Wall Street Week with Louis Rukeyser; 1436; One of the Hottest

And. Wall Street Week With Louis Rukeyser brought to you by this and other public television stations and by grants from the Hilton Hotels Corporation America's business address and its subsidiary Conrad international hotel for the work. Girls business address credential based security credential breaches total financial planning can help the American dream happen. And the Sperry Corp computer based information systems for business industry government and defense produce Friday March 8. Our panelists are Frank Gaffney yellow Elisabeth thinker and Julius Westheimer. Tonight's special guest is Lou is a holiday partner

John Holland and Grossman going to man on the left Rue Kaiser. This is Wall Street Week. Welcome back. Well this was the week when Paul Volcker tried to frighten the high flying dollar down from the clouds but succeeded only in scaring the stock market chickens into a whole. Broker who is gift for obfuscation would shame the Delphic oracle. And whose talent for ambiguity. Like your local newspapers astrology column look downright specific. Didn't ever actually tell Congress what he expected to happen to the dollar but he did allow that it might fall very rapidly when it did start tumbling. What's more the Federal Reserve chairman added helpfully. Even a 10 percent decline in the dollar's value might not have the slightest effect on Fed policy. And when glassy eyed legislators pressed bocce unsuccessfully at least to predict that a lower deficit would lead to lower interest rates. California

Congresswoman Bobby Fiedler summed up the week's financial news by saying that trying to get a straightforward comment from Chairman Volcker was like trying to nail jello to the wall. Now the truth is that however you flavor it. Volcker has said much the same sort of obscure thing about the dollar the deficit and the interest rates many times before. As recently indeed as last week but when the dollar actually started falling this time the financial markets went into even greater panic. The same geniuses who were saying a few days ago that a weaker dollar would be terrific for the U.S. economy reviving every family farm in South Dakota and recreating the booming past in the Youngstown and Detroit suddenly discovered that a weaker dollar might make foreigners notably less eager to send their money here. And thereby make a painless contribution to financing our deficits and buying our securities. It would be a complicated world out there folks.

Even if the Fed chairman did speak English. The markets having descended in universal terror regained their wits one at a time. First ironically enough was the one vocoder has apparently been seeking to influence the currency market. When traders perceive that the real import of his remarks was largely stale air. They went right back to buying dollars. A decision that however controversial has been a pretty good way to make money for four years now. Indeed the dollar tonight is even higher than it was a week ago. Second to recover was the recently battered bond market shrugging off not just focus words but his actions. The trouble simply growing money supply. Bond buyers staged a strong rebound at week's end by concentrating on a smaller than expected rise in people working and some definite easy you know borrowing impressions or signs that interest rates may not be back in the ionosphere by a week from Tuesday. And that left only the stock

market not for the first time the last to get the word stock traders who are known to detest uncertainty and were inundated with about 23 gallons of it this week. We're struggling right up to the end and after taking their worst hit since the 1985 bull market began. But cheer up broker may make things even more confusing next week. We tonight will make everything perfectly clear. In the company of one of the most successful market timers in the Middle West. But first let's get out. We jus Boyd's and tarot cards and try to make sense of what happened in Wall Street in the week has passed. The Dow Jones Industrial Average started weak and never recovered. After closing last week at a record high. But still a frustrating whisker below 13:00. The Dow had its worst week since November down nearly 30 points at twelve sixty nine point sixty six. Damage was even greater to some of the broader indexes all but the Amex suffered their biggest decline

since last June or July nor is there a consolation from our elves who for the sixth time since they gave a buy signal last may have slipped to a bearish minus 3 on their technical market index. And how reliable are the elves. Stay tuned. Tonight we're going to take one of our periodic works at how they are really doing. Lest you think capitalism was on the run everywhere this week let it be noted that this was the week when the whole diocese of Newark New Jersey announced a new member pay plan for priests. It is not known whether it's rumored The plan includes some heavenly options. Frank Caprio the stock market seems to be heading in a different direction. This is a time for a no brainer list. Yeah I think it's really strange one week difference last Friday compared to this Friday and all of a sudden we have all the tears of a big market correction. I think we're simply in a mild correction and sometime next week we should get off and running. Going back up again this is a

vocalized market I think you hit it right. Well. A few months ago would have given him a recount and said the market went down how do you think poor focus of the market goes down. I thought the stock investor supposed to be sophisticated grown ups with all kinds of computer tools and maybe maybe they're too sophisticated they have too many tools. This is still a game of not worrying too much about the market a market short term but worrying more about stocks. This is the time to be doing some stock like for example IBM was one of the stocks that was really hostile this week because there's a lot of uncertainty about their earnings and today IBM came out and said there's nothing wrong with our earning situation this year we're doing very well despite the Apple announcement. So this might be a good opportunity buy stock like IBM. Bet they do. Frank says the normal shakeout all going to end next week is going to say on a secular basis I am Lou I continue to think that the psychology of these really just kind of stories you just can't really do show you know we're still in that we're still in a secular disinflationary trend

