Wall Street Week With Fortune

So why take the money and run or hang in for the long term. Technology companies want to get leading the market higher and higher but this time may be different. Some of the best performing mutual funds make the worst investment. So stay with us for Wall Street Week With fortune. Wall Street Week With fortune is made possible by contributions to your PBS station from viewers like you. Thank you. I'm Karen gaffes that I'm Jeff called and welcome to Wall Street Week With fortune. Well Jeff we had a soft holiday shortened session to end an upbeat week and an incredibly strong year so far. Just take a look at some of the numbers the Dow Jones industrial average up nearly 9 percent from the start of the year. The Nasdaq has been on a tear gaining over 25 and a half percent and the S&P 500 up

12 percent year to date those are pretty impressive numbers. Very impressive in fact we haven't had a quarter like this since 1998 back in the heart of the great bull market back then. At fortune we were running covers like this one the internet or bust. Don't get left in the dust. The smartest companies are using the net to create a whole new way of doing business. That might sound to you like the hype that characterized that era. I like to point out that we did acknowledge that bust was a possibility. Right I'm sure we met at that way at the time but I'll stick to that story. Now an interesting perspective on this comes to us from Jim Paulson at world's capital management the investment strategist there he says that among the S&P 500 companies more stocks have gone up in the past 12 months than went up during the great boom from 1998 to 2000. I'll say that again. Among the S&P 500 more stocks have gone up in the past 12 months than went up during the great boom of

1998 to 2000 in other words back then as he says it was really a stealth bear market because most of the stocks were actually going down. You're right it is an interesting perspective but I would caution getting too excited about this rally because we're still dealing with an underlying very weak and fragile economy. Just take a look at the numbers that were released on Thursday. The unemployment rate continues to rise. With the economy losing another 30000 jobs in the on that June alone. And don't forget even despite the impressive rally that we've seen so far we're still a long ways away from the March 2000 highs in fact. The Dow would have to jump 23 percent from today's levels just to match those March 2000 highs. It's worse for the S&P. It would be to 57 and a half percent rally and the Nasdaq another 200 and 5 percent rally to get back to breakeven. Well Still though it's been a great start to this year in fact so far this year it's been easy to do well in the stock market. The real question is who's doing best. A couple of our

favorite Wall Street Week With Fortune stock pickers have shown once again why they are real champions. John Buckingham is editor of the highly popular and successful prudent speculator newsletter. His 2003 stock picks for us are up 21 percent year to date. He joins us from San Diego. Joan Lapin of grammar Seed Capital Management called the market bottom on this program last October. Her picks are up 25 percent. Congratulations to both of you. Joan your two best picks for the beginning of this year were Nextel Communications the wireless phone company. Now up forty four point four percent year to date and Providian Financial turnaround situation up forty one point six percent. A couple of good moves do you still like them. I do. And we still own both. Would you still buy it. Yes I would tell me more. Well Providian I would remind your viewers is down from sixty two dollars. It was down it was down to $2 last year. And when we started

buying it last summer it was around 4 and I think when I recommended it at the end of the year it was around 6. So it's now around 10 and I think it I don't know that it's going back to 62 anytime soon but I think it's going higher and Nextel is has gone from earning nothing. To I think at the end of the year and when I entered your competition I thought they would earn between 50 cents and a dollar a day this week themselves have said they are urging people to expect that they will earn at least 75 cents for sure. So to go from zero to a dollar I suspect will be rewarded with a higher multiple. John your best picks were Centex a home builder now up fifty four point two percent year to date and cap terrorists a business information systems for fifty two point three percent. Would you still buy those. No both of those have moved above my buy limit but I do have another homebuilder named D.R. Horton that looks very inexpensive and cap terrace was what I call the cash is king type

