Wall Street Week with Louis Rukeyser; 3131

Every week for more than 31 years America's most widely watched and trusted source of economic and financial advice Wall Street Week With the misrule geyser is made possible by to look into. Today's network economy. To help business respond with fertility logs. 40 business services the answer is the people of the lawyer and two by A.G. Edwards committed professionals providing a full range of financial services and investment advice. A.G. Edwards trusted advice exceptional service by Oppenheimer Funds. Skill. Experience Strength. The strategy Oppenheimer Funds uses to achieve long term performance. Oppenheimer Funds the right way to invest and buy Occidental Petroleum from exploring for new oil and natural gas resources to striving to protect the environment.

Occidental Petroleum is bringing a new energy to energy solutions produced Friday February 1st. Our panelists are Harvey Eisen Barbara Marson and Brian Rogers. Tonight's special guest is Ned Davis President Ben Davis research that even I'm Louis Rukeyser that of Wall Street Week. Welcome back. And welcome to the Super Bowl of finance where the forecasters are often only slightly less reliable than your average odds maker in Las Vegas. Of course the words often have different meanings in the wall ins and in Wall Street. IN THE MONEY world for example halfback is what a correction now means on Nasdaq and quarterback is what most Enron stock holders would love to have instant replays refer to what's going on at the accounting firms as investors wonder whether any of the reported numbers can ever be taken seriously. And there's four of the five biggest accounting firms announced

yesterday. Presumably after another look at the embarrassing videotapes that they would finally take steps to avoid conflicts of interest by separating their auditing and consulting businesses the referees in Washington indicated that there still might be some serious penalties for illegal use of the hands on calculators computers and shredders. Meanwhile the economy was making what looked like a run on the weak side. The unemployment rate dipped unexpectedly and the economy lost the fewest jobs in five months. But more than had been forecasted and U.S. manufacturing improved less than the consensus of learned economists had been looking for. In short there were still excellent reasons to think that 2002 will bring economic recovery. Indeed the economy actually expanded a bit in the last quarter which means only one three month period in 2001 was down. And even the Federal

Reserve acknowledged that the future looked promising but the bounce thus far has been anemic. And many of the markets gloomier players fretted that earnings might again fail to meet expectations in the months ahead. As a result every major stock market index ended January slightly down which means that the typical investor continues to be a prominent member of the kicking team. And finally remember that the two people not to invite to the same Super Bowl party are Sumner Redstone and Mel Karmazin the feuding Viacom Titans are so cross with each other. The Kama zine is considered likely to leave that team when he becomes a free agent next year. But lest you think that all financial predictions are worthless. I know that many viewers have written me recalling that that all time all star John Templeton predicted on this program on August 14th 1987 that the Dow

Jones Industrial Average and Japan's Nikkei index would eventually cross. It seemed fantastic at the time the Dow was below 20 700. The Nikkei was above 25000 and the great Sir John knew he was making a bold forecast. But they too are going to get together. Either Japan must go way down or America must go way up. Or more likely they'll need somewhere in between. He was right on all counts and it finally happened for the first time today. The truly alien Nikkei fell to 97 91 more than 100 points below where the Dow is now. Score one more for the global wizard. But now let's check out the lesser players. The Dow Jones Industrial Average fell to a new low for the year on Tuesday at ninety six eighteen but rallied impressively from there to close with a second straight weekly

gain. Up another 67 points to 99 0 7. The broader indexes were mixed with the losers led by Nasdaq as traders fretted that the recent dramatic rebound in technology stocks might have gotten ahead of itself. The oil price crept back above $20 a barrel and the dollar was no better than mixed. U.S. Treasury notes and bonds improved as the ghouls rejoiced that the economy might not be as strong as expected yet. And so the Fed was unlikely to be rushing to raise interest rates. And speaking of Japan's decline from world economic leadership I know that the winner of a dream car competition in Tokyo was a car powered by hamsters running on treadmills call me nuts but I don't think it will play in Peoria. Hobby as in which way do you think The Wall Street hampers will be going next.

It depends on the mood of the day as you well know and they go up and they go down but you know it's fascinating to me because I was I was shocked when I think back in 30 years ago the Dallin ICAI were the same price in a thousand. So they'll continue to do is a great philosopher once said fluctuate. I think they'll fluctuate. I think that could be the prediction and it's a point that we're going to fluctuate up but I really think we are I'm I'm I continue to be optimistic I think the obvious reasons are the Fed easing until recently I think the fact that the government has fiscal policy is going to be helpful I think there are a lot of things that are very bullish to me. So so for this accounting mess doesn't seem to have affected the markets too deeply but on a case by case basis it's at least I tell you it's terrified people in Wall Street because what's happened is all of a sudden people finally recognize the fact that the numbers aren't reliable. And whether it's Enron in this week as you well know was Tyco I mean these are huge companies these are not little fractions.

