Wall Street Week With Fortune

The shakeup at the White House could mean a shake out for your portfolio. She was one of the leading mayors of our day. Gail Dudack has some strong views on where the market's headed now. Stocks with high dividends good value were too good to be true. All that and more on Wall Street Week With fortune. Wall Street Week With fortune is made possible by contributions to your PBS station from viewers like you. Thank you. I'm Karen Yes and I'm Jeff called and welcome to Wall Street Week With fortune. Well his farewell to Washington had been anticipated for ages and this week it finally happened. No not Strom Thurmond. Paul O'Neill Secretary of the Treasury who resigned today along with White House economic adviser Larry Lindsey. These comings and goings in Washington often mean

little for individual investors. But here's a case where they may mean a whole lot. The White House wants to cut drastically the tax on dividends. A move O'Neal opposed that's reportedly one reason the administration asked him to leave eliminating or cutting the tax on dividends would be a historic change that could have huge implications for your investments like what. We'll find out. I'll talk with a couple of Wall Street experts on dividend paying stocks and with a Washington hand about what really will happen next. Wall Street like the news understandably though this was still a down week. Let's take a longer view. It was on this date six years ago that Alan Greenspan gave his famous speech asking if just maybe investors were exhibiting irrational exuberance the Dow stood at all of 63 82 and neither he nor anyone else imagine that investors were well on their way to psychotic exuberance. Of course were much more rational today. Or are we back then. The P E multiple of the S&P 500 using trailing earnings was about 20 today even

after 34 months of a bear market. It's about 30. We turn to you for totally rational exuberance no matter what the market did what to do this week. Well Jeff with all the changes going on in the Presidents economic team the market is really looking for direction. And this week the direction was decidedly down. A host of unsettling corporate news to rail the eight week long market party. AOL Time Warner told ailing investors to expect even more pain before things turn around. Telecom giant Nokia says it expects to see the mobile phone market shrink next year. Disney restated 2000 into earnings and Hewlett-Packard issued a lukewarm sales forecast. Retailers reported poor November sales figures and the nation's number two airline United teetered on the edge of bankruptcy after a federal panel rejected pleas for one point eight billion dollars in loan guarantees. Add to the concern of Washington in the discomfort on Wall Street a disturbing picture on Main Street. The nation's unemployment rate rose to 6 percent while the nation's payrolls lost

40000 jobs. And those that are employed are working even harder than ever with productivity rising over 5 percent giving firms no reason to add to the workforce. That was enough to take the punch out of the punch bowl and the wind out of the stock market sales. The Dow falling 250 points this week while the NASDAQ lost 56. The S&P shed twenty four while the Wilshire 5000 gave back almost two hundred eighteen points. But don't cry in your beer. Some well-known names are up over 25 percent just since the October 9th lows. Take a look Corning up over 68 percent. The gap and Yahoo. Each better by 40 percent. Big Blue. Better by 33 percent while it legal to Citi Group has managed to rally 25 percent. That longer term perspective reveals a much different picture than the weekly Morningstar style boxes which show across the board selling with small cap value stocks bearing the brunt of the losses reversing the strength of the past two weeks.

Well is today's up people in the administration's economic team good news for investors. Jeff Birnbaum is the man at the intersection of national politics and business. He's Fortune's Washington bureau chief and he joins us now from Washington. Jeff how are you. Jeff how are you. Very well. So let's start at the beginning. Why did O'Neill and Lindsey have to go. Well this was a welcome surprise really. Both men have broken political antennas and Wall Street and Washington has known it for a long time. In particular I think O'Neill liked more being a contrarian was always going off the Bush administration reservation and that's really not the job of a Treasury secretary. And as you mentioned earlier he was a doubter about the need for a growth package a tax cut package that the president was moving to push very hard when the new Congress returns in January. That combination

that is O'Neill speaking out of school or Lindsey not listening very well when he should be listening especially to Wall Street. That combination made both of them part of the Gang That Couldn't Shoot Straight. Really that's the way the economic team was considered. And so they had been long rumored to go they finally are out the door. So now the brand new favorite guessing game in Washington is who's next Does anyone have any idea. I'm sure someone in the White House does but most of what we've been hearing I think our rantings of speculation from people who don't know a thing. And I have heard a lot of names but I really don't put a lot of credence into any of them. I think what we should expect though is that the president will choose a new treasury secretary within a few weeks. OK let's get to one of the specifics which is the possibility of a cut or even elimination of the tax on dividends. Now I've heard you say before Jeff that this is unlikely to happen because it's a very expensive tax cut do you still think that that's a fair criticism of me.

