Wall Street Week With Fortune

WorldCom Xerox How badly have they damaged the market. Washington says the economy is humming along but Wall Street isn't buying it. What's up. We'll hear from none other than Robert Rubin. And we'll hear from a couple of Wall Street pros who've made an art out that might a bit of money bucking the trance. That's just the beginning stay tune for the inaugural edition of Wall Street Week With fortune. Along with fortune is made possible in part by the way into. Today's economy. Health business response. It was all. For the business services. The answer is the people of the lawyers. And by contributions to your PBS station from viewers like you. Thank you. I'm Karen here. And I'm Jeff COLVIN Welcome to the first edition of Wall Street Week With fortune.

It was one of the most dramatic weeks Wall Street has seen in months. The FCC charged WorldCom with massive fraud. Three former Rite Aid executives were charged with the same thing and more. Former Tyco CEO Dennis Kozlowski was charged with two new felony counts. Xerox discovered more improper accounting. Adelphia filed for bankruptcy and Merrill Lynch suspended Martha Stewart's broker. All of that in just the past five days. Our extraordinary guest this evening led by former Treasury Secretary Robert Ruben will help us sort out what it all means for investors. But first since you and we may not have met before we thought you ought to know where we stand on a few things. It would be easy to give up on stocks in general right now. Corporate fraud and deception are such hot commodities that Enron which made markets and everything else might have found a way to trade them. And we haven't seen the stock market this troubled in months but buy a lot of stocks. No way. History is clear. Even in times like these there's still long term value to be found and finding it is what we're all about.

In the shorter term bear markets happen. That's reality and it's irresponsible not to face it in any market. Knowing which stocks to sell is just as important as knowing which stocks to buy. Karen I won't pretend to agree on everything. For example I think the new investigation of investment bankers by New York's attorney general is further evidence that this confidence meltdown is a complete system failure. And I think there may be more than a few bad apples out there. But American managers on the whole are still honest and ethical. You'll benefit from the debate. We'll give you unvarnished points of view not some watered down compromise because we figure that's the best way to make sense of the markets. With fear and distrust so thick in the year nobody has more sensible views on the economy of the future than Robert Rubin former Treasury secretary and one of the most important players in global finance. As director of Citigroup he thinks most Wall Street prognosticators are overlooking some hugely important factors and he'll tell us what they are. Jim Chanos looks for trouble and when he finds it we better listen. He saw Enron coming

before anyone else. He'll tell us which stocks he doesn't like now and fund manager Jim Berra will tell us what he does like in this market where many find only frustration he finds value. Well Jeff they found some value today closing the books on a brutal second quarter dominated by scandals and indictments. The Dow losing nearly 11 percent since the end of March. The Nasdaq falling almost 21 percent and the S&P 500 shedding almost 14 percent. But it was a surprisingly upbeat performance during another scandal plagued week that followed with September lows. The Dow was up most of the day boosted by companies such as Boeing 3M and Wal-Mart which hope to ride the stronger economy to higher profits near the close. The markets fell reacting to the news that President Bush would undergo a routine colonoscopy. The Nasdaq weathering the WorldCom debacle managed to post a weekly gain of one point five percent. As investors sifted through the carnage and the S&P added a fraction as fund manager snapped up

battered financial services companies to dress up their portfolios. The largest financial services firm on the planet is Citi Group and very few people have gained the respect of Wall Street Main Street and Pennsylvania Avenue. The way Citigroup director Robert Ruben has as Treasury Secretary Bob Rubin helped engineer the longest economic boom in U.S. history. Fighting hard for fiscal discipline and open trade. I'm not sure he'd take credit for it but the dollar rose at a 25 percent annual rate during his tenure which must make him Wall Street's all time favorite. Treasury secretary before Washington he spent 26 years at Goldman Sachs where he was co chairman and where he built an extraordinary reputation as one of the Wall Street's most trustworthy leaders. Now he's one of the most influential players in all of global finance. Thank you for being with us. You have to live to be with you after a week like this. An awful lot of ordinary investors are scared to buy anything. How should they be thinking about this market now.

