Louis Rukeyser's Money Guide

Oh America's 8th annual look at what's ahead for you and your money. Lewis Rookizer's 1995 Money Guide is brought to you by MFS.

MFS helping mutual fund and institutional investors achieve their financial goals since 1924. By AG Edwards, serving the investment needs of individuals and businesses for more than 100 years, build on the foundation of trust, research, and commitment to investor success. Good evening and welcome to one of the most remarkable hours we've ever been able to present about what's really going to happen in the year ahead to you and your money. With perhaps the greatest array of high powered thinkers ever assembled in your living room. Maybe even including the times when Uncle Harry and cousin Fred come for Thanksgiving dinner. We're going to zero in on three big questions. First, when you hold your nose and emerge from all the political hot air, what differences will the historic changes in Washington truly make to your bottom line?

Second, how can you best arrange and adjust your finances right now to take maximum advantage of those changes? And third, what else can you do to achieve a significantly better lifestyle and more genuine financial security in 1995? For this, our eighth annual Money Guide remains television's only look at the year ahead that cuts through all the baloney to get to the only big cheese that counts around here. And to give you the best possible food for thought, we've assembled an unprecedented lineup of super chefs starting with the two most influential economists of the past half century to plan the broad menu with Nobel Prize winning skill and then proceeding to an array of all star chefs who will serve up the specific dishes to fill out your full-course financial menu for the year ahead. I'm hungry already.

And to help set the table, let's begin with a few results from an exclusive nationwide poll we'll be reporting on in the course of this hour. A poll designed to measure the true state of the American mine today. To determine that, we commissioned the Opinion Research Corporation of Princeton, New Jersey to ask a variety of questions of a cross-section of just over a thousand Americans. The polling was done late last month and has the customary 3% margin of error. First, it's clear that a majority of the American people think the economy is recovering, just as they did in our poll a year ago, though the largest group continues to believe that the recovery is weak. But optimism, both national and personal, is clearly on the upswing. Most respondents believe the year just passed was a good one for America, a reversal of the result in our poll 12 months ago. And nearly three quarters say it was a good year for them. And the numbers get stronger when people look at 1995, nearly two-thirds are expecting a better year for the country, and fully four out of five feel that their lives will improve.

Last year, the vote was evenly divided, 45% to 45%, as to whether the country was headed in the right direction. Today, slightly more think we're back on track. And for the longer-range future, the number who are optimistic about America has risen to nearly four out of five. While even more now voice the traditional national belief that their own lives will improve. Unemployment may be at a four-year low, but it still tops the list of Americans' economic worries, with the budget deficit coming close behind. And here's a key clue as to why Republicans control both houses of Congress for the first time in 40 years. By nearly two to one, Americans now believe that Republicans are better able to deal with economic problems than Democrats. Incidentally, our pollsters always ask each respondent for statistical purposes, which party he or she more closely identifies with.

And this year, found the Republicans ahead of the Democrats by a record 44 to 32%. If President Clinton is watching, he may want to look away now. When those polled were asked whom they favored for the 1996 Democratic presidential nomination, the incumbent got less than a third of the vote. And finished in a virtual dead heat with don't know. But the Republicans have no popular favorite either. Don't know is a clear winner there. Well ahead of the leaders among actual human beings, Kansas Senator Bob Dole and retired General Colin Powell. Despite all the recent media attention focused on new House Speaker Newt Gingrich, he is the favorite of only two percent. And California Governor Pete Wilson didn't even make that cut. First ladies historically get high approval ratings, even when their husbands don't. Hillary Clinton is arguably the most controversial first lady in our nation's history.

And our survey found opinion deeply divided on her. 41% now view her favorably, 33% unfavourably. There is, as expected, a significant gender gap who rating this distinctly unfavorable among men. But Mrs. Clinton doesn't get majority approval now, even from women. And here's a fascinating indication of American skepticism toward all politicians. Though both Congress and presidents say they want to cut taxes for the middle class, nearly nine out of ten of those polled are convinced that their taxes a year from now will be at least as high as they are today. And here's an interesting reputation of the 1990s notion that there is no political cost to raising taxes on somebody else. Fully 71% now think that taxes in general are too high. While only 64% think their own taxes have been raised too much. And in case you were wondering just how many Americans think of themselves as middle class, our survey found it's nearly four out of five of us.

Almost all the rest regard themselves as poor, with barely 1% describing themselves as rich. The most powerful new financial factor in the past year has been the succession of six interest rate increases by the Federal Reserve. Fully 47% of those polled think the Fed went too far, as compared with 34% to believe the Fed pursued wise policies and only 8% who would have wanted even more increases. Has the Fed been pursuing wise policies? Let's ask two extremely wise economists whose wisdom has never kept them from vigorously disagreeing over six decades. Joining us from Boston is the man whose textbooks have taught economics to generations of college students, an unapologetic advocate of a significant government role in the economy. About 79 still a professor of economics at MIT, and the first American to win the Nobel Prize in economics, Paul Samuelson. In San Francisco near his current Belly Wick at the Hoover Institution is 82-year-old Milton Friedman, himself a Nobel Prize winner, the greatest living exponent of the link between money-supplied growth and the economy, and a fervent spokesman for free markets.