You've been around Wall Street well. Are you surprised to find out that the numbers are not often below are often not reliable. I always knew the numbers were managed but nobody else knew that people would realize that was sort of a given in the game and now that's changed. Now what you have are people saying we really can't rely on these people. How far is this going to go of people that take every corporate report now with total skepticism that I think is the absolute crucial question today because if it ends here. The markets I think going to continue to do well but if this thing spreads as it has with Tyco and then you had some comments about a company called Cendant. If it spreads this could be trouble for a while. The president seems to be trying to get out front on this one too I guess to avoid the. The taint of being associated with that line but also as a national leader at this time. I think he's moving the right direction. Well any politician that's moving by covering themselves is moving in the right direction the reality is that as everybody now knows Enron has given staggering amounts of money to all

these people. And the question is what will be will there be eventually be a scapegoat that has to take the fall. And that again could cause great uncertainty of the market and worry people. But I think all these things are short term I think longer term we're just fine. Well Marchionne What's your view. Well on the positive side Alan Greenspan told Congress last week that he thought the economy was bottoming out and the massive amount of economic data that we got this week I think really confirms that. So I think it's not clear how much of a rebound we get but I think it's clear the economy is stabilizing. Well you're a dedicated value player. Is the value in this market. Yes there is good value in this market you know. We really you know what's happened the last couple of years point out the great strength of our capital markets system which is that although it allows for investment spending boom in bubble it really allows for natural clearing process where companies go out of business and don't get funding anymore and what we're left with are some strong competitors that will eventually be able to spend and compete and offer services so I think there are good values.

Do you as a money manager do a little more probing analysis of the numbers and your mother five years ago. I think so I think so of course as a value investor you're always looking at companies usually that have already had a problem or have already gotten into some trouble so frequently there's already been a lot of scrutiny in the companies that I buy. I should ask you where your father by now. Yes. Well Cendant as Harvey said it's gotten tagged a little bit with accounting issues but I think he's doing a good job already of trying to resolve those Compaq Computer. I think its value has really been overshadowed by deceptive affection with the Hewlett-Packard merger but on the CEOs of both of those companies have been doing a good job lately of explaining that the merger can bring up about growth opportunities and not just cost cutting and I think investors needed to hear that. I still like Lucent and think it's a matter of when and not if that company really has better profits. And finally I think Halliburton with us best whose issue it has really been overdone it is a very inexpensive stock and I think that will get resolved. So you really love the ones that a lot of other investors love to hate right now yeah.

Many people are wondering whether Compaq and I can go up together or whether it's a seesaw. What do you think. That's a that's a good question. I think that if Compaq and Hewlett-Packard merged together the emphasis will be somewhat off the just the PC business for Compaq But you're right in the past it's been as you saw it with just Compaq and Dell and I would hate to bet against that. Ron Roger Heaven knows you're a dedicated value player what what's your view of what's going on now. Lou I was just thinking how much I love Barbara stocks. I should beat you if you like those. Well I think the surest thing is the Patriots and maybe we should get to that right now. Really think the two touchdown underdog I think that's the best investment one can make at this point. But I think hardly raise an interesting point and something interesting come out of the rest of us. I think we really should distinguish between accounting earnings management and some really bad things that certain companies were doing and I think IBM and G.E. and companies like that are always involved in managing earnings. But I think what we've seen here with a

few instances is are companies that probably will ultimately be found to have been pursuing fraudulent types of activities. And that's really different from maybe being a little bit more aggressive in terms of you know ones revenue recognition or things like that. Explain for us civilians the difference between managing earnings and cheating. Well I think managing earnings is when you try to maybe defer some expenses by a quarter or recognize a little bit of revenue that maybe was going to come the day after the quarter ended. I think what was going on with moving all this stuff off balance sheet and borrowing money and letting insiders benefit. From partnership arrangements I think that's really different from trying to put the best spin you can on how your company is performing from a APL standpoint. What are a couple of your favorites that Barbara has already mentioned. Well I think the telecom sector is interesting and I would have mentioned Motorola. And I think you can buy good companies too I mean you can buy companies like Merck and some of the health care companies at pretty attractive prices and my Especially the stated company these days would be

