Wall Street Week with Louis Rukeyser; 2728; Abby Cohen on the Market

A. For nearly three decades America's most trusted and widely watched source of economic sense and financial advice. 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 provides solutions for a lifetime of investment needs. That's the power of the rock at work for you 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. Every year millions of Americans place their financial futures in the hands of one mutual fund a company. Oppenheimer fund. The produce Friday January night. Our panelists are Mary fowle Barbara Marson and Macy o Sloan. Tonight's special guest is Abby Joseph Cohen co-chair investment policy committee. Goldman Sachs and company. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well this was the month when the extraordinary number of people were seeking to travel around the world in a hot air balloon. So I guess we should have known that Wall

Street would soon be taking its cue from their rapid descents. Just today the fourth in the latest series of high altitude over we chain saw two U.S. balloonist parachuted into safety in New Mexico. After traveling fully 100 miles barely 24000 short of their goal. But who's counting. Therefore was clearly an inspiration and I go forward to Wall Street. Which never likes to let anyone outdo it in the realm of hot air. The Dow Jones Industrials took their steepest plunge since their five hundred fifty four point swoon October twenty seventh. Thereby completing their sharpest weekly descent in eight years and their biggest ever in terms of points. And a very Happy New Year to you too. What avoided. Wall Street's latest attempt to regain the stratosphere with the same unfavorable easterly wins that cause the October

plummet. With the Asian Flu increasingly perceived as the aging pneumonia. Key indexes from Hong Kong to Singapore nosedived overnight. Following Asian currencies now social unrest in countries like Indonesia was the source of nail biting in cockpits as far away as New York and the Philippine Stock Exchange briefly led the hysteria with a one day fall of 8.3 percent. Here in the U.S. The argument was shifting from whether these Oriental shocks were going to hurt is to how much. With a widespread assumption that it best the American economy would be growing a half a point to a point slower this year than would otherwise have been the case. This news was of course just what the doctor ordered for the bomb ghouls who rejoice at any suggestion that times may be getting a bit tougher for everybody else. The prospects of further economic slowdown in the US combined with the lowest

annual increase in producer prices in a decade and the ever present desire to seek a safe haven when stocks are gyrating sent the bond pits into uncharacteristic euphoria. The yield on the bond markets benchmark issue the 30 year Treasury bond which the now entirely discredited inflation scare mongers had pushed to around seven and a quarter percent as recently as last spring fell today as low as five point sixty nine percent. That's the lowest return on 30 year Treasuries since the government began regularly issuing them in 1977 though for most of the earlier part of this century considerably lower yields were routine for a comparable long term Treasury issues. Ironically the prospect of weakness ahead diverted the bonds Toure's from reacting negatively to some pretty good economic reports from factory orders to jobs which taken together

suggested that the last three months may have been the best quarter of the entire Bush Clinton recovery. Though still well below the growth levels reached during the Reagan boom. Indeed while the yearly employment gain of three point two million was predictably the subject of much crowing in Washington the hot air capital of the world. In reality it was barely above average ranking in percentage terms just 27 out of the past 67 years. Still it was nice to see any good economic news not send the bond market into a tailspin. Even if the bond ghouls joy came at the expense of the world's stock markets and its biggest continent. How serious is the Asian contagion and do the dramatically negative events and reactions of recent days signal it last the end of the historic bull market. Or just one more buying opportunity for the stout of heart. No one is better equipped to

answer that question than my guest tonight was not just the most influential woman in Wall Street but the industry's most astute analyst of either sex of the consistently underrated markets of the 1990s. But before we hear from that high flying lady let's examine the hot air wreckage in stocks. And as the Dow Jones Industrial Average indicates concern over the impact of Asia's woes on worldwide commerce. Plus even greater than usual fretting about the outlook for corporate profits. Cut 1998 off to a disappointing start with a two hundred twenty two point drop on Friday taking the Dow down 275 eighty point four to a weekly loss of just under three hundred eighty five points. One hundred points more than the index had managed to gain back last week and all the broader indexes joined the Dow and losses of close to 5 percent for the week. The carnage scared one elf. Ralph Akam poora who downgraded from

bullish to neutral on the next three months citing what he called further group deterioration which is Wall Street speak for. Ouch. With the index consensus now a plus for Gail Dudack gets a rare halo for her bearishness since the Dow is now more than 5 percent below where it was three months ago. While the market's shaken start to 1998 have many observers weeping about the supposedly in the evitable implications of the so-called January effect on the rest of the year for stocks. In fact the performance of any year's first five days has often been misleading. The S&P 500 has fallen 17 times during that initial period since 1950. And on nine of those occasions more than half. The index finished the year with a gain. Before we seek to find out what to expect for the rest of 1998 including whether Federal Reserve Chairman Alan Greenspan really is about to lower short term rates for a change. Let's note another