Gentlemen, our latest poll shows widespread distrust of Federal Reserve policies over the past year. How would you assess those policies? Paul? I give two and a half chairs for the Federal Reserve in 1994. They acted quickly, subsequent events have shown that the American economy has been a bit too vigorous on Main Street, and they were right to act. Milton, much of you. Well, on a customer that I am to agreeing with Paul, I come very close to him. If I were to judge the Fed by its rhetoric, I would give it very low marks, all this nonsense about trying to peg real interest rates or looking at gold. On the other hand, by its performance, you have to give it very high marks.

It has kept the inflation rate relatively low in study. It has been following with respect to monetary aggregates, a rather steady course, very low increases in the broader aggregates. How does that translate into the outlook for the economy over the next 12 months? Economists have a very poor record in predicting the future for such short-term periods. It is hard to give a decent answer to that question. So far as a long-term outlook of the economy is concerned if the Fed can keep inflation down and relatively steady. If the new Congress can live up to its promises and cut taxes and expenditure, the long-term future ought to be very rosy indeed. You are threatened to give a bad name to the dismal science. Would you accept that optimistic view, Paul? Well, I am somewhat optimistic about the Main Street U.S.A. economy, and being optimistic means that I expect in hope that will tone down the rate of growth a bit. The Manic stage is not good for sustained growth. But if we do that, and if we have a shot at a soft landing, that's not necessarily good news for Wall Street.

In 1994, Wall Street went one way, had a bad year, Main Street U.S.A. had a great year. I hope that that doesn't happen again in 1995. Well, your compassion for Wall Street will be deeply appreciated there, I'm sure. Are you saying that we're likely to have higher interest rates? I think so, because I don't think we've seen the end of it, to tone down the economy, which is a necessity now that we're at low unemployment rates. Now that there are signs of incipient growth and inflation, modest is true, but still a very widespread. I think the Fed will find it has to do that same job a few more times, and that could be hard on bonds and maybe even on stocks. I'm much less sure, Lou, of that proposition.

I think the economy is growing at a moderate rate. Growth in the economy is not inconsistent with low inflation. We've had it before. Indeed, the logic of it is that the more good you produce, the lower the inflation should be, not the higher. So, I think whether interest rates go up or down is not going to depend on what the Fed does. It's going to depend on the basic underlying forces that affect interest rates. And the two most important of those, for on the one hand, what inflationary expectations are, certainly for long-term money for bonds, and second, the real interest rate. I believe the real interest rate is higher now, the underlying real interest rate, and it has been for a long time and is lucky to remain high because of the technological revolution and the opening up of the world to worldwide commerce. Those two forces have been driving up real interest rates. I find it very hard to know how to balance those two things, because I think inflationary expectations are likely to come down,

but there will continue to be upward pressure on real interest rates. Milton, you spoke favorably just now about the desire to cut taxes in Washington. Most of the talk has been about a middle-class tax cut. Is there really much economic merit to that kind of proposal? Well, my position has always been, Lou, that I'm in favor of tax cut at any time, in any shape, in any form. On the other hand, I would prefer the tax cut to be directed at the marginal income tax rates that affect the incentive of people to save and to work and to innovate. Bringing down the increases that were enacted in the 1990s under both Presidents Bush and Clinton. Well, I'd really like to see Dick Army's flat rate tax. That's what I'd like to see. Paul, let's show you on the question of the progressive income tax. Well, since the U.S. economy, as of this moment, as of President Evidence, is still a bit strong for what's healthy for moderating inflation. If we have widespread tax reduction, something of a replay of what used to be called Reaganomics, then the optimism, which I expressed a little bit earlier, would dissipate.

I hope that won't happen. Would you favor income tax cuts if they were indeed matched by spending cuts? I think that spending cuts that the democracy does not want to apply resources for are always in season. But the notion that the only good direction for government, public spending, is down, I think is bad history and bad ethics. And I don't think it will make for a good future GDP behavior. I think it was bad ethics in 1929, perhaps, when government had all levels. Federal state and local was taking about 11 or 12 percent of the national income. Government, state and local and federal is taking 43 percent of the national income, imposing great many other costs through regulations, through mandates on individuals.

I think it's a very good thing to cut government down. Are we out of historic turning point in terms of government economic policy? That depends. It's very iffy. There is an opportunity for a historical turning point. The public at large has made it clear that it wants a smaller government. That it does not trust government to perform the functions that it has assigned to government. At least not the central government. It has more faith in local and state governments. And if the Republicans are effective in taking advantage of their new position, then I think it could be a historical turning point. But I may say I've been wrong before. I thought that in 1980 and I was wrong. Well, what's your view? Are you concerned that it may be a historic turning point? Well, I think with the problems we're talking about are not washing problems. These are problems in the electorate. The electorate loves low taxes.

