Wall Street Week with Louis Rukeyser; 0419; Retail Stocks: Less Money in the Till?

Whoa whoa. Whoa. They're ready for more public broadcasting. What action funding provided by public television stations the Ford Foundation and the Corporation for Public Broadcasting. Wow. Wall Street Week reduced Friday

December 6. Your host for Wall Street Week is Louis Rukeyser. Our panelists are Frank can't be alone. Robert no luck at Carter Randall. Tonight's special guest is Gerald R. Gallagher vice president of Donaldson Lufkin and Jenrette Securities Corp.. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. There's been an awful lot of time wasted this year arguing about what to call the present state of the U.S. economy with its stagflation was it sideways waffling. Was it recession or what. Well tonight ladies and gentlemen the arguing should finally be over. There's no question what we should call the present state of the U.S. economy let's call it a mess. The recession for it is surely that to begin with and may indeed turn out to be the worst since World War 2 is deepening layoffs are increasing and capital spending is decreasing

and the government has just announced that unemployment last month we had six and a half percent the highest such figure in more than 13 years. The last time the unemployment rate was that high was in October of 1961 when the rate was coming down from the peak of 7.1 percent it had reached five months earlier. This time most economists would agree the rate is rising and may in fact approach or surpass the post-war record set in July 1958 of seven point five percent unemployment. A few months ago many Wall Streeters were saying that what the stock market needed was authentic evidence of a recession because that would be exactly what was required to cure the underlying problem of inflation. Well this week the stock market certainly got what it was supposed to be wanting and didn't like it. Does it ever. You know the stock market seems just as depressed by recession as it was deflated by inflation. It ignored the good news and then to the coal strike

a continued easing of credit by the Federal Reserve Board and instead concentrated on some things that didn't happen. Banks did not lower the prime interest rate any further. It still stands at 10 percent two points below where it was in early October. And President Ford did not come up with any actions or words to inspire the financial community. His own stock on Wall Street is in a definite downtrend. Faced with this bleak economic environment the market confirm that if you use the situation as a mess by fall into a new 12 year low and doing it on so little volume that a buyer in New York who is rarer than a scarlet tanager. One of the many statistic shedding gloom on Wall Street was a report that department store retail sales are skewed even as unemployment climbs and even the employed do more worrying and fretting than buying and wrapping. My special guest tonight as an expert on the retail industry and we'll be asking him for his latest

observations and forecasts. First though let's turn to the wholesale dumping of stocks that occurred this past week on Wall Street. And as the Dow Jones Industrial Average indicates the market's downhill run was virtually uninterrupted by the end of the week the closely watched Dow average had dipped below which previous 1974 lows to a depth that hadn't seen since October 26 1962. Few other price indexes can make that claim. The weeks loss was more than forty one points to five hundred seventy seven point six zero. Major damage was done too through the composite index of the New York and American stock exchanges and the over-the-counter market. So that's a technical analyst says remain among you may be interested to know that the Wall Street technical market index improved Not much though it is still cautiously stopping short of recommending a bomb. Or if you don't much care for the ELs you might find some cheer in a letter I received from a hole

of Kansas City Kansas. Mr. Hope sent along a clip in reporting that fashion design the whole system is trying to bring back the miniskirt. Although apparently in keeping with the economic times he calls his version the skin. The whole recall deal skirts and stocks tend to rise and fall together and indicated that even if the theory proved wrong this time he was going to be keeping a close eye on things for us. Frank Caprio I don't know whether you are wearing your trousers shorter this year. I wonder whether you a recent optimism has been dampened by the week's events. It's hard not to have them dampened. I think we're all surprised at how quickly the stock market went about optimism about your plans. But the market just went through the 584 area very quickly without even a pause although this is not really cause for panic yet because it might well be some technicians have been saying a false break and we could have a rally next week I might point out that there's an

old saying on Wall Street and we need old sayings in these times and it goes something like this that the Bears may have Thanksgiving but Christmas belongs to the Bulls and that means you're coming into a seasonally strong us up pattern in the stock market. And we should see this within another week or so is tech selling abates. Last week you were suggesting that the market would react negatively or at least it should react negatively if the government stimulated too soon and the recession too quickly. Obviously these facts and figures are just reported in the demands of the do just that. Still there it is still there and I'm afraid that short term many people would view this is positive in the market. Let's get something done. Let's get the unemployment rate down. Let's stimulate the economy. And this might help the economy temporarily but will pay for it in 1960 and 1976 and 1977. But there's no question the Federal Reserve is moving to a gradual stimulation the discount rate break is evidence of this.

