Wall Street Week with Louis Rukeyser; 1519; Bonds, and Some Stocks, Too

And. Yeah for Wall Street Week With Louis Rukeyser brought to you by this and other public television stations and via grants from the Hilton Hotels Corporation America's business address and a Conrad international hotels a subsidiary of Hilton USA competition makes American business itself Prudential based security and investment firm with rock solid resources that's leading the way to the Future for Investors and this very corporation providing high technology computer based system solutions to the. Complex problems of business industry government and national defense. Produce Friday November 8. Our panelists are Frank camp below Mary Farrow and Lou's holiday. Tonight's special guest is William H gross managing director

of Pacific Investment Management Company. That gave me and I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well this is the weekend that every fan magazine in America has been awaiting breathlessly the most exciting news event since the shooting of JR. The arrival in the US of their glamorous Highness as the prince and princess of Wales and Wall Street ever attentive to a sovereign or even a half crown beautifully paved the way with a right royal celebration of its own trooping the color green in its case again and again. The Dow Jones Industrial Average marched on Tuesday on Wednesday and again on Friday the record heights not previously seen in all the years since the Battle of Hastings. The Dow which seven weeks ago was below thirteen hundred and setting off widespread fears of further financial beheadings now stands at top 49.

Indeed the same petition average took more than 10 years between the time it first hit 1000 and the time it landed at eleven hundred. Never saw a thirteen hundred to a five and a half months ago and now already considers that very old hat indeed. And there was a princely performance in the bond market too as speculation that the Federal Reserve Board was in a mood to ease news that was first tipped in an interview on this program two weeks ago kept interest rates tumbling in keeping with the aristocratic mood. There was even some encouraging news about Earl as it is pronounced in Brooklyn as Mexico and Venezuela lowered their prices on heavy crude. The financial courtiers were abuzz with the rumor that more declines in oil prices were imminent which translates to less immediate concern about inflation. There was nothing particularly majestic about the economic news to be sure but Wall Street shrugged off reports of sluggish auto and retail sales on the assumption that those

bulletins combined with an unexpected decline in the money supply would serve only to reinforce the Fed's determination to ease and thereby it was frankly assumed lead to a happier and more profitable 86. Another kind of peer pressure was seen in the world currency markets with the U.S. and four powerful partners recently put up their dukes and determined to send the dollar down. So far it seems to be working. As the dollar dipped during the week to a 57 month low against the Japanese yen though some skeptics insisted that it was still too soon to vie count the dollar out. But the barren pickings for the financial bears extended even to the housing market where mortgage rates resumed a decline that had stalled since July and seemed on the verge of falling below 12 percent. We tonight will seek to give you a better title or at minimum a title to some better assets by talking with

one of the authentic kings of the U.S. bond market. But first my lords and ladies let us descend among the rabble and briefly view the colorful bear baiting in Wall Street in the week has passed and as the Dow Jones Industrial Average indicates the market certainly did its best for Charles and Diana adding briskly to last week's thirty four point move the Dow finished at its 22nd all time high of one thousand eighty five up another 14 points at fourteen oh four point three six. Up to now cynics have said the move was just in the Dow but the broader indexes are now climbing rapidly. The Amex took its biggest leap since June and both the New York and S&P composites are within two points of setting records themselves nor are our elves ready to cry hold enough despite the Dow's two week gain of nearly 50 points. Their technical market index remains at a mildly bullish plus 2.