which I think is can be very positive for both bonds and stocks over the long term but I think the market's got some things to absorb this year. I think people are now starting to look at the possibility of a recession in the second half of 85 or the first half of 86 and that'll be discounted at some point six months before it happens. What's going to happen to these interest rates. I think in the short term that they could go up. I think though that it's unlikely that they'll go up too much because I think that the government really here has to be very very certain not to rekindle the inflationary expectations I mean we're really in a very important part of the changeover from the inflation to the disinflationary psychology here. Jury's Westheimer shows how kind hearted We are around here. If you've been gloomy all the way up in this market now the market's had its worst week of the whole rally and we have you on to say See I told you so I'm not going to do that because from the stock brokers point of view this is no fun this week. But Louis I think the reason the market's been weak and will probably get weaker is I think and this isn't going to endear me to any of the balloons rampaging out there either on the panel or elsewhere. So

you'll watch that months ago. He has that's nothing new but Lou with Congress debating all the budget cuts now I think the newspapers and TV and radio were full of this type thing and the deficit is starting to worry people much more than it ever did even though it's invisible. I think investors realize that there's trouble out there. Furthermore there's something else a lot of people believe now that tax reform is going to go through if it does I think individual rates will come down. But corporate benefits could go to the wayside. Earnings could get hurt and I think stocks get knocked down another eight or 10 percent. Would you expect a major tax change this year. Yes I think there will be some type of a tax reform and simplification. They'll go through this year and I think it will hurt the stock market when it does because it will thank you for your words of good cheer. It's always a pleasure to talk with you and when things are in the dumps get up and get that it is time now to try and revive our viewer's fortunes. Frank happy yellow Jay Janette of Cambridge Massachusetts says newspaper listings of wands never give the details of the ones even the expiration date. Wonders whether there

is some master list somewhere that would provide such information. And by the way what the pitfalls of investing in ones might be. OK well let's start with some basics though one is this is if the buy a set amount of stock for a specified period of time and a given sum will buy more warrants than stock so the stock goes up. The winds will go up much faster. We've had cases where stocks have doubled and warrants have gone up eight times. So there's a lot of leverage involved and it's a good game to play if you can stand the heat in the kitchen. The reason why we don't have a lot of specifics on more ads when they're quoted is you have to have the time period you have to have the price in which the warrants are exercise a ball and that's found by going to Standard Poor's and Moody's or there are a number of services that advertise in the financial journals that you can subscribe to his broker could give that information the important thing is that pick the stock that he's interested in the see if they have a right not to look around for warrants themselves and I think and the recommendations come with no warranty. Say to Robert Sheehan of Chicago has noted had the national publications for

certificates of deposit from Maryland savings and loan associations promising higher than normal yields. These CDs are not federally insured but are insured by the Maryland savings share Insurance Corporation. He wonders whether this sort of insurance is reliable or whether you want to settle for the lower rates closer to home. Well the state does not guarantee up to 100000. After a hundred thousand dollars the insurance on that that's an important differential. I think that the difference in the yield right away reflects the perception that there's more risk in those certificates of deposits in the federally guaranteed ones. I therefore say that there are really three things in in this in any state that you have to look at you have to look at the yield differential differentiation at the look at the underlying asset values and then basically you have to go and say what is the credit worthiness of the state that is behind this. On the other hand and you have to also be very comfortable with your own comfort level it seems to me that you have to have at least one hundred point basis basis point differential differentiation in order to the full percentage 1 4

percentage point in order to really make it worth your while to do the research. Already the only Jewish West I mean how would you respond to Ken got wind of Oceanside New York writes as follows. As an avid boater and Boat Show dreamer I have noticed the tremendous increase in sales of the national and regional boat manufacturers. Nevertheless many of these companies seem to be privately held and not publicly traded. My question is how can I climb aboard and invest in any of the National Manufacturers without getting away. You gave this question to the right guy. I can't swim from me to you and I can use all the boats I can find. Mr got one you cannot participate in the boating boom by some publicly held stocks. The purest play the most direct way to participate is in stock on the New York Stock Exchange outboard Marine. It sells for about 30 and yields about two percent and it is about 10 times earnings which is sort of a market multiple. There are two other ways AMF and Brunswick ore but they

