Wall Street Week with Louis Rukeyser; 0222; Energy: A Crisis for Investors?

For Public Broadcasting. Wall Street Week but whose line. Why do you march to your host for Wall Street Week is Louis Rukeyser. All panelists are Frank Cappiello James Price and Porter Randall. Tonight's special guest is Charles two months with partner Cyrus J Lawrence of sun. Good evening I'm Louis Rue geyser This is Wall Street Week. Welcome back. For those of you

who are aware of our commitment to the small investor may well be wondering just what we can claim to have done for him lately. That's been added to this fair Alicia and charitable. And you should be ashamed of yourselves for if nothing else we have finally got rid of February. And for anyone who has been keeping track of the nation's economy that has to count as a magnificent mission of mercy. It's not often that you find a single month with so many dolorous economic developments. The dollar was devalued by 10 percent and so was the bull market in stocks. Food prices were reported to have undergone the largest monthly gain since the Korean War and George Meany let it be known that whatever phase 3 looked like to anyone else it didn't look like much of a straitjacket to him. So you can see that it ranks as a public service just to help you make it into March. Tonight as we enter the month the month of the Romans intended all along the same the brand new year we hope to perk up the energy crisis that too many stocks have been going through by taking an informal look at the energy crisis that is affecting all the country and indeed much of the world. My guest tonight is one of the top oil

stock analysts in America and we'll be asking him how the wise investor can take advantage of this crisis to fuel his own bank account. After all if you're going to have to sit around in the cold dark living room you might as well at least have some money to count. Now though let's take a look at the count that took place this past week on Wall Street. And as the Dow Jones Industrial Average indicates the stock market had a little trouble making up its mind this week about whether or not it hit bottom. Amid uncertainty about both the foreign and the domestic strength of the dollar the index of 30 blue chip stocks touched a four month low on Tuesday and then see saw it ending with a 12 point rebound on Friday. They gave it a tiny gain for the week less than a point and a half and left it at nine hundred sixty one point three two. As has been true for about a year now the big old line company is measured in the Dow Jones Industrial Average tended to do better than most other stocks. The result was that what looked like a small improvement on the Dow was not reflected in our other weekly indicators all of which were down. The New York Stock Exchange

index which keeps track of the prices of all common stocks traded there gave up point 65 to finish at sixty point 1:07 while the American Stock Exchange suffered its eighth straight weekly decline the index off point three naan to twenty four point six eight and the Nasdaq composite index of over-the-counter stocks was at nearly two and a quarter points to one hundred twenty point one one. They were as usual two points of view as to what it all meant to the pessimists the slow erosion of the major averages was reminiscent of previous declines as 1969 70 which ended you'll remember in a second one to the optimists all that negative talk confirm their conclusion that an upturn was just around the bend. The assumption that widespread gloom is bullish in other words that the popular sentiment is usually wrong underlies much of the Wall Street technical market index which continues to have six indicators positive and only four negatives. And at least two of

those four are on the point of turning neutral or positive. I'm sure that will be a great source of comfort to you. Meanwhile we have to deal with the here and now. And one of the here and now problems that has been bothering some investors has been the upward course of interest rates a quarter Randall as a banker your view of interest rates may not be exactly the same as ours but you at least will be able to give us an authoritative forecast of where those rates are going. So would you please Thora terribly forecast. Well as a matter of fact Lou it's a burning question in financial circles and. Really the outlook for interest rates all boils down to supply of money and the demand for it. Right now there is a lessening supply of short term funds bank loans and money needed for other short term purposes. And yet there's a great demand for it with corporations building up inventories and so on so rates are going up. I think that area of the money market will experience higher rates over the

next two to three months. Now the other area of the money market the longer term mortgage market the corporate bond market the mortgage market and even the municipal bond market. There's plenty of money around to buy these kind of investments but there's a very small supply of them. So I don't expect those rates to go up very much. I think later this year we're going to see overall lower interest rates than we're now seen. So in terms of bond prices that means they probably would not be much affected for a while and then they might be higher if anything the long term bond prices might decline slightly over the near term but I believe six to nine months from now they will rise. Jim Price It's been a few weeks since we've had you with us what do you make of what the market's been doing the meantime where we're at now. Well I've got several reasons why I think we're probing for a bottom here one is my prediction was low at 950. I mean what that's worth your annual prediction what Yeah I was never wrong. I don't get invited back if it is but I have seen some selling

in the P blue chips which I think would come in and we had not seen this time last month and we had a little rows with high priced right IBM Xerox type. And thirdly one of our fellows said today he called portfolio manager in New York and suggested I buy something in the man and said This is the first time all week anybody's told me buy anything. Every broker that calls tells me I should sell this and that in my portfolio I have to believe that pessimism is perhaps overdone do you think we're at bottom. Yeah I do remember that the day is not indicative of what's really happened here the Dow is off a fair amount maybe 100 points. But stocks in general in many cases 20 30 40 50 percent this better right bent upon some market analysts are saying now that the high price earnings ratio stocks Jim Jeff I'm referring to are going to be out of fashion for the next year. You have over the course of the month recommended a number of those stocks do you think that the fashion is moving against you.

