Wall Street Week with Louis Rukeyser; 0641; Making Contrary Opinion Pay Off!

The. Public broadcasting it. Wall Street a week produced Friday April 8. Your host for Wall Street Week is Lou's rule geysers. Our panelists are Frank Caprio Carter Randall and John Moore. Tonight special guest is Daniel R. long the third president Corben Associates Incorporated believe me and I'm

Louis Rukeyser This is Wall Street Week. Welcome back. Well the stock market late a great big Easter Egg this week and it couldn't have happened to a nicer bunch of bunnies for over a year now the most appropriate animal symbol for Wall Street hasn't been the charging bull or the diving bear but the jittery rabbit popping aimlessly about scared of a shadow laden with a eggs many of them rotten and constantly sniff sniffing at the wind in hopes of finding some real purpose in life. Once again however this was a week when the Wall Street bunny trail failed to turn up much less the market was down for the 11th time in 14 weeks this year and so was the volume and the mood. The bunny has been doing most of his hopping backward this year arriving this week it territory hadn't visited in 15 months but he still managed to stay in that narrow terrain above nine hundred on the Dow Jones Industrial Average that he has inhabited since the great winter rallies of 75

and 76. So out of Peter Rabbit out. What ails the hair. Well it's too early yet to talk about a quarter bear market. This is still a nervous rabbit not a bear. But if the current decline is not halted there may be no other rational description. Investors are worried and they can't make up their mind whether the new president will or will not turn out to be good for the rabbits they're worried about inflation a concern that scarcely was alleviated by yesterday's report that wholesale prices rose more than a full percentage point last month alone the worst price increase since October of 1975. It was to be sure a month affected by the extraordinary winter weather and the huge increase was caused primarily by higher prices for coffee and other food price sector that is notoriously volatile. But it wasn't good news by any interpretation. It really fortified worries about the growing federal deficit to which both White House and

Congress seem determined to add with its eye on the budget. Wall Street has not been diverted by the much publicized Carter cuts. That is the line up of the presidential yacht. A move it seems to have discounted as we say showboating. Investors are jittery too about what they fear will be an anti-business bias in Carter's forthcoming energy and environmental programs and their rabbity habits may not end unless and until such programs emerge a more encouraging form than expected. Meanwhile it's easter bunny time on Wall Street and nearly all the eggs seem to be colored blue. But enough of the old shell game tonight to brighten your basket. I'm going to be talking with a man who believes in making money by being contrary which given the present mood might not be a bad idea. But before we get to nest eggs Easter or otherwise let's hop on over to see what happened on Wall Street in the week has passed. And as the Dow Jones Industrial Average indicates the market was jolted

on Monday its second worst day of the year as news leaked out that the wholesale price index would be in annual terms a double digit shocker for the second straight month. Prices then meandered about before actually rising a trifle on Thursday as they so often do when expected bad news becomes official. For the week the Dow average was still down eight and a half points to nine hundred eighteen point eight. The broader composite indexes of the New York American stock exchanges and the over-the-counter market were similarly afflicted with the Amex ending the week at its low point. The rabbit's going to expect no help from the elves. Their technical market index has slipped back into negative territory indicating their belief that the market is not ready to rally. Incidentally I am grateful to a vacationing viewer from Jamaica New York for sending me this postcard from the black forest so that I could see exactly where they are and what the elves are up to. Plainly the answer is nothing good. That European note is appropriate tonight. However since we have as a

guest Dawn Moore a pretty British Member of Parliament has he had a night as a panelist. He's also the chairman of the London office of Dean Witter International. You may remember that John was one of my guests when we were in London last year and we'll be asking him for an update on investment opportunities abroad. But we're going to start closer to home by asking Carter Randall whether this Wall Street rabbit is not now in danger of diving into a deeper hole. Lou I don't think so I think the holes dug deep enough and I think we're probably going to have a rally before it's before before long unless we get. Some unexpected bad news and I don't know what it is I don't think it's the energy program I think that's pretty much discounted. I still say that I'm a. Little worried about some unexpected bad international news or just don't know whether the. Number of people who look at the technical side of the market because of this is a pretty sloppy condition

