Wall Street Week with Louis Rukeyser; 2451; What's Coming Out of Wash...

Lord. Sobering its 25th year as America's most popular program about the economy people and their money. Wall Street Week With Louis Rukeyser is made possible by the Corporation for Public Broadcasting. And by the annual financial support from viewers like you by MF s and FS helping usual fund and institutional investors achieve their financial goals since 1924 by A.G. Edwards serving the investment needs of individuals and businesses for more than 100 years built on a foundation of trust research and commitment to investor success and by Prudential Securities with more than 50 600 financial advisors nationwide branch of securities can help you invest your

money wisely. Produce Friday June 16. Our panelists are Allison being burnt to death Murphy and Martin's wife. Tonight's special guest is Thomas Gallagher senior vice president of Lehman Brothers. Believe me I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well this was the week when AIDS scored several victories over youth in America. And some of us think it's about time. The keynote of the week was the second straight professional basketball championship won by the Houston Rockets a venerable but still sensational quintet over the Orlando Magic. A flashy group of kids who have not yet encountered a 30th birthday. Forgetting all other partisan considerations it's always nice. Heck it's downright console in the sea any group of Wily seasoned veterans still able to teach the brash young

upstarts a thing or two about life. Take that MTV. Meanwhile not to put too fine a point on it. You and me we sweat and strain body all aching interact with pain but all man stock market. He just keeps rolling along. When the year began the consensus of all the conventionally skeptical folks was that there were two possibilities for the financial markets in 1995 they would either crack totally recognizing at last the somewhat blurred version of reality that the pessimists had been preaching perennially and inaccurately or at best they would have a sharp early year sell off followed by a mild snap back in the fall. You better. As we meet tonight the crafty old stock market has done it to them again. Every major index stands at an all time high and the Dow Jones Industrial Average which never tested the air above 4000 until this year has marched an additional 500 points in just three and a half months. Sorry about that kids. On the

political front. Two younger fellows who now seem increasingly proud of their whitening hair. Bill Clinton and Newt Gingrich appeared together at what turned out to be a love fest for senior citizens. And events so stupefyingly polite that if the two could get together and patent it you could corner the market for sleeping pills in America. Later in the week the president who had been known until recently as a free trader continued his protectionist assault on Japan to the presumed delight of Patty Cannon and Ross Perot. But the evident disgust of our other major trading partners meeting in Nova Scotia. And the president who proposed endless deficit spending in his budget in February told us in June that he actually thought it would be a swell idea to balance it no later than 20 05. Proving if nothing else that the most fascinating economic debate in America today continues to be the one between Bill Clinton and Bill Clinton. And may the better man win. As for Gingrich he showed his boldness by demanding that the United

States adopt one common language. The only thing confusing about this clarion call was that Newt suggested that the nation's choice should be English. A language that hasn't been spoken in Washington D.C. in years. Maybe you can teach an old dog new tricks after all. We tonight will zero in on the reality behind the Washington rhetoric on both sides in the company of a guest whose full time assignment is to get to the economic bottom line. But first let's see what they were learning in kindergarten in Wall Street in that we just passed. And as the Dow Jones Industrial Average indicates stocks were helped by increasing optimism about lower interest rates ahead by a Senate vote for deregulation that boosted telephone shares and by a more benign judicial environment typified by a courtroom triumph for Microsoft. Tonight for the first time the Dow sits above forty five hundred at forty five ten point seventy nine up nearly 87 points for the week. And every other number you see here is a record 2 as a

triple witching expiration of assorted options and futures contracts help make it the fifth heaviest trading week ever. Our elves remain unmoved at a net plus one for the third straight week since Marty Zweig stunned the glooms Toure's by switching all the way to downright bullish on the next six months. Marty is with us tonight to explain his startlingly new cheerfulness. As for bonds they were up for the week despite a sell off in the last three days caused both by fears that consumers might not be panicking. Always terrible news to a Bond girl. And buy more deep seated fears that the Federal Reserve having persisted too long in raising rates might delay too long in lowering them. And in a final bow to those with a few years on them this Father's Day weekend the Consumer Product Safety Commission came up with the brilliant idea that so-called child resistant packaging should not in future take the strength of Shaquille O'Neal to open in future it seems manufacturers are supposed to produce