I was going to admit it myself that on this very show I said it was unlikely to happen. And at the time I think it was and certainly a lot of the people I spoke to on Capitol Hill were not enthusiastic. But one person is enthusiastic that is President Bush himself and he has put it into the short list of tax cuts that are likely to be pushed early next year as part of a growth package. And I think either the easing or elimination of the double taxation of dividends is now quite likely perhaps very quickly perhaps passed by May. Jeff. Sit tight Don't go away I'm going to bring some others into the discussion right now because today's news from Washington. Has got investors focusing on dividends like they haven't in a very long time and so to get us up to speed fast we've got a couple of experts on the subject. James Bianco is president of Bianco Research in Chicago. He's done some fascinating research on when dividends are and are not good for investors. Gail Dudack is chief investment strategist at SunGard institutional brokerage in New York City and she's been arguing for months that dividend paying stocks are the place to be.

And so far this year she has been very right. Jim and Gail thanks so much for being with us. Great to be here. Gail forgetting about whether there's a change in the tax on dividends. You've been arguing for a long time that stocks that pay dividends are the place to invest how come. Well there's a lot of free sense but there's one simple one for the current environment which is we're going to be in a slower growth environment terms of GDP growth because of all the debt load. And if that's true then earnings will be harder to come by. And if that's true they'll probably grow maybe 5 to 7 percent. If you can get a 3 percent dividend yield in your portfolio you're halfway there you're likely to outperform. But you know the argument against dividends which is that if the companies just kept the money reinvested it they could make the stock price go up more and investors wouldn't be taxed when they get the dividends you don't buy I don't buy that because if you're in a slow growth environment there are few places you can get that return required rate of return. So companies are buying back their own shares however that's been that's been kind of the

spin of the 90s because what did all those share buybacks bring investors in the last few years. Very little Wouldn't they have rather had the check in the mail than those stock repurchases. I think so especially over the past two and a half or three years they would for sure. Jim you've done some looking into when dividend paying stocks have been a good investment and when they haven't and what you find. What we found is that dividend paying stocks is an investment theme that seems to work well with the direction of the market. Meaning that when the stock market goes up non dividend paying stocks do better when the stock market goes down dividend paying stocks do better. So one of the overarching themes and whether or not you want invest dividends is your your belief of which way the market's going to go. It's going to go down. You want invest in dividend stocks. It's going to go up. You don't want to invest in dividend stock. And what do you believe. I think that after two and a half years the market has found some kind of an important low in October. I think it's going to rally for the next several months maybe a year. Maybe it's not going to make a new high I doubt it's even going to make halfway towards the race in the losses that had maybe

Catesby twelve hundred. And if that's true and the market does do better for the next several months I think that non dividend paying stocks are going to lead that charge. OK. Interesting because it's not quite the same as what Gail has been saying. Let's take a step back and look at the longer term the bigger picture dividends have really been going out of fashion for the past 20 years. Right. And I think we have some information on this showing that the number of companies paying dividends has decreased from almost all of them in one thousand nine hundred ninety three point eight percent paying a pretty fair yield at that time 5.9 till today only 70 percent are paying dividends and the yield is tiny one point six percent. Historic low historic lows that an opportunity for companies to start picking. There are dividends and for investors to start looking for some. I think one of the most important points here is that investors understand that stocks are the best performing asset class. They don't understand why. It's because they have capital gains and dividends. And so the aftermath of

the 90s shows that stocks don't always perform. In fact in the bull bear market that high yielding stocks are the best performing well and in fact we can see that in a graphic we have also which says that I think this is year to date so far. Companies that didn't pay dividends declined much further than companies that did paid dividends and Jim that's consistent with your observation over a longer period of time. That is true and if you actually were to break down this year's activity between dividend and dividend paying stocks you'd find that dividend paying stocks are performed non dividend paying stocks to about August of this year. And then they started to kind of perform in line. And since the October low they've been really up performing so the non dividend paying stocks have been leading the charge for the last two months. Well now this really then gets to a bigger question of what you think the big picture of the market's future is. Jim you've told us you were pressured to own this fact a few years ago when you said