one that may require a little more downside correction. You're not looking for anything of that nature. Well I don't even think that way. But but if I listen to the tech business negatively or technically I don't pay much attention to the technicians but. But if I do listen to them they tell me that the 909 20 area is a quote resistance area unquote and that should bring buying back again. Frank Carter has now spoken twice about a possible ominous event on the international scene. Do you share this concern. Well it's always a possibility particularly with the lesser developed nations something from Uganda Rezai air without really putting American stock market into ruins. No unless it precipitated some frightened people regarding some of the New Yorker or major banks but that's not the kind of international incident I would look for. I think the possibility perhaps of a war

in South Africa flare up in the Middle East but I really don't think any of these are going to be visible anytime soon and I think we are due for a rally and we're going to rally from this area I think the 920 area is still a pretty solid area. The market seems to be getting terribly oversold particularly in a lot of the big name stocks and I submit that one of the indications of the market is still in a bull phase is the transportation index the Dow transportation index which is holding up remarkably well and a utility index which is not. It is not the flag at all. Well how about the argument that the market needs one solid to shake out all the nervous people and prepare us for a real rally. Well they mean by the nervous people the individual investor I think if they shake them out they'll be shaken out the institutional investors who are more nervous than anyone else. I don't know if that's an old wives tale just like the market can't really go down on low volume. You can get killed on low volume just as you can happen to a lot of people this week.

You know right. JOHN MOORE I'm not going to ask you about the American stock market because your perspective is a lot broader than that. We talked in London nine months ago you were quite gloomy about the economic prospects for your own country but you still bearish on Britain. One day I'm going to have a Happy to answer I'm afraid not today. We're still living with the consequences. Three is socialism. We've unfortunately only 3 where we've had a lot of other problems as well but essentially that public recognition of that has been offset somewhat by the excessive amounts of money that people like your own taxpayer has. Put up to help in fact supposedly in our difficulties. We've got a new incentive economy. Inflation rates that is staggering in relation to yours. And I think we still got all the worst vestiges of prices and incomes policies. So in the short term I simply cannot be bullish. I should point out that anyone who hasn't guessed already that John is a Conservative Opposition Member of Parliament not representative of the government but many independent observers of Britain

are looking for great things with the North Sea oil coming on stream and so forth. You're not sure their optimism. You've got to put it in perspective. Clearly it's a major advantage to Britain. It will give us independence complete independence you know energy by 1980 give us a balance of payment surplus next year. But people are deluding themselves into thinking that it produces massive revenue the revenue is already a great deal more gauged and much more important it's creating illusions for the British people that. They think in fact that they don't have to do anything else because an old C will answer all their problems. This just isn't true. Are there any other major Western European economies about which you are more positive. There's a lot of difficulty in Western Europe at the moment there's a major check. I would say Western Germany is very very sound economy. The doctor economy despite the political difficulties is very solid. The economies of most of the political overtones Yes. In London last July you remember I asked you to name the three top countries in order in which you would recommend for people to invest and you replied the United States Japan and West Germany. Well since then the US has been a bit of a disappointment the stock market in fact even a hair lower now than it was then.

Suppose I ask you the same question tonight how would you answer nine months is a short time in the investment world I will answer almost exactly the same. But if anything I would say more emphatically the United States today. The bed is our problems maybe they are not as bad as that and they pale in comparison. Yes I think much more important there is enormous investment object possibilities here far more possibilities in many other security markets. Are there any specific foreign investments that you would recommend to Americans. Yes I think there are some major international multinational companies companies in the order of the state from a British point of view the ICL used to be that some of our own domestic market difficulties and in companies of this kind I was looking at and you think the turn for Britain is coming but not until we have a change of government with a fair summation. I don't think that's any subjective that's a very objective comment yet when we expect that to happen this year. OK that's a more bold prediction than we sometimes get more strictly financial types in any event it is time now to spin the globe back to the living rooms of our viewers and answer some of their

questions. More of Sun City Arizona has noted that some utility companies as he puts it indicate that certain dividends have a non taxable status. He wonders how their status is determined what it should mean to investors and where he might find a list of utilities pay nontaxable dividends All right what will the reason some utility dividends are either partially or wholly taxable. Is the difference in the tax accounting of the utility and the stockholder reporting. That's the basic reason an investor can find a list of those in many places but the easiest place is a standard for dividend service. And most brokers have this available. I would not necessarily choose utility stocks on this basis. As a matter of fact I would be a little wary of it because it means they're overstating their earnings to stockholders. Maybe