Well I think Jeff at least in my view the way to think about the market is to start with your long run view of the American economy and at least in my view. The prospects for them or the potential for the American economy of the long term is very favorable Now having said that there are a lot of challenges need to be met if we're going to realize that potential We've got to reestablish fiscal discipline. We have to invest in our people. We have to deal with a whole host of international economic issues we have to do with terrorism and political instability abroad. But I do think we have a a very favorable long term potential and I believe over time the stock market will tend to follow fundamentals and long term means. How long. Oh a long term means something out beyond a couple of years. Yeah. We just had some apparently great economic news this week the announcement that in the first quarter the economy grew at six point a 6.1 percent rate which is blistering growth. And yet the markets shrugged it off and went nowhere. Well I think that's a different matter. Yet at the start of the shorter term outlook

the first quarter as you know was very much influenced by adjustment inspect inventories. I think the short term outlook is more complicated most forecasters are very happy and have felt for quite some time. Very positive and I think there's a powerful positive argument on the other hand I think that there are uncertainties and concerns that have been badly under weighted in most forecasts and I think in fact you have probably a roughly equal likelihood of the favorable outcome most forecasters expect and perhaps more difficult short term or intermediate term outcome. But that uncertainty has been seen not just domestically but also internationally the dollar hitting two year lows against the euro. What's the downside of that and is there any positive in a weaker dollar here. Well I think. That the strong dollar served our economy enormously well in the 1990s in terms of attracting capital from abroad which we are as you know a savings deficient country in terms of to keep inflation down and interest rates down. The dollar exchange rate after all is our exchange rate or terms of exchange of

the rest of the world to enable us to get the benefit of a more favorable term of exchange and selling our goods than importing. I think that the imports that we had in this country put pressure competitive pressure on American business which was one factor in driving productivity. So I think a strong dollar contributed enormously to our economic well-being in the 90s and I think that should be our policy objective going forward. I want to get your views on this crisis of confidence that we have right now. Your former colleague Henry Paulson gave a speech a few weeks ago that was very widely covered in which he said if I get it properly that the crisis of confidence in the way in which companies do business has seriously impaired the confidence of investors CEOs and boards of directors alike. It has been a drag on the economy. How bad a drag is it. I think it's hard to know Jeff I think a number of factors affected confidence I think that the most important one has been the concern about terrorism and geo political events political instability abroad conflict abroad. I think extremely important to deal with those issues effectively and thoughtfully

and also discuss them in the public domain a thoughtful fashion on the issues that you're raising the corporate governance issues and accounting issues clearly a set of problems have developed. I think it is extremely important that we deal with them effectively and energetically and I think have been some very interesting and very thoughtful proposals put forth. On the other hand we have a system that has served our country extremely well for a long time. And while it's very important we act and act thoughtfully and sensibly I also believe it's very important we act with balance and don't over react because I think if we do that we cannot balance damage our long term economic prospects. What should Washington do if anything. I think that the bill that came out of the Senate Banking Committee Senator Sarbanes bill which is you know has had bipartisan support it passed with a I think of 17 to 4 something like that was a thoughtful Bill I think. On the whole it has provisions to make a lot of sense that it focuses on what I think is the central most important issue in all of this which is accounting. You know our system really is dependent on the credibility and trustworthiness

of the the numbers that people get investors get but also the banks like ourselves get. And those are the audited statements that come out of accounting firms. And that's what Senator Sarbanes focused on and I think rightly what about the president. Do you think he has a role in reassuring the investing public in terms of this crisis of confidence or should he stay or stand aside. I think it's always important Karen for political leaders to discuss issues that are affecting our economy investors or businesses or the consumer in a thoughtful and serious fashion I say to President Clinton the times when we had difficulties that at least in my view and he very much felt this way extremely important to discuss these issues in a thoughtful and serious when the public made because I think that does personally increase public understanding. But I think it also increases confidence and it increases the sense that people have that the their political leaders understand the problems that they're dealing with. Part of this crisis of confidence is trust that isn't there

