Wall Street Week with Louis Rukeyser; 0109

Friday December 3 for Wall Street. Our panelists are Frank happy Hello Howard Cole and Carter Randall this evening special guest Abraham L. Pomerantz partner Pomerantz Levy how they can block. The event. I'm Louis Rukeyser This is Wall Street Week and welcome back. And what a week it's been on Wall Street. Why the smiles have been so brought up a broad street at wall that you'd think Pollyanna had just declared a dividend. And where do you hear from our regular panelist tonight a couple of weeks ago and they remain stubbornly optimistic in the face of the market's decline. We were calling them our happiness boys. Now that they have once again been proved right at least for the moment they have big grins make the Cheshire cat look like Ebenezer Scrooge. We'll also be hearing tonight from the man who has made Christmas a lot less green for a lot of mutual fund managers. Abraham POMERANZ figures he has taken no less than 80 million dollars from those managers on behalf of their shareholders

Mr. Pomerantz has made a fortune of his own defending small stockholders against big corporations and sometimes even bigger mutual funds. And he's an expert on the legal rights of the little man. But first let's take a look at the news that brought the pre-Christmas spirit to so many investors big and small this past week on Wall Street. The Dow Jones Industrial Average which had its nine hundred seventy one low a week ago Tuesday has been moving up every day since then. That index of 30 old line blue chip stocks added more than 60 points in the last seven sessions. Forty three of them this week alone and bowed ahead to close today at eight hundred fifty nine point fifty nine. As if to emphasize how much money is weighed in when the market does decide to go up volume this week surged ahead to a bustling 93 million shares and that's nearly 30 million ahead of the recent weekly average. This past Wednesday alone more than 21 million shares changed hands. The busiest trading day since August 17th. And the weeks joy was pretty generally shared. The New York

Stock Exchange index of all the common stocks tacked on nearly three four points to finish at fifty three point fifty one while over the American exchange where volume was also sharply higher. The gain was just under a point twenty four sixty. And the Nasdaq composite index of over-the-counter stocks added more than five and a half points to end the week get one hundred seven point twenty six. Interestingly enough the market is now after this explosive advance that just about where it was before President Nixon announced his brand new economic program on August 15th. Now does that mean the market is now pretty well discounting that program and are happy days really here again on Wall Street. RANDALL You called the doggedly I might add wild thing to Hearts flooded. So where do we go from here. Well Lou I think long term we're going much further than this and this is only the beginning and after all we're still about 100 points away from where we were six months ago seven months ago.

Quote I gave you credit for calling the tune and you deserve it. Did you expect it to be quite so sharp and direct. No this is much more dramatic than I thought. But it's very interesting Lou that two weeks ago whatever was good news was interpreted as bad news and bad news which we had some of this week was interpreted as good news and the market went on up. You have the advantage of not having been on for four weeks. So you haven't had to put your reputation on the line every week but as I remember it four weeks ago you said you thought the upturn would come in about two weeks. You didn't miss it by much you happy mostly because I missed the full weeks of waiting. The eye had dissipated in so did my colleagues here recovery in this period. I thought it would be rather strong I was surprised by the 60 points in one week was rather a lot. I think the market this is a traditional time for the market to be strong that is between Thanksgiving and Christmas. I think we'll continue to see strength in this period

but we won't have a duplicate of last week. Now you've said it's a traditional time for the market to be strong. Other people have said it's a traditional time for year end tax selling. Are those two things in conflict. It depends on which way the market is going if it's going down it's tax selling if it's going up once a year and really we always have an explanation we just don't know what's going to happen. In fact traditionally in December towards the end of December and that's the period we're headed towards the lower end there's a rally and you agree with quarter that we still have a long ways up to go. If you look longer term yes. I don't want longer term. The next year but more of pacifically in the next two weeks I think the market will be continue to be strong. It may if it goes up too fast I might look for another correction in the beginning of the 1070. Frank Caprio last week you were wearing a big smile button I see is missing this week. Why is that. Don't need it.

