Wall Street Week with Louis Rukeyser; 1729; Three Months After the Crash

Oh. World. Wall Street Week With Louis Rukeyser brought to you by a public television stations by Hanson a 10 billion daughter trans-Atlantic company with 23 consecutive years of growth in earnings and dividends by providing essential goods and services for eventual Bates securities. The investment firm with rock solid resources and market wise

thinking in the business of making money and by primary the new name in financial services and specialty retailing a company with the resources to fund a growth for tomorrow primary a name to remember. Produce Friday January 15. Tonight special guests are a Barton Biggs. Chairman Morgan Stanley Asset Management Irwin Jacobs chairman and CEO in-story incorporated and Felix W. Zelalem first place President Union Bank of Switzerland. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back any time you are inclined to doubt that we live in a wondrous world. I invite you to consider one of its most remarkable creations the mind of an investment banker. It's only about a half inch high in a quarter inch wide and it has

absolutely no depth at all. But with it he was able to control billions and billions of dollars. The handicap though is that in a space so small as we have been reminded on occasion of late there is room for no more than one single idea at a time if that. That one idea that singular preoccupation changes from time to time apparently on an electric signal that simultaneously hits the pea brain of every other investment banker at any given time it can be the price of oil or the value of the dollar or the money supply or the cost of cauliflower and caught a hand at the sole requirement being in that it also preoccupy all one's colleagues in Wall Street today that subject is the pre deficit. Now to us mere civilians whose minds have been known to hold more than one thing at a time and with us will never have the unique skill necessary to control billions and billions of dollars. The trade deficit may seem a somewhat belated preoccupation after all we

Americans have now been buying more goods than we were selling every single month since March of 1976. During which period Wall Street has taken on an abandoned more fetishize than the Marquis to some since October though. Trade is it. And if you don't understand that you'll never learn how to wear yellow ties and red suspenders. A bad report on the August trade deficit is widely thought to have begun the October slide. Just last month a disappointing report on the October deficit sent a stock market rally into reverse for its forty seven point hammering. And today when the November report showed a narrow win of the trade deficit all the boys clapped hands and sent the Dow Jones industrials up by 40 points. Never mind that there are at least one or two thousand other things going on in this economy. Never mind that November's 13 billion dollar U.S. trade deficit which so excited not just the stock market but the bond and currency markets too would

not so long ago have been viewed as absolutely horrendous when the gang focuses on just one thing and just one usually wrong estimate of what that thing will be. Any happy news is an excuse for near terminal euphoria just as any disappointment would have been taken by the affluent MBA is as an excellent rationale for Harry Carry the only remaining question is would any sensible human bein buy a used portfolio strategy from these guys. We tonight will try to rise above said single minded silliness in a special program that will temporarily put aside our usual format as we attempt to put the crash of 1987 into more meaningful perspective. Three months after the event my guess will be three genuine investment rarities independent thinkers who are willing and able to buck the crowd and who have repeatedly done so and not just a national but a world arena. If you watch them closely you will see that all three

are actually able to think and chew gum at the same time. First though let's stroll down peabrain Promina and see what did happen this past week in Wall Street. And as the Dow Jones Industrial Average indicates not even the combination of lower interest rates and a firmer economy could cheer the lads for long until Friday when the trade news arrived and was followed by another good report on producer prices thus enabling the Dow to finish up nearly forty five points at nineteen fifty six point zero seven which means it's now also ahead for the year by 17 points and Friday's strength was enough to assure that all the broader market indexes scored advances too. As for elves they brighten fully three notches and their technical market index back up to plus five is again saying bye. Gold and Silver lost a bit on the week but the big winner was the long suffering dollar its investment bankers these days have exactly the same

preoccupation of the day in Zurich and resemble ENDA. The 25 percent decline in the monthly U.S. trade deficit sent the long suffering greenbacks soaring against all major currencies. It's almost enough to make a fellow yearn for a legitimate line of work. But before we panic and indeed before we meet the three wise men who we hope will help us not do so. Let's take a look at some of the truly major developments that have taken place in the financial world in the three months after the plunge. There was lots of talk that some of the largest firms in the brokerage industry were in financial difficulty after the stock market crash. And sure enough just seven weeks later the industry's second largest firm Shearson Lehman Brothers swallowed the 10th largest firm E.F. Hutton for one billion dollars creating by some measurements the largest securities firm in the country. And the fun isn't over yet. This week there were reports that industry giant Salomon Brothers was ripe for takeover and that Kidder Peabody was up for sale too in the shares and Hutton merger

that with thousands of layoffs mostly have gotten veterans but they weren't the only firms littering the street with something other than ticker tape. As many other companies cut costs to offset their October losses Incidentally the worst performing stock group of 1987 was the brokers. Many of those shown the door were so-called yuppies once the fashion in Wall Street. Now learning that markets don't always go their way. Before the crash foreign buying helped mightily to fuel the rally. But now the inflow of yen pounds and Marks has slowed to a trickle and mutual funds the choice of many a first time investor which enjoyed record sales in 1986 and early in 1987 are no longer the rage. Sales of mutual funds have fallen off dramatically and redemptions Rose last fall to record levels. But some things never change. The previous predictions may have proved a bit leaky. New ones are being voiced by the same old navigators as confidently as ever. What have we learned from October.