I'd love to have a reduction in my capital gains tax rate. I'd love to have my marginal tax rate down. And that's repeated across the income stratum in every part of the land. But the public also likes functions of government. And we haven't yet shown in our democracy that we have a capability to select wisely among the most valuable services of government. And cut the others, Pari Pasu, with cuts in taxation. So I'm not optimistic at all that the rhetoric that took place during the midterm elections, and since is going to be translated into sound sensible economic macro policy. Well, the three of us last talked on television three years ago. Both of you, despite your divergent views, agreed on one thing,

which was that there wasn't an exceptional candidate for President in terms of economic policy. Do you see one for 1996? Milton, you want to start? No, I really can't answer that because there are so many candidates. And their economic policies have not all been fleshed out. In many ways, the policies Lamar Alexander is proposing are very attractive. But I think we have to wait and see until the field narrows down a little before you. They're all throwing their hats in the ring, but we ought to hold up before we start picking them up. Paul, do you have a candidate? No, one person has stood out from the crowd. And I'm speaking now, according to my lights, of the Republican crowd, but also the Democratic Party crowd, with a consistent and plausible practical policy. I guess the good thing for the country is that you both remain reasonably optimistic about its future,

despite our leadership in Washington, not because of your aspirations there. Well, it's not despite our leadership. It's because of confidence in the general public. I do not agree, I agree in a way with what Paul said before, but in another sense I don't. I don't think the public at large is in favor of the large agricultural spending on agricultural subsidies. I don't think it's in favor of the sugar quotas. There are dozens of other things that I think the public at large is not in favor of that we ought to get rid of. Paul, we'll give you a quick ask word on this. Oh, well, I simply say this, the example of Italy is impressive. The Italian economy has great potential, and the politics is in chaos, and that politics has frustrated the economic potential. I think we'll do better in this country, in the years ahead, despite both parties. I agree with Paul on that.

Thank you both for your time and your wisdom. Now, let's move from theory to practice, from the two most eminent of our national economists, to the two most influential financial economists, giving advice in Wall Street. But first, let's consult the public, which in our poll last year accurately for sore rising interest rates. This year, an even higher number, more than two-thirds, are looking for the trend to continue. Only 5% expect interest rates to be lower a year from now. Is this few justified? Let's ask the two economists that investors listened to most. Edward Hyman has been voted the top economist in Wall Street since Jimmy Carter was president, and he's currently chairman of his own international strategy and investment group. Edward your identity's work is followed just as widely. He took Ed Hyman's place as chief economist at CJ Lawrence Deutsche Bank Securities, when Hyman went out on his own four years ago. What will happen to interest rates long and short in 1995? Ed Hyman, what do you think?

I think on the short side, your poll group is correct. They're going to go up. They're fed funds right now, or five and a half percent. I think they go up to six and a half percent, but I think that will be it. On the long side, long rates are about eight percent. And I think in the first part of 1995, they're going to go up a little bit more to eight and a quarter, eight and a half. But I would disagree with the poll, and that by a year's end, I think long rates are going to be down to say seven percent. And you think short rates will hang it about six and a half percent. Ed, do you identify what you're looking at? Well, I agree with that Hyman's projection for interest rates as we go through the year. However, I am somewhat concerned that the poll that you just described may be onto something. Maybe people know that the economy is doing very, very well, and that the Federal Reserve may raise interest rates higher than six and a half percent. I happen to think that six and a half percent probably will be the high point for short-term interest rates for the Treasury bill right for example in the first quarter. But there is an outside chance that rates might go still higher.

Either way, I think bond yields are going to be lower by the end of this year simply because if inflation remains low as it has been, then the Fed won't have to raise interest rates much more. If inflation comes back, the Federal Reserve will raise interest rates, short-term interest rates levels that eventually bring inflation down and long-term interest rates down. Do you share the seven percent goal for long-term? Yes, I do. Yeah, I think seven percent is very reasonable. I do believe that an eight percent bond yield, which is what we're now getting roughly for government securities, is an awfully attractive rate of return relative to an inflation rate that has remained around three percent or lower. At home, and your identity just said that you thought the public might be on to something because the economy was healthy. We've had healthy economies without rising interest rates. Why can't we have it this time? The problem is that we're chewing up slack. Unemployment keeps coming down, operating rates keep going up, and at some point that's going to create an inflation. And there's already been a clear pickup, a major pickup, in pricing power and manufacturing. It hasn't flowed through to the consumer yet, but you can see that, and with the economy still growing a little faster than potential, that's what the markets are worried about.

Let me ask you, and then ask the other, Ed. You have to be an ed to be a great wealthy economist, I guess. What do you see for consumer prices this year, and what do you see for the dollar this year? On the consumer prices, I think they're not going to be able to pass it through. That inflation is going to stay around 3% or a little bit less. It's a risk, but I think that inflation, that it go higher, but I think inflation is going to stay low. On the dollar, I believe it's bottomed. The yen is broken out on the upside, and the difference between today and a year ago, when the dollar hadn't bottomed, is that now you have U.S. interest rates up enough to give you good support. What does that mean? The yen is broken out on the upside. World meat sushi? It's finally, it got down where the yen was in the 90s, and it broke out a little bit on the upside here in the past couple of days. I do agree on what you have you on those two.