But I still remain on the point that I think that if we just wait and be patient this thing will work itself out. But obviously politicians are not going to be patient. And I guess it's easier to be patient if you have a job. Cut around the last Friday you were taking issue like you were saying the we should stimulate I guess that what's happened this week has fortified your resolve has it. Yes as a matter of fact Lou because I think that it's quite obvious what the economic climate is we were in a downturn that could last for quite some time. And there's a lag time on stimulation. First of all one way of stimulating is tax reduction which is now being talked about. But it's going to take months to just put in legislation through and then the results of tax deduction will take even more months. Once you get all worried the tax reduction might increase the inflationary potential in the economy or way it will but by that time the inflationary pressures will be a lot less. I think it's

almost axiomatic that the inflationary pressures are going to decline as consumption of goods declines and there is no supply demand pressure for higher prices. So you're both walking the tightrope frankly one way you're leanin the other but really it's a carefully balance walk over the arena. It's a tight rope and I'll say one thing about that tight rope that the politicians are vacillating a little bit more than they ought to. They really don't know which way to go I'm not being critical it's just factual. And this in itself tends to create the lack of confidence that we have at the moment because the architect of our technical market index which since you have recent revisions has been a good deal more cautious. Would you mind tell me why it still isn't negative in any of its 10 indicators. Because none of the indicators really have reached the extremes that you see at a point where you would expect the market to go down I might add that at this point one of our indicators using the revisions we made is probably ready to give the most bullish signal it's given recently and that was

our government bond indicator which gave the sell signal on January 4th nine hundred seventy four turn neutral and never turn positive and I would say that at this point the direction the market will be very very heavily involved with interest rates and I would say that if government bonds continue to rally in the next week or so as they have over the past few weeks we're going to buy signal and my dad as Frank has indicated the cut in the discount rate after the close of business on Friday to seven three quarter percent is reason enough to believe that we now have overt action on the part of the Federal Reserve to get money moving again. And I think it's a very very very bullish sign for the market. OK I just hope that next time you give advice you know you don't just give it here you give it up in New York as well we're going to go into it don't worry about it. This is the point in the program when is all good whilst we viewers know so well. We usually answer a few specific questions from our viewers this week and next however we're going to have to admit that feature because the program will be three minutes shorter than usual. We've been asked to surrender those minutes for two weeks so that your local public television station can talk to you about another

kind of investment and investment in better television by becoming a member of that station. The question and answer sessions here will resume two weeks from tonight though. So if there's something about money and investing that's puzzling you just send us your questions to Wall Street week or week as Mills Maryland 2 1 1 1 7. That's Wall Street Week Owings Mills Maryland 2 1 1 1 7. And we'll see if we can help you through this winter of despair. Now before we meet tonight's special guest let's take a look behind the cash registers and into the minds of the people who were minding the store. It's what every good retailer knows is that his business is highly seasonal. Over the last three years for example the nation's largest stores have done more than half their annual business in the final three months much of it crowded into the period between Thanksgiving and Christmas this year because of a late Thanksgiving in that crucial period is only 26 days long. We're still for the retailers. Consumer confidence in the economy which is often an indicator of buying intentions is now dismally low.

As measured by the University of Michigan consumer confidence peaked above 100 in 1965 and has been declining most of the time since then. In the first quarter of this year it topped sixty eight point nine The lowest reading ever recorded by the 22 year old survey. Then after a bounce in the second quarter as the energy crisis appeared to ease the third quarter reading was back in the basement again and the first reports on Christmas shopping suggest that the immediate outlook for retailers is something less than merry and bright. Does this mean that Santa Claus is staging a sit down strike this year. And what is the outlook for the nation's retailers in the kind of May who's stocking is stuffed with troubles. For some answers let's go over now and meet tonight's special guest Gerald R. Gallagher. We welcome. You here. Gerry Gallagher graduated from Princeton with a degree in aeronautical