big winner at the conference in Aereo. The still strength of the American dollar and a really big loser goal which keeps on going down despite as much international chaos as a gold bug historically could yearn for. The panelists who appeared on our program last week had the best 1997 stock picking records through November. Now that we have the final year lease to test X however we see that two panelists Barbara Marson I'm a CEO Sloan finished with a surge to take second and third place respectively with average gains for their selections of more than 40 percent. So we've invited both of them to join us tonight. Barbara has the story of nineteen ninety eight shaking you up. Well as you point out the stock market is off perhaps about 5 percent from its highs but I think that some sectors have stocks where they're off 20 percent or more and I think that dramatic changes in financial markets can create buying opportunities in 1994 when the Federal Reserve raised interest rates so dramatically even though the stock

market was flat for the year we got big buying opportunities in stocks in sectors like transportation housing and finance and I think we may be getting some of those relative value opportunities here particularly in view of your stellar record this poster people like you go identify two or three of those opportunities. Well two sectors which have really affected have been dramatically affected by what's going on in Asia or the financial sector and also some of the stocks in the semiconductor equipment area and I think what happens is the stock in it. OK. Applied Materials in the semiconductor equipment area and Chase Manhattan Bankers Trust JP Morgan really a broad range of banks in the financial area. But would you be staying away from that. I probably would just be staying away from stocks that really haven't corrected as much stocks that have really held to their highs here because I think there's better relative valuation I think what happens is investors tend to look at some of those sectors and say the ones that will be affected by earnings. Let's just sell them and ask questions later. Where is the rest of the market really holds up so I would stay away from the

ones that haven't had any real corrections. Sloan you like the beaten down ones do. You. Lou I think that there are some real opportunities out here. Some of these stocks have gone down more than the fundamentals justified so I think you can shop and be very selective in the stocks that you pick and can get some real bargains. Hey what a selective force look at something like IBM which was down almost 200 was down over four points just today it was the largest point loser and that sector. And I think that's a great opportunity IBM with the turnaround that their new CEO started four years ago is doing great there in new areas. It's just a great company and I think that people just kind of annoying that. What do you think of the hysteria is it justified. No I don't think it's justified at all when you look at the swing in the stock market. It is not a very unusual swing if we were seeing 7 8 percent moves then I would get unnerved and say maybe it's time to go play with the bond market for a while. But we're still saying no more than 3 percent swings this week the Dow was down 4 1/2 percent so I mean that's not that

bad for a week. When you look at it in historical terms you bet it happened every week will be very bad happen every week but the numbers are just larger but the percentages are very much larger than what they normally are very far as they are and undeterred bull as they look at your shadow a little bit after a week like this. I do and I'd say a cautious bull as always but nothing we've seen in Asia is sufficient to derail the positive economic expansion. You're neutral I guess about the next three months I think in the next three months I expect to see more of the same. This volatility this up and down I think the direction is still up the bull market is here but we're not going to resolve Asia overnight and that's going to be reflected in volatility. How important do you think Asia is to the American markets. I think the interesting thing about this crisis is that we are global economy there is an effect but I think we've thrown out the baby in the bathwater. It's clearly with a strong U.S. dollar weak economies over there we're going to have some problems exporting that will hurt some companies on the other hand some companies have much cheaper cost over there when they're doing a lot of their manufacturing which helps

them here to be competitive. So you have to look company by company. And I think it's problematic. But again earnings are going to be up the economy will expand and that's what will price U.S. stocks. The bond traders hated bonds when they you know that 7 a quarter percent less and yeah they adore them with a you know less than five in three quarters. What do you think of the present levels. Well given the inflation rate the real returns on bonds remain very good at but even with the volatility in the stock market I think for long term investors and remember we're going to be seeing a lot of inflows into this for a 1 K plans now the year end is behind us. I think people who are long term investors will not be satisfied with an under 6 percent return and they will be looking for those bargains out there and back in the stocks. Finally both Barbara and Macy have said pick up some of the beaten down do you have one that you would like in that category a beaten down or let me mention Chase Manhattan also I mean they do have some exposure in Asia but I think that we'll see the worst of it that past fourth quarter and then things look going forward. OK. No guarantees from the management. But remember we're always here for you no matter how the economy and the financial markets choose to go crazy. So let us hear from you here at Wall Street

