Wall $treet Week with Louis Rukeyser; Final Show

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America's most widely watched and trusted source of economic and financial advice. Wall Street Week with Lewis Rookeiser is made possible by Deloitte and Tuch. It's an automated wired digitized push zero for more options world. Who can help business make sense of it all? For professional services the answer is the people of Deloitte and Tuch. By AG Edwards, committed professionals providing a full range of financial services and investment advice. AG Edwards, trusted advice, exceptional service. By Oppenheimer Funds, skill, experience, strength, the strategy Oppenheimer Funds uses to achieve long -term performance. Oppenheimer Funds, the right way to invest. And by Occidental Petroleum, from exploring for new oil and natural gas resources to striving to protect the environment, Occidental Petroleum is bringing a new energy to

energy solutions. Produced Friday, March 22nd, our panelists are Frank Apialo, Michael Holland, and Barbara Marson. Tonight's special guest is Richard Bernstein, Chief U .S. Strategist, Merrill Lynch. Good evening. I'm Lewis Rookeiser. This is Wall Street Week. Welcome back. Well, a funny thing happened to me on the way to the studio this week. I got ambushed. By the time I completed the journey of hundreds of miles from my home that I've been making for 32 years to bring you this program, I have expected to find the door bolted, the furniture padlocked, and my swiveling armchair up for auction. There was a report late this week that judging from the truly extraordinary reaction we've been getting, seems to have stunned millions of Americans, including yours truly. The idea that some folks apparently think they can do Wall Street Week without Lewis Rookeiser.

Well, more power to them, but here's the important part. Contrary to what you may have read or heard, another weekly program with me as host and commentator will be on television. I want to assure all our loyal viewers and the underwriters who have supported us over the years that Lewis Rookeiser will still very much be around. It turns out that the woods are full of smart television executives who are wonderfully excited at the prospect of producing and distributing the new Lewis Rookeiser program. The name may change a little bit. That's what we have lawyers for. And we will not be coming to you from the studio that has been my television home for 32 years. But never fear. We will be offering the program to public television. And if that sounds good to you, please be sure to stay with us for the whole program tonight because I'll be making a very important announcement at the close about what you can do to make sure you'll be able to continue to see me. Meanwhile, let me tell you what a very lucky guy

I consider myself tonight. I feel like Ernest Hemingway, who was famously able to read his own obituaries. Papa Hemingway was on a plane that crashed in the jungle, after which he was given up for lost. But he eventually emerged from the jungle carrying a bunch of bananas and a bottle of gin, declaring to a world that had prematurely eulogized him. My luck, she is running good. And that's the way very sincerely and humbly I feel tonight. First and most important, because of the genuinely amazing outpouring of support. From what I've always said with the world's most fantastic viewers. In 32 years, we have never had such an unsolicited landslide of messages from viewers, as we've had in the past two days. The total is already in four figures and may well go higher. Virtually unanimously expressing their incredulous displeasure at this announced

change. And the hope that they will at least be able to follow me to my next program. That's why I'm so happy to be able to tell you that that will indeed be possible. While the viewers have always come first around here, which may be one of the secrets about durability. I've also quite can't believe been bowled over by the media reaction. The Washington Post's Liza de Mourais, for example, led her report with this generous headline. Noting with astonishment that Wall Street Week with Louis Rucaiser remains so uniquely popular that it continues to pull in about seven times as many viewers as the most watched business news show on cable. You know what concerned me a lot more than what was being done to me? I'll be just fine, thank you. Was that there appeared to be an attack on you, the viewers? But a number of diligent reporters found evidence that mocked the notion that our viewing numbers were in sad decline. Let me give you a reality check on that. Nobody's television ratings are as high as they were a few

years ago, because there are so many more competing sources of programming than they were then. But the truth is that ours have held unusually strong. Joe Flint of the Wall Street Journal did some old -fashioned investigating and found that the show actually has been holding steady against increased commercial competition in the business news marketplace. According to Nielsen Media Research, the show averaged 2 .7 million viewers in November, which is relatively flat compared with the 2 .8 million it averaged for the same month four years ago. Considering the growth of business reporting on the internet, as well as cable business channels CNBC and CNNFN, units of General Electric and AOL respectively, it is pretty impressive that Mr. Rukaiser, with his low key approach to financial reporting, has managed to hold on to his audience. Thank you, Joe. I would add only that those numbers demonstrate that we have been adding loads of