I don't think so because I don't see where there's any real way to make money in cyclical stocks. If we're going to have a one to explain with I mean well a cyclical stock is a stock that has earnings that make up a couple of years and then you get into a down cycle in a particular industry. And then the earnings start to go up very rapidly. And when the earnings start to go off rapidly or when the first breath of earnings erosion occurs the price celebrates viciously on the downside. And I haven't seen any evidence that any portfolio manager on a consistent basis has ever made money in cyclical stocks. They'll buy them right but they won't sell them right. So mused by that comment I think what we have here are a bunch of guys who missed buying not just growth stocks I'm talking about stocks that are that have consistent earnings records and what we have are a bunch of guys who missed buying the Disney's The recent Polaroids and so on and are mad at the market. I think they're going to get back at it. But I question whether buying General Motors or Ford is really the way to make consistent money.

So in any event probably not going to settle that argument tonight. It's time now to invest some time in our viewers and answer some of the questions we received about the wicked ways of Wall Street. Got to Randall Charles Brady of Annapolis Maryland writes as follows before the market opens or when securities become volatile brokers receive numerous orders what who how or when determines the precedence for executing these orders for the big orders come first and the odd lot is last. Just what procedure is used. Will Very briefly Lou if brokers receive orders before the market opens and they are market orders. And I mean that advisedly all those market orders go off at you know what it is to buy or sell at whatever price on the market right. All of those orders go off at the opening price in the market. Now if there are any restrictions on price or if the broker is told to use his discretion on price this will not be true but a market order regardless of size will go off at

the opening price of that stock. The assumption is that the be someone on the other side of the transaction is them. Well that's right now the price is determined by the weight of the orders on the buy and sell side and the specialist on the New York Stock Exchange will adjust for that but they will all go off at the same price. Prize Edwin J Morton of South Haven Minnesota would like to know if it's possible to buy stocks in such a way that he can have complete control over them receive all revenues from them and at his death have them revert to some designated person without going through probate court. And if it is possible how do you do it. Question is replete with legal and tax implications and not a lawyer. I think it administrative leave this could be handled this fella and I'm going to suggest how this fellow should see is counselor before he gets into this. There is a thing called a permanent dividend order where the people that own the stock do and they can assign the dividend to one of these people or to some third person. They could

register the stock in joint names which would take care of the if one were deceased. Thirdly they could have an agreement whereby one would have control over the stock and could sell it and take the money back. This is a kind of a hard way to do it and I think they better get some advice before they do it. I think it was pretty good free advice. I've got to add one thing to what Carter said. There is a not a hell of a market order which we all know. And this order could be held back if the price was not in keeping with what the broker thought was right. Frank Cappiello on a flat part of Decatur Illinois writes as follows. I own shares in a company which recently announced a 100 percent stock dividend with delusions of grandeur I envisioned having twice as many shares in the company with of course the stock price remaining the same. Needless to say he was disappointed. Although he had twice as many shares the price per share was cut approximately in half. So he was about where he started. But what he wants to

know is what is the difference between a 100 percent stock dividend and a two for one stock split. And while both terms used for the same situation right militaries are used interchangeably and as far as the investor is concerned the person that owns the stock there's really no difference between a stock dividend or a stock split. But there is a difference to the company. And the difference relates to par value. And it also relates to the accounting of the capital stock a cap and a surplus a cat in the liability side of the balance sheet and very quickly a stock split splits the par value. If you have a $20 par stock you have a two for one stock split. Then you have $10 par stock stock dividend. Nothing happens to the par value except you transfer funds from the surplus account up to the capital stock. And of course our listener knows that his proportionate interest remains the same in any case he just got the same piece of pie.