Cooper Industries which is a little problem but looks like it offers really good value to me. Keep you safe in the fire anyhow. Absolutely. All right if there is anything anything at all that still baffles you about the world of money send your queries not to mention your bafflement to us here at the UN baffling headquarters of finance and low Owings Mills Maryland 2 1 1 1 7. Now before we meet tonight's special guest who believes there are three key indicators of the stock market future course. Let's look at where he sees each of them pointing now in his three pillars of wisdom. First he looks at the tape where he calculates this measurement of the trend and momentum of 100 industry groups. So the absolute number is still in the neutral zone. The recently rising trend leads him to conclude that the verdict for this indicator is mildly bullish. Next he checks out the Fed where his indicator is a combination of liquidity inflation and

interest rates. There he finds liquidity at a record high after excluding the needs of the economy and inflation making his verdict on this indicator very bullish. Is third pillar looks at the crowd measuring sentiment and valuation focusing on price earnings ratios which you find still disturbingly high leading to a verdict for this indicator of bearish. He then puts the three pillars together weighting the tape twice as heavily as each of the other two for his overall verdict that the composite is mildly bullish which he interpreted to mean that investors now should be very slightly overweight in stocks. Are these pillars the way for you to build a winning stock market strategy or will they just turn like Lot's wife into many grains of salt. For some thoughts on that let's go over now and meet tonight's special guest Ned Davis. Welcome back to SPIN to our eyes to have you here again.

When Ned Davis speaks institutions listen nearly 700 of the markets 800 pound gorillas. So it's up to the reports of Ned Davis Research the Florida based firm he founded in 1980 after 12 years with Daisy Bradford and company. We have long respected his role as a dedicated market historian and highly independent investment strategist. That is tonight making his sixth appearance as my guest on this program that it sounds as if you're giving the 2002 market about two years. What is very slightly overweight. Well basically we just you know we we put the indicators together and we go with the weight of the evidence and it is the indicators improve we get more overweight if they deteriorate we get less less. But right now they're slightly bullish in terms of asset allocation. But does this mean we are our benchmark is 55 stocks 35 bonds and 10 percent cash in our 60 percent stocks 40 percent

bonds so we're 5 percent overweight in stocks and bonds. I mention that all the indexes turned down in January. Some people believe that's a January indicator. What's your view. Well it's called the January barometer and the way most people report it is as goes January so goes the year but then when they do the stats on it they include January in the year and of course you don't know what January did till the end of January so we look at it January versus February through December. And when January's up 88 percent of the time they were December's up and the average gains about 13 percent when January is down which it was this year eighteen times nine times the market's been up nine times it's been down the average return is minus 1.8 percent. So it's sort of 50/50 odds and it's just sort of ended up in line with. But my indicators but my son Brody he tells me that the Super Bowl indicators are guaranteed to give a biased signal on Sunday.

Well let's listen to Brody. How about the Ned Davis barometer what kind of a year are you looking for. Well we think on the S&P 500 that a thousand is this floor that's provided by this trillion dollars that the Fed is induced into the system over the last year. A lot of it half of that went into money market funds yielding less than 2 percent so we think that's a real floor under the market but the valuation and debt problems are providing a ceiling. We think the upside is probably 12 50 so it's a range between thousand 12:50 right the middle looking at that which was the one that led you to a bearish verdict. It looked as if it was about as bearish by your measurement as it's ever been. Yes that this is the average stock and Value Line calls the median P and they only use stocks with earnings a lot of companies don't have earnings now but anyway it's about 19 times earnings and the average is fourteen point three. However if you look at that versus the S&P which is 28 times earnings are

forty eight times earnings pending on which earnings use the average stock really is relatively cheap versus the major averages. Can you work me translate it into specific stock recommendations. Well I can but we feel like the thing that really moves individual stocks is the overall market that's about 30 percent 50 percent as industries and really about 20 percent is sector stock specific. And so we like to focus on industries and there's the thing that we feel strongest about really from last year and now a small cap value and we like them on the charts. We like them on a valuation basis. They also were up about 12 percent last year when the market that market averages were down big. And so this is really the area I would consider consider based on your historical work when we have a shift to small company value stocks as we did quite distinctly last year in the Stick around for a while. Yes they can run three four five years at a time and you know from the