younger viewers each year and have accomplished this despite the biggest bear market in most investors' memory. So you and the audience have done your part and more. The Wall Street Journal writer also noted that the program has continued to be a major cash cow for public television. Reporting that, it brings in about $6 million a year in national underwriting and costs less than 2 million to produce. And that doesn't include massive local underwriting, which may explain why I've been hearing yesterday and today from so many PBS station executives who are anxious for yours truly to continue. So don't worry, folks. I've always said that I wouldn't retire until I was old enough to be an anchor on 60 minutes. And I've got a long way still to go. So thanks to you all. At the end of the program, I'll be giving some specific suggestions on how you can help. But now let's turn to what we really like to do around here, reporting the news rather than making it.

The Dow Jones industrial average ended its five -week winning streak, longest in more than a year and a half, falling just under 180 points to 10 ,427. And the broader indexes were mixed, as investors fredded that a rise in interest rates might retard the recovery and lower corporate profits. Rising long -term rates sent the yield on the 10 -year treasury note to its highest since July 5th. And with rising midi's tensions giving a boost to both oil and gold, it seemed an appropriate week for a report on a six -year study by Norwegian professors as to why people cry. The chief reason the report concluded is simply because they feel better afterward. Thank you. Would you like to be a little weeping tonight? Yeah, in many ways, Lou. I can appreciate that comment. Tell me what you think they have for the market as always. We look ahead as well as behind. Right.

Well, I think what's happened to the market is it's looking at the bond market and it's getting worried about how fast the bond market has moved up in terms of yields. And it's very disconcerting, and now the rumor is that we'll probably have a rate increase in May. Now, I think that's a little too much, but that's the thinking. Some people say that since market interest rates are rising outside of what the Fed's doing that maybe a little Fed increase wouldn't hurt much. Yeah, I think we could take an increase in May. I think it's been well adjusted in the minds of many investors. The thing that I find very difficult to believe is the Fed has cut rates 11 times. And it takes about nine months to a year for those rates to go through the economy. So we're going to have expansion in terms of stimulus all the way through to 203. So that's positive. So what should investors do at this point? Well, I think what you should do is start continuing to look at good stocks. But I think you ought to be careful for the time being because valuations are slightly stretched. And I think we have to grow into them when we haven't had - Right. The prices have moved

faster than that. Right, exactly. We have to wait for the earnings to catch up. But there are bargains around. I still like United Technologies. Charming shops is an interesting speculation in a retail area. Do you shop there, Frank? Those are for people different than I. No. I'm glad to hear you don't. No, right. Lou, were you asking me a question about this? Please tell us what else you like. Let's see. What else do I like? Probably a defense stock. UTX would be one in a gap before it's still in a retail mode. That's another speculation, but the chart looks pretty good on it, too. Barbara Morrison, how do you feel about the outlook? Well, I think that the Federal Reserve, of course, left the interest rates unchanged this week. The first time they've done that in over a year. And, of course, I guess that has the market a little bit nervous because it's a change. But really, it means that the Federal Reserve is seeing that there's a solid recovery. And at some point, earnings will follow that recovery. So I think it's pretty positive. They gave up their - They don't want to buy us anymore, but they gave up

their waiting for weakness in the economy. They're kind of neutral on the outlook. Are you kind of neutral on the outlook? Are you more optimistic? Yes, they like to call it the balance now, as opposed to the bias. And I think that certainly we're having a stronger recovery. It's certainly surprising as to how much of that carries through. For the second half of the year, I think that's in question. But it's really a matter of when and not if on this recovery now. What's your advice to investors? I think there are solid values in the market. Clearly, the telecommunications and technology sectors are way off. And I think that area has been really frustrating for investors. So to start off with a couple of companies that are doing well now, but that I think are still very good values here. Sendent and Wyeth, which changed its name from American Home Products last week. And why don't they do that? They named it after one of their drug companies. Yes, they gave the reason that they said that people saying, hearing the name American Home Products, it sounded like it was a products company, you know, with consumer goods rather than simply a pharmaceutical company. And they wanted to make that clear. So that was their reason. And they may also want to... Everybody thinks the people are stupid. Yes. Yes. You've pointed some of that out. Yes.