I have a little bit more optimistic on inflation. I think inflation this year could be somewhat lower than last year. Last year's inflation rate was probably about 2.7%. I think inflation this year will come in around 2.5%. I think there's a lot of very powerful forces at work that will offset some of the pressures that Hyman referred to, in terms of running out of capacity. For both of you are more optimistic about inflation than the consensus. I think so, but I think the reason interest rates are going to go up is the Federal Reserve believes that the economy is too strong for its own good. They're going to raise interest rates until they perceive that it's sustainable growth. Do you share at Hyman's view on the dollar? Yeah, it really does look as though the dollar has bottomed out. The dollar is awfully cheap now in many countries. The dollar is very competitive. I think our exports are going to boom in 1995. I also think that investors are going to become a little less interested in investing in overseas markets, particularly after what just happened in Mexico. I think more money will stay at home and I think that'll also be a positive for the dollar.

Really, the forecast you both made is favorable for the bond market. Is it also favorable for housing as mortgage rates come down? Well, I think so. Though I think demographically there may be an upside limit to how much better housing can get. I expect that housing starts will stay around 1.4, 1.5 million units, which is what 1994's pace was. I think that'll be the case this year. And how about the overall economy? The overall economy looks just in fabulous shape. I think we're going to continue to see growth of 3.5 percent in the first half of the year. There's already some indications in the relationship of short-term interest rates to long-term interest rates. The so-called yield curve that suggests that we shouldn't anticipate some slowing in the economy in the second half of next year. This year, I should say, and I'm looking for growth of 2.5 percent in the second half of the year. So some slowing. And I'm going to let you disagree with? I'd have a little bit growth, a little bit less growth in the second half of the year. The key issue on the growth right now is we've got this terrifically synchronized global upturn with developing nations and freer trade. And definitely, the economy still feels strong right now.

But I think the forces are in place to have a pretty good slowdown in the economy in the second half of 1995. Recession in 96? I don't think so. Certainly, if the economy unfolds in 95, like I think it's going to. There's not a recession in 96. Finally, in a sentence, what do you think about the outlook for the stock market and do this? Tough first half, better second half. As long as the rates are biased upward, I think the stock market is at risk. And when rates start to come down in the second half of the year, I think the stock market will do fine. I do. I need to share that for you. Well, I think the Federal Reserve moves very aggressively in the first couple of months of the year to raise interest rates. I think both the bond market and the stock market will be impressed that the Fed has, in fact, successfully preempted an inflation problem. And if, in fact, the inflation year remains low, then I think the cost will be clear. I think we'll find that not only will bonds do well, but stocks will do well also. Thank you both for your remarkable edification. And now, having sharpened our economic perspective with four of the profession's keenest minds,

let's move to the world of investments, starting with two top global investors. First, though, let's look at the public's view of one of the world's biggest investment disappointments of the past decade and a half, gold. Only 4% say they'll buy the medal in 1995, and that's the lowest number we've ever recorded in our surveys. Is that in itself a signal that the time to buy gold may at last be here? Let's ask two extremely worldly guests. Jean-Marie Eveyard is a native of France and manages the remarkably successful SoGen International Fund. Barton Biggs has been one of Wall Street's heaviest hitters for three decades. He watches investments around the globe as chairman of Morgan Stanley Asset Management. Jean-Marie, you've been advocating gold for so long, I might have guessed you were an old-fashioned dentist. Has your enthusiasm flagged yet? Not yet, no, the mere fact that gold has been so disappointing for 15 years. I mean nothing lasts forever.

I also like the fact that so few Americans want to buy gold, that's a good signal as well. So you people can make all the profits. That's fine. Actually, our gold fund was flat last year, which is not so bad. I like the protection that's being afforded by Joe already man continuing to exceed mine production. And as far as investor demand, it hasn't appeared yet, but I think it may over the next year or two. I still think we are the early stages of a multi-year bull market. In 1994, gold had trouble rising convincingly above $400 an ounce into the year. Well below, where do you forecast it will go in 1995? I think it will go higher. I mean, there is inflation in Russia and China. There will be inflation tomorrow in Mexico. In the US, we're moving from 3% to 4% inflation in a cyclical basis. Governments are unpopular throughout the world. Who wants a paper of money, which is government money? If gold went up every time, government will unpopular.

There will be a 3,000 by now. It might be. Do you think it will go to 500 this year? This year, I don't know, but I think over the next year or two it will go to 500-600. But what's your view on gold? Well, I agree with what's been said. And I guess the Bible says the last shall be first and the first shall be last. And gold has been last for an awful long time. And I wouldn't be surprised to see it do very well this year. It's hard to say why, but maybe there will be a flight from paper money. Who knows? But I think this could be a year when gold could do well. The traditional reason, of course, was inflation. Do you expect much inflation? No, I don't. And that's why I say it's hard to see why gold could be a spectacular investment. But that's always the unexpected that creates for surprises that makes something do very well. Looking around the world as you do every day, where are you putting money now? And I think right at this moment, I think people have got a really terrific buying opportunity in emerging markets.

