Wall Street Week with Louis Rukeyser; 2228; What to Expect Economically from Clinton

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made possible by the Corporation for Public Broadcasting and by the financial support of viewers like you by the travelers. Nearly 40 million Americans benefit from our insurance investment services and managed health care. The travelers by M F S M F S helping mutual fund and institutional investors achieve their financial goals since 1924 and viper eventually securities rock solid market wise Prudential Securities celebrating 10 years on television with Wall Street Week With loser of geysers. Friday January 8. Our panelists are Howard Cole Michael Holland and Carter Randall. Tonight's special guest is Henry Calphalon president had recalculated Company Incorporated. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well this is the month in America when youth must be served the nation is

coming together to honor a man representing a new generation a new way of life indeed a whole new lifestyle. I refer of course to Elvis Presley. Elvis would have been 58 today which is arguably not all that young. Though some of us would give you an argument on that. And in honor of that historic occasion. 40000 post offices began selling in the US the first of five hundred million twenty nine cents stamps being printed to commemorate a rock n roll singer who has been dead since 1977. Though he's still been cited hourly by every tabloid in town. They say only in America is to belabor the obvious. While theoreticians can debate endlessly as to whether the country is going conservative or liberal. Over precisely which nine point economic policy is the absolute wanky best. The real truth about our society has once again been laid bare.

When you get right down to it we've got rock in our heads and some of us have long suspected it. Now we're going to see it in the mail. Forget you George Washington you're John F. Kennedy you're Dwight Eisenhower. Oh sure they got to adorn postage stamps too along with countless others who have taken a national look again but none of them ever got the attention or the sales of the Elvis Presley stamp. Economically it's already a phenomenon. Postal Service officials are projecting a much needed 20 million dollar windfall from fans who will buy sheets of 40 stamps and save them as souvenirs. Incidentally most investment experts think that's all the stamps will ever be and so many will be around the people attempting to resell them at a profit are likely to find that the Elvis stamp is actually if you'll pardon the expression a drug on the market. But the nation seemed to be humming Elvis's biggest hits none the less. Bill Clinton an old Elvis

fan was enjoying a pre-inaugural media honeymoon with most analysts reverently chorusing. I can't help falling in love with you. George Bush for his part was sending a verse to Saddam Hussein. You don't have to say you love me. Let's get those missiles out of there. The economy was it usual mix medley new construction spending rose enough to justify a rendition of. Baby Let's Play House. And while the stalled unemployment numbers made it clear that it would be premature to sing the wonder of you. And the things are still not all that terrific in the ghetto and unmistakable pick up in economic reports ranging from retail sales to some of the underlying jobs numbers made it clear that at long last the nation really is finally checking out of the recession's Heartbreak Hotel no matter what Suspicious Minds may think this news left the financial markets all shook up. But what else is new. Those guys just wish they

could come up with a new issue as popular as the Elvis stamp. So that they could be the one singing. Love me tender. In the hope that you won't be lonesome tonight we'll be talking with the eminent economist whose pronouncements over the years have led to nearly as much action as the Blue Moon of Kentucky. But first let's put on our Blue Suede Shoes and see what the hound dogs of Wall Street were yapping at in the leaked US past. And as the Dow Jones Industrial Average indicates the theme song for the week could have been don't be cruel. As the market opened the year in decidedly downbeat fashion. When heavy trading often driven by hysterical computers. The Dow gave up more than forty nine points adding to last week's twenty five point loss to close at thirty to fifty one point six seven. The unhappy new year selling was strong enough to pull down all the broader indexes except the over-the counter which eked out a tiny weekly gain after moving to new all time highs on Tuesday and Wednesday. One of

our Chief Wells let out a mild eek to Michael Metz downgraded from bullish to neutral in the next six months reducing the consensus to plus one met side of the growth in speculation to an intensity symptomatic of a short term peak but said background monetary and economic conditions remain so favorable that he anticipated no worse than a protracted trading range. And speaking of protracted. The pain for gold bugs continue as the metal closed below 330 dollars an ounce for the first time since 1985 and at its lowest weekly close since 1980 Gold's ongoing weakness cast doubt on some concerns in the bond market that a strengthening economy might lead as it often has in the past to dangerously high inflation and interest rates. But there's no doubt who the champion stock picker on this program was last year. If you had just bought everything Pico who recommended it new years 1992 and held it till New Years 1993 you'd have made more than

58 percent. Pete what are you doing right. Good luck good luck. It was I thought it was skill when you went out and bad luck when it went down. No it was just good luck. Broken clock is right twice a day though and I was awfully lucky in that. We just have to do hopefully half as well. The coming year well or all your new recommendations what with all the other panelist in that New Year's transcript but tell us what you think of the way the markets are perceiving in general. I think the expectations are too high for the stock market I think we have got off to a bad start here in January and I think we're going to have a bad month. I think you'll have improvement in February March. My view on the years A-hole is you're going to go up a little. I think one of the real axioms here and one the most important things I can say is when it looks obvious it's not the thing to do. Ten years ago everyone was going into a money market fund getting 10 percent. When you look backward you get 17 percent a year in the stock market and you only got 7 percent in money market. Today everyone says I don't want three percent in money markets.