as much as it used to be in Wall Street institutions investment banks and brokerage firms because of the conflicts that are there. Obviously a big part of Citigroup is one of those firms Solomon Smith Barney you know people are going to wonder why they should be trusting the advice and recommendations they hear from that firm. Well let's leave let's leave Citigroup some broad out of I think that you've got a a a a a systemic question which is the relationship between research departments and investment banking. And that I think Jeff is a manageable conflict in there a number of proposals around with respect to how to do that I don't think that that is a problem that will be a long term systemic problem. I think that a far more central problem with respect to how our system function is the role of accounts because I think they're in a extremely difficult position. On the one hand they have a sort of acquired by regulatory responsibility for the integrity of numbers and other in there but they are profit making institutions. And I think we have to find some way of enabling that to work effectively as I said I think Senator Sarbanes came up with a number of very constructive ideas.

Do you think we're encouraging this kind of a systemic flaw by focusing on these tiny points these now issues such as earnings per share. Karen I left treasury in July of 99 and even though while I was in Treasury I kept in touch with people I think had a good sense it was how to market. I was astonished. How greatly the intensity of focus on quarterly earnings increased in the time that I was in government and I say I kept very much in touch with business and with markets. I think not only is that a non-sensible. In terms of maximizing over the long term it's irrational in terms of maximizing the long term both investors and businesses. But I think it does put a great deal of pressure on managers and businesses to make accounting aggressive accounting decisions. So I think I just think it unhealthy unwise. Trouble is I don't think there's anything that you can do. To reduce at least than I've been able to think of to reduce this intensity of quarterly pressure. It's not another layer of oversight or even more regulation could take away that pressure.

Karen I don't think there's anything that you can do in a regulatory legislative sense to reduce. The what has happened which is this intense focus on quarterly earnings I think if people were sensible about maximizing their long term investment results they would focus on the quarter they focus on the underlying fundamentals of business invest for the long term. Well this is a real basic question this one which is Can corporate America heal itself. I think corporate America is very much in the process of healing itself Jeff and I think I think the power markets themselves are a powerful corrective is very strong if you look today with today if you look over the last few weeks in the corporate bond market one thing you'll find is that companies with good liquidity positions are now selling more favorably at more fuel prices than companies without good liquidity positions. The market's going to do a great deal to correct what's happened but I do think I do think there are some systemic issues particularly with spec to accounting and I think that those do need to be dealt with. How could they get out. Well Senator Sarbanes as suggested in this bill that passed the Senate by committee be an oversight.

An oversight committee set up that oversight operation which I think is a useful thing to monitor in effect the function of the audit processes. Arthur Levitt has said I think you're right that there probably needs to be a better way of dealing with accounting standards. Most people think that audit doing and consulting should be separated I've never been sure myself that that quite goes to the core of this problem but I think it probably probably is useful thing I'm less clear about that. So those are three suggestions I thought. Warren Buffett a various Yes and so in the press not long ago. You can't make audit committees into super accounting committees because they're not that's not their function they couldn't do it but what you could do is have audit committees ask a series of questions of the auditor's with respect to what problems and what judgments they made in applying in doing their audit and I think that was a useful suggestion. Bob Ruben thank you very much for joining us today. Delighted to be here. Thank you very much. Well today turning to the markets story that has dominated the news this week. Jeff how

bad is the WorldCom fallout. Who's been hurt. Karen it's a lot worse and it's hurt a lot more people than you might think the fact is any one of us might have owned WorldCom stock without knowing it. Many mutual funds and pension funds held the stock including some of those popular Vanguard and Oppenheimer Funds. As of the end of last quarter the losses have been mammoth not surprising since the company was once worth 160 billion dollars and is now worth little if anything the stock hasn't traded in days. The retired teachers and state troopers of the New York State common retirement fund have lost three hundred million dollars helper's the California Public Employees Retirement System has lost five hundred sixty five million on WorldCom stock and bonds and the New York City pension fund which supports the families of New York firefighters and police officers among others has lost 100 million dollars on WorldCom Karen. So the question is how do you spot the next WorldCom are able Gast will attempt to read the tea leaves or should I say 10-K filings. Jim Chanos president of Kenya coast