you turned bearish you took heat for it. You were right. What do you think no. Well I think we're we're in the final stages of the bear the bull the transition from a bear to a bull does not happen like that. It's a transition. So in saying all year that 2002 is the transition from bear to bull I now think the transition is going to be pushed out into 2003. The reason being earnings were huge disappointment and until the momentum improves we're still in this process. I think we maybe test those lows and that's a country or interview right now. Yeah it is indeed. And longer term. Jim are you optimistic or pessimistic. You've spoken only so for about the next years you know longer term if you look out three four five years I'm not that optimistic. I do think that after like you said two and a half years of going down we've got a period where the market could rally. I believe the rally started in October but after we go up maybe 20 percent or so over the next year year and a half if that hands out. I think the markets then ready to start back down again and may test the

lows. Is the big bear market that started to 2000 over. No. Is we ready for it to be a cyclical bull market or a cyclical correction that could last many months where the market's going to rally. That's where I've been calling down with. Got you. Gail let's think about finding stocks that pay dividends are still an awful lot of them out there and you want to choose only particular ones how do you choose them. Well I think it's important to kind of look at to use some filters you know to look for dividends that are greater than inflation because right then you're going to have an inflation is pretty low if it's a 2 percent. And then to look for stocks that have payout ratios that paying out more than 70 percent of their earnings and then you want to look for companies that still have improving profit margin so if you're looking for good companies with above average dividends the dividend in line with or above the inflation rate when you run these screens what kind of companies do you end up with. Well I run the screens the at the top the high paying dividends are always the ones that you really have to check out very carefully. You get very a pretty low number from the S&P really of companies and I look

for other things that I like I like to see companies that have increased their dividend every quarter every year for the last 10 years. That shows to me they have a very good business plan. Like who. Well there are companies that have done that like ExxonMobil has done that they've increased their dividend more than the rate of inflation every year. Johnson Johnson has done that Kellogg has done that. Interesting. Now you mentioned a minute ago those that have really high yields and those may be more dangerous than they are attractive What are some of those. I think we have some of monograph titles. I think you have some other graphic the one thing I would say is that when you start to get very high dividend yields it's probably because the stock prices collapse because of some event which needs to be checked into. And so you have to be very careful and you also want to take and this is where the screen is important make sure that their dividend is not more than their earnings. So take a look at their payout ratio. Interesting. We only have a few seconds left but I want to get one other view Jim because I know you have thought

about bombs we hear a lot of talk. What do you think investors should be doing but odds are at this point in 2002 the opposite of the stock market they bottomed in yield the same day the stock market bottom. If they should be the opposite of your view I think the stock market's going to rally. That means that yields are probably going to be had higher bond should be avoided if you have the view that the stock market's going to go down. Bonds will probably do very well. So they're kind of an anti stock is really what they are and they should be viewed as that. Jim and Gail thanks so much for being with us. I think there was some good news in there enough to warrant raising a glass of champagne which we like to do at this time of year. And I think Karen has some news about what's happening in the business of champagne and related products. Thanks Jeff. While Are you in the holiday spirit yet some investors have been diving all year long and feeling a bit heady right about now. And why not. In this topsy turvy market beverage stocks have been steadily profitable with less volatility than other industries. But all beverage stocks are not created equal

making direct comparisons difficult. So I went looking for proof the alcoholic beer comes out of foamy head and shoulders above the broader market and the buzz is that investors are high on bud. That's the ticker symbol for the number one beer maker Anheuser-Busch up 9 percent year to date while the S&P is off 21. And highs of Bush has a commanding 48 percent of the US beer market and is considered one of the most skillful marketers of the entire consumer products sector with a distribution system that its rivals can only dream of. With the growing twenties age group came a hot fad of the past year but most turn to tips such as Zima Mike's Hard Lemonade and Jack Daniels hard cola. But there are signs that the alternative fad has started to peak and we're going back to the Manhattan or the Shaken not stirred martini as favored by Bond James Bond. Double-O seven recently switched to a Finlandia martini brought to you courtesy of brown Foreman.

But analyst we've talked to rate Brown Foreman stock a hold at best. Well she's called the first woman of finance and was the first lady to own a seat on the New York Stock Exchange. I'm talking about Muriel Mickie Siebert founder and president of the discount brokerage that bears her name and the subject of training the rules adventures of a Wall Street Baffert Mickey seen a lot in her nearly 50 years on Wall Street. I asked her based on her experience if she had ever seen anything like what's happening now in the marketplace the lack of investor confidence and the increase in corporate greed and the remedies to fix the problems. Never seen the level of greed. You know we had one person that broke a rule we had another person but Enron was a total moral bankruptcy. What's the individual investor to do right now. Well I think that when they see that we throw a couple these people in jail. The individual investors are going to feel much better.