containers. The opening of which depends less on brute force and more on the Wiley strategy that comes more easily to those with a few more rings around their clocks. Which is certainly a welcome new twist. Money is why a breathless nation awaits the answer to the question why is this man smiling. Why. I've been getting you know progressively less version more bullish for months. The question is Where is the market to be in six months. I don't have a clue anyway and what I thought of the head I know and you know what I kept thinking is the market's going to work higher in the short run that probably within six months it'll be down and still may be that way for all I know. But the evidence just got less compelling than the bear side and the skepticism in the market remained. There's still barely more bullish advisers and bearish ones which is startling with the market up this much in rates down so much. Have you ever seen comparable pessimism at this stage of a market advance. Not with the market up for this long in both time in magnitude

and occasionally you get a blast off of a bottom. It's very sharp and may take a little more time to get the optimism in for this amount of time with six months off the December bottom already. Don't fight the tape was always part of your counsel and the tapes pretty clear. Don't fight the feds the other party what is the Fed. Well I went with the tape right away going back months ago the problem was the Fed the Fed was tightening as recently as February and short rates still really have been going down the Fed has not loosened yet. They are meeting right after the Fourth of July. There's a chance they may loosen they meet again in August and there's a bigger chance that they may loosen then but I think they will have to listen if the economy weakens anymore. The bond markets seem to share that perspective this weekend to think that it's in Alan Greenspan's nature to wait to see one more month evidence. Well he's not going to come out and say he's going to loosen the Fed would never do that. So he's going to talk the tighter game is what English was the official language not the if there's no way to read that Murphy you're not quite as

bullish is Marty and you and the technician tell us what you say. Well I have to agree with Marty though about the action of the bond market being very positive and I think that is adding to the life of this bull cycle. I think I'd be more comfortable with the market if we had some sort of a retracement like we did last fall which was about a 6 percent and I think that would give us a very good entry level. If we don't get that retracement I think it's a possibility after the end of the quarter. All your people have been waiting for that replace my No. And then it keeps getting higher and I know now that the president would be down to levels that are above most of those when they started getting question right well in early December I think the rally began from around 30 80 years just under 4000 and so that a 6 percent correction would bring it down to about 40 to 100. Yeah but that me not happen I think there's a possibility we may get some kind of a ship against them. Anything you buy in here will. I tend more toward the industrial stocks. I like stocks like Caterpillar tractor.

I think this this government action on the telecommunications and the cable I think is very positive. SBC is one of my favorites in that Time Warner I think will benefit from those changes. I love the oil stocks. I think there are good areas. Does your affection for the industrial stock suggest that you don't see a recession in the future. I think the probability of a recession is less and less slowdown but probably not a recession. I wasn't doing what you might was well I'm not as optimistic about the Fed cutting rates this summer as a matter of fact I think there's a potential later this year that he might have to move to tighten that the underlying trend of the economy are still strong enough that the economy could pick up in the second half of the year and actually start increasing some of the overall inflation rates. And then the Fed will have to tighten later on the year so that makes me worried about the market longer term. The Mentos positive right now but I think longer term there's some risk to the markets and a lot of it's been fueled by lower rates. Do you think the bond market has seen its peak.

I think so yes at this point I'd be moving out of the bond market staying in the stock market but only for a couple of months. What would you start selling within the stock market I probably would start selling in lighting positions and financials they've been very strong performers. I've become much more focus in technology since they've been very strong and I think outside of the really powerful growth companies I wouldn't want to be too broadly exposed there either and I'd be a little bit worried about health care. Some of those areas had a rally the biggest technology companies like Intel and Microsoft was very strong and this week on YOUR buy yourself list there my buy list there high quality that's what we call focusing. Yes. Even though they're doing well. Yes even though they're doing well already. Now this is the point the program will usually pause for a round of your questions and I think we'll be using that time to ask a few additional questions about the wifely effects of Washington's maneuverings on your money. But we'll soon be back to your questions economically sensitive or politically incorrect. So keep them coming to us here at Wall Street Week Owings Mills Maryland 2 1 1 1 7 0 fax them to us at 4 1 0 5 8 1