Week Owings Mills Maryland 2 1 1 1 7. Or faxes at 4 1 0 5 8 1 0 9 8 0. And now let's go right over and meet tonight's special guest Abby Joseph Cohen. I mean welcome I think you know the way. Good to have you here. Year after year when others faltered and were ready to throw in the towel. Abby Cohn continued to give the best advice of any Wall Street firm strategists on this historic low market. Abby has co-directed the investment policy committee of Goldman Sachs since 1990. She is tonight making her sixth appearance as my guest on this program. Abbi many people believe that Wall Street is entering its first bear market in seven years. Could they be right. They could be low but I don't think they are. What is going on in Asia is obviously quite serious for Asia but I think we'll have only a denting

impact in the United States. The United States is like a super tanker. We're not the fastest ship. We're not the prettiest ship but it's very hard to knock us off course. And I don't think we get knocked off that good course in 1998 with a super term prepared to emit applause certainly of the US as a nation a little part of the financial markets. I think it does Lou because I believe that equities today for example represent better value than they did six months ago. Profits and cash flow are higher inflation interest rates lower. I think stocks still represent good value and I think that the dollar the rise in that dollar is finally reflective of the Rodney Dangerfield economy foreign investors have given us any respect for the last five or six years but now they finally are going to put more money in U.S. stocks. We certainly see that over the last few months they have been buying U.S. stocks. They're also buying U.S. bonds. Considering how underweight they still are in their portfolios with very little representation in the United States I don't think it

ends anytime soon. Would you buy bonds of the euro. Depends upon my own. Focus what I'm looking to accomplish but I think Bonds do offer good value. With inflation running at 2 percent or less. Bond yields of 5 and 3 quarters still are very good returns. What would you expect for bond yields. Well this year and for that matter for short term interest rates I think the decline in interest rates will be happening earlier in the year rather than later. I think by the time we get toward the end of 1998 the global economy will be looking a little less scary. Interest rates will stabilize and may even begin to rise at that point. So I think that we could be seeing long bond yields going somewhat lower another 25 or 50 basis points. But I don't think five and a half percent. I think they could go below five and a half percent. I don't think the Fed wants to ease though. I think the Fed would like to wait and watch. They will continue doing nothing which is a great example to everybody in government I think. The technology sector has taken it totally on the chin.

Some of the big tech stocks I guess the best you could say for their recent performance is that they have made new lows in the last few days. Are these places to buy are these places to do what you just said the Fed's going to do which is sit back and wait. I think there are some interesting opportunities in technology now Lou. Some tech stocks have done poorly for months because of concerns regarding Asia. And we think this has created opportunities where stocks have already discounted the worst possible scenario. One example could be Micron Technology a producer drams. We also think that many investors are over emphasizing the importance of Asia. U.S. technology companies produce far more in Asia than we sell into Asia and our other markets here in the United States and in Europe for technology products is in fact improving. The Titans Telemark are sort of stuck at this point and tell because they're afraid that the problems will come to haunt them. Microsoft because they think

the bogeyman of Washington is going to haunt them. What's your view on those two. I think these are still two core holdings for those investors looking perhaps for new names though PeopleSoft might be a very interesting software company. They focus on the personnel related systems including those that will be important in meeting the so-called Year 2000 problem. One of the groups that you find attractive now besides technology financial services very appealing over the last few months as we've heard about the problems in Asian financial markets many U.S. companies have taken it on the chin and we think undeservedly so U.S. companies are extraordinarily well capitalized well managed and interestingly very well regulated. We think U.S. banks including Nations Bank in Citicorp are very well positioned. U.S. financial services companies including Merrill Lynch look very good. And so we think there are good opportunities these are good companies good earnings good management. Some have been beaten down quite a bit lately why do you think they have taken so much damage.

They've taken damage I think because of concerns about what is going on in Asia. It doesn't build confidence to wake up in the morning and hear that a few financial institutions outside the United States are not doing too well. There's also concern about their exposure in Asia. Yet we find that most U.S. companies including the financial services companies are very well diversified geographically. Yes they have exposure to Asia but they also have exposure to many other markets that are doing quite well. What kind of earnings growth you expect for stocks. I think earnings for the S&P 500 Lou could easily reach 8 percent. That is a deceleration from 1997 which was 12 percent but 8 percent against 2 percent inflation 6 percent inflation adjusted is still above the long term historical trend. For those of us was totally Old Math translate into his Dow Jones industrial average force. I think that what this says is were selling at a peak a ratio of about 18 times. Normally when inflation has been roughly where it has been and is now

20 22 sometimes 24 times if I assume that the P E doesn't go up I still see the Dow at eight thousand seven hundred. So I consider that to be an easily achieved target for the year. How much lower do think we might go on a short term basis I think we could go a little bit lower until investors see some information. What happened today was basically an information Lois move. There was no new news about corporate profits but over the next week or two or three we will finally hear from the companies about what the impact was on them in the fourth quarter. We think it will be a good report. Your. Predictions while I have been stunningly on target have also been consistently conservative is that deliberate. Yes. So you're saying at least 80 700. That's right. I would rather say to your viewers Lou that without making dramatic assumptions about profit growth or going higher it still is appropriate to own stocks in the United States would have a dramatic panel for it much less turn to them starting with rather more.