To answer that question we have three of the investment world's giants with us tonight. Barton Biggs of one of Wall Street's heaviest hitters. He watches investments around the globe as chairman of Morgan Stanley Asset Management. Felix Sewell office first vice president of the Union Bank of Switzerland in Zurich and is the first guest to have been with us on two continents having voiced concern about the US markets last June on our program from London. Irwin Jacobs is one of the foremost of the so-called corporate raiders He's best known for his large purchases of the stock of some of America's largest companies such as I t t Gillette and Disney though he says he'd rather be known for his successful operation of several companies through his own firm mystar. Gentlemen let's begin by asking each of you what is the most important lesson that has been learned in the three months since the crash. First dog peed a pea brain problem and I know you are looking down on all the travel I think uniquely qualified to guide us.

But I think I think what we learned was how incredibly fragile the psychology of the market was and how fast stock could go down. And certainly what I learned was that the next time I see prices spike I'm going to do some selling. Felix you were ahead of the crowd in some respects. What do you think the most important lesson. Well the most important lesson these that financial assets do contain risk and financial markets on the one way streets. And the more excesses you have sent the longer they lost the more painful the correction would be and crowd behavior is an important factor in financial markets. When you have the advantage in that you do it some of your investing quietly. These fellows are on the line every day. What do you think is most likely from my own personal point of view that's the only way I can relate to them. The lesson I think is really two things for that I have learned one is that although sometimes we

believe we have certain. Ways of creating our own destiny we do not know of these exterior forces or the ability of markets to move so dramatically as we saw with the place like 19th and from my own point of view to always make sure that never forget the fact that this has happened and could happen again in the make sure that I have the ability not to get hurt as bad as to take advantage of the situation. When you say next time it's bikes you'll do some selling How do you know bike. Well I mean I think that in retrospect that what happened in August in particular in the very end of August there at bay you really had all the symptoms of an important Spike I think a lot of us recognize that but we never dreamed that the correction was go would go so far and the symptoms were high volume big price moves in big capitalization stocks that kind of thing. To what extent do you think these new computer games or so-called program trading made the

downfall in the downturn as severe as it was. Well I think there's no question that the that the computer trading and the derivatives converted what might have been a 20 or 25 percent correction into 30 or 34 35 percent correct riveted to be in the options and futures on the stock and that was the New York Stock Exchange as you know yesterday announced some curbs on this program trading on days when the market moves at least 75 points in either direction. Some people thought this was a knuckle wrap when a straight jacket was required. What's your reaction. Well I don't I don't really feel that the program trading. It is the problem. I I think it's the it's the futures and options and that the that the real solution lies and raising the margin requirements on futures and options very significantly. Would that really hurt the great institutions with their huge amounts of cash. No that wouldn't affect the way they have situations at all since they seem to dominate the program trading as opposed to individual speculators what goods are going to raise the money.

Well I'm not talking about program pray I'm talking about on the purchase of futures and options on the options exchanges. But in 1929 you had a market dominated by individual speculators. This market is dominated by people with huge amounts of cash and huge computers. Yes but that all the all the all they do is extend that the trend that it's already in force that comes out of the institutional buyers and sellers. Felix since you. We're the first of this trio at least to be gloomy maybe a little prematurely. We should ask whether you are now more cheerful. What's your outlook now. Not really usually. You know our business is cyclical and there is a bull market followed by a bear market and the bear market usually ends with very bad news declining profits and disappointed investors. I think we are not there yet. The news is still good. Profits are reported to be very sound and the market is rallying I think it's a typical bear market rally

and I'm I'm not positive at this point of time. The optimists say we will have a very short bear market. You clearly disagree how long do you think it's going to be. Well basically I think the long term cycle or rock trend is broken in the next several years will be sideways to slightly down with highly cyclical swings comparable to probably what we had from the mid 60s to the early 80s and we are now in the first cyclical swing down which could end late this year or early next year. Why is the game over. Why is all the good news behind us. Well we hit the excess evaluation levels and we had a tight door liquidity situation due to the currency situation getting out of hand. And I think now we have broken psychology. I think after the break stocks will be looked at