0 9 8 0. Now before we meet tonight's special guest let's try to cut through the hot air of political rhetoric that suffuses the nation's capital and see how he thinks the major fencing match is going on there will really affect those of us who are on guard with our cash. In the trade battle between the United States and Japan he expects the U.S. to impose sanctions later this month. A move whose chief beneficiary U.S. expects to be European luxury car makers. The losers in his view would be Toyota and his son Honda. And the American dollar. But probably by November he expects a settlement of the issue in which Japan will agree to deregulate its auto markets and Japanese car companies will promise to increase their purchases of U.S. cars. He doesn't expect the U.S. Big Three to gain much in this settlement but he does see gains for parts makers such as Arvin or the motive industries. Dana borgwarner and superior in the budget battle between the White House and Congress. He thinks the major differences that exist

there will prevent agreement on a plan to reach a balanced budget. But he does expect more modest reductions in the deficit is now projected partly because of changes in health care programs. Winners under that scenario would include bonds which he believes would gain from even a modest cut in the deficit. And since he thinks it's too early to know what specific changes are likely to be agreed on health care this fall he believes the smartest strategy for investors in that area is to focus on low cost providers such as foundation health Humana Pacificare in fine net Community Health Systems and manor care. Losers would be firms that are high cost providers and those that rely on loopholes and government regulations to succeed. He does think the ultimate budget package is likely to include a capital gains tax cut. This should benefit growth stocks broadly he believes and he's particularly high on a bundle of smaller companies such as sea cube Microsystems electro glass Fred Meyer fusion systems and Northwestern steel and wire in the battle between the

cable and telephone companies over deregulation. He expects agreement on a bill that will largely deregulate telecommunications. The biggest winners in his scenario would be equipment makers like Qualcomm Tellabs and ADC Telecommunications. Two particularly well-placed regional phone companies Ameritech and SBC Communications and one long distance company WorldCom potential losers include what he regards as less competitive telephone companies like 9 x U.S. West and MCI. He also thinks there will be benefits for at least one cellular company AirTouch and one cable giant company asked. Finally in the battle between banks and brokers he does not expect repeal of the Glass-Steagall Act that has separated their functions for six decades. But he does look for a short drop in the deposit insurance premiums for banks that would give a boost in his judgment to banks with a high concentration of insured deposits such as nation's bank. Bank 1 and first interest rate. How clear is this man's crystal ball. And

is Washington likely to produce any other shattering experiences for investors. For some thoughts on that let's go over now and meet tonight's special guest Thomas Gallagher. Welcome. Great to be here. Please you made it safely out of Washington. Tom Gallagher It was 13 years old in visiting Washington on a family vacation. He went to see his home state senator South Dakota as George McGovern the governor gave him a personal tour of the Senate and Gallagher decided he might just want to work in Washington. If you're taking a master's degree at Harvard's Kennedy School of Government you decided to sample life in Washington for a few years and he's been there for 16 years first as a congressional staffer and since 1986 as the eyes and ears for investors as head of Lehman Brothers Washington office a job he says is much more fun than working on Capitol Hill. Tom has anything been meaningful been accomplished at this group of seven summit and how it works. I think in one area there's been some good progress and that is the Group of Seven made

some progress in a compromise on dealing with future Mexico so that is developing countries that run into financing problems. The manner in which the U.S. government and the International Monetary Fund dealt with this crisis in Mexico was so ad hoc that it can't be repeated again. So there is progress there. But in other areas where the markets were looking for something namely in the currency area or in the U.S. Japan trade dispute. There is no real progress. Well let's stay with the positive for a minute there. What does that suggest for investors that emerging markets may be better investments. I think at the margin it's probably reducing the systemic risk that if a country gets into a situation as Mexico Did you won't see the cataclysm there. That happens at the margin there's some good news for emerging markets. The tough trade stance against Japan has been put. Predictably popular in the domestic arena seems particularly unpopular at the meeting. What do you think it's going to really be resolved here. There's a temptation to look at this dispute and say we've seen this before. A lot of rancor brinkmanship and then an 11th hour deal. I don't think that's what's going to happen this time around. Instead this