associates has been hailed as the David that slew Goliath a straight up guy loaded with integrity. He was the first to blow the whistle on Enron. A short seller he manages over one billion dollars his Ursus or Bear Fund has seen some nice gains up over 80 percent in 2001 and at the end of May a four and a half percent. And Jim Berra loves the ugly stocks finding value in companies everyone else hates as a manager of Vanguard 23 billion dollar large cap winter to fund. He has well outpaced the S&P over the past decade. His mid cap fund Vanguard select value returned 15 percent in 2001 and so far this year up 4 percent. Thank you gentlemen both for joining us. Let me ask you first Jim China is now translating Greek from Latin your companies may means kind of cynic or cynical bear. How do you play this do you think. All investors now have to be cynical to continue and we'll let that continue to define this market.

And I don't think all investors have to be cynical but I do think that investors. Need to take care when they invest they need to investigate on their own. I think in light of the accounting scandals that we're seeing this year and last year it behooves investors to pay more attention to what they're doing what their managers are doing and to make sure that their money is being invested prudently and within the guidelines that they accept for risk and this environment to the erosion of confidence. How can you even step up to the plate and buy anything. Well. We focus on companies that have low price earnings ratios that have low priced books and have high current yields and we try to get you know a fair amount of diversification in our portfolios. And I think if you focus on them in a portfolio with a 15 P E and A you know two and a half or 3 percent kind of current yield I think you can be all right as in these rocky times and when things get better I think you'll do just fine. When do you think they're going to get better. Well. The market

itself is not cheap. Looking at the S&P or something. But but there's still a representative group of companies that are cheap enough to buy cheap enough to own and have good fundamentals and. We don't have any problem with funny names. Trend as you mentioned that investors should check with their management. But in this area of accounting fraud and scandals I mean how can they believe anything that they see or read or hear. Well that's the $64000 question currently. I think former secretary Ruben hit it on the head. We do need to look at the accounting profession the kind of issues. And I think something has to be done quickly in light of some of the large scale frauds we're seeing. I'm not so sure I know what needs to be done. Even as a user of financial statements it's amazing but I can't think of one major financial fraud involving a large publicly held company that has been unearthed by the outside auditors in the last 10 years. It really has been in the press or an inside whistleblower

or God forbid even shorts others who are dealing with people like you or Jim you found many of them over the years. It is amazing that more of them haven't been found by the outside auditors and I think that that alone tells us there's a need for reform. What don't you like now. Well generally there's a few areas we don't like. Broadly speaking all of the stocks are down quite a bit. We are still quite negative on the cable TV or cable TV as you may know is an area that's been valued on a so-called basis and I think this past Wednesday we saw the death of even with the world disaster. But what bothers us most of the cable industry is this is an industry it's never had free cash flow and never had earnings and it has a very high ongoing capital expenditures. So the depreciation and amortization is real just for anybody who is in isn't clear on it earnings before interest taxes depreciation and amortization right. In other words earnings before a whole lot of things that make

earnings smaller. Exactly. And free cash flow is cash flow after all the capital expenditures and in the cable business you've got a lot of capital expenditure and always have had probably and always will exist. Jim you're talking about looking for value. Things are very overvalued if you're looking at price earnings ratios now. What are you buying. What do you see. What are your major picks. Well we have big holdings in tobacco companies they've had a bad week this past week and one week there's not a lot of other year Mike. We have big holdings in all companies we have the whole large holdings and utilities just really kind of boring things but didn't really seem to be bucking the trend talking about tobacco at the litigations and energy which seems to be rife with this accounting scandal. How can you justify that. The energy I'm talking about the large oil companies not to be known in Iran or. That sort of thing you're talking the Exxon Mobil's That's a lot of that sort of thing. But are they still considered cheap.