But it's in smaller pieces so it affects the company's accounting but not the invest exactly right. OK now if your stocks are giving you splitting headaches and if you have any other questions about the world of stocks and bonds there send your queries along to it whilst we always Mills Maryland. 2 1 1 1 7. Once again that's Wall Street Week Owings Mills Maryland. 2 1 1 1 7. Now before we meet tonight's special guest let's take a quick look at what this so-called energy crisis is all about and what it means in terms of the average American family. One of the economic factors that has made this country great has been an abundance of natural resources and all that has suddenly changed even though getting those resources to you and me is becoming harder and more expensive. The average American household now uses forty six pounds of coal a day. By 1985 the figure will be up to £70 But at current rates of usage we still have a 200 year reserve of coal. With nuclear power on the other hand. We only have a 13 year supply in hand even at the current low rate of usage of the equivalent of half a

pint per family per day. By 1985 with the supply expanding the average household is expected to be using the equivalent of five and a half gallons of nuclear power each day reserves on hand of natural gas or even less imposing an 11 year supply at the current rate of seven gallons per family per day. With that figure expected to increase to 12 gallons by 1985. And the outlook for oil is bleak before we now use nine and a half gallons each day. By 1985 the average household is expected to be using 15 gallons of oil. Yet even at the present lower rate of usage the reserve on hand will be wiped out in 10 more years. So the energy crisis is more than so-called it's very real. It means that the U.S. no longer can count on cheap abundant energy as a certain asset in industrial growth. The implications for the entire economy and for the future of the country are profound and the implications for the investor are manifold. For an expert look at what the energy crisis is likely to mean to the stock market and to individual stocks.

Let's go over now and meet tonight's special guest Charles team Maxwell. Ali welcome nice to have you. Thank you. Tell him as well as a partner and senior petroleum analyst at Cyrus J Lawrence and Sun where his work since 1968. Before that he spent more than a decade with Mobil Oil a period that range from the Suez crisis to the B Africa crisis all of which presumably left him and surprised by the energy crisis. Mr Maxwell is also something of a cover boy having been chosen by Institutional Investor magazine last October as the oil stock representative on what it called its all America research team in preparation for his modeling career Mr. Maxwell took degrees from Princeton and Oxford and as a graduate scholar in Persian and Arabic. So Ali how serious is the energy crisis. LU It's large. It's going to be with us for a long time.

It's going to be a fact of life which we have never experienced before which is going to change our way of life and the future of our industrial society. How do we let ourselves get into this mess. That's a political question though more than an economic one. But I think it is rooted in human nature in which it is very difficult to built Titan today in preparation for what mishaps are predicted may befall you tomorrow. It's a bit like your wife's exportation that you take your rubbers along because it may rain in the morning you look out the window you think that you're not sure where your rubbers are in the closet anyway the weather looks fine and off you go. It rains some day it catches you and you come home wet and bedraggled. Well I don't want to belabor the past to turn you into a politician but what kind of steps could we have taken that might have avoided this problem.

Years ago we were an energy rich country relative to our demand and at that time the government allowed us for reasons which we probably owed the industry and the government in the public would have agreed on two premises. A lot of our growth on an abundance of energy at very low cost without thinking about tomorrow without thinking about conservation without thinking about where future supplies may go might come from. And the result was that in many cases we priced our energy desperately under what you would have to use in economic terms as its real cost or the economic rent of that commodity. The result was that at such a low value price we used it at an exorbitant rate. And as these supplies began to go down we began to can to import from abroad not mindful of the possible political repercussions of running out some day ourselves some day has now come.

OK now like it or not and I don't think anybody likes it without the energy crisis stage what are we doing about it now and what should we be doing about it. As always in a democracy the government can only move so far in front of the public so far in front of rational opinion so far in front of the opinion of our close economic and other allies at the moment. We are just beginning to realize the size of the problem and therefore we're just beginning to take the first preparation steps to solve it. But in modern societies such as ours heavily developed societies the lead times required to make major shifts in public policies are so long that if you begin to perceive that the direction you're proceeding in is wrong it can take years both to change public opinion into an acknowledgement of where the new direction must be as well as to turn the great bureaucracy of government around and move off in those new directions.

Do you think we're heading for some kind of fuel rationing in this country. I think fuel rationing is very close by within a matter of two years. I think we will be in a possible gasoline rationing within three years probably in the form of allocation rationing across the board for all industrial fuels partly accomplished by sharply rising prices partly accomplished by limiting what an individual our industrial concern can have. One of the implications of all this for an investor in stocks. Certainly a cost component for the fuel side. Of our industry that will represent a rising cost that. We have not become accustomed to in the past. That will be sharper. Than most other cost component rises because after all in an environment such as ours with at least mild inflation expected most things are rising in price but this will be a super price rise and

the net result will probably be that the first axe will fall on those major industrial users of power such as the aluminum companies would be an example of one that have been very profitable in their use of power and in fact are premised on the easy availability of large supplies of low cost power. What are some examples of stocks that might be made more appealing by the crisis. Well. Certainly those stocks which are involved in. May I start with try sickles. Most children do. I am suggesting that the implications would run something like this. As an example let us pretend for the moment that the price went up within three or four years to a dollar a gallon for gasoline. Let us presume that we were getting a rugged presumption. That's a very rugged production. Most of that now is