Let's go to the stock market. And I think they're doing the wrong thing. They should sell their stocks and put money market funds. They should have a say 20 percent in cash. I think they want to buy international stocks. You got to buy international bond funds that are hedged. And I also like REIT says a group but lower your expectations for this year. Real estate investment yes as a way to get more income you think. Yes and also to participate in the depressed real estate market I look for recovery. Quite a round O you. Your expectations is low it is Pete's. You. Know I sort of half agree and half disagree with him I don't think we should have high expectations for the year but I have positive expectations and I think the equity markets stock market in particular where I do the bond market or a total return basis for the year. Your picks last year were up more than 18 percent which was not chop suey. Think you can do that well this year. Let's say I hope so but if I do I think I'll do better than the market because I don't think the market will do that well. I'm looking for something between the 10 15 percent kind of range

for the stock market which is not a bad range as a matter of fact. If inflation held about 3 percent that would be a pretty typical that would be a very good performance and it's going to be based on much better earnings coming out of the corporate sector without much change in interest rates. Right away you think about some of these beaten down old growth stocks and kind of stop by and have them yet. Yeah I think there are two areas to be contrary to what other people think I think one is the economic sensitive areas the automobile stocks as an example. And then the other one is some of the beaten down growth stocks the obvious ones the health care stocks I think are dirt cheap at the moment. No I don't see buying power in them. The next week or month but but the great quote starts my column with your Lou. My view is that I'm an optimist but if Pete is right there's a much better predictor than I and predicted that 80 percent of the time that's the January barometer January stock market in the past century has been a predictor of it's down the market's down for the year

it's up it's up for the year. So forgive me listen to what's going on in general sometimes that indicator only works if you include January. So my stocks are down from February to December. People say all the January indicator there's Iraq was still up. I think that's right I share a little bit of the caution I keep some powder dry as as each quarter and Peter talked about and the reason I say that is Peter Lynch recently reminded people that during the past century we've had 50 markets that have been down more than 10 percent and it's been a couple of years I think the bull market is still intact. If stocks were down to pick them up but you don't think people are going to be euphoric about the results this year it's been a lot of good euphoria in the past several years that I think this year we'll have a little rest for you then even a finalist It's time now to go to work to make this a happier new year but I unfriend some questions from our viewers. Pico whom Steve sums of Sierra Vista Arizona writes that some of the mutual funds in which he invests have asked him to approve proposals allowing them to increase the maximum number of shares available to the public. Well I have no inherent desire to inhibit the size of any of

my mutual funds he adds I wouldn't want any of them to grow so large that they become difficult to manage and perhaps suffer in performance. How can I tell whether or not it is a good idea to approve an increase in the maximum number of shares a given mutual fund is authorized to offer to the public. Basically you want to say yes but he's not going to be asked many more times in the future because the states where most mutual funds are registered have given the power to have more shares authorized by the directors and not the shareholders but there are some still some states where he will be asked. And if it's a money market fund or a fixed income fund without doubt he ought to say yes to get the benefits economy of scale. If it's a small capitalization stocks maybe the answer is No. But by and large say yes. So if he said just the increase shares it's really just a matter of musical chairs. I already got a Randall Terry templates of Chevy Chase Maryland wants to know why it is not permissible to enter so-called stop loss orders on stocks traded on the Nasdaq over-the-counter market. In his words this electronic exchange without walls would seem to be ideally suited to this protective strategy which is allowed by the big board in that mix.