Thank you. With no guarantees from the management, Mike Collins, any of these people talking any sense? Why did you come to your word after you said stupid? Not in any sense, just in that vote. An area that I'd tell like you. Frank's point about interest rates. I think the bond market up until recently had been pricing in very little inflation. We had some inflation reports this week. Nobody expects inflation to be anything of significance for the next couple of years. But we did have a little bit of inflation. The bond market had not priced these in. The Treasury inflation index bonds that the U .S. Treasury puts out have been very good places to be. I think they'll continue to be a good place to be. You've recommended them for a long time. They've worked. They've worked. And I think at the same time people are pricing in a lot of fear. This week we had General Electric trading at prices to earnings that have been not seen for several years. Bill Gross, a friend of this program, made some comments about them. They took the stock down. The comment was that they used too much commercial paper, which he thought was risky. It's a triple A credit. They use a lot of commercial paper. It makes a lot

of sense because they've been paying such low rates. I think as a shareholder, now as a bondholder, he's got a different perspective. As a shareholder, you say, that's a really good idea. So I think we have companies like that, Merrill and others, that have come under pressure in this bear market. You point out we've had this incredible bear market of the generation. Some of the great companies are coming under pressure and becoming very attractive. All right, and if you have any remaining questions about how to get rich before the 4th of July, I'm not saying which year, we'll still be at this address for three more months in the town you've put on the map. Owings Mills, Maryland 21117. Now, before we meet tonight's special guest, let's try to put in perspective the latest downturn in blue chip stocks and see how it compares with earlier financial times when the bear was king. According to our friends at Barinia Associates, there have been 25 times since 1916 when the Dow Jones industrial average met the definition of a bear market by falling at least 20%. Three of them were in 1931 alone, as

the market struggled repeatedly and vainly to regain the ground lost in the 1929 crash. There were none at all in the 1950s, and after a brief in shallow bear market in 1990, the Dow nearly quintupled before it peaked above 11 ,722 at the start of 2000. The deepest of the Dow's 25 bear markets occurred in 1932 when the blue chip index lost more than 53 .5 % in just four months and ended at its 20th century low of 41 .22. The least deep was that 1990 episode, which barely qualified as a bear market with a decline of just over 21%. The last, which bottomed in September of 2001, ranked 15th with a decline of just under 30%. The longest bear market, lasting more than three years, began in 1946 and languished amid what turned

out to be false concern among investors that the US economy could not prosper without a war. The shortest was over in less than two months in 1987, with some erroneous profits proclaiming that the so -called crash had doomed not just the stock market, but Western civilization itself. In terms of duration, the latest bear market was much further up the list. The 616 days before the Dow hit bottom was the fourth longest of all. Is it well and truly ended? And where do we go from here? For some thoughts on that, let's go over now and meet tonight's special guest, Richard Bernstein. Richard, welcome back. Thanks, Lou. Great to be here. It's always a pleasure to have you. Thanks. Rich Bernstein has long been one of our favorite voices of market caution, a position that brought him deservedly now over the past couple of years. Merrill Lynch, for whom he had been the head of quantitative strategies since 1998, following similar density of Hutton and Tucker

Anthony, promoted Rich this past December to the additional position of chief US strategist. He is tonight making his third appearance as my guest on this program. Rich, just how bearish are you these days? Well, Lou, I'm certainly bearish compared to other people on this street. I think that's probably because most of my colleagues or the firms are extremely bullish right now. But my view is very simple that bonds and cash will just be very good competition to stocks. It's not an end of world scenario by any means. We're looking for roughly 5 % to 7 % of the S &P in the next 12 months. Well, let's start with the cash part. Money market funds are yielding less than 2%. Do you think they're going to be any more before the years end? Well, you know what's ironic about cash is that if you go back to 1982 and this whole bull market started, money market rates were 14 or 15%. The S &P multiple was about 7%. And everybody said, why would I ever invest in equities when I can get a riskless return out of equities? And here we are 20 years later, that same multiple that was 7 is now 41. And obviously short term rates are much