Because so many of them suffered in 94. Because they suffered in 94 and now this last, what you could call the crash of Mexico, which is really now a soon panic proportions, is creating and has brought down all the Latin American markets. And the doomsayers are calling for the end of the bull market in emerging markets. But I suspect it's really a major buying opportunity. You mentioned Mexico, what are some of your other favorites? Well, I think that Hong Kong is attractive again. It's down about 45, 46% from its highs. And there's all the worries about the trade problems with China. But at eight and a half, nine times earnings, I think Hong Kong, as guy has got to be a buy. So, I'm really aware of you investing in these days. Well, I like emerging markets too, but not so much the equities,

but the Brady bonds and dollars of Argentina, or some of the Brady bonders, some people think it's a sitcom. Well, it's, you know, when the Mexicans and the Brazilians and the Argentinians defaulted in the 80s, on their debt, that was restructured under the auspices of the Secretary of the Treasury Brady, when Mr. Bush was president. And now that that trades actively, and we're getting in dollars, because we're talking about dollar denominated fixed-income securities, about 15% yields end up. And the only risk for which I'm being paid very nicely indeed is that at some point, those countries will default again on their external debt for the second time in a few years. And Diazalo, the Brady is one big happy family, or some members more attractive than others do. I find Argentina more attractive than Brazil or Mexico, but I like them all, which areas of the world are you avoiding me? I'm avoiding the Tokyo stock market, because I think it's still expensive.

Contrary to bounding bigs, I'm avoiding to a great extent Hong Kong, because I suspect that the real estate bust is in the making there. That's it? Which areas are you staying away from, Martin? Well, I agree that Japan is expensive. It's 90 times earnings, and they're depressed, but it's hard to make the case that even with a huge earnings recovery that Japan can be a really good market. And I tend to think that the European markets are going to be dull, and that you're really not going to make very satisfactory rate returns in Europe. But I think in general, in 95 is going to be a year when 15, 17, 18% returns are going to be very, very satisfactory. Finally, let me ask each of you, in a sentence, how do you assess the relative attractiveness of the U.S. market compared to its competition around the world?

I look at the U.S. market, the two-year Treasury Note yields more than 7.5%. The S&P 500 yield is less than 3%. I see the other upside in the American stock market. It's more attractive only to my mind than the Tokyo stock market. It is more attractive than the Tokyo stock market, but less attractive than the emerging markets of the European market. Pretty low on your list. How about you a button? Well, differences of opinions are what make markets. I think the U.S. is the most attractive of the big markets. Not as attractive as the emerging markets, but more attractive than any of the other mature industrial country markets. And I think that the U.S. is as much further along the line in the process of restructuring. And I think it was really a major chance that the dollar has turned here and if it has, and if we're going to have an appreciating currency, I think you're going to see a huge flow of money from Europe and Japan in the U.S. equities.

Thank you both for a world of advice. Everybody else predicts the stock market. Why shouldn't the public? Most think that the market will move a bit higher or remain about the same this year. A year ago, incidentally, the largest group said about the same, which was a pretty good call. More to the point, 28% of those polled say they plan to buy stocks in 1995, which incidentally is the exact same number that said they plan to buy a year ago. Should you be among them? Let's ask two people who have very different opinions on the market. Abby Joseph Cone is one of two co-strategists at Goldman Sachs, and Geraldine Weiss publishes the Investment Newsletter Investment Quality Trends in La Jolla, California. Abby Stocks in 1994 didn't do as well as you predicted, or as badly as Geraldine did. What went wrong and what do you expect for 95? It was a punk year for the stock market, Lou Stocks in general went nowhere, and the really big obstacle, of course, was the crash in the bond market.

In 1995, my guess is the bond market will be sort of a neutral event with regard to the stock market, investors can focus once more on the profit outlook, and I think that'll be good. Geraldine, why didn't the disaster occur? Well, Lou, for many stockholders that the disaster did occur, certainly utility stocks were down now 32% from their September high. The transportation's average was down about 25%, and of course many of the individual stocks in industry groups were down 30% or more. It was a silent bear market. The only average that didn't speak to the bear market was the Dow Jones Industrial Average, but all of the rest of the averages did. I think we really experienced the first year of a bear market, and we're now entering the second year of the same bear market. How do you define a bear market given that the major averages were off less than 10%. Well, when you say a major bear market, certainly the utility average had come down 32%.

Now in the past, whenever we've had a decline in the utility average of that magnitude, we've seen a similar or greater percentage decline in the industrial average eventually, and I think certainly a 32% decline would qualify as a major bear market. So what are you predicting for 95? I'm predicting that kind of a bear market that's being reflected in the Dow Jones Industrial Average. 32%? 32%. Down from its high of 4000, may interday. That would bring us down to about 2700. It may not reach 2700 next year, but I think we will be well on our way to 2700 by the time the year is over. Have you before? I'd buy jumps out the window. Let's see whether or not you agree with that. I'm glad we're on the ground level here. It seems to me that we had a very bad market on a subterranean basis in 1994, and many of the stocks which are sensitive to interest rates did quite poorly, but let's keep in mind that the Federal Reserve tried to move in a preventive fashion this time around.