Actually I think the good news came out of Rome one of the uncertainties appears to be settled and that is the international balance of payments the international monetary situation. But I do agree with the two panelists what we've had is a technical rally from an oversold market on top of which you do have the traditional year end rally most attack selling is out of the way and the combination of these two has produced a very explosive market. And I think long term we're headed much much higher. And I just made a short term prediction he says the next two weeks are going to be pretty fun. Would you agree with that. Yes I think it would Jan. quite strong and sometime around January we might have some selling off to test this market and then I think 1972 is going to be a good year a really good year presidential years in which we are presidential election years are usually good years. President Nixon would be happy to hear your forecast. I don't think it makes much difference whether he's elected or not it will be a good year. OK time now for our weekly Wall Street exchange which we exchange

panelists answers for viewers questions. I wonder which group will win tonight. Go to Randall Here's a flash bulletin question from Robert Hunter VOD of Secaucus New Jersey Mr. Hunter that owns one hundred fifty shares in a company due to vote on a merger by December 15th you can see that time is of the essence. He's vehemently opposed to the merger says in fact that he won't accept it. He wants to know how he can realistically fight such a merger and what it would cost. All right. Well first of all Lou he can vote against the merger. Secondly he can organize others to vote against the merger. Thirdly he can sell his stock. Fourthly he can forget it because if the officers and directors of the company are for it most of the stockholders are he's fighting a losing cause it would be very very expensive many thousands of dollars to really wage an all out campaign and in the final analysis in most states if he is against it he will be

able to get appraisal rights which is a legal term. I won't define that but if he doesn't win he's probably going to want to sign a stock you think if you want except the major either selling his stock or asking for a court appraisal of his holdings. OK Pete Calhoun is a mutual fund executive you are the one to answer this next question from Patrick Calandra of Philadelphia. He'd like an explanation of the bid and ask quotations for mutual funds that appear in the newspapers and how they affect the value of the shares he holds. You might also explain what it means when those been asked quotations are exactly the same the quotations shown in the paper are daily the bid price reflects the net asset value per share of the fund and is the price a person would get if he were to liquidate his shares that day. He asked Price is the price. Of acquisition which means the net asset value per share plus a sales charge running

around 7 or 8 percent which is in addition to the Knesset babe pushchair when their prices are the same. The bid in the ast this indicates that the fund in question is a no load fund because as we've said before no load funds have no sales charge and one can buy it and sell it at the same price and the load to the sales charge Carette exist for these funds. Correct Frank Cappiello s Webber of Long Island City New York thinks brokers are overly greedy and charging interest on margin loans and then charging commissions on the purchases that are made with these loans. He wants to know if there are any legal restrictions on how much margin interest a broker can charge. Why don't you explain just how a margin loan works. Well a margin loan would be where an individual goes in and deposits cash and then the brokerage house applies the difference between his deposit in cash and a loan amount he wants. And this

is typically a lone situation in which the securities are purchased part for cash and part with a loan. Nothing. Nothing difficult about that. These days you can 65 65 percent cash. Yes right. There are no restrictions except legal restrictions and each one of the states in which the broker resides. By that I mean the only restrictions on interest rates charged by brokers on margin loans are usury laws. All brokers charge interest on more than one. Yes they do so as to when but but the interest is scale though I might mention the interest is scale that he has a large loan balance a large debit balance and does a lot of business. I'm sure the brokerage house will take into account this particular activity and so the loan will be the same but the interest charge will probably be less. Just like a commercial banking operation. OK. If you'd like to trade some questions for answers in our Wall Street exchange just send them along to us at. Wall Street Week no incentive for public broadcast in Owings

Mills Maryland 2 1 1 1 7. That's Wall Street Week at the Maryland Center for Public Broadcasting in Owings Mills Maryland. 2 1 1 1 7. Now before we meet our special guest and find out some of the things he thinks are wrong with mutual funds we thought it might be useful to summarize some of the things the industry itself thinks are right. Three main advantages are usually cited for a start there's the appeal of professional money management. Theoretically at least making available to the little guy one of the main advantages that the big boys have. Then there's the appeal of diversification which is Wall Street's way of saying don't put all your eggs in one basket. A fund reduces your risk by spreading your money around in a lot of little baskets which is particularly helpful if you're chicken. And finally there's the promise of convenience a ready market when you want to buy or sell. This combination of professional money management diversification and convenience has proved a powerful inducement to the ordinary American investor. The first mutual fund appeared in 1924

and in the last generation or so it's been up up and away by 1940 there were 300000 shareholder accounts in mutual funds which by 1950 had tripled to 900000. Then the big boom began by nineteen sixty four point eight million investors had bought the appeal of mutual funds and by last year their ranks had swelled to fully 11 million. Now were these 11 million shareholders right to be so mutually inclined. And what's protecting and who's protecting their rights. Well the man to whom it's been said that he has taken more initiatives in favor of mutual fund shareholders than the Securities and Exchange Commission has is tonight special guests. So let's go over now and meet him. He's Abraham L. Pomerantz. Oh I have a lot to see. Pleasure to see you. I think you know these gentlemen. How is. He. A POMERANZ as a socialist who's made a million or so in capitalists. He