differently than before the break. And many investors are recognizing that they probably carried risks in their portfolios. They are not able to carry and that's why I think we lose many of the stock investors in the next in the future who will decrease their stock investments and probably go to a safer place where you put your money now. All large party Zeen can Treasury bills and parties in Treasury bonds and on stocks I'm pretty low. In fact I think Treasury bonds could be a little bit while the tiler maybe they are a little bit ahead of themselves short term but I think they are an exciting investment for the Shia at least when doing of value was just mentioned value is what you always see as a corporate raider. We've seen a decline in takeover games since the crash why is that. That is clearly temporary in the reasons temporary is that if you people who own

stocks today whether stance to sions or whether it's the individuals they look back I told her 19th and hypothetically if they own a stock that was 40 dollars that is 20 dollars today that they still don't believe that the value of the stock has really gone from 40 to 20 unless they want to really sell it. But everybody's believing that better days are ahead of us. If I as you called me a Raider was willing to pay $25 or $30 a share for that particular company. I don't think people see that's the same people don't that stock a for it. I don't think they really realize what the value of their stock is today that in fact it has gone down. Many people aren't recognizing it in the real sense that they believe the value is still there but it takes some time to bring this back. Three six months from now I think the realization of what's taken place and based on where the market value that stack is that you will see a continual surge of of takeovers but coming from a different force. I think you're going to see that overseas buyers as we've seen of the the recent day that two mega deals of two

multibillion dollar deals announced the sterling drug and the pharmacy group insurance company both coming from offshore is really just the beginning. I mean if being a foreigner today and having the currency going in your direction as well as the market creating a much lower value I mean there's nothing more magic than to come into this country than under those two scenarios. You're saying the same thing as Felix really that people don't realize how bad the situation has become. I don't necessarily agree that it's a bad first of all I don't agree with with Felix that things are that bad in him and I have disagreed a few different areas before we became in the show today that I believe it is in on the secret weapon. Where do you differ. Well where we differ is first of all I am of the strong belief that this country has never been better postured from an industrial site to flourish for the first time in my lifetime I have seen that we now have a country that is again an industrialized country that can compete both here and abroad. I have not seen that my lifetime where we can literally compete both with price quality and acceptance in the

marketplace and be competitive. Felix said to me that when Europe gets shut off and you start shipping a good there and our industry turns down we're not going to be really buying that. You know we're going to shut down our spending over there but nothing goes to zero in any case. And I believe that if if we can handle our needs within this country and at the same time competing in all different markets abroad we don't have to get all the business in order to flourish. I think that we've got some great days ahead and the best example I can give is our own businesses. I will tell you that. I have never seen it better than it is right now and not for one minute would I pretend to tell you six months from now I was going to be that way I don't know which areas of the economy do you look most right for for the takeover. I'm strictly value was and when I say that it can be the two things we are not involved in is high tech and medical. You know that point to where we just that isn't our expertise. You know we're we're really old fashioned investors. Things that we understand we're not complex people.

You write over the word writer I know you're a co-owner of the Minnesota Vikings and so I did mean the Los Angeles. Times more generic leaf. Many people blame people in the takeover business as you were exactly the bidding for takeovers business for having pushed the market helped push the market to high. That's a valid criticism. That's a complete cop out completely. And you know to say that there is one particular reason I mean go the other way and what is value. What is something worth it's what somebody else will pay for it. If you look at the Japanese market it trades at sixty six times multiple were a steal were a license to steal in this country and yes there will be a day of reckoning in Japan. But let's not kid ourself to build the industries and the technology that this country has created could not be done for all the dollars that the market has has a value on it today and the market continues to be a supply and demand what everybody wants to get out of those dollar we want to go up it goes up. But there is another statistic that's very important when you look back. There's been a shortage of shares in Japan to feed the

frenzy of the people that want shares there. And if you look at our markets here we have lost the shares for the last since 1984. We have had a shrinkage in the shares approximately 80 billion plus dollars a year or a 12 and a half percent shrink in shares that we've actually had no markets and that does not include October 19th and forward I'm sure that number will be dramatic since that time. But what do you think of Felix estimate for our long term future. Well I mean I think that just hearing feel like center of talk about it and they lay out the two that the dilemma I mean on the on one side Felix made a great call and and he's right there are a lot of financial risks in the system and the psychology of the market has been severely damaged and we have a very tenuous situation. The other hand as Europe points out American manufacturing companies are superb position. So I am going to have tremendous earning power over the next couple years so that's the dilemma that the investor has to deal with.