company where the cash on the balance sheet was actually greater than the share price of the company. And I have a stock to replace that one for those interested in that concept it's a company called net works ticker symbol V and a dollar fifty a share and cash stock trading at a dollar. John you are remarkable in that you have not been afraid to go into technology and has done pretty well for you one of your principals there. Well we do like to focus on balance sheet strength so companies like Cap terrorists like the larger cap names like Apple Computer 3Com these are all companies that I think have excellent growth potential. But more importantly they have the balance sheet strength to ride through the nuclear winter that we're going or sort of under way and in technology. John your worst pick back in January was Schering-Plough it's down over 16 percent year to date what happened there. Well that we still like the pharmaceuticals sharing of course has had some company specific issues and and this is one of the reasons why I preach broad diversification. You know our picks are up 21

percent as you said even though we have a dog and there are a few Well right now I probably would rather go with a Pfizer or a Merck than a Schering-Plough although I own Schering-Plough in my own portfolio and I'm sticking with it. Right. Joan you were telling us to avoid Coca-Cola it was overpriced you were shorting it. It has since gone up. What gives Well it's up a dollar from when I was on your show it was not down. Well it did go down it actually was in the mid 40s it went down to about 37 and I think I would counsel your viewers on that one that they should pay attention to the fact that for the last five years every time coke rallies it rallies to a lower high and goes to a lower low. And I think that this week the New York City Board of Education decided to ban the vending machines with soft drinks from any New York City public schools. I think this is just part of a wave of what's going to overtake that comes between that and the lawsuits against sugar and fattening foods and stuff like that you know I think there's still a big

trend you're still down on coke. It's just not a winner I mean the stock sells at a very high multiple for a company with about a 3 percent earnings growth rate for the last five years. Joan since the low in October since you were last here the dollar was up 24 percent. Pretty big move are we running out of steam. I don't think so. And in her opening remarks Karen commented on how much more you have to have the averages go up to get back to their old highs. I would put it in in the obvious way which is to say that when the Dow drop when i'm sorry not the Dow the NASDAQ dropped from 50 100 to eleven hundred it was down about 78 percent. It's now at sixteen or seventeen hundred Its still down 65 percent. And in order to get even I think you have to have the Nasdaq up. You know it's like from the bottom back to the top it had to go up 500 percent. Right so you've just made your down payment.

Well that's an encouraging way to look at it anyway John. At the beginning of this year you predicted the DA would close this year at ten thousand two hundred were giving you a chance to revise that if you want. What do you think. Now I don't think I'd revise that of course I don't really care what the Dow does I don't own too many Dow stocks more interested in the undervalued out of favorite companies that that I think will do far better than the major market averages over the next six months and next three to five years. Well let's talk about those a little because your picks now include three of the stocks from New your New Year's list which were 3Com in vision technology and Office Max plus 10 new ones now there's no need for viewers to write these down as they see them on the screen because they are available at our website PBS dot org but among those 10 stocks. What are your what's your favorite now. Well I like a little company called orbit international ticker symbols. BT they're an electronics maker of power units. They have exhibited excellent earnings growth here of late in the stock still trading at a single digit multiple although it may have popped up to 10

today so I think they have excellent growth potential It's a comp and it's been overlooked the market cap is very low. About 12 13 million dollars. I know their name might be Nautilus which is in the health and fitness products area Nautilus has a 3 percent yield the current P E of 5 and I think that's a company that you might want to look at as a long term investor it's come down dramatically it's a busted growth stock. But I think it has an excellent value potential here. John I was a little surprised to see a stock you mentioned earlier D.R. Horton a home builder simply because the home builders in general have had a big run up and a lot of people think maybe it's time to get out of them. Well that's that's what a lot of people think but they've been thinking that for the last five years. Home building stocks are trading at single digit multiples and exhibiting growth of 15 20 percent a year. If only they didn't make houses and made some kind of technological gadget they'd be trading at five six ten times the current multiple or current valuations. So D.R. Horton is trading at about nine times earnings and those earnings are growing

significantly. I like the demographics of the housing industry over the long term and I also like the fact that the major publicly traded homebuilders are gaining market share and even though they only have about 20 percent of the overall market right now amongst the top 10 or 11 builders so Horton I still think is cheap yes we've made a lot of money on that we've made a lot of money on Centex but I still think there is value there. Joan how would somebody grow not one on the D.R. Horton Yeah. We actually bought that in January in the upper teens and it has been as high as thirty two I don't know where it closed tonight but I think it's interesting. Whether or not the homebuilders remain interesting will be largely dependent on interest rates if interest rates start backing up. I think whether or not growth continues for that industry. Those stocks will have trouble you know. Who else do you like. Well it is since John is mentioning smaller companies I will mention a company called drugstore dot com which we