Rather than waiting for inflation to rear its ugly head, they moved interest rates up quickly before inflation was a problem, and so from that standpoint, I think many interest rates sensitive stocks fell much sooner than usual, and I think this economic cycle is going to last much longer than usual. Normally the Fed would start to tighten and within just a few months, we would have significant economic declines. I don't think that happens. Don't expect a recession in either 95 or 1996. How bullish are you in terms of the Dow would you expect us to go? I think we go back up to the high levels and then a bit more, which means for 1995 from current levels expected returns of about 10%. Not a great year, but an average year for the stock market. And where specifically would you be putting money? I would be looking at some of the groups that performed poorly last year. That would include some of the economy-sensitive industries where investors walked away towards the end of 1994, fearful that there would be no profit growth in 1995.

It would include some of the basic commodity areas like aluminum. It might also include some of the consumer durable sectors including autos. Financial stocks have selected opportunities as well, and U.S. technology stocks, great products, great companies, very competitive in a world economy that will continue to grow in 1995. Since you've heard selectivity, why don't you select a stock or two in each of those areas for us? I'd be happy to. In technology, I'd be looking for the companies with the strong products, semiconductors, accompanies such as AMD or Intel, computer software company, Microsoft, telephone equipment, including DSC communications. Among the financial services areas, CD Corp. because of their credit demand, needs outside the United States. They service many corporations multinationals. I'd also be looking among some of the basic cyclicals, a company such as Alkan would fit into that category. Joe Dean, would you buy any stocks in view of your gloomy overall forecast? Yes, I would.

I look at the stock market as an arena of value. And in the stock market, there are pockets of value. Certainly the utilities, the electric utilities that have come down so precipitously this year, are now offering very good value. And I certainly would look to stocks such as American electric power, Allegheny power, consolidated Edison, Detroit Edison. All of those stocks are priced yield better than 7%. Atlantic energy is priced yield about 8.6%. So I would look for stocks that are yielding better than 7% or 7% or better than the electric utility industry. And stocks where the dividends look relatively safe, that means that the payout ratio is no higher than 85%. And all of those stocks that I mentioned have payout ratios that are 85% or less. Is this based simply on your assessment of the quality of those particular companies, or is it an overall belief that interest rates are coming down? It's based on the value of those companies. The fact that they offer historically good value,

the fact that there are yields now are higher, are high enough to support the prices. And the fact that the payout ratios now will offer some latitudes so that dividend increases can occur. Also, I would mention some of the beaten down drug stocks, such as up John and Bristol Myers-Squib and even Merck. So to ingest between the two of us, if I had told you a year ago, the short-term interest rates were going to nearly double, the bond market was going to have its worst year in recent memory. Wouldn't you have expected stocks to suffer more than they did? Well, again, you're talking about the Dow Jones Industrial Average. Stock did suffer mightily during the year. The Dow Jones Industrial Average has been in an overvalued area now at lieu for almost three years. So I have been looking for a down draft in the market. I've been looking for those values to come down or rather to the values to rise. Well, the prices came down for more than a year now. And I think that we have seen it, but we haven't seen it reflected yet in the Dow,

but we will this year. You, too, don't need a broker. I could make the market myself. Thanks, ladies, very much. The greatest sustained bull market of our times has lately been fueled by record buying of mutual funds. It may be interesting then to note that while 26% of those polled say they intend to buy funds in 95, that's down two points from last year. How significant is that small change? Let's ask one of the nation's leading monitors of mutual funds. Don Phillips is publisher of Morningstar Mutual Funds, a service he helped found in Chicago to rate funds. Don, surely, the most obvious reason for a halt in the rise of interest in mutual funds is that the average stock fund lost money in 94. Is that a good reason to avoid them in 95? I think the people that are going to be avoiding mutual funds in 1995 are more of the fixed income buyers. Those people that still had a savers mindset. They came from the CDs, the money market funds, and those are still their preferred investments. They got into long-term government bonds, perhaps utility stocks, found that there's a penalty

when interest rates rise this last year. They may be the ones that are chased off, but the fact that that number is still so high tells me that a lot of investors are still committed to mutual funds and to equities for the long term. You and I have always had a category in for the long term. What percent of mutual fund buyers accept that advice? Well, it's hard to tell right now because so many funds are new. We track more than 6,000 mutual funds now. Only 750 of them have a 10-year record. So that's one of the things that keeps the average holding period down from mutual funds. Right now there are a lot of people saying that they intend to be long-term investors, but only time will tell if they are. In the time you've been tracking funds, does a stalled year, like 1994, suggest poor sales in 95? No, not necessarily. In fact, if there's been one lesson that fund investors have learned over the last five to ten years, it's been that periods of weakness are the time to get back in. That was the case after 1987, that was the case after the third quarter in 1990. And in addition, I think a lot of the money that's going into stock funds is going in through 401K plans

where it's systematic, where there's some added incentive to do so. So I think you're going to have a relatively good sales year for mutual funds, especially on the equity side, but not as good perhaps as you've had in recent years, and certainly not as good on the fixed income side. A year ago, the big story in mutual funds was the tremendous growth in foreign funds, international funds, overseas funds generally. Now there's been a pretty rotten year for those funds. They did worse by and large than the American stock market. What do you see as the trends now for those and for other funds? The investors are continuing to buy them. If there were two big trends last year, money left government bond funds and it went into foreign equity funds. And I think that's going to continue. I think a lot of investors are recognizing that that foreign element has a place in their portfolio and that mutual funds are a very intelligent way to access those markets. Certainly buying individual stocks in foreign markets is not an easy thing for the average investor to do, so if they want to invest in those markets, funds are really their best option. Many people who otherwise do their own individual stock buying will buy mutual funds for foreign investments for just the reasons you've cited.

