Wall Street Week With Fortune

A. A. A. A. Coming up on Wall Street Week With fortune. The era of cheap loans and little mortgages is coming to an end. But Karen good to show you why many investors are cheering higher rates. But beware that elusive search for better returns is also leading many unwitting investors into the hands of financial gone artist Jeff Gold reveals some of the creative money scams you need to watch out for. Welcome to Wall Street Week With fortune.

Will through good fortune is made possible in part by Nuveen investments. Now you can learn everything you need to know about exchange traded funds. Comforting. Isn't it. ETF connect an educational website of Nuveen investments and is proud to support Wall Street Week With Fortune Wausau insurance at Wausau. We know most workplace risks aren't this obvious but we also know that any risk can have a big impact on a company's bottom line. And by contributions to your PBS station from viewers like you. Thank you. Welcome to Wall Street Week With fortune.

I'm Jeff COLVIN And I'm Karen Gibbs. They came they saw they conquered in a move that surprised absolutely no one. The Fed policy making are met this week and where a short term interest rate for the first time in four years. That hike in rates was an admission by the Fed that the economy is on track which should be a good thing for stocks. But higher rates supposed to be bad for fixed income securities government corporate and municipal bonds. What should investors do with the trillions of dollars sitting in money market funds Tony Crescenzi follows the bond market for military back and says Now is the time to be defensive. Tony joins us from New York. Wall Street Week With Fortune contributor Michael Farr joins us as well. Well Tony if a hike in rage was signaling that the economy is strong we got some numbers for Friday morning that were a little disappointing non-farm payroll job growth at one hundred twelve thousand was half what was expected. What do you see the economy going. There's a moderation underway that's been quite apparent for a number of weeks now. And so I think it's

partly or largely priced into the market. We've seen weak car sales or weaker car sales than we had seen the chain store sales from the major companies major retailers have been softer in June. Restaurants are seeing weakness and so on. It seems pretty widespread right now but it may be the type of pause that refreshes the economy typically goes through ups and downs and this is just part of that down part of it. But the fact is the fundamentals of the economy remain sound and the best thing I could point to in that despite the job numbers for today which did show a gain of one hundred twelve thousand income growth year over year is near 6 percent the historic norm is 5 percent. Adding to that corporate profits up 300 billion in the last five quarters. Tremendous fuel for expansion. So I see a reigniting of growth in the next couple of months a better stock market than a weaker bond market. Tony what are the chances that some of that growth or that the rate of that growth becomes inflationary and perhaps an inflationary concern.

Well luckily with the Fed Chairman Greenspan at the helm the likelihood of an inflation acceleration that we've seen this year and we have seen an acceleration in the core CPI running at a three point three percent rate so far this year triple the pace seen in January of on a year by year basis which is low since 1965 although there has been an acceleration Greenspan is likely to keep it in check. Most consumers aren't thinking that inflation is here they're fine to get their painfully at the gas pump. And when you couple higher gas prices as well as higher interest rates doesn't that mean that you might start seeing demand by consumer slowing. And wouldn't that be negative for the stock market. A few weeks ago we saw a downward revision to GDP the gross domestic product for the first quarter instead of a 4.3 percent pace of growth it was revised down to 3.9. The reason because there was more inflation than thought during the first quarter. Inflation cuts into growth it reduces the purchasing power of our dollars some slowing in the pace of consumer spending could actually be very good here where you get back

home to the investor in an inflationary environment rising interest rate environment. What should investors be doing with the trillions of dollars sitting on the sidelines. Should we invest in Treasury should go to corporates. In fact this six month Treasury is you know one and a half percent right now. Well the two years just about it two and a half percent. What should investors be doing. Well of course much depends upon the investors objectives if one is seeking capital gains. Right now the Treasury market is looking a bit overboard. If you can believe it the yield on the 10 years fall into four forty five from four point nine percent just a few weeks ago and that yield I think is low relative to inflation the inflation rate we know is running close to 3 percent and maybe it'll go down about two and a half but still the premium in yield over inflation is very narrow. We want to see that close to two and a half to three percentage points over inflation during periods of vigorous economic growth it averaged three and a half over