I would choose a much more on the fundamentals. Last week we had a discussion about utilities with Charlie nor You mentioned several northern Indiana Public Service and central and south west southern company maybe Columbia gas maybe any of them that nontaxable have and they're not they're not nontaxable companies but. But I think I'd rather buy the fundamentals than the tax part of it you know make the profit and pay your taxes. Frank Caprio an airlift of corn in New York says he's looking for what he calls undervalued growth stocks and he'd like an opinion of companies involved in the video games and video recording industry. I think video games is the rigging of your television set to play electronic hockey or electronic tennis and it's a growth area 3 million last year. That's up 10 times from 1700. But it's a tricky

area and the company I like Innes area and I think there is growth here would be a company called Warner Communications. This is a company that not only has a fine subsidiary of Terry which produces the games but also has other things in motion pictures and so on selling at six times earnings I think it's undervalued. Video Recorders this is an entirely new area about a year old. As far as the residential home market is concerned the leader here in taping TV shows and showing them again set is Sony with its better Macs in operation but I much prefer the much use system which RCA will market very shortly and it's a good way to play the system. And RCA may be a good turnaround candidate. I should say that Mr. Guppy almost throwing out names right and left. These are usually only their own recommendations those of you who have videotaping facilities may wish to record their projections and see how they look a few months from now. John Moore is in for making you a panelist for

tonight let's make you a full fledged panelist and would print this of Deltona Florida with clear explanation of the difference between a company's so-called cash flow and its net earnings. With apologies to the time since I took accounting. It's a central cash flow is the internally generated. Cash that a company has to you. You take away from it a lot of noncash items like basically depreciation depletion and of course taxation a little bit at the end. It's called net earnings. That's a very clear explanation is the same procedure in the same nomenclature used in Britain. Yes accounting principles are somewhat different games with different accounting systems of the language but essentially similar. Yes thank you. Now if you're interested in improving your own cashflow on no account should you fail to send along your investment questions to us here at Wall Street Week Owings Mills Maryland 2 1 1 1 7. That's Wall Street Week Owings Mills Maryland. 2 1 1 1 7 and now gentlemen it's time for us to hop right out of Mr McGregor's garden and

inspect Instead the world of Mary Mary quite contrary. You may never realize that she wasn't just a nursery rhyme she was actually found in the school of investment thought. So let's sound our silver bells and go over now to meet tonight's very contrary special guest Daniel are along the third. And well I'm very pleased to have you. Know. Then long founded his company Corben associates just over four years ago after serving as vice president for investments and treasurer of the Sun Life Insurance Company of America. He now manages more than 100 accounts ranging in size from $50000 to two million dollars and totaling about 25 million in Wall Street terms that's still small potatoes. But Corbin is going to attention for its success and for his devotion to what it considers a contrary opinion. Then how contrary are you would you only buy when others want to sell and the only buy what they're trying to unload.

Well Lou frankly I tried to be contrarian a modified since I'm not interested in being completely contrary because I think this is more of a speculator type of procedure. Well it sounds to me like you really talk about independent thinking that independent thinking I'm I'm interested in contrary opinion but it's a modified form I'm not interested in getting in or getting out of a situation where there's a great deal of interest either negative or positive at that time I'm more interested in the neglected stuff so I'm not quite as interested in the recognized situations. I didn't mean to suggest that independent thinking was not itself a rarity in Wall Street. What is your modified contrary thinking tell you to do in a market like this one. Well a market like this I think it doesn't give me as much as eight as it does in the number of others because there is not a clear consensus right at the moment. I think it's quite difficult although the panelists earlier have suggested that they feel bullish at this point I think there's a there's a lot of questions so I don't think it's clear cut. If uncertainty is the mode maybe certainty will be contrary. You know you don't have any certainty at this moment.