What are some of the other areas where you think funds have an edge? I think there are a number of areas. Certainly high yield bonds. I wouldn't want to own one junk bond, but a mutual fund can diversify a way to credit risk. Look at something that happened recently with municipal bonds in Orange County. If you own a single Orange County bond, you might be in for a very difficult situation here. But if you own a mutual fund that was diversified and you've got a fund manager to go in and fight for your rights if there's some sort of legal action, you're in very good shape. These were diversification helps you, funds are a very compelling argument. One concern some people have about the mutual fund industry is it may not be keeping up with the current boom. Fidelity Magellan, the biggest fund of all, reported incorrect prices as did a number of other Fidelity funds one day last June. Then Fidelity said it was going to pay out more than $4 a year in distributions to turn out they weren't distributing anything. How serious is the problem of keeping track of all this money? The fund industry has grown tremendously, and some of the mistakes that happened at Fidelity this year are mistakes that happen at every fund complex. It's simply that Fidelity is under the microscope and Magellan especially, and I think that's something that the industry is going to have to recognize. The industry, Fidelity in particular, Magellan especially, this is the leader in the market.

This is what people look to first, and that demands increased performance. Thanks, Don, for a usual fund of knowledge. Thank you. A conspicuous victim on the 1994 investment scene was bonds, which had one of their worst years ever. Perhaps it's not surprising then that only 17% of those polled say they plan to buy taxable bonds in 95, down from 21% a year ago. And only 10% down from 12, plan to be customers for municipal bonds. What is ahead for the bond market? Let's ask two of its leading figures. Tad Ravel oversees all bond investments, totaling just under a billion dollars, for the Los Angeles-based firm of Hotchkiss and Wiley. And James Labanthorall, who heads the company that bears his family's name, is the nation's most widely known advocate of municipal bonds. Tad will 95 be as tough a year for bond investors as 94? Well, I think that's almost a complete impossibility. We actually look to 1995 to be a pretty decent year for the bond market.

We think it'll be a year in which the typical investor will earn, at least the coupon rate of return on his bonds, and possibly even some capital appreciation as we go into the second half of the year. All in all, our feeling is that the ordinary bond investor should carry home about 8% in terms of total return, which looks pretty good with the expected inflation in the three to four percent range. It looks spectacular when compared with the absolute train wreck that the bond market experienced in 1994. In fact, one of my colleagues back at Hotchkiss and Wiley, Laird Landman, put it very in a very pithy way that the pain of 1994 is likely to lead to some gains in 1995. But if you say that it's going to earn the coupon rate, or a little bit more, you're not really forecasting much of a decline in long term rates, are you? No, that's correct. Our feeling is that interest rates will be more or less in a trading range throughout most of 1995. The long bond will probably stick to a seven and a half to eight and a half percent range during the year.

It's not generally the point at which an investor should think to back up the truck to add lots of bonds to his portfolio. Bonds certainly have more competition than they did a year ago from short term investments like money market funds. You expect that trend to continue? That's a very good question. I think one point that really needs to be underscored, however, is that the typical money market fund is still producing a yield only in the three to four percent range. And that doesn't really compare all that favorably with a two-year treasury, which today is yielding a little bit north of seven and three quarters percent. And when you consider that there may be some opportunity for some capital appreciation. What bonds would you recommend, though? Our feeling is that investors should really look to maintain a fairly defensive posture with respect to the bond market into this year. So for that reason, an average portfolio maturity in the two-year range looks actually pretty attractive. Jim Leibenthal, certainly your area of greatest expertise and interest is New York. At the other end of the country, there was a big scandal in Orange County.

How much does that affect the rest of the nation? I think it affects the bonds in a significant sea change sort of way. Even though I doubt that individual investors are going to lose any principle or interest from Orange County or the 187 municipalities that were involved investing in its pool. I don't think you're going to see losses, but what you are going to see is a blow to confidence. I think my industry has to restore investors' confidence in this instrument, which is the only tool we have left in America for the productivity agenda and fulfilling some of the objectives of the contract with America. How attractive are municipal bonds generally right now? At the long end of Bonanza, right now at 6 and 3 quarters percent tax-free municipal bonds are producing approximately 85 to 86 percent of what the long-term treasury bond is paying. That means that one could be in the lowest tax bracket and on the basis of pure arithmetic benefit from tax-free municipal bonds.

So, I am very bullish as far as the growth of this market is concerned and excited by the news that you bring me that 10 percent of Americans plan to buy municipal bonds because the fact is that only 4 percent of taxpayers own them now. So, I'm looking forward to a great year. Thank you. Well, as you know, everybody reads the Atlantic and Harper's and nobody reads the National Enquirer. Are you suggesting that people buy the longest possible municipal bonds? I can't do that, and I won't do it. You know, 1994 has to have taught us some lessons. And one of the lessons that has taught me is to cool it on recommending just long-term bonds. The ideal portfolio is going to be what we call a barbell portfolio, a bunch of bonds in the short end, maturing on regular scheduled basis one year to five years, and then half of the portfolio invested way out in the long-end maturity be darned for the maximum return that you can lock in. Thanks for lifting those barbells for us tonight. Thanks to you both.

