stocks have dropped about a third of their value in the last year so I think it's a little late to sell and the issue is what else would you want to buy. OK you've been relatively lukewarm on the group but you've named a lot of names of specific companies in a typical portfolio what percent would you put into these companies. I would guess somewhat less than the market average maybe about 1 percent or so 1 percent so for the average individual investor that's going to be nothing. Unfortunately yes unless you've got a specialized situation nice dollar companies like United Technologies or Rockwell or a market I think are very good for the individual companies that would do well even if peace broke out in the correct.

Well we hope that your prediction of PCE breaking out who's as good as some of your more dire forecasts in the past and I thank you for coming back and being with us again. Was will see again a year from now I hope the world continues as nicely as you suggested doesn't come to an end I mean well thank you very much to our panelists and I hope you'll be back with us again next week when we'll take a look at the Elliott Wave Theory. And no little children that is not a revival of the movie Shampoo. It's a theory that market cycles come in predictable waves. And my guest Robert Prechter thinks he knows where we'll be washing up next. So bring your sea sickness pills. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Tonight Wall Street Week With Louis Rukeyser. Has been brought to you by a grant from the Martin Marietta corporation. And by this and other public television station.

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