not in cost to the oil companies or costs to the producing function it's rather in government tax increases to stop us from using so much gasoline. Let's also presume that we were cut to 15 gallons a month. Then probably a major change would be a move by the car industry to give us the low powered very efficient 15 hundred CC thousand CC type of cars that have so long characterize the European nations. This of course would enable us to import less oil which is important for the balance of payments import less rubber import less zinc and chrome for these large metal monsters. But it would be very harsh on the public because it would be the first time when the energy crisis really came home in terms of changing our personal lives. I want to turn you over now to a group that's always intellectually will fuel doing cooking on all burners. I want to start with the hard gem like flame of quarter Randall.

Goodness I don't know what to say. Charlie one of the things that obviously we're doing about the the energy shortage is trying to find more energy and one of the places that we've looked in the last several years is the North Slope of Alaska. Now just recently a court ruled that this pipeline could not be built. What do you think will be the outcome of this if the pipeline is not built how will we get the oil here if we don't have the Alaska oil. We will have two alternatives which are the same alternatives that always occur in any one of these similar dilemmas we will either not use the oil. Which on the trends of oil use that we see today will involve direct government interference with the process of the growth of oil and therefore direct government interference with a process of growth of the whole economy or we will successfully have. A judicial resolution of this after the

congressional resolution or in the end of course if if it is considered that the value of the dollar and the value of. Oil as it portends to the balance of trade becomes a critical consideration for the government so much so that they feel that the unusual position is warranted they could declare a national emergency on this issue and actually move ahead and appropriate the land and let the legal sort itself out afterwards. It's something I think the administration would want to avoid but it is a practical possibility. Surely we've got 200 years worth of coal and it seems to me here is a cheap available fuel in this country should we be working hard to scrub the sulfur out so we could use it. Absolutely. It is the great domestic source and the problem here is one of the same ones that Carter has raised in a confrontation in effect between

conflicting objectives of the society the environmental goals which we all share and the growth goals which we all share. And. This resolution it will have to come in the case the Alaska pipeline in the case of coal the present laws on coal. Would have us begin very strict standards in 75 and carious are two extremely low tolerances by 77 and on the basis of the developed coal reserves today you know at the pit head that can be easily transported I'm not talking about all that's underground has not yet been developed this would if carried through to full effect eliminate about three quarters of the presently developed coal reserves from further consideration in our energy picture. I think the one obvious answer to this is that some compromises some variances in the sharp ecological standards are going to have to be made so that we can not deliver ourselves lock stock and barrel into the hands of both the

foreign speculators against the dollar and into the hands of the major foreign powers that control the oil supplies of the world. Charlie as an investor how do you net all of this out. You certainly don't run out and buy coal stocks because there are some basic production problems there and you don't you don't go out and buy X and go off ruthlessly just for getting other sources of crude. Where where can we get maximum by investing here. You can get maximum bang by going to a small town in Texas. Never mind which town it could be any town and becoming very familiar with the local tavern keepers and the local bar maids and the local trucking agents and spend three or four months hanging around the oil patch and you may in time come off with the exploration find of the century. You also may hang around for 20 years and lose all your money and your wife and your children and your fortune. That is one answer

but there are going to be great fortunes made in oil and gas exploration in the United States the problem is that as an investor most of us can't take this rather radical way out and we have to use some means of predicting who will be the winners and who will not. This geological game is extremely complex. If I knew the answers I wouldn't be sitting here talking with you today I'd be on my yacht off e.g. if the oil companies knew how to do this. They would not be in the position that they're in today with this with the demand closing in around their ears and unable to make supply. It's a very difficult problem. I think we'd have to go with the overall view that the oil industry in the critical relation it has to the overall economic growth of the country is going to have to be supervised regulated up to there I'm afraid. More and more by the government. More more government regulation and that you really know if we're well on our panelists and I hope you'll be with us again next week when my guest will be Norma Pace vice president and director of industrial economics for Lionel

the ETN company some of America's biggest corporations regularly call on her for advice and will be doing the same. She is one of the top economists and top women on Wall Street and that's a tough combination to beat. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Good night. If you would like woodgrain a written transcript of tonight's program send $1 to Wall Street Week Owings Mills Maryland 2 1 1 1 7. That's $1 to Wall Street Week Owings Mills Maryland June 1 1 1 7. Please allow 4 to 6 weeks for delivery. From.

Wall Street Week is produce live in the studios of the Maryland Center for Public Broadcasting. This program was made possible by a grant from the Corporation for Public Broadcasting. You know.