Oh well the little fellows always were a closet Marcus. With inflation and interest rates both continuing to behave that was further a slight deterioration in gold and silver prices. In case you were thinking of some nice little going away present for the Windsors. Meanwhile we've assembled our own palace guard. So let's start by getting the latest word from that dashing prince. Thank up yellow. Thank you Lou. Looking into what can I say. What a lead in. Well you can give us your regal view of where those markets headed. I think it's heading further up Lou I think about a month or two ago. All my colleagues could give me 100 reasons why the market couldn't go up. Actually the market is doing what it's doing what it does best. It's forecasting really over the next six months that by spring of next year the economy will be rolling again. I think that's what the markets are looking up forward to rising earnings the lower interest rates push over that forecast lower interest rates will help but I think what's going to continue will be the consumer buying in later on next

year will have a decline in the dollar probably in the summer of next year the declining dollar will help the export business help the farmer and that'll keep the economy going. Frank for a couple hundred points some of your more cautious colleagues have been saying oh take some profits take some profits. We're now about fourteen hundred for the first time in history would you take some profits. No I wouldn't. I'd stay fully invested and I particularly look at the LTC stocks I think one of the amazing things today was not only the OTS the market but the Nasdaq 100 stocks did extremely well and I think that's the place to be the larger ot see stocks. The over-the-counter markets are going to is going to have a term that I think sell because this divergence that everyone was talking about Lou that the only the Dow was going up is now narrowing. And I think it's going to really get the speculative fever boiling. Mary Fowler do you share this euphoria I have just heard in fact I'm afraid I do know that I will never stand in the way of a bull market and we're certainly in one. What are some of the signs that we're really in a bull market.

Well I think the Dow Jones being the most obvious sign being at an all time high and I think a very healthy sign is the amount of skepticism that's around talking to the experts on Wall Street who are reading from the financial reports. People really don't generally believe Rambold market and I think that's very healthy and indicative that we're still in the early stages of a long term bull market aside from showing contempt for your colleagues was that a good indicator. Well it's never too bad to be a contrarian on Wall Street and think tends to work out better. Well it's a very good sign because I think the last time we remember there was a we were in a market where everyone thought stock to do nothing but go higher that was nine hundred twenty nine. And I feel very comfortable right now that people are being as skeptical as they have some money to put in the market they haven't committed yet but I think there's still a lot of money out there and I think a lot of it's going to come in the form of IRAs which means you're going to have the small investor back in the market and I think that's very healthy little home and I would hope at this point to hear some bearish and pessimistic words but in fact you were one of those who expected this to occur as well you know. And unfortunately I can't be bearish at this point I have to agree with Mary. In that I

think never has been. Never have so many people made so much money and enjoyed it less. Look let's let's change the focus them to where they could make money in the next few weeks and months would you be putting new cash in this one new cash I think continues to be in the disinflation stocks. Even though I agree with Frank in that I believe that because we've had such a disparity between the Dow and some of the secondary stocks I think those stocks will catch up now. What's a disinflation stock you buy a share of Paul Volcker. So far so good. What are some of this in this latest inflation the stocks obviously that are stocks that relate to interest rates declines and interest rates such as insurance companies. You tell a days and banks. Right with you people so unanimous I am for the first time in some weeks a little bit jittery about this market. But in any event it is time now to go onward and upward with our viewers. Frank Caprio Johnathan Wendel of Pittsboro North Carolina is looking to jazz up his investments by adding some theoretically riskier stock. Right so Warren's would

you explain how they work for whom they are really suitable and whether they are any of that in your opinion should warrant his attention now. OK low a right is the privilege that a holder has to buy stock at a set price for a period of time usually for a right it's a couple of weeks a warrants the same thing except the length of time that a warrant stands out is really yours in some cases we have a warrant to buy stock at a set price that are perpetual they're out there forever. Basically a warrant should be used by an aggressive investor. Let's make a lot of money because a small amount of money can control a lot of stock stock goes up a little bit the warrant will go up very dramatically. So you have to be very aggressive in appetite for not only gains but losses pays no dividends and you might lose it all that's right. You very very much likely if the stock goes down you going to lose almost 80 percent of your investment. There are two warrants that I think command attention they're both airline warrants one is republic airline warrants and the other is Western

