Wall Street Week with Louis Rukeyser; 2637

Yeah. For more than a quarter century America's most popular program about the economy people and their money. Wall Street Week With Louis Rukeyser is made possible by the annual financial support from viewers like you. By Prudential Securities with more than 50 600 financial advisors nationwide securities can help you invest your money wisely by A.G. Edwards committed professionals providing a full range of financial services and investment advice. A.G. Edwards trusted advice exceptional service and by Oppenheimer Funds. Across America millions of people have reaped the rewards of our long term investment

strategy. Oppenheimer Funds. Produced Friday March 14. Our panelists are Mary Ferrell James Grant and Macy slow tonight's special guest is John Campbell president and chief investment officer of countless Investment Management Incorporated. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well this was the week when those wonderful fellows at Dow Jones reminded us of their patented method for reshaping history. If you don't like the statistics change them. As of next Monday the famous Dow Jones Industrial Average will still consist of 30 stocks as it has since 1928 but not the same 30 stocks in the biggest shake up since 1959. The Dow will say bye bye to four members of the

industrial old guard Westinghouse Texaco Woolworth and the only remaining steel company. Bethlehem and instead start including in its calculations four companies thought to represent the newer high tech service economy travelers. Hewlett-Packard Johnson and Johnson and Wal-Mart. It's the sort of thing that you ordinarily be of interest only to such mindless entities as index funds which mechanically add to their portfolios. Whatever is added to their index and sell whatever is dropped. Nor is the selection process historically a flawless guide to the economic future. Back in 1039 for example the wizards of Dow Jones decided that it was time to drop one company that had been in the index for seven years and clearly did not meet their standards for having any importance to the future of America. The name of the drop company was IBM. By the time an embarrassed Dow Jones put that old

fashioned little company back in the average 40 years later its performance had far far outstripped that of those considered more relevant and the Dow would have been significantly higher had it not been dropped. But the latest changes in the nation's most watched if not most representative stock index suggest applications far beyond a mere financial calculation. Do you not like all your relatives. Just follow Tao Jones's lead and make some substitutions. Thanksgiving dinner will look a heck of a lot prettier. Are you not pleased with your annual income simply revise the calculations and start with a more promising base. Or you for that matter a bond trader who goes out of his skull with panic because the warmer winter has produced a slightly faster economy and therefore you fear a horrifying prospect of terrible new inflation shocks just wait one day and the components of your own neurosis index will be

changed for you with a stunning report the producer prices actually dropped again last month and now show a total rise for the past 12 months of a piton lean to point 2 percent. If that's runaway inflation I'm Charles Dow himself. The big new fear in the stock market of course is the Federal Reserve Chairman Alan Greenspan will let the bond ghouls spook him into raising short term interest rates at the Fed's next policy setting meeting March 25th. The new Fed word for such a seemingly needless move is preemptive meaning that you should raise interest rates even in a slow economy with tame inflation. If only to show that you're not going to let things get out of hand. Perhaps a simpler definition would be locking the stable door before the horse is stolen though in an economy as sluggish as this one it might be more correctly described as before the animal is even fully awake. While the Fed rushed to release the new rule is that it hasn't made up

its mind yet. It does hate it terrifically when Wall Street defiantly insists on thinking for itself. There's a growing consensus that some modest increases in short term interest rates totally in the range of another half a point or so may be if not imminent at least on route. And so not only did stocks and bonds both have a losing week but the damage was especially great in the higher flying areas of the economy such as technology. As of now the concern is that every time the economy shows signs of picking up some genuine speed officer Greenspan gives it a ticket. If this keeps up we may have to make some changes in his indicators too. We tonight will talk with the man known as many more than just 30 stocks. In fact the total assets at his command are in the neighborhood of 40 billion dollars which is a very swanky neighborhood indeed. If that's more than you have but you'd like to get closer. Stick around. But first let's see which components it would have been