No I wouldn't say so I think one of the things that I'm very positive on at this particular time is the inefficient sector of the market. So many people are concentrating on the efficient sector of the market and concerned about the glamour stocks that have come down. This perhaps is one consensus opinion that the indexing that's going on now. This is a broad scale operation. Could you give us some examples of how your particular approach to market timing works. OK some of the market Tommy one of the things I'm looking for is I'm looking for securities that have sold off significantly for an adverse development and perhaps the sustained expectation of that development carries on further. I think today of the toy industry as an example seems to be pretty much in the doldrums largely because of the characteristics of one of its former leaders the Mattel company. Does that mean that as soon as the group Save the toy industry fell out of favor you'd rush in to buy it. No absolutely not. Lou I think that the what we're looking for is a dull period a

period where we must exercise greater intellectual effort because of the fact that there are fewer analysts following it but perhaps less emotional because of the fact that it's basically not very volatile when we're interested. So if a stock fell you'd let it lie for a while before you exactly start to nibble at it. OK what are some of the criteria you use in deciding which ones are worth nibbling at. Well we're very much interested in low price earnings ratios that seem to be more popular today than it has been in a number of years but we're interested in low price earnings ratios. We're interested in liquidating value very often people suggest to me that liquidating value is a concept that's old fashioned it relates only to sell it can't it. Frankly the directors and the officers of the company are also interested in the return on equity and they're also want to put any value on the Do I assume with the office party why don't you explain to liquidating the value primarily is the tangible net book value with any adjustments for what a person could anticipate they could sell out of those assets.

So some idea what they might get if they went bankrupt tomorrow right. Is tomorrow more or less OK. Do you have a specific profit target when you buy stuff. Yes we look for at least 50 percent within a 15 to 18 month period. We think that this is how often did you hit that we hit it right. Right frequently we set an objective when we buy a particular selection and we try to treat it sort of like an early married budget you stick to it as best you can. You have said you favor a low price earnings ratios what is a low low today would be half of the market average of the broad indices maybe four or five times. And aside from the high price and inflation what are some of the other criteria you use in deciding what to sell or avoid. I think the general level of popularity. If there are a great number of analysts following a particular group at one period of time I would mention perhaps today the coal mining equipment industry or the gambling industry I think we would avoid those because of the great level popularity they've taken on almost a concept. Well one of the big gambling stocks Bally had a very rough week so maybe it's not quite as fashionable tonight as it was last week I think it's lost a good deal of fashion this week.

You've mentioned the toy industry as one you thought was worth looking into what are some of the other areas that you favor. I think the brewing industry right now is very much out of favor I think for good reason some of the competitive areas there. I think the trucking industry the trucking industry is currently suffering under the energy proposed energy caution funds what stocks do you like in that industry. Well I think Paps is a very interesting company because of its cash position and because of its lack of phone generally in the brewing industry in the trucking industry. Smith transfer is a little smaller company but I think it's a very high quality. And how about the toys to play with in the toys we haven't decided yet. We haven't really made up her mind. My kids that we don't of course endorse any of these recommendations But suppose somebody did follow one of your recommendations how would he know when according to your system it was time to get out. Well I think the general level press by the time he sees in the average periodical business periodical business weeks and a number of the other press that are directed not to the professional exclusively I think this is the time when he should at least have the warning flags up and be considering the actions.

Now I know what you think you are the only country around we have a very contrary panel here tonight so let's look at them starting with quite a battle. I don't feel very contrary Lou but. But then you look first and thank you. Then it seems to me that in order to follow this philosophy one has to do a lot of trading. And if you buy something and you're patient with it and it turns out well and then the world likes it so you sell it. You've got to buy something with the proceeds. And if you don't at that time have anything to. Buy. What do you do. That's a very good point. We sit on the we do not try to force the equation. And yet the market might be rising in the meantime. Absolutely absolutely there's no question at certain periods in the market it's very difficult for the contrarian and even the modified contrary. But we will sit on cash we do not try to force the equation. Then you look for a low P E A book value that's higher than the price of the stock.