do own all of the stocks that I've mentioned we do own and I will tell your viewers that drugstore dot com It was another broken Internet stock but it's got enough assets and cash to carry it to profitability which should come later this year. Stock is probably up from three to you know five or six in the last few weeks but I think that one can go a lot further once they demonstrate continued earnings capability. May I challenge John on one thing he's a big fan of broad diversity. And if he's mentioning companies that are as small as 15. Million dollar market caps then you should own a bunches of them. But if my approach to investment life in what has been the success of my company is based on running concentrated portfolios I've always called it put your money where your mouth is investing and if you know and thoroughly research the companies that you own then I believe that 10 or 15 stocks is all anybody should own.

Well it does go against the conventional wisdom but it seems to have worked OK for you at least so far. Right. Thanks so much Joan and John for your insights. Thank you it was a bangup first half of the year but veteran Wall Street economists Robert Brusca says beware of looking through rose colored glasses. Bob is chief economist with Native American security Citi joins us from New York. Bob it's great to see you. That's with you Karen. Well what's the view. What's wrong with the view through these rose colored glasses. Oh it's a great view the question is whether it's going to be the right view but it's a great view. Tell me why you think it may not be the right view. Well the first thing that I want to say about this outlook for a pick up in the second half is that you know this is the same forecast that economists have had for about the last three years and forecasts suggest that their forecasts and. You don't have any assurance it's going to occur when you make a forecast it's a little bit like getting directions to somebody's house you don't just turn at the corners do what you're supposed to as you go along you look at the streets. You check you look at the scenery you try to see if you're getting closer to your final destination. And as we get closer to this final

destination of stronger growth in the second half that scenery doesn't look like the kind of scene we were supposed to be seeing. We're supposed to be things getting stronger. But instead what we see is consumer confidence in fact just as we fell in June for the month according to the two major monthly indices it fell. This is not the kind of thing we're supposed to be saying on the brink of a stronger economic recovery. But the stock market is supposed to be a leading economic indicator and it's certainly saying that things are looking pretty good with four consecutive back to back gains. But I'm sorry did you say it was a leading or misleading economic indicator Carol. Oh well. Remember the stock market is one of those indicators that is said to have forecasted you know eight of the last five or sessions and it does the same thing of recovery. This stock market in particular has had a very very bad record of telling us how the economy is going to do this is the great bull stock market that went way over the edge got things way too strong and had to go through some tremendous restructurings. This is a stock market made up of companies that have fudged earnings. This is basically a stock

market that has the thought police all over it because of its past transgressions and I don't know why anyone would want to say that this stock market is precious and knows where we're going. Even though it's true that the Federal Reserve has said that the strength in the stock market is one of the more bright fundamentals in the economy. OK so look at all the corporate reforms that we saw in active last year and this year is that with the deals that were made with the Wall Street brokerage companies aren't investors better off now than they were a year ago. Well they should be better off but saying that they're better off isn't to say that. It means the economy is going to do better. What it means is that firms have to toe the line more and you need real economic activity again. It's another reason to look at the numbers wake up every morning look at the economic reports and say well what are they doing. And the answer is they're not doing that great. Factory orders are still pretty weak. We look at things like the National Survey of manufacturers that says that things are still declining in the manufacturing sector. We haven't had any job growth to speak of yet. We're looking for

the unemployment rate to continue to rise if this continues to be a problem. Well let's talk about the interest rate scenario of the fans last week lowering rates to 55 year plus closure show. Doesn't that mean that the cost of borrowing should stimulate some sort of business activity and help the bottom line. Well the cost of borrowing is important. And when you cut tax rates that's important for businesses too. But again. Businesses are investing because they think that there is going to be somebody out there to buy their product. If you don't have final demand you're not going get people to invest and you're not going to get people to invest just because of reduced interest rates you know you're out there trying to sell iceboxes to eskimoes you're going to hard sell even with zero financing you know 24 months same as cash. It isn't going to move those ice boxes you've got to sell them something that they want. Right now we just don't have strong demand. Consumption has held up fairly well but let's remember the consumer is in there buying bargains buying autos with zero percent financing buying things not at Christmas but after Christmas when consumers can get them on sale.