handy to change in Wall Street in the week. Yes past the current Dow Jones Industrial Average was as fretful as a bond traders seen somebody else get a job after marching to records on Monday and Tuesday. The Dow took its biggest one day hit since July on Thursday 160 points on anxiety that the economy might be recuperating too quickly before steady again Friday on the soothing inflation news. To cut its losses for the week 265 points at sixty nine thirty five point four six and with long term bond rates creeping up to just under 7 percent all the broader indexes show declines as well. While our elves haven't changed their forecast for the Dow's next three months a plus for consensus is looking for a further rise of at least 5 percent. Tonight we add a halo for my column. One of the four who got it right that is bullish three months ago. The real issue confronting these markets is

not whether the economy has recently been strengthening. It clearly has been as an array of indicators from retail sales to industrial production confirms. But whether this was a short term phenomenon aided by an unusually balmy winter weather or whether it signifies something more fundamentally ominous from the standpoint of the inflation outlook. And with such key indicators as the consumer price index due to appear between now and the March 25th Fed meeting it's a good bet that not even Alan Greenspan yet knows for sure what those fellows are really going to do then. There wasn't much excitement in the currency and metals markets but connoisseurs of life's ironies may be interested to know that a survey of Johns Hopkins Medical School graduate showed that psychiatry's have the highest divorce rate among physicians proving what we've long suspected. A lot of those guys should have their heads examined. Michelle you have been steadfastly and correctly bullish to those rising interest rates have you

rattled. They do have me rattled rates really are the problem for the market today. Whatever that long bond approaches the 7 percent area it certainly becomes a limitation for stocks progression but I think those rates are artificially high here I think the threat of what Greenspan might do is holding these rates up. And I would expect we'd see them lower as the year progresses. You want to take a stab at what the Fed's going to do. You know I think what you said about you we do have a few more statistics coming between now and then. I suspect that Alan Greenspan doesn't know what he's going to do. He's talked a lot. He's certainly given a lot of hints out there that he might do something but I think that's part of his job. The Fed doesn't just raise rates but it communicates and it's been doing that. But I don't know whether he'll actually raise or not. What's the cutoff point for you how would interest rates go and then you would turn bearish. I think if we got over that 7 percent area without seeing over 7 percent in earnings not looking as strong as they are right now are things look very good for this year and for next year or so. But a combination of higher rates and

a deteriorating earnings picture would certainly be a negative. Jim Grant says the interest rate picture finally going to verify the person this was with who have been selling us. Who's counting. I think the interest rate picture is quite bullish for people who see bonds as income vehicles and white bears for those who see them as prices specular vehicles. There is a savings class in America who want to relish the prospect of higher reinvestment rates in a world without much inflation. A 7 percent yield that we're kind of there I mean we're one day away from seven six point nine for as close as you can you know rattle you loose. So I think that the burden of proof is on those who do expect in that inflation the mean time we have high rates bonds of going down in price up and yield for not a few months but for three years. So this is not actually new Well if you believe that they are attractive for income minded investors is that a suggestion that you don't think the rates are going to go much higher now. No I mean who knows. But in relation to Jim

what is it that you forgot that you know certainly really I mean the S&P is yielding before tax. One point eighty five percent after tax rather probably less than one percentage point. You can't live on what the stock market is paying you in the stock market heaven forfend should fail to go up if it should forget to get a bid if it should not sell you're going down a hill and sideways people find they could live on it. The trouble with inflation in this country is the S&P 500 and in competition to expected 15 percent returns a mere existing 7 percent bond yield presents no competition so that's that's the inflation that's a problem. It's an inflation of assets but I think there's going to be a shortage of income and you're casting around for income people will look at Bonds more favorably and it shows alone what you have you. I think this market has run a long way in a short period of time. I think it's got a little bit more to run. But we should be getting cautious at this point and starting to look for a correction at some point. It's been six or seven years now since we've had a 10 percent

correction. That's a long long time. Well corrections are no longer bear markets a little more severe than corrections which when we do really I don't see anything that's going to kick this into a bear market. Earnings like Mary was saying look good for this year and look good for next year. When you look at the multiples on a historical basis they're not as high as people seem to think they are in the movements in the market are not wild fluctuations in fact this market is not his has not been fluctuating as much as a normal market would fluctuate the numbers just pick up because we're up at 7000. So you're not panicking but you're not racing to put new money into the things that I think. All right fair enough. But a program will be a few minutes short this week as the good folks at your local public television station continue their worthy efforts to get your support for the very special kinds of television you find on this channel and literally nowhere else on the dial. Please tell him that I wanted to continue and show them that I mean it. And you know we mean what we say when we say it's always great to hear from you here at Wall Street Week Owings Mills Maryland 2 1 1 1 1