last two years in the 90s it was all big cap stocks and they ran for four or five years in a row from the time the Fed quits easing looking out a year there's been 12 easing cycles. Small cap stocks have been up 28 percent on average for that year. So clearly by your measurements the Fed's done as much as it can. And that yeah I'm very bullish. I could cut one more time with it. Well it didn't go over it all of us are very strong and inflation is very weak and I you know we're we're way below trend growth and I think they could have they could have gone a little bit more. How much do you fret about this valuation question. I fret a lot not only I think of the valuation is a problem but as you mentioned earlier the quality of earnings is a real problem. Is that going to have a bigger effect on the market than it has up to now. What's your view. Yes I think it will because I I don't think I think what Enron did a lot a lot of maybe criminal stuff that may not be normal but the

quality of earnings is is as wide 500 stocks did pro forma earnings in 1906 it was a thousand in 2000 a fifteen hundred two thousand ones and these are really make believe earnings. So but if the regulators get their act together maybe people could have a little more faith in these numbers. Well you know these earnings are what column as if earnings where they go through and they say well this is an unusual revenue this is an unusual expense. And then they report earnings as if the expense didn't even happen. And that's not really it's not really illegal but it is deceptive is a word I would use. Some of them have one time to adjust for a generation or two. That's right. They call they're calling one time charges but they happen every year. Well let me turn you over to a panel whose probity is undoubted that it was why I hope you're right about these small cap stocks and need the money. You know we've had two bad years and people were very bearish after 9/11 and then people got very bullish. And I mean your work's the best. My question to you is looking

forward six months how do you. Oh yeah afterwards you know to tell me what can happen that can make this thing go off the track. Well the consumer's coming into this recovery with the highest debt load ever in terms of the economy and so are our corporations. Corporate debt is like blowing up I think they were two hundred fifty seven bankruptcies of listed companies last year that's an all time record in the prior year was one hundred seventy six and that was the second worst. So it's a problem. And so. So we're coming on but I think that a lot of other factors are very positive for the economy. And the other thing could happen is economy could come back too fast and interest rates would rise I really don't see that good. Well it dividend yield used to be one of the valuation tools used for the market. Do you think that's relevant anymore. Oh I think it's going to be very relevant again what happened was. The market got to such a low dividend yield that everybody said oh let's throw that out and they threw

out a piece and they threw out everything the only thing that mattered was earnings growth. And what happened is a lot of companies went out borrowed money and they bought their stock to push the stock up. You reduce increase earnings per share. And they said we're doing this instead of dividends. And now this debt has blown up and everybody's face. Three of the large five largest bankruptcy's in history Enron Global Crossings and Pacific Gas Electric have been in the last year so the debt is a real problem. And I think we'll come back to more traditional values I hope so. When I look at your work I get about eight hundred charts from your organization are there one or two indicators. The typical investor can look at to try to understand where we might be in terms of the economy and what that might mean for their investment outlook. Well I think you know the indicators I like are the ones Lou mentioned earlier inflation which looks very good right now. Liquidity amount of increase in the money supply. Interest rates are very powerful and then I look at the tape which is mixed. It was

mixed last year and actually last year supposedly a bear market year but we have 600 stocks in our database and 52 percent of them were up last year. So the Fed the tape in valuation I think of the three areas. Does our present situation remind you of anyone in the past. Oh yes of course. It reminds me of the 60s 66 a two period where we had high valuations and the market for 16 years went from 600 to a thousand You're probably too young to remember Holy s. But anyway we had a lot of both who were active in it. 66 was a bull market 68 was a bull market 70s a bull market 74 78. So even if we are in for a long period of low returns are still possibilities here for people that want to buy low and sell high. As you point out there were bull markets in there and also a lot of people did much better than the averages in those days but been the stock pickers that were going to get back into a stock picker's market so I think very much

so so that people really do have to tune in every week of it. What. Was going on. You laughed at me but when nearly out of time but I know he does have a sizeable bond position but he is going to happen on interest rates. Well normally once the Fed quits easing bonds go flat for a year but we think the bond yields really didn't come down that much. Inflation is going to be very low we think bonds are going to do pretty well. Thanks so much Ned Davis thanks to our panelists. Hope you'll be back again next week when my guest will be the man who's just been named to call the investment shots. But one of the financial world's biggest players he's Steve Galbraith. The new chief investment officer for Morgan Stanley and he'll be telling us what he's privately telling some of the firm's wealthiest clients. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Good night Wall Street Week With Louis Rukeyser was produced in association with Kaiser television incorporated by Maryland Public Television made possible by. Linking to.

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