airline warrants. If the airline warrants a crash take your complaints to Mr. Kapp yellow book. Mary FOWLER So you are good at most of Arlington Virginia says you keep hearing the term leveraged buyout but he's not entirely sure what it means. My dictionary does not give me a satisfactory answer he says. And I bet a few of your audience actually know at least the dumb ones like me. I missed a good move it takes a bright fella to admit he doesn't know something. Mary can you help him. I think so. There's one sure thing on Wall Street is that there's going to be a constant array of new schemes with fancy names to confuse the public and I think leveraged buyouts are one of them. It's actually very simple. Leveraged buyout is when a group of individuals usually insiders of the company purchased the company by borrowing against the assets and future income of the company. So in essence they purchased it without much risk to themselves by putting up little if any of their own money and own the company. Can anybody get into that sounds a bit like it. It is a very good racket and that's actually leveraged buyouts or old quite old on Wall Street but he's right the term is only of late the last few years it has become an extremely popular thing and just as an

aside it's one of the signs of the bull market because it's it's a people finding value in companies that the market has not yet recognized and they're willing to take them private to see that you realized there are enough little hole in the gravy. Quinn of Tacoma Georgia says he's figured out that the price of sugar moves in a six year cycle and that this is the beginning of a new cycle. You agree with that. And even if you don't what is the best way to invest in this commodity on a small scale. While it may take more money of any Thanks Lou when in fact he is considering an investment in sugar. Really there hasn't been a pattern in terms of the number of years in a cycle. In that the cycles have historically ran from between 5 years and 11 years. However the two most recent cycles relative to sugar have been five to six years. Nineteen seventy four in 1975 for example sugar prices peaked at something like 66 cents per pound in 1979 and 80 there were about 44 cents per pound. At this juncture though the price of

silver I should say sugar got down to 3 cents in the month of May. Currently it's hovering around 5 or 6 cents in terms of the world market and 19 cents in terms of the domestic market. I would think at this point that maybe we have seen the bottom relative to sugar prices. However commodities are like stocks they sort of go through a period of love hate and difference. And I think that sugar is in a period of indifference now and it might be 12 months to 18 months before in fact you might receive any performance relative to your sugar contracts. However should he pursue it further or want to proceed further I would suggest using options as a way to participate. There is an option A in 1086 option and sugar that we could buy for about seven or eight hundred dollars. Therefore limiting his loss. There are also futures however the futures provide an unlimited level of risk. I guess the third alternative would be common stocks however they reflect relate to the domestic

price and that substantially higher than they are in the world prize through investment you would take with a grain of salt. All right now if you'd like to raise a little cane. Don't go stalking after synthetic sugar daddies try to point your so what some sweet profits. So stop taking your lumps. If we find your questions and pour them into us here at Wall Street Week Owings Mills Maryland 2 1 1 1 7. That's Wall Street Week Owings Mills Maryland. 2 1 1 1 7. Now before we meet tonight's special guest let's take a look at his area of crime expertise Bon's and see the extent to which investing in bonds has been in the immortal words of that other Bond James Bond. A View To A killing. For starters let's follow the trail of yields on long term government bonds since 1970. Remembering always that the higher bond yields go the lower bond prices go after beginning the decade around 6.5 percent.

Long term yields climb steadily as the 70s wore on to an annual average of nearly 13 percent in 1980. Lately however with the recovery pushing bond prices higher the average yield this year has dipped back below 11 percent. Meanwhile for short term meals such as those on a 90 day treasury bills have followed a similar though more volatile course after topping out at over 14 percent in 1981 T-bill yields have averaged around seven and a half percent this year. Miserable bonds with their inviting federally tax free returns. Normally offer yields well below those of their taxable cousins. In recent years though uneasiness over the safety of some issues has forced Mr. polities to narrow that gap and the average yield on new municipals this year has been less than two points below that offered on taxable federal issues. And what's the outlook for Bonds now. Or as they say in Congress. Will the gentleman yield for some thoughts on that let's