Rising interest rates have already begun to slow the housing market, and just 13 percent of those polled say they'll be buying a home this year. Well, below the record 19 percent recorded a year ago. Have you made a will? The only half of our national cross-sections say they have. But less than a third have put together a plan for their estate. Alexander Armstrong is an old friend of this program, and one of the nation's leading financial planners. She's president of the Washington-based firm, Armstrong, Welsh, and McIntyre. Alex, how important is it for the average person of average means to have in a estate plan? Well, it's important to have in a estate plan so that you may assure that your assets go to whom you want them to go. Even a single person thinks, well, gee, it'll go to my parents, and so who cares. You might have some charities you want involved, some nieces, and nephews. So the purpose of a estate plan is to make sure your assets go to the right people. What is in a estate plan? Other than a will.

Well, estate plan is making sure the assets go to the right place. It also is to make sure you don't give too much to the government that you don't need to. And there's some easy techniques that can be used that are perfectly legal, which can avoid estate taxes. But if you don't have a will, and if you haven't looked into a unified credit trust, which is one of the buzzwords, or into maybe a living trust, they're all different things that could save your family taxes. That doesn't matter to you because you're not the one paying the taxes, but when you die, your family will have to pay them from the estate. And we'd rather give them more than less. I'll be deeply concerned for them. So who should one consult? Well, estate planning lawyer, a financial planner can give general guidelines, but in a estate planning lawyer, not your mortgage lawyer, but somebody who specializes in this, can sit down with you for an hour and talk about your individual situation. I think everybody thinks estate planning is for rich people, quote, unquote, but really is for everybody who wants their assets to go to the right people. Alex's, we've just seen these high interest rates of scared people out of the housing market.

Should people be looking at homes now? I'll buy a point of view. I think it's a great time to be looking at houses. I'm always on that side, but with mortgage rates moving up, the sellers are getting a little scared, and they're going to be willing to lower their prices more because they may agree like many of your panelists do. The rates are going to go up even higher, and there are going to be fewer people willing to buy their house. So if any of your viewers are looking at that, they really should go out and buy that house now. You live in Washington, but your other habits are good. What's going to come out of Washington this year in terms of tax changes? Gosh, I don't know. A lot of rhetoric. We know that for sure. And a lot of people are asking me about that. And I said, gee, I want something more substantial. There's a lot of posturing, a lot of negotiations. You know, it'll go on. I'm deeply concerned about too much in the way of tax cuts because we do have this deficit, and we've got to do something about it. And I can't see any way that they're really cutting the spending to offset it, even though there's a lot of talk about that.

We nearly got a capital gains tax cut under George Bush. It was blocked primarily in the Senate by George Mitchell. Do you think we'll get a capital gains cut this year? Yes, I do. And that's one thing we wouldn't have to worry about offsetting spending cuts as much by. Where else do you think they're most likely to be looking for tax cuts? I think the IRA has some good possibilities. It's a little tricky, but I think that that should be more attractive. Making more attractive. It's been suggested that maybe they'll tax the money going in, but not the money coming out because they wouldn't have to keep score on that. That's right, exactly. And they can defer that. The implication won't be, that'll be for the next administration to worry about instead of this one. Are you suggesting then that even though there's been a party change in Washington, there'll still be politicians? I think there may be, though. What do you expect to be the most significant change in this change of party, sir? I think that there will be more emphasis on fiscal management. And I think there will be, there's certainly clearly a change out there. Thanks very much, Alex Armstrong.

There we do have to stop. With many thanks to all twelve of my truly extraordinary guests, they are without exception authentic leaders in their fields. People whose most impressive line is the bottom line. As you will have noted, they did not always agree. And the one guarantee I can offer you without qualification is that some of them will be wrong. Nobody bats a thousand in this business. Only the charlatans ever claim to. But the assembled advice we've heard in the past hour represents the thinking of some of those with the best batting averages in any league. And history suggests that one year from today will be able to look back on some of the things we've heard tonight. And have that rarest of human emotions. Genuine gratitude. Let's hope so. And more important, let's hope that the exciting and challenging year ahead brings you everything you would wish in each of the areas we've discussed. From the White House to your house. After all, my friend, who deserves it more. I'm Louis Reucheiser, and I'm awfully glad you came.

Louis Reucheiser's 1995 Money Guide is a production of Maryland Public Television, made possible by MFS. MFS helping mutual fund and institutional investors achieve their financial goals since 1924. By AG Edwards, going beyond stocks and bonds to help you create the right plan for a more secure retirement. AG Edwards serving investors for more than 100 years, and by prudential securities, with more than 5600 financial advisors nationwide, prudential securities can help you invest your money wisely. For a printed transcript of this program, send $5 to Louis Reucheiser's 1995 Money Guide, Oings Mills, Maryland, 2-on-1-1-7. This is PBS.

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