7 4 by fax a 4 1 0 5 8 1 0 9 8 0. Now before we meet tonight's special guest let's introduce a new feature on this program. While many of our viewers are already sophisticated investors millions of others are not. We want everybody to make money of this financial party and understand completely what's going on. So for starters in the immortal tradition of college teachers everywhere. Let's begin by defining our terms. So as we pay our first visit to Professor Lou's classroom to begin with there is this thing called common stock. It's a unit of ownership in a public corporation and stockholders are entitled to a share in a company's growth by receiving dividends if any and to vote in proportion to their holdings on the selection of the board of directors and on other matters that are submitted by the firms other stock holders preferred stock on the other hand has been preferred only in that it theoretically carries less risk preferred stock usually pays dividends at a specified rate not rising over the years. And

ordinarily does not carry Bowden writes a bond in contrast is simply a loan to the corporation paying interest at a fixed rate until the day comes when the company has to return your original investment. A convertible bond is a hybrid usually acting like a bond with fixed interest and a set maturity date. But carrying a kicker that allows holders to convert the bond into common stock of the company at a given price getting a little fancier. Here's a frequent question we get. What are up ticks down ticks in closing tax. Nothing to make you bleed as it happens. And uptick is simply a stock trade that occurs at a price higher than the last previous change in the stock price. While a downtick is the reverse occurring in say when a stock that last traded at $10 a share now trades at 9 and 7 8s. The closing tech is simply the number of stocks that close with upticks Minus the number of stocks that closed with down ticks. It's a quick way to judge the overall market strength as it ended the day.

Then there are load funds and no load funds a load fund is a mutual fund whose selling price to you includes a sales charge that goes to a broker or other representative. A no load fund has no such initial sales charge and is normally purchased directly from the company that runs the fund. Or these days from a discount broker or from in a variety of such a no load fund. So both types of mutual funds do charge other fees. Finally in today's curriculum people regularly ask us to explain precisely what so-called profit taking means. Well what it's supposed to mean is that the market went down because deliriously successful investors decided to sell a few shares when this analysis is correct which is sometimes the downdraft will be only temporary as even more delirious investors quickly snap off the new bargains. So that's what some of the lingo really means. Stay with us and we'll soon be on the faculty yourself. And with that assurance Let's go over now and meet tonight's

special gas John Kim. John welcome. So glad to have you here. Thank you. John Kim was born in South Korea and came to this country 30 years ago at the age of six. But there's no question that he has learned to think in dollars huge quantities of John currently runs more than 38 billion dollars for investment management a subsidiary of the giant insurance company which he first joined in 1983 and the assets John now invests include those of the investment advisors fund which is staged a nice turnaround since John took it over three years ago. John is the bull market cracking. I don't believe the conditions right now are still very strong. Bull markets don't turn into a bear market when fundamentals are still very strong. And from our perspective the fundamentals remain very much well in France on the positive. The economy is growing modestly. Yes

we're all concerned about some wage inflation here but we don't think that inflation is going to get out of control. Interest rates remain fairly benign. They are in a trading range in our view and right now we think at the top end of the trading range and corporate profitability is still remarkably resilient and our expectation for 1997 is that it's going to surprise on the positive. Where are you looking for the best bargains at this time. We are cautious on the market right now. We have a had a significant rally as we know. So we are a little bit defensive on the market from a sectoral perspective. We're looking at some of the capital goods sector. We like companies like United Technology. We think Intel in the technology sector is actually a very strong play. It's one of the few companies while it's currently trading at a high P E multiple above the S&P multiple with the earnings growth rate we think will actually fall below on a 4 p basis below twenty

