Wall Street Week with Louis Rukeyser; 0711; Wall Street Pioneer

The. Public broadcasting it. Wall Street Week produced Friday September 9. Your host for Wall Street Week is Louis real geysers. Our panelists are Frank Caprio. Dan Dorfman and Carter Randall. Tonight's special guest is Philip L. Karaite president Caray and Company Incorporated.

Oh believe me I'm listening guys or this is Wall Street Week. Welcome back. Well this was the week of Labor Day. You couldn't approve it in Washington or in Wall Street. Productive labor seemed the farthest thing from anybody's mind in either place. A sort of fearful goofing off was the order of the day in both cities. In Washington the really big issues seem to be not how to deal with such petty annoyances as inflation and the economy but instead a who should run the Panama Canal in the 21st century and B how long do you think Jimmy is going to let Bert twist in the wind. The only thing that could save Bert Lance now the Washington wiseacres are convinced would be if the budget director could come up with a personal check for the entire national debt and not have a bounce. By now though whatever happens to Lance he has two assured titles in presidential history. First as overseer of overdrafts

and second as Carter's real high liver pill. Meanwhile the suspicion grows that hardly anybody is actually minding the store. In fairness to our noble public servants however let it not be recorded that nothing happened on the government economic front this week. The House did pass a budget for next year which presumably is part of the promised march toward a balanced budget contained a deficit of only sixty two billion dollars or 9 billion more than this year's. Oh well if the philosophers can argue that less is more why can't the politicians maintain that more is less. Meanwhile back at the private money farm there was perhaps understandable uneasiness on Wall Street. Not only was there a distinct aroma of disarray emanating from Washington but there were also some disquieting signs of underlying economic problems most notably a squeeze between a slowing economy and quickening interest rates. The

result was that the Dow Jones Industrial Average lost a little bit of nerve it had briefly recovered last week and went down just as it has in six of the last seven weeks and for that matter nine of the last 11. Those who predicted a rousing summer rally. And we have one or two with us on our panel tonight. Well that let's have a completely convincing explanation. Maybe they were standing on their heads when they made their predictions. My guess though is a man particularly with listening to it at a time when all about us are losing their heads because Phil carré has kept his and made a lot of money besides for half a century of market ups and downs. First though let's see what actually did happen this past week on Wall Street and as noted the Dow Jones Industrial Average lost its forward momentum with a bang plunging on down to within three points of its row mark for the by week's end the Dow stood at eight hundred fifty seven point zero seven a loss for the week of more than 15 points. The blue chips in the Dow were worst hit than stocks in

general as measured by the composite indexes of all common stocks traded on the major exchanges and the over-the-counter index managed a tiny gain. No encouragement from the Elves though. Their technical market index which was moving toward a buy signal last week is only mildly optimistic now. I think they own any stocks in Georgia banks. In any event while the market malaise continued there was a definite touch of lethargy even to the malaise. The volume of trading was quite light and there are those who believe the market won't turn itself around until the pessimists show a bit more enthusiasm until there is something resembling a high volume selling climax. This goofing off just isn't panicky enough but all that doesn't explain Whatever Happened to Baby some route. Be either was or Gone With The Wind. And if so whose. What a summer. I guess Lou one has to say that we're all disappointed. We should have at least had something like a low

volume just kills the brokers but the poor performance just kills us. Some of the traditional autumn rally like when the leaves start. I think the market is worried about a couple of things right now as a recession and I just can't see a recession in the works despite the leading economic indicators. Their track record isn't that good. The point should be made that this is a period in which the economy has been moving in fits and starts and we have within is a lot of caution. Businessmen are cautious consumers are cautious and with all that kind of caution it's hard to see any excesses. Well how about this technical point them in the end that maybe we haven't had enough selling yet. If you were selling climax you would put in the stock and I got a thank you I guess. Again historically in the old days you would have a selling climax I thought we had a one day climax with the Bethlehem Steel dividend cut. Apparently that wasn't climax and certainly didn't anti-climax. But you know I don't know where the market is going to go I think it's cheap enough to buy and I think there are a couple of groups that are pretty obvious bodies like life

insurance stocks drug stocks I think it would be better to concentrate groups and stocks rather than trying to predict when we're going to have a market climb. You sure they're not going to be even more obvious buys a month now and not life insurance stocks I don't think so. You could be right. You know whatever happened to your summer rally. Same thing happened a few times. But this market reminds me very very much of the 1962 market the 1902 market was predicting a recession that did not happen. And the market was weak for the first half of the whole year and we did have a selling climax in the twenty ninth of that year. We're a little late this year. I don't think we're headed into a recession. You think we need a selling climax. Repeat the question I asked. Yes I do yes I do at this point. We have had a system and eroding market all year long. I'm very surprised we haven't had a 30 or 40 million share day with