What's your outlook for the market this year. Well my problem has that high I understand very clearly what both of them are saying and I'm sympathetic with what both of them saying. And I'm not sure which way it's going to play out and so we were taken were taken I really check an approach where in a in a portfolio we'd be 50 percent in stocks 40 percent bonds and 10 percent in cash. And I think there's big risks in being as extreme as Felix is the other hand. To be 70 75 percent in stocks is equally risky with the 50 percent in stocks be in the big blue chip companies. Well to the extent that that the big blue chip companies are cyclical American manufacturing companies and I think that's where the where the basic industries the chemicals the steals the papers the capital goods companies technology stocks that's where the value is and that's where the earning power is going to come from.

You mentioned technology stocks some of the big technology stocks IBM Digital Equipment have been the major victims of this market decline. Do you think with their purchases at this level. Absolutely and just that and technology was a victim. Again this week as a you know as a hyper active and hyper sensitive market responded to minor disappointments in digital equipment. Felix everybody here is praise you for your freshens and being a little cautious about this market more than a little cautious. It's only fair to say you strike out occasionally to you told me last year that the dollar had very little downside risk and that it was going to have a big rally in fact with I was much lower now than it was then. What's wrong with our currency. Well what's wrong with your currency. I think the world has recognized that you are just procrastinating economically. You have problems and you do not really pick and solve them. And that leads to a decline in CA and see all the major currencies in the world markets.

Does Europe care who wins the election this year in America. I think it does but I think it's not the decisive point about financial markets and economic factors I think whoever wins. Politicians have not really recognized that they really should now tackle the problems that we are faced with but that's painful because it's a painful adjustment process to bring that into line with economic reality. That's really the basic problem we are faced with. When you've essentially been optimistic you suggest that the holders of properties don't have their prices low enough for you to get to it just to get them. No no that's not true at all I just don't think that there is a reality and I'm not out to conquer the world I'm very pleased with the businesses we own the fact that I am put in the group of the Raiders it's a very elite group of them from a handful of people out there and I take it complimentary from you but some other people don't quite look at it that way but let me ask you about this business that you say you like to be in that group. You were quoted as saying they never clap their hands and say oh boy are winds coming.

Would you ever do a friendly deal. I tried. It isn't my fault let me tell you and everyone else is interested if you look at the businesses that we have purchased and the ones that we run today. Yes we have sold off certain parts of business we can't run everything in the whole world but we've been incredibly successful and we've created the second largest voting company in the world pleasure boating couple the world this was done from a bankrupt company in 1077. We brought a food company and in the consumer products and bankrupt company we have bought very depressed assets and our management group has been able to make them very successful. There are incredible values out there but there's one thing that I will tell you the dollar situation just to move over where Felix was a second ago. The dollar situation I believe the best single thing we've got going for us today from the industrial side is the depressed dollar. I'm totally for it 100 percent. And I would be I would be alarmed to see that thing move I mean to see the yen move 5 5 yen today against the dollar. That is I understand why but it still is a little larger to me. I don't want to see that dollar move back up

again and make us uncompetitive in the world market. I think it's very important and I think that the fact of the government is doing nothing to try and bring that dollar back up is very important. Best thing we've got going for us out of town bar and what's your view of the dollar what do you think's going to happen this year. I think there's a reasonable chance that the dollar data is bottom of the can at the end of last week and that that that the central banks scared the speculators and that the. The trade numbers are it were good enough in the beginning of a trend that were out of the woods. Well it's a nice note in which we have to stop Unfortunately thanks very much to all three of my distinguished guests button Beggs Felix Irwin Jacobs for joining me on this special program helping us to understand where we've been and where we may be heading. Hope you'll be back with us again next week when I'll be talking with a top expert on one of the most controversial part of the federal budget aerospace and defense I guess will be Gary Rice will give us his views and how you as a citizen and as an investor might wind up with more bang for your bucks.

Meanwhile this is them off the week. I'm Louis Rukeyser. Good night with the group that has been brought to you by public television station by the ten million dollar transatlantic company with. The three consecutive years of growth in earnings and dividends by providing essential goods and services five for venture based security the investment firm with rock solid resources and market wise thinking in the business of making money and buy primary got a new name and financial services and specialty retailing a company with the resources to fund a growth for tomorrow primary a name to remember for a transcript of this program. Send five daughters to friends read. Wall Street. Loons move round. 2 1 1 1 7. That's $5 to transfer. Wall Street Week Owings Mills Maryland 2 1 1 1 7. 1 Street we credit reps are also available to subscribers of the Dow Jones news

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