Well it would seem to be that way but it isn't that way the main reason is that there is no central market maker as a result on the list of exchanges. Nobody to keep track nobody to hold responsible for making that particular trade on that stop loss order. Nasdaq's working on it but they haven't come up with an answer yet. My column How would you respond to Don alone of Bentonville Arkansas writes me as follows. We have noticed that in Arkansas it has become fashionable to dye one's hair. I missed the Rhone. Who could you be talking and thought that perhaps in the next four years investing in hair dyes and cosmetics would be a good investment. Please let us know if you also feel that hair dyes will go to high places. Not on my head. Who. Baldly speaking. There are no clear plays in this in this industry Clairol for example is the largest manufacturer and there a very small part of Bristol-Myers. If Mr Owen is implying that voters may get turned off by politicians from Arkansas or anywhere else who change their hair color as often as they do their

political positions we may get a re-emergence of the Whig party whom. Harry responds. All right. If you're just dying to get ahead. Just seeking to put a little more color in your life we'll be happy to do our part. And you can be sure that we're at last at least are not going to be here today and gone tomorrow. So comb through your nightie as questions brush aside your doubts. Get ready for some stylish suggestions 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 remember folks. All politicians never die. They just fade to grey. And on that hair raising No. Let's go over and meet tonight's special guest. And we go. And we welcome back. Thank you Lou it's nice to be with you. It's always a pleasure to have you. As the most influential Wall Street economist of the past generation Henry Cowen was often derided as

Dr. gloom Dr. Doom for his warnings that the country was simply storing up trouble by recklessly accumulating debt. Now there are a lot of people around who wish they had paid a more heed after 26 years at Salomon Brothers in which you came to lead all that firm's research to Calvin left in April 1988 to found his own investment management consulting firm an old favorite of our viewers he's tonight making his ninth appearance as my guest on this program. Henry to the surprise of cracked lino and I'm sure not to you. The federal deficit was reported this week to be even worse than previously admitted. What can what should Bill Clinton do to reduce the deficit the next four years. I think it's very important Lou for this president to demonstrate early that he has the courage to take some action. And that from my perspective means that in fiscal 1994 which begins October 1 1993 he has a budget that does not explode.

We're in a slow economic recovery. Therefore he has to reduce the deficit gradually. The fiscal stimulus should be modest moderate and it shouldn't be dramatic like some have advocated that would be a clear cut signal I think to the market that with further economic growth and revenue gains and a reduction in military outlays which is still largely ahead of us. We can make some progress. But he must show that in the early years not talk about the lady as everyone talks about the later years and never never really brings home that particular result. What would you do this year what a couple of specific things you do. I think it's quite reasonable for this president elect to favor an investment tax credit for new political machinery and equipment. It would seem to me that beyond that as a fiscal stimulus the most over a 12 month period I believe should be 20 to 25 billion and not 60 billion. 20 to 25 billion as a fiscal stimulus

I think is acceptable to the market. A larger amount would be highly worrisome. How about on taxes. Well he apparently made a commitment a political commitment to raise taxes for the higher income groups. I think that will gain very little. In deed I think it will hurt savings somewhat but it's a political commitment. I do believe at the same time that he ought to be very careful about this proposal that he had one time out of lowering the tax rate on the middle income group. I think in the current situation it's unnecessary. Can and should a president get away with. Lowering entitle many of them. I think a president should get away with lowering entitlement spending. This is one of the key problems in our budget deficit. The time for him to tackle that is early on when the country is behind him

when politically he strong as we go on over a period of time. I think the congressional process hardens against us. Now is the time to begin it. You told me a few months ago that you thought the longer term outlook for the deficit might be at somewhat better than people thought. Do you think any of that has changed. I think the problem for five years from now is overstate it five years from now is a long period of time depending on where the economy is five years from now the level of economic growth the rates of inflation and so on I think five years from now the budget deficit is reasonable action that is taken will be below what was estimated by the outgoing administration. Let's concentrate now in 1993 what kind of a year do you see for the economy in terms of growth in terms of inflation in terms of money. I am reasonably constructive about the economic outlook of the United States I think will generate real growth of about two and a half percent perhaps two and three quarter percent. The rate of inflation will remain subdued at around

3 percent or perhaps even less. I think it's very important to recognize the structural changes that are taking place in the United States that will hold down the inflation rate. After all restructuring is still very much in force in the United States. Plants closing corporations downsizing and internationally the supply of labor is extraordinarily large So wage demands will be moderate. And from that perspective I think there's going to be a reasonable growth reasonable financial environment in the footings will be there for continued economic expansion. The common view is that the restructuring to which you referred is leaving many people without jobs who will never again get jobs as good as those they lost. Is this accurate. I think it is probably accurate and to a large extent accurate perhaps not entirely. Some of these middle management people whether it's from IBM or General Motors or any of the other larger corporations that are downsizing and restructuring. Most people are going to be very