go over now and meet tonight's special guest William H grows. Welcome back I see you again. Thank you Lou it's good to be here. William Gross has had a vested interest and interest since 1971 when he helped found Pacific Investment Management on the shores of the Pacific in Newport Beach California. He consistently ranks among the five best institutional bond managers in the country and he now runs an eight billion dollar bond portfolio for such notable clients as AT&T and Boeing build the bond market has led the stock market upward. How much longer is that likely to continue. Well I think Lou it stands a good chance of leading the market further in the next several weeks if not next several months. The bond market itself as you may know has had a bull market of its own over the past five years and today yields at their low point for the past five year period so it has a certain momentum of its own going and I think there are a number of economic and monetary

factors that may force interest rates lower. Looking ahead to the next 12 months would you rather be in bonds or stocks. I'd rather be in bonds and we have a guideline that inverts the price earnings ratio of stocks into an earnings price ratio in other words and learnings yield and if you take the P E ratio of stocks today 11 times and invert that that's about a 9 percent earnings yield and I think with long term bonds at 10 and a half percent to 11 percent the bonds are out yielding stocks when you look at them and on that basis since you have already boldly said that you think interest rates are going lower. Tell us how much lower. What would you expect over the next year to happen to these long term interest rates. Well for use the benchmark of the long term Treasury rate of 10 and a half percent today I think they stand a good chance of moving into single digits. That would be around nine and three quarters to perhaps as low as nine and a half. That's not too much lower but nonetheless it's a sizeable appreciation in terms of principal about in the book on a percentage basis how much would a Bond move

up the interest rates fell the way you've suggested or long term bond would move up about eight points or 8 percent if interest rates fell a hundred basis points and shorter term intermediate Bonds of course would move up a little bit less. Well there's optimism for principal appreciation here. Why with the money supply ration ahead ahead of its target. With the talk about inflation creeping back in our economy with the talk of a new recovery next year why would interest rates go down. While investors see a wind. They see a window of lower short term rates. Paul Volcker came out in the press this week and suggested that the short term rates would not move higher for the next several months. And actually the Fed is fighting a war against deflation. They're putting money into the system in order to bail out the financial system not only of the domestic economy but the international economy and investors sense reflation perhaps several years down the road but for the moment at least it's clear sailing in terms of lower short rates and therefore

lower long term rates as well. Bill you have emphasized long term U.S. Treasury bonds as certainly the safest investment in the world in that Michael Sam will always print money if he has to the payoff the interest although what those dollars will be worth in those days is not guaranteed. Could you give me brief comments on some of the other areas of this market. Why are you not talking about corporate bonds. Corporate bonds are selling today a very narrow yield spreads relative to treasuries. A typical Double-A utility bond today would sell at 11 percent vs. 10 and three year old son along Treasury. And historically that's very narrow. In addition a lot of corporate industrial bonds have been the target of leveraged buyouts mergers and acquisitions and to a certain extent investors are becoming very gun shy of a corporate industrial bond so we're shying away from that area who will should and should not buy municipal bonds. I think individuals in a tax bracket that can take advantage of tax free income obviously and that might be an individual with $35000 or more in terms of gross income I think

Nestle's are very attractive. They are selling at a ratio of about 90 percent of long term Treasury yields. And despite the potential for tax reform and for lower marginal tax rates I think the next several weeks will bring to market perhaps 3 2. Three to four billion a week of new municipal offerings and that will provide an opportunity for in the year tools to take advantage of very attractive yields. We're trying to go in my panel because when you said that you thought bonds would outperform stocks head snapped up and I'd never give away who it was but the other was if I kept up with your forecast for next year and compasses of the Cline of the dollar and I find it hard to understand how we can have a decline in the dollar which means foreigners are probably be taking their money out of the United States and those still have lower interest rates I would think that would mean higher rates short term rates. Well I think it's a question of your time frame Frank and certainly a lower dollar in the short run can mean lower interest rates. Paul Volcker is acting in concert