I think so yeah. Now in other words these are big holdings of yours but you'd still buy em today. Yes. OK good to know. And similarly Jim chain knows the things that you are short you'd still go short today still go short today on cables. What else. Well after that it's fairly eclectic. Jeff we're looking at individual companies we've tried to make a stand in the market as a whole. So it's a variety of sort of individual situations that we think have problems with their business plans or problems with their accounting. One thing that I think is still worth examining is the extent to which companies using stock options as compensation and not expensing it in their income statement. For example a company where short is Yahoo. Well-known Internet search engine company. And last year in 2001 their stock option expense which is buried in a footnote exceeded the revenues not just profits no legacies of the revenues of the revenues an enormous amount you know that reminds me. It was a little over two years ago that the Nasdaq was at 5000. I want to ask each of you. How long will it take before it's back. At 5000.

Well when it was 5000 a lot of people. Ask me you know where it could go and I thought 1000 was right you know and we're getting pretty close there too. You have to remember that it went up there in such a rapid We went from in 1980 Nasdaq was at thirteen hundred. About. It doubled the next 12 months to 20 600 and in the next eight or so months it went from twenty six hundred to 5000 and something. And yet the higher it got the. Less earnings there were if you took out five companies there were no warnings in those days. What do you think the Nasdaq might get back to 5000. Well Karen I started my short selling fund when the Dow was at thirteen hundred so I'm not exactly the right person to ask. Having said that I'm generally an optimist. The U.S. economy is former Secretary Rubin is so I don't know I think that over time it will ultimately get back there it's you know it's an easy answer but but my guess is.

Will be there as soon as we get through that you have to have a different make up for the companies some of the companies that were very had 5000 I'm never going to get back so I didn't want to be able to do it you know very different as that makes it almost like it's really just a group of companies that have the trade there on the exchange I understand. OK thank you Jim chain. Thank you Jim Barrow. Karen These guys seem to think it will take a long time before the Nasdaq is anywhere near 5000 again. What other investment pros think. Well Jeff top money managers surveyed by Money magazine don't think it will crack that level for at least another decade. Forty eight percent of the respondents believe it could take a lesson to 20 years for the Nasdaq to climb that high again. And 11 percent don't think it will happen in our lifetime. So are the rich as pessimistic as the rest of the market watchers. Another survey shows that 76 percent of people worth over a million dollars don't believe what they read in corporate financial statements. And how about all those great stock picks that come from your broker 73 percent don't trust stock

recommendations from equity analyst. The biggest worry facing the wealthy terrorism and its impact on the economy and securities markets. Will Karen Martha Stewart has much more immediate worries. She was the other inescapable stock market story this week. But some people might have forgotten just how completely her situation has reversed. Only a few months ago when Kmart was heading for bankruptcy Martha said Of course she'd be loyal to her longtime business partner. Now this past week a reporter asked Kmart if they'd stick with Martha and without a trace of irony they said. Yes they sure would. Well let's take a look at what will affect a short holiday week on Wall Street. We'll find out next Friday just how many people have been handed pink slips. The nation's unemployment rate for June is expected to rise slightly. We've planned a very special show for you on the next Wall Street Week With fortune. We're going to help you figure out who to trust our colleagues at Fortune magazine I've been crunching the numbers and they've come up with Wall Street's all star analyst. You'll hear from the ones that have gotten it right.

We like to hear from you. Your comments your questions or criticisms send them our way to Wall Street Week With fortune here in Owings Mills Maryland. 2 1 1 1 7. You can also e-mail us at WSW at PBS dot org and be sure to visit us online for a weekend Web edition of Wall Street Week With fortune. That's it for tonight. We'll see you next week. Good night. So long. See you soon. Right. Right. To learn more about this program visit PBS online at PBS dot org America Online keyword PBS for a transcript of this program. Send a $5 to transcripts Wall Street Week With fortune. Maryland Public Television Owings Mills Maryland 2 1 1 1 7. 0. Wall Street Week With fortune that was made possible in part by the employee going to

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