Wall Street Week with Louis Rukeyser; 0517; He's Bullish On America

Run for public broadcasting. Wall Street Week produced Friday November 21. Your host for Wall Street Week is Louis Rukeyser. Our panelists are Frank happy Hello Howard P. Cole Hoon and Carter Randall. Tonight's special guest is Donald Regan chairman and president Merrill Lynch and Company Incorporated. Good evening I'm Louis Rukeyser This is Wall if we. Welcome back.

In this life you have to pay for everything. Take the case of poor Gerald Ford. The week started nicely enough for him there he was over in France for a jetset weekend with some fellow heads of government and their Billion pâté sipping Clarett and making statesman like compromises on such matters as international exchange rates. It was all almost incredibly presidential. That he had to come home and get clobbered. From California to New York they came charging at him the Golden West contributed the familiar face of Ronald Reagan who was a lot more successful as a movie star than Mr. Ford ever was as a male model. Mr. Reagan contributed the most unsurprising bad news of the week for the president by announcing that he will indeed run against him for the Republican presidential nomination. Well Mr. Ford was mulling these rumblings of thunder on the right. He was struck repeatedly by lightning on the left. Coming from the direction of New York City. President had not exactly been the toast of the town even before this week. But Gotham really sizzled at

what it regarded as a newbie trail on the question of federal help for the city's financial needs as New York and for that matter the stock market had understood it. The deal was made New York would take stringent measures to get its extremely messy fiscal house in order. And Mr. Ford would then step in in the nick of time with what we might call a jerry built solution. But then the president instead of summoning the cavalry said in effect who may be. Postponed until next week any positive assurance. New York exploded. Even the normally friendly Daily News was mopping up its presses with the president's face. And the disappointed stock market gave up most of last week's optimistic gains. All in all it was enough to make a man want to go back to ramble yay. Mr. Ford did have the satisfaction of observing that his obstinacy had produced action in New York as the mayor and governor admitted much of this action has been toward increasing taxes in what is already the most heavily taxed entity this side of Harold Wilson.

As the week ended New York state legislative leaders said they were considering tax boosts that would affect everything from banks to massage parlors. Now there indeed is the rub. Tonight we'll be talking about another kind of friction that between the powers that be at the New York Stock Exchange and my special guest the number one man of the number one firm who has proposed the magic changes that could affect every investor in America. But first let's see what already happened to those investors in the week just passed. And as the Dow Jones Industrial Average indicates Monday's soar the only advance of the week with gloom deepened even as the president hung tough after a gain of close to 18 points last week. The Dow Industrials this week declined nearly 13 points to eight hundred forty point seven six with similar drivelling as recorded by the composite indexes of the New York and American stock exchanges and the over-the-counter market. Now for the real bad news it's for the first time in its more than three years of existence. Our technical market

index doesn't have a single indicator on the upside. If the market now goes up strongly we will know exactly whose forests to burn. On the happier side when most of this week's economic indicators including those for industrial output housing starts and orders for consumer durable goods even the prime interest rate came down another notch. Less pleasing will reports that the rise in the cost of living last month was the third biggest of the year and that consumer confidence had taken a turn for the worst. On balance what do you make of this week. I'd say the market was just treading water waiting for the outcome of the New York City situation. The interest rate picture went as expected the banks dropped their rates to 7 percent. The inflation figures which you suggested were about in line with the expectation that 8 percent eight point four percent annual rate. The bad news of the week was from a New York bank that cut its

dividend and reflected some of the poor loans that New York and other banks have. But we're just treading water here until the New York situation. What do you think's going to happen there. I think the federal government will come in at the last minute and guarantee the difference between what the New York legislature tax and what the New York City will we do City expenditures. They will have if you had the government will have extracted what they want out of New York City in terms of promises. The confusion is greatly overseas where foreign people don't understand how a city like this could get in this picture and not confuse They don't understand the situation. Thought Amanda would you accept what Peter just said one thing you said that struck me was you said the rate of inflation was about as expected some people thought it was worse than expected. What were your expectations. Well a long term basis meaning several months is worse than expected but no I think it was right along with expectations. I think Lou as far as the market is concerned yes it's in a consolidation phase and is waiting for solutions to New York City and

other problems. I've got to come back to it to an old theme. Earnings are coming through. Well compared to a year ago they will continue for the next four to three or four. And earnings are basically the basis for stock prices they will improve. You know I mentioned that there was at least one bad report on a consumer confidence survey this week Consumer confidence is not on a lot and to the State of the stock market is right. Why do you think the average person doesn't believe that we are in a recovery period. I think he's been burned for a long period of time and I think any bad news anything that is negative anything that worries him scares him that we're going to go through what we went through in the last year and a half. But I think this is a temporary downturn in consumer confidence. I think it's really basically high relatively and will continue. I kept you know I mentioned that Ronald Reagan joined the fight this week and at least one Democratic