inflation in the 1990s for example. So the 10 year note I think is the short if you can play teal TI's It's simple. It's an exchange traded fund. That's one suggestion for aggressive players for those who are more modest about their strategies. I think right now a defensive approach makes sense if one must own and wants to own fixed income securities they want to own. The shorter maturities because they even though they yielding less as you mentioned with the T-bill rate so low they are not as subject to the types of price losses that one can experience in longer maturities which are much more sensitive in terms of the price change the changes in interest rates. What's your feeling on corporate or municipal bonds vs. Treasury bonds and where to see DS fall in this whole realm. When we look at a two year chart a two year CD is it two point five percent while the Muni is just under 2 percent and the corporates are trading at two point six percent. Yeah well as I mentioned I think cash flow is the story there. If if if

corporate profits are improving we're going to see what cash flow this is what that means and so that they become a bit less risky. But I do think as the expansion progresses corporates become less and less attractive one wants to stay closer to the higher rated instruments and as far as treasuries which of course are Triple-A the risk you risk list securities as the expansion matures the risk of weakening in economic growth will increase making these less attractive so as the expansion goes on reduce the degree of risk taking in in certain assets. Well let's switch to investment for a bit because we saw the stock market the first half of the year pretty much crept water. The Dow was off about two tenths of a percent while the Nasdaq and the S&P are both better by a little more than 2 percent. Given the fact that the fastest hike rates are expected to continue to hike rates. What changes are you making to your portfolio.

None. I continue to buy. I continue to put money to work and I'm very happy with this environment. It's strange that investors aren't coming into the market. I think it is a real reflection of sentiment as we talked about last week with the Zogby poll. But there are plenty of opportunities now and then all within all sort of industry groups to thank America. I love bank American I want is a great environment in a rising rate environment. Hurt yes financial be hurt. I wouldn't own a mortgage company to save my soul. But Bank of America has a very diversified base. They have already been discounted they're selling at 12 times earnings. Earnings are growing at 12 percent earnings for the S&P are growing at maybe 8 percent over the next five years this was growing 12 percent. They just increased their dividend 4.3 percent dividend. They're going to split the stock they've announced a two for one stock split. Tell me I know you follow Bonds but looking at the stock market are there any sectors like the cyclical stocks that are poised to do well in a rising rate environment.

Well generally speaking of course one has to look at where we are in the interest rate cycle and when the where in the early stages so I think certain industries that might be subject to risks related to interest rates are not going to be getting heard just yet. I think lately we've seen weakness in retail shares my outlook on the consumer is pretty positive based on that 6 percent year over year income growth that we've seen. So I think some of that sector might fare well basic materials stocks I think that industry looks pretty good because the amount of new supply coming to the market for commodities is still not all that great making for good pricing power there. Technology I really like the story there because corporate profits now picked up and so it's got a lower P E ratio in the market. Corporate profits are up one point two trillion dollars it's 300 billion more than five quarters ago. Corporate profits exceed capital spending spending on equipment and so on by a little

bit. So what this implies is that capital spending will be picking up as it has been for the last year double digit growth will stay strong for the next year and a half maybe two years. And I think that that will help the technology shares pretty much. But aren't technology companies usually heavily laden with debt and doesn't that hurt them in a rising rate environment. A lot of them are particularly in the earlier stage companies they're highly leveraged others aren't. It really depends on the company which I think makes this largely a stock picker's market. As I said in the finances I wouldn't own a mortgage but I would own a big bank they have investment banking in the tech sector. I like Nokia right now it's been beaten down stocks about $14 a share they've got $3 a share in cash. You exclude that cash and they're earning around 12 percent. It's I think it's really a cheap stock with a huge market share. I think you can see other companies in different industry groups a PCC American Power Conversion.