lower. People are looking backwards and saying, where can we possibly get these returns that we get out of equities? If you think that bonds and cash will be competitive with stocks, what kind of allocation would you suggest? Well, our allocation right now is suggesting 50 % in stocks, 30 % in bonds and 20 % in cash. How does that compare with your benchmark? Our benchmark 60, 30, 10. So we're slightly underweighted in stocks relative to that benchmark, equal weighted in bonds and slightly overweighted in cash. Do you think stocks will be down over the next 12 months? I think it depends on where you are in the market. I very often use the analogy. And I think I use the last time I was on the show about a sea salt within the market. But I think if you're in the wrong parts of the market, yes, I think the market will be down. But I think if you're in the right parts of the market, it could actually be a very good 12 months. Well, let's start with the right part. Right. I'd love to see you smile. I think the sectors that we really like are things like utilities, consumer staples, aerospace defense and dustreels. There's actually, I think, lots of things to invest in. Unfortunately, the sectors we don't like are ones that most people do like, which are things like technology and telecom. Technology

just seems still overvalued you. It seems overvalued and Lou, the big issue for us is much more that we fragmented all the industries. The technology bubble really developed just too many companies. And these companies are still competing and margins are being squeezed. I think there will be a cyclical rebound and profitability in the technology sector. But it's probably going to be muted relative to people's expectations. What are some specific stocks you think are worth buying or present prices? Well, I think right now, you know, one of the things we've talked a lot about has been dividend yield. And have people have sort of focused too much on capital appreciation and not enough on capital preservation. So whenever you talk dividend yield, the first place you go is utilities. And my, our two favorite right there would be Texas utilities and progress energy. You were down on technology, but your colleague and technology with Steve Milanovic recently mildly upgraded. He went from a underweighted position to a market -weighted position. Is that at odds with your forecast? Well, as I said before, people don't

like to have lunch with them anymore. But I think it is a little bit. I think Steve is really oriented towards the traditional technology investor. My concerns are more within, you know, looking at other sectors and our other sectors more tracking the tech sector. And I really think they are. What do you think will happen to interest rates this year? Long and short. Short to interest rates, I think, will probably head up. There is a very high correlation historically, especially during the green span years, between changes in Fed funds and changes in earnings. So if we're going to have very strong earnings growth, the odds are the Fed will be tightening. How much would you say? One and three quarter percent? Yeah, I think it's a fair guess that over the next year, year and a half, we'll see. At least doubling of the Fed funds rate. I don't think that's a bold call by any means. Long term rates, I think, in the short term, I know we're talking about long term rates. In the short term, I think long term rates will probably back up a little more. But then I think you're going to have great values at the long end of the curve. It's a chance to buy some bonds a little later in the year then. I think that's right. Well, let me turn you over to a panel that's obviously Rebecca of Sunnybrook Farm compared to you. Study with Frank Caviel. Rich,

a lot of people on Wall Street are growing minorities, say, to go to the safest place, small stocks. Because small stocks always act well in this kind of environment. I find that very curious. Is that your view too? Right now, yeah, I would agree with that. I think small cap stocks are extremely cheap relative to large cap stocks. But also what you're making a bet on there if you're buying small cap stocks is the economy. And the rebound of the economy, the rebound of the profits cycle. If you're concerned about profits growth, you probably don't want to be in small cap stocks. But right now, the valuations are really quite compelling. But you have a favorable outlook for interest rates, basically. And yet, you don't very much care for the financial sector in those stocks. What do you think is priced in there? What is the problem there? Barbara, we started talking about the problems in the financial sector about a year ago when the Fed was easing extremely aggressively. And financial stocks weren't performing well. We kind of thought that people had forgotten that the Fed's responsibility was to support the banking sector, not to support NASDAQ. And our summation of that was that there was credit risk looming in the background. And we're still concerned about credit risk. I think on the corporate side, people are well aware of that. But I think it's the consumer side that the people should be

looking at more. Rich, you have been described by Louis Ricard, or someone who at one point was bullish and correct. And now you've been bearish and cautious and correct. Right. In the 32 years of this program, the viewers have seen very few people who have been right in both the bullish and bearish areas. Why is it so difficult? Well, you're being very kind and you're description of me. But I think it's difficult because there's many pressures on analysts in general. And both psychological, business -wise, I think we all know about all those kind of pressures. But I think the way to look at a strategist, or even an analyst, is not necessarily, are they purely right or wrong, although certainly you want that. But have they added value to your investment process? In other words, did you not make mistakes you might have if you hadn't listened to that person? I think that's the value added that a strategist like me can really provide. Well, let's put you on the spot. What would it take to make you more bullish? I think to make me more bullish, certainly number one would be our sentiment work. Our sentiment work still shows that people are extremely bullish about the prospects of the market going forward. I think the crowd is always wrong.