engineering and then proceeded to spend four years in the Navy's submarine service. This rapid descent from the heights to the depths was excellent basic training for his career and Wall Street for the last five years Mr. Gallagher has been a securities analyst specializing in the retail industry for Donaldson Lufkin Jenrette and for the last two years Institutional Investor magazine has ranked him the best in this field. Jerry how wretched is the outlook for the Christmas season and what does this suggest for the health of the nation's retail stores. Lou I think it's going to be an extremely difficult Christmas. Certainly the worst in many years substantial unit sales declines. Little consumer demand payment tour. I think the profits of the major companies will show substantial declines in the fourth quarter. Who gets hurt worse by a bad Christmas season the discount is the regular department stores or the catalog.

And in this particular case the catalog chains have a particular inventory situation which I think will combine with a soft sales patterns. To produce relatively pleasant comparisons. Now the stronger companies the more efficient companies that have been picking up market share in recent years will tend to do all right through this period. It will be particularly bad for the marginal companies. But most companies with a strong or weak will find a very unpleasant profit picture in the fourth quarter. Given the current state of the economy given what you've just said about the Christmas season given the current state of the stock market can you in good conscience recommend any of these as stock investments. I think they will perform over a period of years from present levels reasonably well. But over the near term I do not think they fully discount yet what I see ahead in 1974 fourth quarter and 175. So your guess will be that they'll be down before they'll be up. That's right. Or any of that is

a longer range investment you would favor would you stay away from all of them right now. I think there are a handful of companies that are particularly strong that would make good long term investments the company would be one Federated Department Stores certainly May Department Stores J.C. Penney caught all the. Retail Industry has a lot of well capital as well as companies which over the long term have replied to one of the first questions will be quite healthy. Particularly did not like. There are many marginal companies in the business who I think are going to be in very difficult positions over the next two years. They haven't done well in a good period between 70 and 73. I feel that we will see a compression in the industry that will be exacerbated by the next two years. You've been very forthright in telling us that you think these stocks even after their recent declines may well have further down to go.

But you also indicated that you see a some light at the end of the tunnel if you will even though the tunnel's going to one of them a little farther. How would detail the forecast can you make now for 75 or for that matter 76. Well I think when you're on the steepest part of the slope it's extremely difficult to predict exactly how deep the bottom is and when you're going to see the turn. I think it's fair to say that through at least the first three quarters of probably all of 74 we will not see a robust sales pattern and it could well extend into 76 I think it is also fair to say however that their particular him going to a problem that exists in the industry today should be cleared up no later than the end of the second quarter. So your comparison is in the third and fourth quarter even on mediocre sales of 1974. Well look somewhat better but certainly not robust. For the longer run do you think the retail business has a future in this country that is as bright as its past the retail industry over 25 30 years has been one of the few industries that has

performed consistently well. The companies have the capability to shift resources whatever to the consumer who is one of the most flexible. One of the most interesting industries that I think will continue to be one of the more attractive areas to have equity investments. We have a lot of talk these days about turning away from materialism. Do you see this young married couples not want to buy as much as young married couples used to want to buy. I think I would choose the word value orientation. They are less likely to buy things they do not better educated and more sophisticated. They focus their more demanding and this exacerbates the problem of the inefficient company which is not meeting the real needs of the consumer. As a student of the industry you have any particular bargains that you see right now that people will be looking for over the next three to six months I think the consumer is going to be faced with a whole series of excellent voice of reduced slack seasonal Christmas items because most probably haven't been apprised of

the purl over the next three to six months it's hard to stock up on Christmas trees. Just want to or perhaps we would want Christmas and I think it's just the way of the business. Speaking of discounting as we were I want to let you chat with our panelists. What are you selling. Trying to sell a question. Taking a look at the price of oil which is probably one of the big problems we have internationally and nationally. And the likelihood of an increase in the tax on gasoline in order to cut consumption to crack the foreign cartels. If this occurs in all probability wouldn't this affect the crazies. J.C. Penney's because a lot of the traffic is generated in suburban stores the suburban shopping boxes. Frank it will affect them but I don't think it's the function of being able to get there. It's more of a function of the consumer having to pay for the price of oil and works his way through everything the consumer bonds. The amount of gasoline in the country that's expended for shopping