very difficult to put back quickly on the same level of management skills and the same level of renumeration there but there is another aspect to it. We find today that for example in the United States American corporations can outsource can put up a plant in Canada or they can put a plant in Mexico or in Asia. But equally so the Europeans can put plants and equipment in Eastern Europe where labor costs so much much lower and the competitive aspect therefore is very powerful. And this is one of the new structural developments of the 1990s that is going to hold to the economic and financial situation in reasonable bones without moving to extremes. I can't hold the panel about it any longer so let's turn to that. Start with people having the economy go back to a question about the deficit. Right. It is a subject that many financial experts opine about but for the average American that's watching what criteria year you think they should use to say that's too big a

deficit as interest as a part of the budget is it at. Total dad is a part of GNP what kind of guidelines could you tell the average American. Pete I would say it's very important to know the relationship between the deficit and economic activity number one. But secondly at what phase of the economic development is it. Is that a ratio that's high in a period of recession or in a period of an economic boom. And that matters. Now the dilemma for the United States was that during the economic expansion of the nineteen eighties we were never able to bring down the budget deficit and therefore we went into the economic slowdown with a high deficit and therefore that has put limits on the capacity of the American government to really use taxes reductions or expenditures as a means of stimulating the American economy. And really this president has run on a platform of creating jobs he promises

he will do I guess through the infrastructure vehicle among others. He also wants to regulate industry such as the automobile industry for emission controls. And yet he wants to reduce the deficit by increasing taxes not only on the high bracket people but on your gasoline and my gasoline. Can he do all of that without being inflationary. I think the inflationary situation is another critical issue for the 993 and probably not for nineteen ninety four. There is tremendous excess capacity in the United States. There's global excess capacity. We have enormous supply of labor coming out of Eastern Europe coming in coming in from the Far East. In the United States there is a large supply of labor. So I don't believe the inflationary issue is the critical issue that we face at this moment in time.

And your investment management company manages a chunk of municipal bonds. What would you advise the new jewel investor to do who might be thinking about this area. Well the municipal market has changed drastically Mike in recent years. For one it is participated in in terms of buyers by households and mutual funds and mutual funds represent primarily households. Secondly there's been a credit quality deterioration in the municipal market that is difficult to evaluate for the individual investor. And thirdly because we do not have many participants banks are out of it. Fire and casualty companies are not in that market at the present time and therefore there is a liquidity problem occasionally in the market itself. And therefore if you're an individual investor I would recommend two things stay with the issues rate a doubling or higher. And if not find a good mutual fund with a very good professional manager who will oversee those problems for you.

And we only have about a minute left I can't let you get away without asking about interest rates. The long term government bond now you know in about 7 1/2 percent. What do you see it going this year. I believe it will still fall into the range of seven to seven and a quarter percent particularly. And I say particularly if the federal government on this forthcoming refunding meaning the issuance of long bonds in the month of February will either reduce significantly or omit the issuance of long bonds in that option. I would I would really suggest that to the new administration and I hope it will do so at the other end of the curve. Money market funds yielding less than 3 percent what you think they'll do in the course of the year. I suspect by the end of the year the rate of return will be slightly higher than they are at the present time. Given your overall assessment you think the jitters in the bond market this week were misplaced. Is that correct. Yes I do of course interest rates but stock prices and bond prices never go in a straight line. Volatility is the hallmark of the financial market and it will continue to do that.

But you see trending downward as the year progresses I think a veil trend particularly by mid year. Thanks very much Eric out and thanks to our panelists hope you'll be back with us again next week and we'll focus on some specific investment ideas for the year ahead with one of Wall Street's leading strategists He's Eric Miller the chief investment officer for Donaldson Lufkin Jenrette and he'll be giving us his ideas for investment success in the first year with Clinton nomics. Meanwhile this has been last week. I'm Louis Rukeyser. Good night. Wall Street Week With Louis Rukeyser has been made possible by the Corporation for Public Broadcasting. And by the financial support of viewers like you by the travelers providing American business with insurance investment services and managed health care the travelers buy him at fast and they're fast helping you to a fund that institutional investors achieve their financial goals. Since 1924 and by Prudential Securities rock solid market

Weiss provincial securities celebrating 10 years on television with Wall Street Week With Louis Rukeyser for a printed transcript of this program send $5 to transcripts Wall Street Week With Louis Rukeyser Owings. Mills Maryland 2 1 1 1 7. Transcripts are also available to subscribers of the Dow Jones news retrieval service. From. Wall Street Week With Louis root geyser is produced by Maryland Public Television which is soley responsible for its content. This is B.S..