time because as you point out it's so politically popular that the U.S. is willing to impose sanctions unless Japan makes disproportionate concessions. So we're looking for evidence of that there's been some maneuvering over the last few days. But I think there's probably no better than a one in three chance that there is a deal to avoid the sanctions so I think the June 28 the odds right now favor the imposition of sanctions. I suspect the average viewer seeing what we just showed. When we said those who the loser is starting with the Japanese car companies the Piper said well sure that's the idea but then we put up the American dollar. Why is the dollar going to be a loser. Well I think it's almost more of an emotional factor than anything else I think when global investors see the image of the U.S. declaring a trade war on its biggest creditor. That's going to be a little bit unsettling. So it might be natural to avoid the U.S. dollar U.S. markets until this whole thing settles. Furthermore you'll have more rumors like we had a week ago where there were rumors that the Japanese government was coordinating the selling of Treasury bonds by major Japanese investors. I don't think that will happen but all it will take is a sale by a major Japanese institution.

And rumors can magnify the impact of that on the market so Bonds might be affected also in the average living room I suspect the happiest news we just reported was your expectation of a capital gains tax cut. What form do you expect it to take. Well it's a tough call the House passed really to very generous provisions on capital gains one provides a lower rate. Reducing the rate from 28 to 20 percent. The other provision is indexing. I think that Congress will choose between one of those and I think the president would it would accept that ultimately. My guess right now is that to be the lower rate the 20 to 20 percent lower rate. So be a 20 percent top for all investors on long term capital gains the maximum rate that's right. That's right and it may investors may have to hold assets for maybe two or three years to get the full rate more than a lot of that remains to more than the current year which used to be six months. That's right. Now in 1978 when capital gains rates were cut it was cut they were cut by a Democratic controlled Congress. Now it's become a partisan issue. The president himself has talked about tax cuts for the rich and then the budget cuts for the

poor. How is Congress going to get past this and how is the president give us on this. Well that's wrapped up in the whole budget debate. And I think what's going to happen is that the president's speech this week probably is not going to succeed in engaging the Republicans in negotiation. The Republicans will proceed on their own plans and send the president budget legislation in September or October that he'll be compelled to veto. At that stage negotiations will commence where we expect a less modest or I should say more modest deficit reduction package that will also include a tax cut. So we're really trying to predict what's going to happen in the context of very heated negotiations with the government being shut down probably for a little while and the government debt servicing even being interrupted a little bit. What are the chances that Congress. In this century might really enact a flat tax. Well not before the presidential election. That won't happen but I think the odds are highest if the Republican sweep the 96 elections that is if they win the White House and retain the house in the Senate. Then you've got the kind of consensus on principles to

move ahead on a flat tax you'd see action beginning in 1907. Presumably a Republican president will have committed to this during the primaries and will be part of the platform. So maybe by 1998 you'll see major tax reform. I don't know if it'll be a flat tax or two or three important alternatives to the existing tax code. Flat tax is the one that gets the most press. Let's open this up to a vote of our panelists with money. In speaking of the flat tax. If you were. Investors are holding municipal bonds would you be worried about the flat tax and would you sell the bonds because of the threat or what would you do. Well I don't think I'd be selling but the problem with the flat tax is that all the other alternatives is that a major goal is to promote savings. So the taxes everybody would become tax exempt. So it's very hard to carve out a special treatment for taxes so they lose their special status. I think if I were a tax exempt bond investor what I probably do is focus on the shorter maturities. You figure that the Congress is going to get around to it for a couple of years it'll take a couple of years to act on it then maybe another year or two of transition