are not as pure a play. Another way is a pure play but Chris Craft. But they haven't been as profitable as outboard Marine but there are ways you can do this and you could make a splash with that with nothing already Now if your attempts at nautical investments have left you bloodied but unbowed. Don't be too stern and angry. We may be able to interest you in another kind of sail. Don't miss the boat just steer your money questions to the tiller here at Wall Street Week Owings Mills Maryland 2 1 1 1 7. That's Wall Street Week or weans Mills Maryland 2 1 1 1 7. Now before we meet tonight's special guest let's take that promise look at how our elves are doing by checking the results of the buy and sell signals given by their technical market index since the fall of 1974. She fell for new rock designed the index to predict how the market will do over the next three to six months. How well does it work. Well it seems to work best if you're probably just the outright buy and sell signals a bias a reading of plus five or more and a sell as a reading of minus five or

more. And forget about all the other intervening noise. On December 13th 1974 shortly after its first revision the index gave a buy signal that was right on the nose. The Dow which had hit bottom around five hundred seventy eight just a week earlier then launched itself on a historic rise of nearly 400 points. The elves were pretty good at the TALK TO GIVE ME A series of cell signals in early 1976 just before the Dow tumbled one hundred twenty nine points in 22 months. They seem to jump the gun with a buy signal in November 1977. A true believer would eventually have been vindicated though. The elves reconfirm their buy signal in March 1980 and the Dow managed a net gain of eighty seven points before the elves said it was time to sell. Beginning in late August of 1990 the little fellow was let fly with a series of sell signals. The Dow complied by falling 108 points in 18 months. And the index indisputably looked sharp when it gave a series of

buy signals in 1982 culminating in one of the strongest signals it has ever given right on the eve of the market's meteoric take off measuring from the first signal that one produced a net gain of four hundred eighteen points in 16 months. Then shrewdly in June of 1993 with the Dow at twelve forty two The elves said sell and the market obliged by dipping 87 points in 11 months with many broader indicators showing considerably greater damage. And finally on May 4th 1984 with the Dow at eleven sixty five the Intrepid Gnome said bye again. And their faithful followers have already enjoyed a one hundred four point game. Could it be the little fellows sometimes know something after all. Now for the thoughts of another prominent market timer Let's go over to me tonight special guest Louis a Holland. A. Little welcome we're delighted to have you here. Thank you Lou. Louis Holland went to the Rose Bowl in 1962 as a running back for the University of

Wisconsin and later played professional football in Canada. Those days are behind him now but he's still very much on the ball. After 15 years with a G backer he helped found the Chicago firm of Hahn Holland and Grossman which employs on its own behalf some market timing techniques that have had notably above average results over the years. Lou the profession is up at Harvard. Just don't believe that market timing is anything more than blind luck. Could it be they're right and you've just been on a lucky streak. Well I'm not sure. I guess the. I don't understand all of the methodology of most market timers so I guess I can't really respond too to their approach. I guess my concern is that when I would put all of the market timers together for example if we were to go out and tally up all those people who are trying to make some sort of a market timing approach and contrast their performance to those people who are so-called stock pickers or bottom up managers they haven't outperform the market either for most periods of time as a matter of fact

as we all know 70 to 80 percent of our managers have not outperform the market. I guess the only response is that Harvard should have maybe come to us before in fact they wrote the article. What do you do that's different from what the other fellows do. Well I think our approach is is a longer term approach and I think what we try to do I guess to explain our firm in three basic points the first point is that we try to conserve capital. And I say conserve capital is that if you hire us to manage your money our concept is to not lose money in bear markets. Which was really sort of avoided. We use a whole series of indicators we have something like 30 indicators that we use that span the spectrum from economic fundamental monetary indicators and also market indicators. What are the other two things market indicators out there too. You said you preserve kept the other approach is the second approach is a top down approach that you brought in but also. The

top down approach would suggest that the most important thing in terms of the price action of a stock is market direction. And we believe the greater than 50 percent of the price action of a stock relates to the overall trend of the market. So from our point of view the time that we expend as contrast to other managers we spend a great majority of our time concentrating on the primary trend. The second category in the top down approach deals with the individual sectors and we split we say that equates 30 percent of the decision and we spend approximately 30 percent of our time making that judgment. The third is the individual stock selection which we think is 15 to 20 percent of the overall equation. Now this contrasts to a manager that we would refer to as a bottom up manager who spends most of his time trying to select stocks really not concerning himself as much with the overall direction of the market. All right let's take the three areas you've met you've mentioned and get kind of a shorthand response to you on each one. Where is the economy now in terms of investors.

We think that we're in the third Ryder shed in the environment since the post-World War period. For example back in the 1940s if you recall. People were looking in the rearview mirror sort of responding to what the environment was in the recession. We had single digit doubles back then stocks were grossly undervalued based on all fundamental analysis and we had a 20 year bull market. In 1968 when I started in the business. We had an environment where in fact multiples were 20 times plus earnings. The institutions were coming in in a big way it was an insatiable demand for common stocks and we had an excruciating bear market that took stocks down something like 50 percent. At this juncture we believe that we're into third watershed of which we believe that there are some major structural changes that have occurred in the economy. For example inflation is not the problem that it has been energy prices are on the decline.