Congressman Henry Royce of Wisconsin suggested that that was the real explanation for everything the president did this week that he was worried about Reagan. To what extent is politics dominating economics and the stock market now. Well I think from week to week or day to day the stock market I think politics will dominate from time to time the market until probably we know who the Republican and Democratic nominee is. I would guess that Reagan being to the right is going to force Ford to do several things he's already forced the president to do several things. But I don't think it's going to make much difference in the next several months because the jury's still out. I think this consumer confidence factor that Carter talked about is the thing that the market's worrying about as bullish as Carter is I think the market is in the second stage I think we're still in a bull market. I think there's an apprehension about Federal Reserve policy that the Federal Reserve is in a very accommodative right now because of all the possibilities in New York City. I think after New York.

Hopefully is resolved. I think the fear is that the Fed will tighten up and rates go back up again. We put out by the president's statement this week on New York you've expressed some confidence he was going to come in around this time. Yeah I was. I think he's playing guts ball. I think what he's trying to do is force the city in the state of New York to do what they have to do particularly in negotiating pension benefits. This is the real ticklish problem. And you've got to get the New York union leaders to the point where they're willing to accept it in order to do that there has to be real fear. And New York is going to going to default. So what we're playing is a very dangerous game right up to the last minute to get the union to accommodate the president wishes and then hopefully over the hill comes the cavalry but they may have Little Bighorn and we may actually have one day in the fall. I don't think so but. There could be a miscalculation. I don't think it's going to be that way but Custer situation was somewhat worse than when they had to fold. Questions of New York to the questions of our viewers and see what we can do to answer them.

Pete called him on a number of our viewers have wondered in recent years about whatever happened to the old belief that stocks were a hedge against inflation. For example Leland Michaels of Portland Oregon says he had been led to believe that everything fed on inflation including the stock market. In your view what is the true relationship if any between the rate of inflation and the prices of common stocks. Mr. Michaels is asked a very difficult and comprehensive question and I hope he'll accept a somewhat simplified answer. On the whole stocks are far better than bonds as a hedge on inflation. However during periods of rapidly rising inflation such as we had in 1074 the investor does rather badly in stocks and bonds. In fact it would be much better off in short term instruments such as treasuries during periods of declining rates of inflation such as we're having now inflation is still positive and still going up but it's increasing at a decreasing rate. Stocks tend to do much better. And that's I hope

a. Satisfactory supply sometimes seems to me that the stock market is like the old story the growth I want to be a little bit pregnant with a little bit of inflation. Colorado is growing interest these days in the writing that is selling of options on common stock as a shortage of Brooksville Florida would like some guidance on what factors a prudent options writer should use in determining the asking price of an option. Lou there's a myriad of factors and we haven't got time to go in the night but I would advise the average prudent conservative investor first of all to sell only out of the money covered options. And I would advise him to just play with that means in English where the strike price is higher than the current market price of the stock. I would advise a number of options being options on stock he already owns. I'm sorry. I would advise him to. Make sure that if the if the stock is called from him he makes at least 10

percent on his money. There is a good ground rule there are several. You fellows are saying these questions are too complicated and you get a very good short answer. Nothing wrong with that cap yellow Gary silver bird of University Heights Ohio who says and I quote This investing in the stock market is somewhat of a gamble anyway. Is thinking of investing in the so-called gambling stocks. Companies that produce gambling equipment operate the CEO's you'd appreciate an expert appraisal and he adds I may even take a chance on your answer. How come I get these questions. OK there's one of your years of expertise right. This is really a recreation category believe it or not. At least that's where the stock list put the stocks. Basically what we're talking about is really three stock Cesar's world a company called Harrah's which operate gambling casinos and a major manufacturer of gaming equipment slot machines which is Bally manufacturing. The entire business depends really on discretionary income that

is what does the consumer have left over after the necessities of life food shelter and so on. Surprisingly he may have a lot left over in 1976 because a gambling instinct is pretty primitive and they just won't go away. If you believe in a good economy in 1976 these stocks are quite cheap on multiples and could be interesting. The problem is that you will not get an institutional following on Caesars world or how or as or even Bally manufacturing simply because of the tinge associated with gambling gambling is only legal in a few areas mainly in the state of Nevada really. Slot machines are only legal in the state although they do operate in certain counties so there's a limited market. Also institutional investors such as people and Carter probably would not buy these stocks because they're simply not appropriate. So you're not going to get these people to move the stocks up. So it's a speculative situation but I think they're cheap. I think they'll work out what I don't know.