They're around $1000. They make the power strips you plug your computer into an redundant backup battery supplies that the market leader trading at around 19 times. Earnings maybe 17 times after you exclude the $4 a share and cash management's excellent as Tony says. As you see this rebound in cap ex that we've been calling for for years we've been talking about looking for cap x to return till we were blue in the face. It's returning and it looks like it's going to continue to return. Tech shares tech shares with cash tech shares with market share leader present chip positions I think are really going to benefit. And on Nokia you get paid 2.3 percent. So instead of getting your point 8 percent in your money market account if you can stand it on the Nokia own General Electric own B of A and make a little money while you wait. All right. One last question Mike and for you to Tony Mike first. How many times do you think the Fed is going to hike rates this year and where will the market be at the end of the year.

I think that I think the Fed has another two hikes maybe three before the end of the year but I mean actual 200 percent to more I'm going to bet a quarter of a percentage that's that's really throwing darts. OK. I think the market closes easily 10 percent higher than we are today Tony. Well let's remember when the Fed's raising rates they were moving accommodation they haven't raised interest rates in a way that's worrisome to investors. 1 percent funds rate that we had recently was extraordinary. I think they'll probably do a few will probably get at least three. There is a chance if we have a strong holiday season I think we might because of strong consumer spending that the Fed might be more aggressive around that period around the holiday season or afterwards. So but for the day I think we're looking at the second half better than the first. It's the opposite of what people thought the start of the year. I think the market will find that the economy's in the confort zone not too strong not too weak. Great for stocks and for bonds. Rates might go up a little bit

more Chenier yield might go close to 5 percent perhaps but the Fed is going to keep a lid on inflation. That's going to keep a lid on rates. A good environment for investors. I think looking forward Tony Chris and Michael Farr thank you very much for joining us. Thank you John. Thank you Karen. Everybody wants higher yields than bonds are offering but could your hunger for higher returns make you easy prey for an investment scam. No way right. Well don't be so sure just this week the FCC shut down a bogus website that mimicked almost exactly the real website of Pax World mutual funds except that it promised a guaranteed six hundred fifty seven percent annual return and ask for personal information that could be used to steal your identity. Investment con artists never stopped creating new and better ways to steal your money. So how can you protect yourself now. Gary Weiss is a journalist who's been covering investment scams for years he's the author of Born to steal. When the mafia hit Wall

Street melody center Luban is the Maryland securities commissioner and plays a national role in fighting investor fraud. Gary what's this latest scam that the CDC has just shut down. Well the scam is sort of a variation really sort of venerable kind of thing. There's nothing really new under the sun. This is a variation of a couple of things that for quite some time there's been something called a private placement scam where basically the. The scammer will sell the stock that doesn't exist. You need to reduce it to its essential in this case they were selling a mutual fund that doesn't exist. I must say this is the first time I've heard of that happening and I have to hand it to them. There seems to be something that is called phishing but fishing's H I S H I N G was not all about the fishing of that I think that's an internet term. I do believe but well you're really doing two things it's really brilliant you're stealing from people you're stealing their money because you know you're promising these ridiculous rates of

returns and also taking their information right. And you can steal their identity steal their money and feel their identity I mean that is marvelous. The latest statistics we have from the Gartner Research firm are the 57 million U.S. Internet users have received phishing e-mail 1.8 million of them have divulged personal information and reports of phishing attacks are going up 75 percent a month. It's really just incredible melody. What can someone do if they think they have been victimized by something like this new Internet style of investment fraud. Well I think with any investment fraud you need to get in touch with the regulators as soon as you think they were there. You can get in touch with state securities regulators the state security administrator in each state or get in touch with the Securities and Exchange Commission. But it's really important that you notify somebody immediately because the sooner we find out that there's a scam the more likely it is that we can go in and freeze assets and try to get money back.