This is what the consumer has been doing this is not an aggressive consumer this is a consumer that sitting back and waiting for deals. And it's not the kind of thing that causes businesses to want to go out there and put their capital on the line and take the risk. And that's why investment is then weak and it's why the low interest rates and the reductions and these tax rates really haven't turned the economy around. It certainly is helping the housing market are you saying that we might be on the precipice of a bubble there as well. Well housing is something that certainly helped this economy along housing prices have been strong. Interest rates have gone down people have been able to revive their house and actually take out some of those capital gains. It's been one of the things that's helped keep consumption going. But I think looking forward you've got to look at these housing prices and recognize that while people say they're justifiable they're really justifiable at this level of interest rates as interest rates go up it will be harder for people to afford prices at their current levels. And at that point you might find the housing market's in a bit more trouble but you're not going to see interest rates go up until we've got some really economic activity from another source and that's just not happening.

And what about the bond market a lot of people last July started taking money out of the stock market or get into bond funds. Have they missed the mark. Well that works that work then but over the last quarter of course the stock market worked even better. And what this last Fed rate cut we had bond yields start to move up rather than down and that could be a signal that the bond market rally is really at an end. But it really depends on whether or not we get growth. Certainly the bond market is acting in a very wary fashion. We don't have anything that looks like inflation yet we have the Federal Reserve not cutting interest rates as aggressively as the bond market wanted. And so this is a good time to be wary about your bond holdings and to watch them and maybe to think that. Maybe just too early to sell your bonds but it's a good time to watch that market closely and see what happens next one of these two markets is going to offer you an opportunity. If the stock market market or the bond market right now it's really difficult to tell where your better bet lies. You also mentioned the tax cut of course that was affected this week July 1st the 2003 tax cut lowering some of the capital gains and dividend taxes. Is this a good thing. Well this is a good thing for the economy but the focus on this has taken the focus off of the tax

hikes we've had you know tax cuts are like a greased pig. It's hard to get your arms around a hard to hang onto them. And in fact these are elusive tax cuts because they're coming with tax hikes tax hikes at the state and local level hikes in property taxes and sales taxes. States are under tremendous pressure. They're going to be cutting their expenditure and therefore we're going to need this federal stimulus. The problem is that the kinds of hikes we're getting from the state local governments are going to hurt people all across the income chain where the prime beneficiaries of the federal cuts are people at the high income levels and therefore they're more likely to save that money that's given to them. And this is one of the main reasons why I don't think we're going to get as much stimulus out of this federal tax cut as people think the implications are rosy forecasts being wrong that the consensus forecast being wrong what do you think. Well if it's wrong we're in trouble because we've got presidential elections coming up or going into that cycle it'll be hard to have any more fiscal stimulus and they've already blown a lot of our capability to do that with this last big package that we put through. Interest rates are going to go down that much

more. We've already seen the dollar fall and we didn't get a lot of kick out of that either. So we're really running out of options so I really hope that we do turn things around. I think the good news is that we have a slump in the second half it's not going to be an outright recession it'll just be more of this turgid economic growth. But you really want to be wary about this idea that we're really going to turn around and have strong growth in the second half that's still a forecast. It's definitely not something you can bet on yet. All right. Thanks very much for joining us appreciate your insights. Thank you. Well he's awfully downbeat Kiran but the fact is we had a quarter so good that finally at long last people can open their mutual fund statements with a smile. You're right after these brutal three year bear markets all of a sudden you're starting to see some of the larger funds really pick up. And in fact among those largest fund Vanguard 500 up 15 percent Fidelity Magellan is up 14 and a quarter. American Funds up 14 and a half and PIMCO told we turn up only 2.8 percent that may be a sign that