Don't gabble the widow's money. However if your investments are not already enough to gamble if you like to spin the wheel in some other direction just send your queries about the world of stocks and bonds along to us here at Wall Street Week Owings Mills Maryland 2 1 1 1 7. 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 look at what many people think will be among the nation's biggest economic problems of the next decade. The raising of enough capital to let the country grow and provide the jobs we'll need for an expanding population. Talk about a capital gap or even a capital crisis has accelerated since the New York Stock Exchange compiled a summary of the nation's capital means for the 12 years ending in 1085 according to the exchange figures more than half of those needs are more than two and a half trillion dollars will be required for investment in private plant and equipment. Capital needs for adequate housing of the American population are estimated another trillion dollars farming and other private

uses are expected to require about eight hundred fifty billion more and the capital needs of government federal state and local are estimated at one hundred seventy five billion dollars bringing the total to 4 trillion. Six hundred seventy eight billion dollars give or take a few odd pennies. If the exchange calculations are correct that's how much investment capital the U.S. will need to maintain even a modest rate of growth. And where will it come from. Well according to the exchanges projections the major source producing nearly three trillion dollars will be business saving earnings that are retained by companies instead of being paid out as dividends. Personal savings the kind you and I might be able to invest are estimated to produce a little more than another trillion dollars. And that's the end of the sources though as you'll notice we haven't yet supplied the full capital investment dollars the remainder close to six hundred fifty billion dollars. Now looms as a capital gap a gap that signals a

probable scramble for the available funds with the likelihood that governments and the biggest businesses will crowd out other potential users of capital. If we do avoid the possible consequences of such a gap including high interest rates and sluggish economic growth we may need some changes not least in the world of Wall Street. The thoughts of a man who has proposed some dramatic changes. Let's go over now and meet tonight's special guest Donald Reagan. Don welcome back to the light it will be with us again I. Think. In case you're wondering who runs the show. Don Regan is the first and only chairman and chief executive officer of Merrill Lynch and Company the holding company formed in May 973 by Merrill Lynch Pierce venom and Smith. This past May Mr. Reagan was elected to the additional position of president of Merrill Lynch in company. He's also been chairman and chief executive officer of the brokerage subsidiary Merrill Lynch Pierce Phantom and smells

since January 1971. So that's who runs the show at Merrill Lynch. Mr. Reagan's entire business career has been spent with the firm which he joined in 1946 as an account executive trainee. His earlier credits included a degree from Harvard and distinguished wartime service with the Marines in the Pacific. Don you appear to be in a war of another kind right now with the old guard of the New York Stock Exchange. Would you define for us the basic issues as you see them. Certainly Lou what Merrill Lynch and I have done in the past few weeks is to introduce a model of a new proposed national market system. Let me make a clear right at the outset that what we're proposing is not something that we have conjured up just for the sake of argument. This is the law of the land. The Congress with the amendments to the Securities Act that they passed earlier in 1975 decreed that there would be a national market. What we have done now is to propose a model of that.

When I was the commissioner of the Securities and Exchange Commission asked you last month whether your proposals would eventually abolish the New York Stock Exchange specialists you replied you are entirely correct. What's wrong with the system as it now exists as the system now exists nothing is wrong this is the best marketplace in the world the New York Stock Exchange. But. What has to be done in the future is to bring all of the marketplaces of the nation into one. And rather than being a geographical location to have it located in a computer. Would all transactions be reported in that computer system. Oh yes they must according to our model and we would instantly know about any transaction and stuff. Yes and there would be a provision for automatic execution of what is in the 100 200 and 300 share amounts large abroad is because obviously the human element would have to come in. Well the opposition of the specialist is obvious you want to put them out of business but some other critics have come along and they say that your plan would hurt smaller brokerage houses and regional firms that

only big firms like Merrill Lynch would be able to survive. How do you react to that talk. Well first of all we're not trying to put the specialist out of business we're merely saying that there should be a lot more people like the specials that is a lot more market makers in the system and today specialists we hope will be one of those market makers in the system. Now as far as large and small firms are concerned anyone can join the national market system. We envisage all current members of the NASD members of the regional exchanges as well as members of the York Stock Exchange being all part of that central system. Your firm is often pictured itself as the champion of the small investor. How would he or she be affected by these changes. Well we think that there would be a even better market than there is today because you have a lot more market makers and because you would now be able to pick the best bid if you were a seller of the best offer if you're buying and be able to get. That automatically for your execution. The individual investor would be better off. One change that clearly would help at least some small investors that you've already proposed is the