And what if you haven't been victimized you're just suspicious. I think if you're suspicious you should report it to because the way we find out about our compliance in the way we're able to take action is by getting in early. And that's our best chance of getting money back to people. It appears that in the past two years state regulators have filed nearly 3000 enforcement actions against investment fraud. They assessed over 800 million dollars of fines and penalties they sentenced criminals to more than 700 years of jail it sounds good any sense of whether we're getting most of the bad guys or just a few of them. I think they're going to be bad guys out there no matter what's going on and we're chasing after as many as we find out about. Anytime we get complaints and we can take action and try and shut somebody down where they're ready to do it. Gary the audacity of some of these frauds is just amazing or at least it is to me because a lot of these places are selling not bad investments. They're selling no investments the money you send into them will be invested in anything at all right. Exactly. It's the classic scam. You know you send them the money and they keep it.

That's actually the. It's going to spec is easy it's a scam because you don't really have to. You know you got to deal with any actual stuff. No it certainly has a certain elegance and beauty to it but I'm sure that I mean I don't want to insult people who have been victims of these things because of suffered a lot. But I'm sure everyone who's listening to you says how could anybody be so dumb as to send in money for something like this how does it happen. People do it people want people it's really comes down to greed. You know people are not satisfied with getting an S&P rate of return which you can just get by just buying into an index fund. They want to do better and you know that's understandable so that they are people are prone to all kinds of scams as a result of that. Well now a lot of this still takes place on the telephone right. Oh yeah. Good old fashioned telephone making cold calls to people and persuading them to send money. Yes the boiler room scam the oil boiler I'm exactly. Now I suspect a lot of people still just can't imagine that normal intelligent people can be convinced of this. Let's you know you've talked to a lot of these scams. There's these common ways.

Let's suppose for the moment you're the con man. I'm the chump. I pick up the phone and say hello. What happens next. Well usually they'll soften them up a little bit. You know the first they might be what you call a lead call you know some might call for and try to soften them up maybe even sell them a legitimate investment you know to get the foot in the door and then they'll come back at you and they'll try to sell you their you know the scam stock either real stock or a phony stock that's when you know they'll come back at you and those who want to sell you stock and you know Bear Bear Paw industries. This is guaranteed to do well that they get you they give you the hard sell that they make basically promises that aren't true they're going to say this thing is going up and I you know I happen to know I've been in this business for 40 years and I have never seen a stock like this you know they have a they have a complete they have a complete. Mar They have a total dominance of their industry in that you know if they are you know this industry will be

completely with you Do they just totally make up stuff for and convincing Khan They can definitely convince you and Melanie you wonder who could be convinced by this and you tend to suspect will at last be going to poor old educated people but I gather that's not the case. It's not the case and I'm very reluctant to blame the victims because these con men con women are good. You know they know what they're doing they know the buzzwords they know what to say to people in order to separate them from their money. But there are things investors can do to protect themselves they can get in touch with their state securities administrator they can check out the person with whom they're dealing they can ask us questions about the investment they need to do their own due diligence they need to understand that. If this sounds too good to be true it probably is so even if you look at the Esses website. People should wonder when something says it's going to pay six hundred fifty seven percent. So there's always something in there that ought to raise the specter says Walsh. What are the buzzwords I mean you know that these con men have worked hard to test concepts to test words and stuff. What have they discovered really

works. I think what works is guaranteed. You know we're going to pay you a lot of money in a short amount of time. Rates of return that don't make sense in relationship to what the market's paying what bank accounts are paying they con seniors by saying you know we're we know you're afraid you're going to outlive your investments so these kinds of things will guarantee you the kinds of returns and preserve your principles they they they hit all the words that people really want to hear to make them feel safe. Should you send money to anybody who calls you up rather than you having called them. I think you hang up the phone when those people call. If if you need investment advice there are places where you can go you can find legitimate investment advisors legitimate stock brokers. I've really yet to see anybody become rich overnight by investing in something where somebody calls them on the phone and says I'm sending the courier over to pick up your check right away. Really hang up the phone. You know you want to gamble go have a go to Vegas