You know, generally, that's what, I mean, if you're going to try and have any kind of contrarian streak, you're going to try and go against the crowd. So, you know, our view is that we want to see people get a little more bearish. We also want to see valuations compress. Valuations are really quite stretched in the equity market, especially if you consider that PE multiples in the equity market have expanded in the last four or five months, at the same time that interest rates have also gone up. That's usually not a very good combination. Given what you've said about bonds, which particular kinds of bonds would you buy now? Well, what's interesting is that in my group, we focus a lot on higher quality stocks recently. My colleagues on the fixed income side, Tom Sawana, who's our fixed income strategist, has pointed out that he feels that high quality bonds are cheaper than lower quality bonds. And Marty Fritzen, who's our high yield strategist, has said that high quality junk bonds have an oxymoron, but higher quality junk bonds are cheaper than lower quality junk bonds. So, I think I would stick with quality for the time being right now. You keep dressing quality, but you also say the market's overvalued. Is quality overvalued, too? No, what's kind of interesting, Lou, is that in this cycle, people have really rushed to lower quality stocks. There's an unusual certainty in the marketplace right now about the turn

in the profit cycle. And if you're sure, and you have certainty, that there's going to be this turn, why would you ever buy a safe haven stock? So, very unusual, what people have done is they bit up the multiples of lower quality stocks. And so, quality is actually quite cheap in the marketplace right now. What's a cheap quality stock? Well, one that people would not agree with me that this is quality. I would say something like a Gillette or something like a Cisco, not the computer Cisco, but my longtime favorite, the food distributor, Cisco, SYY is the ticker symbol. Things like that are quite cheap compared to lower quality stocks right now. Rich Perenstein always plays you the talk with you, with the guy who is sometimes bullish, sometimes bearish, and as Mike points out, has been two for two lately. So, we'll see if we can make a three for three. There we do have to stop. Thanks, Rich Perenstein. Thanks to the panel. Next week's guest is Kathleen Wood, the little -known Whiz for Regent Investor Services. And now what I promised you, how you can make sure to see the new program I'm developing. Don't bother writing PBS or MPT. Make your wishes known to your own local public television station. And do it right now. As soon as this program is over, I want you to rise out of your chair, not the shout out I'm mad as

hell, and I'm not going to take it anymore, but to telephone or better still write or email your local station, saying that you've heard that Lewis Rookhizer is still going to have a program, and you'd like to see it. I promise you, if enough of you do that, it will do the job. So I hope you'll join me here for this program until it expires at the end of June. After which, I hope we'll continue to meet every week. Hopefully, same station, same time. If not somewhere else on your dial, for many years to come. Thank you, my friends, for your unbelievable support. Meanwhile, this has been Wall Street Week with Lewis Rookhizer. Good night. Wall Street Week with Lewis Rookhizer is produced an association with Rookhizer Television Incorporated by Maryland Public Television, made possible by Deloitte and Touche. In today's network economy, who can help business respond when opportunity logs on? For e -business services,

the answer is the people of Deloitte and Touche. By AG Edwards, providing a full range of personalized financial, retirement, and the state planning services, AG Edwards, trusted advice, exceptional service. By Oppenheimer funds, insight, teamwork, discipline, the strategy Oppenheimer funds uses to achieve long -term performance. Oppenheimer funds, the right way to invest. And by Occidental Petroleum, at Occidental Petroleum, we employ advanced technologies for oil and gas recovery, while helping preserve the environment of the world we all share. For a printed transcript of this program, send five dollars to transcripts. Wall Street Week with Lewis Rookhizer, Maryland Public Television, Owings Mills Maryland, 21117. Wall Street Week with Lewis Rookhizer is produced an association with Rookhizer

Television Incorporated by Maryland Public Television, and they are solely responsible for its content. You You You