with the Treasury to force the dollar lower and for the Federal Reserve to raise interest rates at this point would be in direct conflict. I think ultimately down the line that a lower dollar means higher inflation a lower dollar means stronger economic growth and a lower dollar means less buying from foreign interests and all of those combined mean higher interest rates at some point. But that time I think is several quarters if not several years away. Junk bonds are something that have also been on Wall Street for a number of years but lately there's been a deluge of issues of these junk bonds with their much higher interest yield. They're obviously attractive to investors. Would you recommend them for private investors. I would avoid junk bonds like the plague. I think investing in junk bonds these days is like calling playing Bond roulette. And that's a case where you wind up not with a hole in your head with a hole in your pocketbook. I want you to find a junk junk bond as something typically that's rated below B double A B or lower by Moody's or Standard Poor's and the problem with junk bonds today is that they're offered the 14 and

15 percent yields during a recession or even a slow period of economic growth. These corporations are going to find it difficult to earn that high of a return on their investment. And ultimately I think many of them will fail. I would avoid them. Bill you've been a proponent of disinflation for the last several years and now that the dollar is falling. Scuse me. It's falling falling rapidly 15 percent since September. There's a feeling that typically when in fact these markets start to fall that in fact they may fall faster than people think. What with this in fact do to your scenario of lower interest rates or modestly higher interest rates as we go into 1986. Well I think it would bring the horizon a little bit closer in terms of that eventual pointed interest rates did go up certainly a steeper decline in the dollar means more rapid inflation and investors ultimately will be concerned about that so sharply lower dollar in the long run is a decided negative and it brings that timeframe a little bit closer.

Is your bullishness on Bonds a no vote on stocks now. No it's not. I think this is an era Lou and I'm talking about the 1980s basically of financial assets. If you took a survey and I think a number of institutional firms have the returns of assets over the past five years stocks and bonds have right number one and number two relative to gold into real estate. And as long as we continue in a period of time of disinflation of lower rates of inflation of oversupply of goods and services relative to the demand I think bonds and stocks can do very well. And let's face it lower interest rates mean a lower discount rate in terms of future earnings for stocks and that implies higher price earnings ratios. Will we only have a minute or so left. You have the best education for a financial career of anyone I've ever met because after graduating from college you spent time in Las Vegas as a card counter. Those that help you with money management but it certainly does Lou I've I've never had a blackjack or a Double Down opportunity in the bond market. The returns simply aren't

that high but nonetheless there are some similarities. When I was playing blackjack in 1966 I was counting cards in trying to determine when the probabilities favored me as opposed to the house. That's when I would place my maximum bet in the bond market. What you're trying to do is excess risk in return and trying to find that point in time in which return is the highest relative to risk. That's when you place your maximum bet in terms of a sector decision. So in that case bonds how good God is right now. I think the odds are better than 50/50 I'd put them at 60 40 at least. And those are good odds in my bet. And finally although you were less happy about corporate securities other many corporate bonds that you are attracted to now I think there are several some issues a Philadelphia Electric the 18 and three quarters of the 2000 and 12 the 18 percent bonds of 2010 I think stand a good chance of being tended for and that's a reversal on the stock market to a certain extent. Those are two good bonds that investors could buy

Philips petroleum 14 in three quarters are an attractive investment as well for a B Double-A type of vehicle. Thanks very much Bill Gross a man whose word is always his bond. Thanks to our panel. Hope you'll be back with us again next week then I'll be talking with one of the most influential and outspoken voices on the World Economic Scene. Nobel Prize winning economist Milton Friedman is an old friend of the program and he never failed to give us a lively provocative and fascinating evening. I hope you'll make it a threesome in while this has been worth the wait. I'm Louis Rukeyser of my. Wall Street Week With Louis Rukeyser has been brought to you by biz and other public television stations and by grants from the Hilton Hotels Corporation America's business address and a Conrad International Hotel a subsidiary of Hilton USA competition makes American business Xcel Prudential Bache securities

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