that bond rally is running its course. Those are the biggest places to invest your money in mutual funds the best places to invest your money this past quarter small cap mutual funds up twenty one point eight percent in value funds up eighteen point six. Among the sectors science and technology up twenty four point six percent Telecom up 24 after the terrible beating it's taken and funds that invest around the world up almost 19 percent. Now for more insight into mutual fund performance we're joined by Katherine Barr London analyst with Lipper who joins us from Denver. Catherine a lot of funds did well this quarter but the top of the heap was the apex Mid Cap Growth Fund. What are they. That's actually classifies that as a small cap growth fund based on the market capitalization of the stocks that they invest in. But they had a second quarter return of 82 percent in their year to date return is over 100 percent. But there's one thing there are a few things that we should keep in mind with this fund. If you look at that more closely they have a very high expense ratio about 12 percent the average I know of the

average equity fund is a little over one and a half percent about $300000 under management so that's a very small fund. And the other thing to look at is their total and only total expenses but their total return over the last three years their tax efficiency the capital preservation in the consistency of the returns have been very poor as measured by liberal leaders score so this fund even though it's done very well year to date in quarter to date is maybe one that you want to think twice about as an investor. Sounds like it will very quickly let's look at the others at the top or pull through a sector. Yes the Profunds tend to either way under perform or away or out perform what the market's doing they employ a lot of strategies that involve derivatives in options and interest rate swaps and a lot of very complex trading strategies. This particular fund seeks to outperform the Dow Jones Internet index by hundred fifty percent so that's why they've done so well. And then riddles and first hand the Global Technology Fund Similarly were big

bets on technology. Yes exactly that's that's the secret of their success this last quarter. OK Catherine who are the losers this quarter. The losers are also are the bear funds for the most part these are funds that that against the market they take short positions very large short positions or use options and derivatives that mirror that type of technique where they bet against the market so since we had very strong market upturn this last quarter the bear funds did very poorly. Catherine any surprises when you look over all this data. Absolutely in overall terms we saw that value be growth this last quarter which is very surprising because we had such a great quarter for the market and in the last 40 years there have been 25 very remarkable upturns in the market in 20 in 24 of those cases grows the value and so it's very interesting that in this case value growth and the only other time that that happened was when we were coming out of a recession. So this may signal that we are coming out of this economic slump. And what about the small cap large cap thing that's something we've been reading a lot about lately.

Yes certainly we anticipate that we'll continue to see small cap companies outperform large cap companies in the near term Now if if we see that the economy starts to come back very strongly. It's anticipated that we'll see large cap companies start to take over take over that lead. What do you expect for the second half of the year Catherine. It's very tough to say and I think we're all waiting with bated breath to see what earnings come out with what companies come out with with the earnings in the next couple weeks and that will that will tell I think first quarter was pretty strong. If we have another strong second quarter I think that the confidence will come back and we'll start to see companies spending again which is what we've all been waiting for. And once that happens then I think we can be pretty sure that this recovery is well on its way. We've been hearing though over and over and over for about three years in a row second half recovery is going to save us we're hearing it again. Yes that is true and that's why that's another reason why I think that I value the growth in this last quarter I think a lot of investors are have it had a wait and see attitude there still

prefer ng value oriented stocks in the belief that the growth oriented stocks are fully priced and that why would why would you pay that much that price to earnings ratio when we don't see the solid evidence that we're going to have a strong recovery. I understand what you're saying Catherine thanks a lot for your insight. My pleasure Jeff thank you. Well that's our program for tonight. Next week we'll show you how. With a stroke of a pen President Bush transformed the boring old utility industry in 20 of the hottest investment on Wall Street. Got a question or an idea. We do want to hear from you write to us at Wall Street Week With Fortune Owings Mills Maryland 2 1 1 1 7 or e-mail us WSW at PBS dot org. Have a wonderful Independence Day weekend and we'll see you next week. Goodnight everybody. To learn more about this program visit PBS dot org. For a transcript of this program send a $5 to transcripts of Wall Street

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