How about dividends do you look for high dividends to. We have in the past few years I'm putting less concentration on that now because of its very popularity in the market. I think there's a certain mania for a yield deal but we use dividends as a criteria to suggest a yield floor and this is particularly important when you are seeking risk aversion if you like convertibles to. Yes I'm very very down. It seems to me that timing is so crucial to what you're saying. It's rather like a man saying I want to eat just I'm eating a sandwich and trying to leave the bread behind and going to try and do that you communicate in an awful mess or you get very hungry. How frankly do you get this timing which must be much more difficult for us talking from overseas. Well I think it's it's not as difficult as one would think from the standpoint that what we're looking for is value plus a catalyst. The critical element is that catalyst and the catalyst that might bring the attention of Wall Street to the particular undervalued situation the difficulty as you say perhaps is that you will stay there in a sterile investment for a great deal of time even though it is undervalued so the critical element is the catalyst but you're

investigating this particular catalyst a very dull environment to play. Then if the theory of contrary opinion modified it however really has validity and it seems to me that maybe the independent minded small investor has a pretty good chance on Wall Street. Would you agree with that I would agree with that completely I think that if you look at the experience of the institutions over the past few years the individual independent thinker would have an excellent chance that the best thing he has going for the poor performers the institutions. Let's let's talk about this individual who wants to follow some of your methods. How do you find what sources of information you use in finding the candidates for purchase. Well we're pretty eclectic we read a great number of trade publications and periodicals but I think that what is available to the viewing audience. The standard S&P shoots the Value Line. I'm particularly fascinated with long term charts I think they give a good representation of the history of the stock and its popularity.

I don't think they should be used as a technical technique for predicting the movement realistically to what extent can your methods be applied by an investor who can't give his investment full time and doesn't have the $50000 to get a fellow like you to look after him. Well obviously it's a little bit harder but I think he if he spends time using his own judgment rather than suggesting spending time on the opinions given by others I think he can do quite well. I want to get back to the point that John raised. Are you suggesting that everyone who's in the stock market ought to be a trader that nothing should be a permanent hold. I thought I believe that you should set an objective the O'Neill study from the west coast suggest that the greatest amount of appreciation empirically is in over a 17 month period of time. We will hold warmer but we've set objectives at the time we've done. Is it really possible for the typical investor or even most untypical investors to be that nimble in market trading. I think it's a little bit difficult. And I want to clear up my mind exactly what a modified contrarian is. If the rest of us start buying the stocks you hold do you then immediately get out.

No not immediately but you have a tendency is a modified contrarian or a contrarian to sell a little too early if we have a weakness in our philosophy that perhaps it we saw a little earlier. Your comment on the panel discussion earlier you suggested that you were reasonably optimistic yourself right now is that a fair to say yes I am I am reasonably optimistic for at least a bounce although I think that in 1077 the keno will not be market timing. There are so many people spending time on market timing at this point. I think it's selectivity of some industries will be much more important. What's the what sort of economic developments might come along to cause you to take a contrary view. I think the contrary view. The market rising for the movement yes to that to the relatively optimistic. Was there can you guess given or what might turn you into a seller of the stuff price and wage controls would would do to do me in pretty well. What kind of inflation rate do you expect this year. Five five and a half percent. That's relatively low compared to some of the forecasts we hear and that I reckon that's correct. So they're going to slow up with someone and you think of the kind of industries you mentioned although now out of favor my

profit from this environment I think they may I think in the Pacific out with them. And do you do you often argue with yourself you find that you are taking a different view that took the month before all the time all the time. I have to stand back and take a skeptic's approach. No question about it. Thanks for describing to us tonight then. Thank you panelists and being with us and I hope you'll all be with us again next week and my guest will be one of the most persistent long term pessimists in the investing world is David Boston. And if you want to know why he reads his charts so gloomily and what he thinks you can do to protect yourself batten down the hatches wrap yourself in a warm blanket and turn us in. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Tonight. If you would like to obtain a written transcript of tonight's program send $1 to transcripts. Wall Street Week Owings Mills Maryland 2 1 1 0 1

7. That's $1 to transcript. Wall Street Week Owings Mills Maryland to run one 170 residents of Maryland. Please include forceps sales tax. Wall Street Week was produced by the Maryland Center for Public Broadcasting which is solely responsible for its contents and was funded by public television stations the Ford Foundation and the Corporation for Public Broadcasting. Whew.