started his career bringing stockholder suits in the early days of the Depression. Yes when the new securities act was requiring corporations to report what their insiders were up to. Since then he's instituted some 40 suits against mutual fund companies and he has several dozen on the docket right now. His Wrath has been felt abroad too. In 1906 Mr. Pomerantz was deputy chief counsel of the Nuremberg trials prosecuting German industrialists but he quit when he thought the Truman administration wasn't being sufficiently aggressive about those trials. Maybe you've never been accused of a lack of aggressiveness particularly not after taking 80 million dollars away from mutual fund managers. What grounds were those suits won. Well you know at the opening of your program you were talking about bulls and bears and I heard you in a back room but I think in the mutual funds is new animal been introduced into some of the funds they might be called pigs and I like to believe I hope it's true that my Especially my special target has been the pigs and the

mutual fund industry which happily for my own private fortunes abound. Well you've been said to believe that the mutual fund corporation is and I'm going to quote this no more than an empty shell operated for the managers own interests and the rules providing for control of the fund by a majority of the unaffiliated directors and for a vote by fund shareholders on consequential matters are simply meaningless trappings unquote. Could you explain that a little. If I may be so in modest well-packed sentence I think it is true to say that the mutual fund as such stripped from its management people is a great big zero. What to say it another way its whole vitality depends on the management company. Otherwise it is as you have said correctly quoted me as having said nothing but a shell. So-called independent directives the UN affiliated direct is what is

happening with and affiliated with him. Let me say it in three sentences. The management company. Normally people does the mutual fund the president secretary and treasurer of the management company is the same in the mutual fund and they are directors of the mutual fund. Obviously they all have a real case of a pregnant conflict of interest. Now in order to take the curse of that conflict away they have so-called independent directors of the fund who by hypothesis of people who are not interested in the Madison company and therefore can exercise a disinterested judgement in the interests of the shareholders of the fund. The trouble is the independent directors or the unaffiliated meaning I'm affiliated with the management company not owning a piece of the management company. Those fellows up put on office by the managers. So the manager is really putting in to the mutual fund the

watchdog. And as you know and the man appoints the watchdog he's not appointing one with. Too many teeth or too truculent. Well what for the watch dogs be watching when they all want the fun's shares to rise in value. Oh indeed they do I have no conceptual difference with the mutual fund as an institution it's a great institution. I'm all for having it rise in value but the truth of the matter is the unaffiliated or independent director has nothing to do with it. That's a management company. The main role of the UN affiliated director is to make sure that the affiliated director or the management people don't get too much for their services. As you probably know there are funds that get 20 30 Million Dollars A Year in advisory theses. There are funds for most of them I'd say which charge an entrance fee to the mutual fund ballpark of nine and three tenths percent.

Just just to get in. And these things pile up into millions and millions of dollars are all funds which get the brokerage business which mean more millions. Now somewhere along the way the doctrine of too much creeps in. I mean what price or lords or question or management of managerial skills. Yes it's a question of how much the people who run the fund should be getting for running the fund. I might add to that another little abrasive thing abrasive to my friends on this panel or with mutual funds and the only one. Only one and I might say that one two year old price enjoys about the best reputation in the industry is sort of an earlier meeting. The fact is that by and large and pardon me for generalizing. The professional management which you talked about earlier in this program which by hypothesis means a better advisory organization but a performance and short is a myth is a mirage. That

as professor friend has said in his Wharton School study as it was said more recently in the 20th Century Foundation Report year in year out the mutual fund does not do better than random choice or to vulgarize it a bit of a shareholder want to stick a pin in the financial page and pick a stock that way he will on it for which he will on average do as well as his very very expensive. Professional management whether the reasons are the ones you've just suggested whatever they may be there does seem to be some investor disenchantment with mutual funds in four different months this year you know more shares were turned and were bought. How do you interpret those figures. I must say in fairness to the mutual fund and to get this perhaps a little more equitable balance I don't think the shareholders of mutual funds have been fair about it.

They were perfectly happy during a good day so they held cnt days of the market to celebrate their victories. But as so often happens in human nature when the locomotive took a sudden swerve of the disenchantment as you put it came in and they were wailing and moaning. In all fairness they should have taken account of the fact that the mutual fund managements are not miracle people they'll go up with a wave and down with the way down to let our panelists in on this now and see to what extent the feeling is mutual. You know I'm not affiliated in any way with a mutual fund but I take a little exception to your statement that the average mutual fund is no better than random choice. It's sort of like saying that. In the big league baseball leagues as many games are lost as are one and that's certainly true but that doesn't mean that there's something rotten in baseball. It just means that there are some that are better than others and the real trick to