rules maybe bonds in the 4 to 5 to 6 year maturity are not going to be affected by any new proposals. But also you have to wait and see what the political climate is next year before you even make a bet that there is going to be a major move toward a flat tax. Tom for most of us the deductibility of mortgage interest is near and dear to our hearts. What do you think's going to happen to that deductibility. Well it'll be safe this year and next year I believe. But it could be reformed in the in the overall tax reform process again if that begins in 1907. I don't think it'll be eliminated. Some of the versions of the flat tax actually do that. But I think it could be lower. Right now there's a limit of a million dollars of the value of a mortgage which you can take the interest adduction that could come down as low as 200 to 250000 that could happen but only in the context of sweeping tax reform a lot of people have been speculating that the strength in the bond market is partially due to Talk of deficit reduction. Do you agree with that.

Well I think in some ways that's been oversold. First of all I think investors are skeptical to act on information out of Washington. A lot of us chased the health care reform last year to no real result. This year we all thought the balanced budget amendment was going to pass. Early on that didn't happen so I think there's some skepticism there. Furthermore a lot of the bond market rally was really due to the market pricing in changes in Fed policy. I think if the market rally were inspired by hopes of lower deficits you would see a much flatter yield curve but instead the yields on the two year Treasuries were declining as much as on the 30 years. So I tend to think that there's still a rally ahead based on Congress's actions on the deficit. You told us that you expect a capital gains tax reduction one of the alibis used by some of those who have missed the market this year is that the expectation of that cut late in the year has prevented people from selling early in the year. Might this not in fact be backdated to January 1st. Well definitely that's the version that's in the House tax bill right now transactions after January 1st would benefit. That's that has led to a lot of speculation that once Congress acts

on this you'll see this perverse short term sell off as people unlock the gains that they've been holding onto. History suggests that that could happen. But when I looked at this in 1078 in 1901 the last two times Congress cut the capital gains tax rate it seemed to me that the selloff that occurred late in the legislative process were due to other factors especially 1078 the selloff really occurred before the tax break took effect. You could really say that selloff occurred despite the capital gains tax cut not because of it. To what extent do you think the events in Washington are influencing the events of Wall Street. Well I think I think there's a tendency by a lot of investors not to pay attention to Washington too early. So I think that markets tend to be more reactive to political developments than they are say to economic developments. You've got hundreds of economists out there telling you what to expect for the next economic release but not a lot of people telling you how to interpret what's going on in Washington. So that's where we think that you can capitalize on opportunities by paying close attention to what's happening in Washington.

The Contract With America substantially though not entirely swept through the House is going to pass the Senate. Well it's running into a lot of problems there. The Senate rules it's kind of an oxymoron that's the lane a lot of some of the provisions there it's causing more compromises. So it's part of it to get through the through the Senate will be difficulties reconciling the House and Senate versions and the difficulty is going to pass the President. So we really think that while the contract would have some significant implications for the stock market not a lot of it's going to be enacted fast last question. When do you think we'll balance the federal budget. Probably not by 2005. I regret to say you're probably right. Thanks very much Tom Gallagher. Thanks to our panelists. I hope you'll be back with us again next week. Then we're going to take a special in-depth look at America's hottest industry technology and we'll show you some of the newest and most exciting wonders of technology. We'll talk with three of the leading money men in the business so that your finances as well as your life can truly be state of the art. Meanwhile this has been Wall Street Week.

I'm with us tonight. Wall Street Week With Louis Rukeyser is a production of Maryland Public Television made possible by the Corporation for Public Broadcasting. And by the annual financial support from viewers like you my MFA es and FS helping usual fund and institutional investors achieve their financial goals since 1924 by A.G. Edwards going beyond stocks and bonds to help you create the right plan for a more secure retirement. A.G. Edwards serving investors for more than 100 years and by Prudential Securities with more than 50 600 financial advisors nationwide branch of securities can help you invest your money wisely for a printed transcript of this program. Send $5 to transcripts Wall Street we with was rue Kaiser owns Mills Maryland 2 1 1 1 7. 0 0. Transcripts are also available to subscribers of the Dow Jones news retrieval service. Wall Street Week With Louis Rukeyser is produced by Maryland Public Television which is

soley responsible for its content. Serious people. Yeah.