In 1997 we saw the best performance came from large capitalization growth stocks and we saw the performance of the S&P 500 for example up about 33 percent versus the Dow Jones being up about 22 percent. It's more traditionally industrial sort of stocks do you expect that trend to continue in 1998. I think it may very well continue at least early in the year. Right now investors are still nervous and they'd rather focus on the larger names they'd rather focus on the more defensive names that are not dependent upon the vigor of the global economy. But as we do our valuation work it would appear to us that there are some very good opportunities in the small to mid-cap sector. But before they do better we all have to feel a little bit better. I think it comes later every When you have the things we've had going on in Asia today. And the stories keep coming out about how the Asian markets are being destroyed. The number of stocks have fallen greatly because of that. Should investors be looking for those stocks that have been beaten up because of the Asian hysteria and try to invest in those now. On the

assumption that they're going to do well or should they stick with stocks to the primary base in the U.S.. I think investors should always buy stocks in which they have confidence. And one of the interesting things has happened of course is that companies have gone down. Stocks have gone down even when the company fundamentals have not been adversely affected. We think there are some very interesting opportunities but valuation isn't a timing device. We could be buying now buying early. By the way we see opportunities outside the United States as well. Fujitsu a major computer manufacturer in Japan we think offers very good value right now. Abby inflation was such a problem for the U.S. economy and market in the 70s and 80s. Now there's been a reversal we're actually hearing people use that word deflation is that something that concerns you going forward. We have to be very careful to define deflation if by deflation we mean prices going down. We've had that for years. Clothing prices footwear prices technology prices have been going down for 30 years. We can do very well with that sort of deflation. But when people think about deflation as we had

in the 1930s when banking systems collapsed millions of jobs disappeared and the economy shrank. That is not at all that something that we think is likely. And we think people should not be getting themselves alarmed about that scenario. We don't think it's going to happen. I do admit we're really out of time but I have to ask you this from time to time those who have miscalled these markets cite you as having turned more bearish than you really are. Have you noticed this phenomenon. I have. What's going on. You have to put out these fires. We do Lou cation we have to put out fires and what we always try to do is stick with the basics. It's the fundamental analysis that has kept us on. I think the right course looking at the economy which has been in great shape looking at companies which have improved their position and looking at the values and I think they're still there. It's always a pleasure to have you look at it for us and let's hope that supertanker keeps going forward. Thanks very much Abbi Cohn. Thanks to our panelist for joining me tonight and I hope you'll be with me again later tonight on most of these PBS stations for a truly

remarkable hour. A star studded lineup from the worlds of entertainment sports and finance on our 11th Annual Louis Rukeyser is Money Guide. It's such a terrific bunch of guests that I really don't want you to miss this one. And since not every PBS station will be scheduling it right after this program. Here are the times when Louis Rukeyser 1998 Money Guide can be seen in the 20 biggest markets elsewhere please check your local listings. The glittering roster of guests will include Sumner Redstone of Viacom the multimedia powerhouse the fellows who negotiate and invest Michael Jordan's millions. The real life model for Hollywood is Jerry Maguire and a dazzling array of financial experts on how to make more and save more on your taxes in 1998. So do plan on being with us to make sure it's a happy new year for your money. And then of course we'll be back at our usual stand for this program next Friday when we get a top inside look at the industry that ultimately gives Wall Street its biggest

thrills in its biggest build technology and the company of ACE investor Roger McNamee. So don't forget to log in with us twice. Meanwhile this has been Wall Street Week. I will if you guys are so good just a little later. Wall Street Week With Louis Rukeyser is produced in association with roofies or television incorporated by 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 pretentious securities provides solutions for a lifetime of investment needs. But it's the power of the rock at work for you 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 where a long term approach to investing has helped put financial security in the hands of millions of Americans. Oppenheimer Funds. For a printed transcript of this program send $5 to transcripts Wall Street Week With Louis Rukeyser Maryland Public Television Owings Mills Maryland 2 1 1 1 7. Transcripts are also available to subscribers of Dow Jones interactive. This is PBS.