the average investor is to pick the one that's going to win the most ballgames and not lose the most. Well I'm afraid if you'll pardon me that's a bit so I killa. If we have the wisdom that comes after the event. If you could tell me looking at me this minute next year T Rowe Price is going to have a hell of a year and do well. I'm sure I'm going to pick it but unhappily we have to buy by sales campaigns and the average investor buys as you probably know not with any great analytical problems but because of the charm the magnetism the pressure to use a harsh word of the salesman. So we must generalize in terms of the fund. It's unfair to speak about the team that wins a World Series because when you go to the ballgame you're going to encounter the average team the average 10 or 11 million

investors the mutual funds are going to buy the average fund. Now when you charge an admission price of almost 10 percent. In or out of it get into the fund which is what the load funds do. Then I think the postulate is that you're going to get a lot better advice than if you go to an ordinary garden variety broker and say what's on a bargain counter to day order and when you use your own judgment. So I add here to my point that the the mutual fund as an institution and again this is a generalization which as always has its exceptions has not fulfilled its promise of professional management which has of course a connotation that you are. That's with us and you'll wear diamonds. You're going to do better than if you don't come with us. And if that's not true then the investor is being cheated by being asked to put up 10 percent in order to get into the mutual fund. And then again

another percentage for the managerial advice that he gets so I add here to my judgement that the mutual fund as an institution has fallen down on its promise. I would say that apart the load fund because of the low fund while charging no admission fee has. So what has been said by eminent statisticians. As good a performance record. The load which charges almost 2 percent. I'd like to go back to your question about how we might get in the industry the mutual fund industry good unaffiliated directors. Given the situation we in the industry want good un affiliated directors. But they have been as you know many lawsuits in the industry. Some of what I would call the the bus nature that is they embraced many companies on many charges that maybe a number of them didn't do so that directors are afraid of

coming into this arena where there are many lawsuits many charges. What would you propose that mutual funds do in any particular anyone in particular do to get good outside directors when when you approached one they might say gee why do I want to become a director in that legal environment. Let me ask you first in a negative sense because making them negative will help to point the way to the possible. If I am a officer and director of a corporation and I have a self-interest obviously in getting as much of the loot as I can sell or options bonuses and so forth and I decide in the interests of appearances I'm going to appoint a so-called independent director. The one thing I should not do is take my palpate whom I know for 20 years and who is not just man but he has a great

disability. He knows me and I know him. Now I say Pete I'd like you to go on a board and I want you to be an independent director. I think that's evil because human nature being what it is when you put your pal in there and let you put a footnote in the UN affiliated director appointed by the manager is normally no stranger to him. He's a fellow who was in my. Trial experience is a man who went through Cornell with them or went through high school with and went through the army with him. I have had I have had brigadier generals I have had admirals in the Navy. People who are who are pals of the man who needed to be watched the manager. I think that is wicked and it would be wrong to say that the fellow who goes along in a friendly way is a crook or dishonest. But unhappily he's a human being. And as such he's going to

be friendly to his friends. Now that's next. On a positive way it's more difficult to answer and I don't have time to give you a blueprint but just one idea for for thinking that the nothing wrong with going to an institution like the FCC and saying gentleman we don't want to be open to the charge that we're putting pals into office to watch us to make sure we don't get too much advisory Feo too much of a load would you be good enough. To designate for a five or six on affiliated or independent directors now I don't know what their answer would be. I suspect they would want not want to be in that position because when they came around they would be their appointed director who had to respond to some inquiry. Why then then you say the FCC What do you suggest in this imaginary dialogue. They might say go to the University of Pennsylvania Wharton School of Business go to Harvard school go to any other reputable train sophisticated schools and let Professor so-and-so or so-and-so doesn't need for a five

men who at least have the negative virtue of not knowing and not being particularly friendly with the management which needs to be watched. Now if type a bit of I could elaborate that I've given you the thrust of the thing Con don't have a different fact that we already have a very fast and. Very fast. Why are you in the forefront of this mutual fund. Fight Why isn't the FCC doing. Why hasn't the FCC done something on a slide where your question contains an assumption which is contrary to fact the FCC has done a great deal. And in truth I must say I owe a great debt. Both professional and economic to the S.E.C. I'm sorry I have to interrupt at that point but time is up. I'd like to thank our guests a VLAN rance and our panelists for being with us tonight and I hope you'll join us again next week. We will be examining an alternative to mutual funds and stocks we'll be looking at bonds which is an area of the market that's likely taken on a good deal more glamour. My guest will be Nils Peterson who's in charge of fixed income securities Thorndyke Doran

Payne and Louis I hope you'll come. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser tonight. The thing. You're. Most studios of at Maryland Center for Public Broadcasting

This is the eastern Educational Television Network.