Productivity is much improved. Corporate America is much tougher than they have historically been. To the extent that the dollar has risen so rapidly we've had a whole series of recessions that managers have had to deal with. And that obviously the long period of inflation is behind us. We think that corporate earnings will be considerably better both on a nominal basis and a real basis in the foreseeable future. How much of a bull or you put a high point on how high that arm down might go. We are exceedingly bullish now we are about as bullish as we can be we believe that sometime this year that the market will approach the fourteen fifty fifteen hundred area we are currently 95 percent invested in our accounts. And we're very optimistic. Most of our indicators are pointing up. Here's a man who doesn't beat around the bush. We read a watershed here where I want to bring in the panel starting with Frank Caprio. Thank you both. Lou I. Endure fourteen fifty on the Dow I hope we see it in trouble. Yes. Thanks. What stocks would you be buying in here then. I mean what are your favorite three or four stocks OK

by category we like the airlines. And I say that we would rather have the best or worst stock in the best industry than the best stock in the worst industry. So theoretically we like the industries and we would say the airlines would be one of our favorite industries industries in that category we like American. We like Piedmont and we like Northwest. We also like the property liability companies of which we like Cigna. We like CNA financial and we like St. Paul companies. And we've been long term buyers meaning that we've we've owned utilities for over a year. We believe that there's a secular change going on relative utilities particularly in this deflationary concept or disinflation concept that Elizabeth was talking about earlier. So we believe that utilities will be sexually good. In the foreseeable future in terms of the type of investor that should should use your approach. Is it is it really appropriate for an individual or an

institutional investor. I would say that it probably is more appropriate for an institutional investor. Because the disciplines that we have developed over the years to make these timing decisions are not something that someone who says I want to buy a hundred shares of something would ever utilize. So they would have to seek out some sort of additional you know professional advice to do that or to take that approach. He said you try to conserve peoples money and you dont like to lose a lot of it naturally. Let me set a little stage for you right now with the market around 12 70 you're very optimistic and pretty fully invested and you expect the market to go to 14 50. What would happen for example Monday if the market started for some reason to take a sharp drop and went down to 11 70 and a thousand. Do you stick to your guns or do you adjust your thinking and try and get out. Well we stick to our guns I guess part of the work of our indicators is that they tend to be contrary. They tend to lag at

at market bottoms and they tend to lead at market tops. So I guess if in fact the market were to continue to fall at this juncture we probably would become more positive these indicators tend to move contrary to the trend of the market so they probably would become stronger and I would suspect that our conviction would become that much firmer. As you will recall we had a very difficult environment the first half of 1984 because we were at that point also believed in this disinflation concept and of course interest rates were going up. Every month through the first half of the year and it wasn't till the second half of the year that we were rewarded for sticking to our guns. What are your indicators tell you about the outlook for interest rates long term and short. We believe that interest rates are in a secular decline. We believe between the fine the secular which you had best keep using and what do you mean by secular I mean basically I mean the longer term sort of relates back to the rather shed concept that we're talking about is long term stuff and we think that it's possible

that there could be some volatility in interest rates in a short term basis here. But we think that between now and the end of the year interest rates will be at this level or lower. Julius asked you if you'd change your mind if circumstances changed and you. Gave your answer to him You also told Beth that this is really for institutions but a lot of people out there aren't interested in time in their own investments what is one example of something that might change your mind. What kind of indicated might change. What would you consider serious. Well there's a series of Amanda and that's that's why it's a difficult question to answer in that we have 30 indicators or thereabouts that we used. How long would it take you from now could be almost out of time. You know it's something that might happen next week. It's unlikely because all of our indicators at this juncture are primary indicators a pointing up. Thanks very much Louis Holland for. Coming in here and explain how in the long term when I don't need all going to be dead as Lord Keynes suggested and they will make some money along the way. A lot of people out there hope he is right. Thanks to our panelists and I hope you'll be back with us again next week then

we're going to look at an investment that littered in the 1970s but has tarnished badly in the 1980s. It is gold. And my guest Charles Stahl has tracked it with such an unusual skill that he has been one of the most successful newsletter writers in the entire country over the last five years. So it should be a very precious evening. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Tonight Wall Street Week With Louis Rukeyser has been brought to you by this and other pulp. Television stations and by grants from the Hilton Hotels Corporation America's business address and its subsidiary Conrad international hotels the world's business address for eventual Bache securities Prudential Bache is the total financial planning can help the American dream happen. And the Sperry Corp

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