the market gyrating 20 or 30 points up and down. That would make me very happy. That would would make me feel that we were getting somewhere close to the end of this. I say well Ebeneezer Scrooge We'll see if we have enough misery to suit you. All right the endorsements intellect your position in these fellas because the last time you're with us Dan you were quite gloomy you thought things were going to go lower Well they haven't really gone dramatically well but they've definitely gone lower do you think we're going to go much lower still thinking that the market will probably continue down perhaps in the hundreds perhaps of the high seven digits. I think what the market is telling us is there is continuing concern about the economy. The consumer I think is running out of gas and spending. I think capital spending will not be nearly as robust as people expect. I also think though there is growing concern about cost is ability to run the country has it up to handling crisis I just think you know I just think that it's really a poor handling by the president.

Well I mean I haven't suggested myself that there might be some disarray down there I don't want to just gang up on the president. Let me let me let me ask it another way. You think maybe there's some concern about who may succeed when I think I think that's a very good point. The fact of the matter is that the Wayans has a very good in a pool with the business community he's a conservative. If Iran should go the business community would be concerned about who is excessively bait. And Schultz is known by a number of people as a flaming liberal talk shows he is not about and there's been this talk that he may replace replacements. Well we're looking forward to having Mr. Shultz back almost a week later this fall he may take a different view of his case. In any event gentlemen our viewers are probably less interested in the precise future of the market than in the precise future of their individual personal finances so let's answer some of their specific questions. Frank Cappiello I am pleased to report you'll need it tonight that you do have a satisfied customer. Robert N. Richards of Modesto California says he bought two bond funds after you

recommended them last year on this program. They've yielded him a return of eight point four percent after commissions and their market prices have gone up three and a half percent to boot. But now what Mr. Richards s what does the future hold for these funds. We'd like some guidance on whether you think it's time to buy more hold or sell. Well he's had a pretty good performing portfolio although thats a total annualized return of almost 12 percent which isn't bad. Have you done for him lately right. Let's see if we can come up with something. In order to hold on to the funds he has to be assured of the trend of long term interest rates and hear reasonably optimistic. I think the trend of long term rates over the next 12 months could be up perhaps a quarter of a point or a half a point in other words a bond selling at about 8 percent now would probably sell at the most extreme end of the range at 8 1/2 percent. That is within the range of normal fluctuations on a month to month or 6 month basis so I would not disturb holdings is not impacted probably by some long term bond funds right now if you had cash. I would not

repeat not buy short term securities that is less than a year perhaps a little over a year simply because I think the trend of short term rates is going to be up perhaps twice as high as the trend on long term REITs a point in the next 12 months but don't disturb what he has already around a number of you is a best about the best way for an investor to capitalize on the nation's increased emphasis on energy production. For example Henry Sarkis of Tampa Florida is particularly concerned with the outlook for the domestic oil companies. What's your view of that group and do you think it's likely to be a future market leader. In spite of my optimism about the market I have not been enthusiastic about the oil stocks. They have not performed very well but now they are getting down to sort of a de minimus price range. They're all right I don't think they'll outperform the market until we resolve some kind of a definitive energy policy and also a tax policy on oil and also

a price control policy on oil. I do think the domestic wells are attractive. Companies like Philips petroleum. My favorite company in the oil industry is not really an all star Kerr-McGee. I think it's good value for the long term. In general do you like the domestics better than the International I do prefer the domestics better than the international. Yes I think Frank Ritchie of Long Beach California wonders whether one of the new options mutual funds would be a suitable choice for a small investor out of such funds work how they performed and what in general if you have you with them. Option mutual fund is simply a fund which buys common stock dividend paying stocks or quality companies like GM. And sells cool options against them. And basically their their their income funds yielding perhaps going somewhere in the 10 to 12 percent. As for the performance so further down from there or from the

down from there were from price reflecting the declining in the general market. As for the question as to whether they're suitable for the small investor I don't think they're a bad investment. The fact of the matter is they have outperformed the market as always of course these done by making their own recommendations and the last in a world you'll catch me doing this endorsement. Whether you endorse them or not with your money is your decision. In any event if you would like a few more financial options in your life or if you have any other call to complain just put your investment queries in the mailbox of Best 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. Now before we meet tonight's special guest let's take a look at what is perhaps the best single argument for buying bonds rather than stocks. It's called the reverse yield gap and it represents the degree to which the average interest on bonds exceeds the average dividend on stocks. The would reverse is in there because traditionally dividends on stock were higher than interest on