and you want to invest you know with whom you're dealing. You mentioned sending the courier over I gather the reason they like to send couriers is to avoid charges of mail fraud. That my work I don't know that that actually works but they really want the immediacy they call the people and they say you need to invest right away. And I my 18 years of doing this I haven't seen an investment that it was a good deal you can do it the next day. You didn't need to be sitting there waiting for the courier to ring your doorbell to pick up your check. Gary would you ever send money to someone who had cold cold. You know that's the fundamental rule that an investor has to apply is that you just don't buy any investment over the phone. Even by a legitimate firm it just simply is not advisable you want to be able to take some time evaluate it and do your own research. Now in your book you took some of the regulators to task are they doing enough to stop this. No I don't think so I think the regulators I'm talking about the NEA as D and the FCC who are the primary regulators of the of the over-the counter of the stock market

are being I think they're too reactive. They're not proactive. It's really isn't they're not doing as as Blau a lousy job as they were doing say 10 years ago. But I don't feel that the regulators are proactive enough getting out ahead of the investments get them to you prosecute some of these awful people when you find out about them but how do you feel about the regulators that is talking about. I think we all have a lot of work to do and I think we you know make attempts to do you know to address the issues and a lot of times the issues of the day the things you have to chase after. But what I found is like really invest in educating investors as what's important because you you know. Have you not teach investors to have a healthy dose of skepticism. You know it's trust but verify. You know a lot about the people with whom you're dealing learn about the products and you know pay as much attention to your investments as you do to the you know what toaster you're going to buy to replace the one that burnt down your kitchen. It's true people sometimes do shockingly little research write huge amounts of money they're going to say and write they'll just write a check for a hundred thousand dollars without thinking about it a lot but not want to spend $50 on a toaster without reading

Consumer Reports. You know exactly you know one thing that a lot of people got to wonder about and I wondered about for a while Garry is where do the chop houses and boiler rooms get the lists of names to call because they don't just call randomly through the phone book. You know they buy they buy lists themselves they buy these are known as leads in the business and the leads are generated by legitimate firms such as Dunn and Bradstreet. The brokerage firms sell them to each other. There are list brokers and in my book I deal with how they even stole leads they would sometimes would send a burglar and steal leads from riches so that we're not talking about electronic theft we're talking about good old fashioned physical breaking a window and going into an office and getting some papers. Absolutely just like England Gary Glen Ross was exactly the main plotline of going there. Do you think that Internet shopping sites where we all buy so many things online have made us a little too casual and cavalier about giving credit card and other personal information online Melanie.

I think people need to know where they're sending their information. I would never respond with that kind of information for an unsolicited e-mail. You know if your bank your brokerage firm wants to get in touch with you or you're getting an e-mail that looks like it's coming from them pick up the phone call the branch. Find out are you. Do you really need this information from me. Because the scam artists are just a way ahead of the technology even with legitimate people and they're going to use it to their advantage. Good note on which to end realty. Gerri thanks so much. Thank you. Thank you. Of course scam artists aren't limited to just fleecing individual investors. Next week we're going to catch up with the mega scandals of the past few years to see if the punishments that the crimes that's our program so long will see you next week. At a time when the choices we face together have never been more important.

They'll be there. Asking questions providing insight so you can decide by the Election 2004 coverage on PBS to learn more about this program visit PBS dot org. For a transcript of this program send $5 through transcripts Wall Street Week With fortune. Maryland Public Television Owings Mills Maryland 2 1 1 1 7. 1. Wall Street Week With fortune was made possible in part by Nuveen investments. Now you can learn everything you need to know about exchange traded funds. Comforting isn't it. ETF connect an educational website of Nuveen investments and he's proud to support Wall Street Week With Fortune Wausau insurance from lost productivity to medical expenses

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