Let's talk about the big picture of the market right now. We've come off of just about eight weeks of really good strength October November now of course this week we've stumbled just a bit. Do you think we've turned a corner Are we out of this bear market. I don't think we've turned the corner yet but I think we're going to see some things passed by Washington. I hope they do. Such as. An exclusion for some dividends. I would like to see and I was invited and I presented the idea when I was in Crawford Texas because I don't want my mic summit in August. Yes and I gave them the idea that they should allow individuals to double their contributions to IRAs and 401 ks for three to five years as a way of rebuilding the equity so they can say I don't care if they buy stocks or whether they buy bonds when the interest goes up and we get a compound. So they can look forward to going to retirement so you think if they reach the limit raise the limit and I also I also presented another idea what they should be allowed to contribute. Cash. On its stocks and

mutual funds. Because not everyone wants to sell a stock when it's off 50 60 percent or to put cash in you faced all sorts of discrimination are you sure you know you're you're a member of the old boys club you didn't bend to their will at all I don't see any pinstripe suit here at all that you're not a business writer is a real spiral. How did that work on Wall Street. Well I mean of people there are some people that don't like it. They would prefer that I come in in the gray suit with with the case a little white blood. But. I've found out that you know I me and I want to continue to be me. You've also mentioned that money means different things to different people particularly to men. It's power and for women it's freedom can you expand on that for me. Sure. I think to Men Money is power. And to women. And the surveys have shown this they want money to buy a house or to educate their children. Or to buy a car they will save

for a purpose. It's not a matter of saying I have five million dollars are I and now I have eight hundred thousand dollars and men will use money for power. Women don't. I mean it's a difference in the way they're invest. And the results of investing as well. It's probably why women are more conservative than men. Tell me what you would be under your not giving recommendation journey thing right now to go car and individual investors but in the big picture of things what should individual investors be looking for when they're looking for companies to invest. Well first of all if I have my way. Companies are the investment bankers would have to put on a website. The terms of the bonds they sell now right. We have seen companies have literally capsize. Because the stock hit a certain price or they did not have the debt coverage for or against for interest.

Give me your production for two thousand and three. I think the market is going to come back it's going to be volatile it's not going to run. No. I think it's had a nice bounce but I think people are going to start looking again. And you know when you saw some of these stocks and they were down there they were screaming to be bought gas. It was actually the knowledge one of the leaders of the industries that have a business plan and some part of law yet they had to have bottom lines they have balance sheets they have cash they have a cash flow. You look for that free cash flow when a company can they service their debt. You get back to basics basics. That's what worries me about what's happened. Because we have to make sure that capital raising system in this country is a national treasure. No other country doesn't like wheat that is not correct. And we we created companies can like them or not. We created the Microsoft's guess the

entails. I'm talking about leading companies. For sure they've got over production or there's some problems in some cases. But these are companies and they have technology and they are going to continue to move ahead. That was the spunky Muriel Mickie Siebert. Now let's hear from you. Joe belongs or from Arcadia Florida writes I plan on investing in a small cap mutual fund. Some compare themselves with the S&P smallcap 600 index while other funds compare performance to the Russell 2000 the Russell 2000 is easier to beat. What's the best small cap benchmark. Well Joe you're right the Russell 2000 been much easier to beat over the past few years the folks at Morningstar say one reason is the S&P smallcap index doesn't include companies with limited operating histories. While these speculative outfits are included in the Russell 2000 pulling its performance down from small cap funds that Morningstar particularly recommends an hour to Rowe Price small cap stock Royce premier and FTA Paramount would love to hear from the

right is it Wall Street Week With Fortune Owings Mills Maryland 2 1 1 1 7. Or email us at PBS dot org. That's our program for tonight. Goodnight everyone. We'll see you next week. To learn more about this program visit PBS online at PBS dot org America Online keyword PBS for a transcript of this program. Send a $5 to transcript. Wall Street Week With fortune. Maryland Public Television Owings Mills Maryland 2 1 1 1 7 0. Wall Street Week With fortune was made possible by contributions to your PBS station from viewers like you. Thank you. I do

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