bonds. The theory being that investors needed an extra incentive to take on what was presumed to be the extra risk involved in buying stocks in the last two decades though all that has changed. Let's put that change in perspective by comparing stock and bond yields since World War 2. As late as 1950 the average dividend and Standard Poor's 500 stock index was fully four percent higher than the average interest on S&P is high grade corporate bond index. This so-called positive difference. Stocks yielding more than bonds continued through 1958 after which rising interest rates and falling dividend yields produced negative correlation the reverse yield gap. A turnabout of the historic relationship between stocks and bonds that has now gone on longer than ever before in U.S. history. The gap reached its widest point two years ago when Bonds yield on average for an A third percentage points more than stocks. The gap has narrowed by more than a point since then but it is far from

disappearing. As of this week S&P has bonds yielded just under 8 percent while the stock index yields at about four and three quarters percent. That's the negative reversion yield gap still stood at about three and a quarter percent. And with stock prices failing to score the mighty gains of the 50s and 60s many investors regarded this as a powerful incentive to stick to bonds. Well this gap have to disappear before investors will get truly excited about the stock market again. Or has the emphasis on immediate yield gone too far. But some answers from a man who has seen more than a few fads come and go. Let's go over now and meet tonight special guest Philip ready. To welcome my guests Otherwise you could come. Thank you. At the age of 80 Philip carré is not only one of the grand old men of Wall Street he is something even rarer. A successful old man of Wall Street

vigorous he vigorously continues his chairmanship not only of the family investment management firm he founded in 1963 but of the Pioneer Fund which he has run since 1928 and its offshoot pioneer two founded in 1969 in orally runs about half a billion dollars worth of assets and runs them well it would seem not only have his funds done far better than the major stock averages they have done spectacularly better than most other mutual funds lately in the last five years for example. Well while the typical mutual fund was eking out a total gain of 4 percent the to pioneer funds have risen respectively by 64 percent and 91 percent. Phil what are you doing right. We try to apply common sense to the problem to the investors. Well let's start with what we just looked at. How do you feel about this increased emphasis on yield which we're hearing from all sides these days. I'm a great believer in total return theory. You buy

more bonds now unused. You know. I think that an individual should have a certain backlog of bonds but primarily the money is made in stocks. One can't make money without owning something. You said that you had succeeded by applying common sense. That's an uncommon prescription. How do you apply common sense to a market that's been as erratic if this one has been over the last five 10 years trying to buy basic values of stocks of companies with. Good assets small on no liabilities other than current liabilities good earnings record and rising dividends. Preferably not too high. You have gained attention over the years not only because you scoff at short term stock market prediction I think more and more people are doing that. But because you have said that you are always buying stocks. Why do you do that. We believe in being fully invested at all times because this means that

in reference to the general market a third of the time we may be wrong. But again we know the market is not a unified thing. There are individual movements of 5000 individual stocks many of which can be going up on the market in general is going down and we try to be selective and get reasonable results and that way you suggest until it was over easy common sense and you've also given us some of the guidelines you use in picking stocks. But you've also suggested that other people don't have much common sense you've suggested that you don't buy the kinds of stocks other people are buying. Why is that. I don't think it's a question so much of common sense as a crowd psychology it's it's very difficult to go counter to what the general crowd is thinking and doing and perhaps over the years I've trained myself to be skeptical of the crowd mind you said once that you would sell a stock of too many people recommended how to.

How does that work. Well if too many people are recommending it probably their stock is high it certainly is probably not a bargain the bargains are when they are neglected. Well the average person watching this program may think well gee by the time I hear about it I'd be too late. Is that true. Does the small investor have a chance. I think small investor has a very good chance of you know buy a good stock and sit with it and live a long time. Well that's kind of unfashionable to buying stocks isn't fashionable enough for some people these days now you're suggesting that maybe they should sit with them not be a trader. Whereas the conventional wisdom on Wall Street is that buying and holding is old fashioned How do you feel about that. The family you have one stock that we've known for 50 years who has treated us very well. Sold as a new high I think yesterday. What's the name of that stuff. Great Lakes dredging dock now if you hold it 50 year as a perform well over those 50 years for the most part. What it was but you don't always do you have one of the signals that would lead you to sell stuff.