one thousand ninety seven. We like financial stocks financial companies continue. To restructure their balance sheet very well their asset base is quite strong and their expense reduction initiatives are still well entrenched. What are you staying away from. We don't like utilities. We think that the big growth in utilities is nonexistent. They have to still deal with the significant overhang from the nuclear plants they built that three decades ago that cost the decommissioning is pretty significant. We don't like telephones. We think that there's much too much competition in the telephone industry. We think that the Internet is going to be a significant rival to regional and long distance companies. I like the panels let's bring them and so on. One group that really hasn't participated in this great bull market has been the small cap stocks. You think they'll recover and come back.

Yeah. Mary on a valuation basis actually the small caps look quite good to us. In fact if you look at the forward earnings estimate the small cap stocks in a P E basis only are modestly richer than the large caps and historically that is very cheap earnings are expected to grow for small caps anywhere in the range of 25 to 30 percent. So I do believe that small caps will stage a rebound in 1997. The other thing on a relative basis that's favoring small caps this year is a strengthening of the dollar that's going to hamper multinational earnings in favor of small caps. Joe you're a buyer of junk bonds of general risk based interest producing securities right. Greenspan mentioned apart from the stock market was the compression of spreads in the credit markets that is risk rates or bid right down on top of government rates. Does this bother you and what's the risk reward ratio in the junk money area rather unfavorable to investors.

Oh it bothers us a great deal Jim. In fact back in 1991 we had average junk bond spreads in excess of a thousand basis points today. That has compressed into the neighborhood of three hundred thirty three hundred fifty basis points over comparable treasuries. And what that's caused us to do is become much more defensive or seek out the higher quality of the job market. Some of the names that we like in the junk side again it's part of the higher quality play would be Telewest Telewest is a U.K. cable company and a consolidating environment in the U.K. we think Telewest will be one of two survivors and drivers they're trading at a spread of slightly over 400 50 basis points over Treasuries and that's good reward in our view for a very strong cable company that will be a winner in the consolidating marketplace. John when you look at what the U.S. market is doing the last two years and what it

started out doing this year. What advice would you have for our views about diversification of their portfolios into Global Securities and to all the markets around the world. From a pure academic perspective we should all have some modicum of exposure to international stocks because they are truly a wonderful diversification play. Clearly over the last four years being international stocks would have caused her folios managers to far underperform the S&P 500. However we think that there are opportunities overseas that are quite compelling. We think Latin America is finally going to see its heydays. We particularly like Mexico and Brazil we are seeing valuation levels for example in Mexico about half the valuation levels that we're seeing on the S&P 500. We like the the European economies Netherlands has done very well over the

last two years and we think with the moderate economic growth low inflation and relatively stable interest rates similar to that experienced in the U.S. that Netherlands will continue to do quite well. We have time for one last question what's your stock bond allocation. When did it change. It's currently at 60 40. And our next move is expected to be more into bonds because rates have gone above 7 percent. Thanks very much John. Thanks to our panelists hope you'll be back again next week. I won't be on the theory that the real guys are vacation Janks has already struck for this year I think it's safe me to take a couple of weeks off. Next week my friend and colleague Frank Caprio will be sitting in for me and talking with a leading expert on your tell of the stocks low Miller so I hope he lights up your life. Meanwhile this of them off for a week. I'm with you guys for the night. Wall Street Week With Louis Rukeyser is a production of Maryland Public Television

made possible by the annual financial support from viewers like you. By Prudential Securities with more than 50 600 financial advisors nationwide Prudential Securities can help you invest your money wisely by A.G. Edwards providing a full range of personalized financial retirement and estate planning. A.G. Edwards trusted advice exceptional service. And by Oppenheimer Funds. Across America millions of people stake their claim to prosperity. Through Oppenheimer fund. For pretty a transcript of this program. Send $5 to transcripts Wall Street Week With Louis Rukeyser Owings Mills Maryland 2 1 1 1 7. Transcripts are also available to subscribers of the Dow Jones news retrieval service.

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