is relatively small 5 6 percent. So shopping itself and less gas is not available as it was a problem in February. No matter what the price of gas is I don't think shopping will be impacted by that for the price of oil is going to disrupt consumer spending patterns. It's going to cut discretionary income because it cuts through everything. That's right. Everything you buy cost more. Jerry given the downturn which I think is obvious and you've said particularly for the retail stores what economic factors would you look for for a rebound in retail sales would reduce taxes for instance help retail stores. Yes I think it would. I think it's going to be a little longer than normal recession recoveries. Carter I think you're going to find that the consumer is going to be somewhat more hesitant to be aggressive on purchases. So some of the leading lag times you might have used in the last 20 years may not be appropriate this time around but certainly a turnaround in real disposable income is an important ingredient. I think

you saw consumer sentiment bottom out and start turning out that would be a positive thing. You know you've indicated that you believe that the retail stocks generally may go lower near-term that they have a discount of the worst hit list surprisingly after Sears which you've written up and recommend as a well-managed company even after they reported a very very disappointing third quarter earnings surprisingly the stock went down for half a day and then rebounded and it's held above its low. I'm wondering don't you think this is an indication that conceivably now might be the time to start buying some of these stocks that are out of favor when the dollar cost averaging basis and for the long term rather than wait for the decline. Bob in a normal recession I would say definitely yes. You have to buy retail stocks because they do move early. I think this was going to be longer. I think it's going to be deeper and I don't think people fully appreciate how difficult it's going to be. Therefore I do want to step up some time and 75 my best judgment is to really just I want to follow up on this question of management.

How important is management in this business. How important is location how important is product mix. How important is the management of the company. Lou I cannot think of an American industry that I would identify where management is more important than it is in retailing a manager in a retail company can have real impact and you can have impact relatively soon. It's a people business and the better companies almost without exception have first class monitor site location is something along with merchandising along with controls that falls out of the process of having good management. Management is not only a person who's creative and able to select what merchandise. It's a fellow who can control the books. A fellow who can make the right site selections but management retailing is extraordinarily important. Could you cite some examples of well vs. poorly managed companies in the same line. Well I think there are a couple of great examples in the last 25 years in terms of who built a company and turned the company around Harry Cunningham and

Christie for example in 1959 conceived of the Kmart store as it exists today and in 62 The first came when it was opened. Here's a man who took a company that has down earnings for a period of years turned it around into one of the great U.S. corporations a quarter a quarter holy Hale is another example. Of a man who in the early 40s or mid-40s went into Broadway Hale and built a company that is today one of the leading U.S. retailers. I think that management made a great difference in both of those cases. Unfortunately in retail trade today we can cite dozens of examples of bankruptcies and we all know who they are. I think those are excellent examples of companies that were generally not well one thing we haven't talked about yet is high interest rates. I know you think they have an important that when this picture when you talk about them and they hit the worst Many retail companies finance they receive a bulls as well as a woman toys with short term debt and the fluctuations in short term debt has hurt a lot of companies recently.

Perhaps the most dramatic example is that between 1972 and 1974 a period of two years serious robotics interest expense went up more than 200 million dollars. Now those companies that do tend to have extensive short term debt will be benefited in late 75 you're correct. And interest rates are lower. Certain other companies in retail trade because they don't use credit extensively for example has fewer than nine percent of its sales on credit and of those sales less than half of them on their own charge because they have a relatively small amount of short term debt. Many of the department stores have been a business and about well they have been in business for many years and are more conservatively capitalized small short term debt outstanding and they are less susceptible to fluctuations in debt. So Sears and penney of our company wards well worth their beauty Grant companies like that are very subject

to fluctuations in short term debt. Thank you Jerry I have to stop you there. Thank you for the model discussion of the industry. And I take your message as I understand it it's don't do anything now but when the time comes go for good management. In any event thanks very Gaga Thanks to our panelists. I hope you'll be with us again next week when we're going to try and make sense out of a most confusing subject this American economy I guess will be one of the top bank economists in the country life Ohlsen of New York's First National City Bank. And we'll be asking him how the ordinary American can prosper or at least survive in 1975. Meanwhile this has been Wall Street Week. I'm with you guys and good night. If you would like to obtain a written transcript of tonight's poll. Graham send $1 to

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