Well I prefer to have somebody take it away from me by a merger or a tender offer or something like that of the stocks in your fund say the Pioneer Fund which is goes back nearly half a century in the course of a year if your turnover less than that of most mutual funds you self us down I think it is our turnover is about 20 15 20 percent. Now again translating what you do into the into the terms of an average small investor you're saying look for. Companies that have conservative balance sheets they don't have too high a price earnings ratio that are not institutional favorites What are some of the other deadlines that are well-managed. How can an outsider judge that. Well there is one very simple criterion which I apply and that is the extent to which the management has its own money in the business. If the president of a company has happened in one stock a few years ago in which we had an interest on two hundred shares was getting over $20 stock was receiving a

hundred five thousand dollars salary. I thought he didn't have much confidence in the business why should I. Fair enough and you feel that once having found that kind of stock you want to sit on it forever until when. Pretty nearly forever you know. Using your guidelines what are some of the stocks you like right now. One of them is De Beers the diamond monopoly which of course cannot operate in the United States as such as the attorney general take a very dim view of its activities. But I think it can be called a beneficence monopoly with those Every woman likes to think their diamonds are going to be worth more not less. And De Beers takes very good care of that they push the price of diamonds practically once a year. They have a monopoly. It sells at about a nine percent you has a very broad market. It is a very low price dark there being some 300 million shares outstanding.

Well without endorsing that as Phil carré knows after more than half a century even the smartest men of Wall Street can be wrong sometimes. Let's turn you over to our panel they consist of grand young men. Let's start with Frank Cappiello really the stock market has been very good to the types of stocks that you buy the past three years or really the past two years secondary stocks over-the-counter stocks have done well. And recently the over-the-counter market. Yeah Max is outperform the Dow the so-called Eastman Kodak and so on. But what happens now when you start to ship I mean at some point. Will we get a change in psychology when investors start to go after the bigger companies. There's been years when your small company's done nothing. Right. They probably will. Well aren't your mutual fund shareholders going to be very disappointed. I hope not. I don't think they will. You know what about that Jane had a philosophy that worked very well for 50 years. I don't think we're about change.

OK now Phil of course you want growing companies growing in earnings growing in dividends with good finances now that's almost the definition of a so-called growth stock. Now whether big or little the growth stocks have not done well over the last five years. Are they being neglected and should they be accumulated now. And some of the old favorite growth stocks which sold at 30 times earnings a few years ago are down to 12 times at that price they seem rather attractive. I agree. Mr. Craig based on your experience if you could give investors just one single piece of advice. What might that advice be. Have patience. It takes time. The Chinese say that a tree does not grow to heaven and takes a long time to grow a couple of hundred feet. Till a few minutes ago. Carter likened the current market in 1962. In your judgment in your experience are there periods in the past that seem similar.

Yes and I do not see any resemblance to 1929 which is what worries a lot of people in 1929 we had a tremendous market with everybody wildly enthusiastic and after Labor Day which is very frequently a turning point in the market. I have been disappointed that it hasn't worked that way this year. After Labor Day the market fell out of bed and we had a 10 year depression and terrible bear market. I don't see that happening this time. In your judgment why is the market behaving so nervously right now. Well I think a strike is really due to Washington. If the greatest and by and large we get no good news from Washington. Except when Congress adjourns and they adjourn far too infrequently I think. Looking to the future do you feel optimistic about the American economy. Yes the American people I have traveled all over the world quite extensively and the

American people are a great productive people who still believe in themselves and their country and I have great confidence in the future. Despite the constant nibbling at the edges of the economy which the government does but so far businessman have been able to circumvent them to a major degree. So you've given us a one word prescription for the average investor have patience. Let's get to another problem of the average investor. One of the toughest decisions you has is how to find a good broker. Any counsel for him on that. Well he should look for somebody who has been in the business at least five years with the same firm if he has been able to make a living as a broker for five years in a state with the same firm that's in his favor. Beyond that if he is personally simpatico then they should get along very well. How much should he trust is broken how much research can he do him self. He can't do very much research himself except to know for example that

Proctor and Gamble make Ivory soap and a lot of other widely advertised products. But when it comes to things that are not consumer items he more or less has to trust that the firm he does business with and the broker he does business with. Phil you have a special self tonight as a as an optimist you said you always buying stocks you always feel invested yet one of the features of your phones is that they've held up pretty well in bear markets too. How do you explain that. Well we've had better than average selection of stocks of barratry. You were mentioned in response to Carter's question that you thought some of the big traditional Bostock's were tracked and now you actually buy them now for your fund. We've begun to buy one or two. So you think that the fad of rejecting them may come but come along again just as the fad of holding them at any price disappeared. Right. Thanks very much felt I hope you'll come back with us again we're not going to wait another 50 years to have that but we're going to wait 10 either although I'm sure you'll be going strong a hundred years from now.

Thanks to our panelists for being with us tonight I hope you'll join us again next week because we got an unusual invitation for you then. Let's go to the movies together. My guest will be joining lap in an absolutely stereophonic expert on what's happening in Hollywood and how you and I might make some popcorn money by buying the right movie stock so see us right here in glorious color. Meanwhile this has been more Fleet Week. I'm with you guys or good night. 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 1 7. That's $1 to transcripts. Wall Street Week Owings Mills Maryland 2 1 1 1 7. Residents of Maryland Please include five

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