elimination of the differential that small investors have traditionally have to pay on orders of less than 100 shares the so-called lots. You had some resistance in the exchange on that how are you coming on that. Well we're still waiting to hear from the New York Stock Exchange on this. They have given us permission on the opening to bunch all of our so called Share builder program and to eliminate the differential there. They have not replied as yet to our request that they comment on our plan to do away with executing orders during the day except on the bid and offer and without the differential. Why do you think they're so slow to respond in matters like this. It's complicated it's confused them is taken by surprise. I don't think they were ready for it. And I think they're trying to figure out what's the alternative. Is the exchange still too much of a private club. No it's not that it's a private club it's that they think that they have to look at other people's interests besides out of Merrill Lynch. And while I can see

that this would be great for Merrill Lynch and its customers I think they're a little bit worried about what happens to other people's customers. Do you think smaller firms could compete with you on this. We think that the odd lots there will always be some type of execution and that as far as the New York Stock Exchange is concerned it's up to them to see that other people's customers do get some type of execution. We don't have any specials with us tonight but we do have some special panelists. Let's hear from them starting with people who died in the last several years the FCC in the Justice Department to try to bring more competition to the brokerage business as evidenced by assistance to be negotiated rather than fixed rates. There's some evidence that there's some consolidation in the brokerage industry taking place. Do you think that when the full effects of this new competitive environment works its way through the brokerage community. Well the prices that customers pay for the services they receive today likely to be higher or lower and why.

All things being equal and I think I guess for our discussion Pete we'd have to leave inflation out of the picture. Yes and what the price level will be two or three years from now. Yes but assuming it is the same. Yes. My own feeling is that the charges to customers will be less than they are today because of the economies that can come from scale operations. Well done to almost follow through on that same subject. Some people are saying that eventually we will not have a commission system in the stock market that we will have a group of market makers as you indicated and there will be no commissions everything will be done on a net basis with the profit of the broker being on the spread on the trading. Is this a possibility. That's a possibility for the long distance future curtain but not in the immediate future I would see that coming in the next two to five years for example. I say it's a possibility in the future. All right. Thank you. First of all it's nice to have a Harvard man back on there and a fellow Marine right. Exactly.

Aren't you going to be the General Motors of the industry in five years with a Chrysler or two and perhaps a Ford. The way things are going aren't isn't in the zest to lower the commission scale to give the cheapest service to the customer. Aren't you dismantling the venture capital mechanism. No I don't think so. As I see Wall Street developing in the future we might cut down from the. Hundreds and hundreds of firms that are on Wall Street to a few hundred firms. But I doubt if any one firm including Merrill Lynch will ever be dominate the securities industry the way General Motors dominates the automobile industry. And as far as venture capital is concerned. Firms including ours will always be interested in somebody that has a good idea that needs financing. After all that's a business done on behalf of those of us in the audience who didn't have the privilege of attending Harvard to be in the Marines. Let me ask you about your firm's well-known slogan Merrill Lynch is bullish on America. It seems to me that for the fifth past year or so you've been hedging your bets a little

bit. Talking about investments with a greater degree of safety than common stocks. What is your view of the outlook for common stock right now. Well Lou if we can talk about commercials on this particular TV network I never watch it myself. But how about when. You have to understand that that commercial saying that and that slogan of our firm that we're bullish on America indeed means the country not necessarily the stock market. And nor the economy. And during 73 and four we were cautious on both the economy and the stock market. And I think rightly so. However right now we are bullish both on the country and on the stock market which stocks you think will perform best next year. Consumer related stocks and stocks that have good yields. That that's quite a good for you to want to consume a kind of oh more than I would say that things that are in the hotel or motel area stocks that are in the area of rubber products automobiles things of that nature food chains just before you came

to join us tonight as you saw we looked at the New York Stock Exchange projections for a capital gap. Do you share their concern do you think that's shipped in stone. There can be a serious capital gap in the United States. But here this is going to be up to the people of the United States and their political leaders. We have to balance our social aims and desires against our investment needs. The more you spend in the social area the less you'll have to spend in investment. Investment means jobs and you're going to have to watch your trade off here. The more you go for one the less you'll have in the other. And the only way you can make it up for your social aims is to have the government the United States spend the money and there in lies the problem if the government decides to come into the capital markets in a large way. There's less capital available for everyone else. If the government. Cuts back on its desires there will be enough capital to go around. We only have about a minute left. What is the role of the individual investor in the stock

market future and what are you going to do to make him want to play that role. Well out there among your listeners and others like them there are millions who literally have an interest in the stock market. They're waiting opportunities to get into the stock market. They have not thought that the last couple of years have been the opportune time for that. As far as the future is concerned as Frank said earlier we're talking about disposable income as long as the the person has disposable income. A great portion of that is going to go into the stock market. I think the individual investor will return to the market as soon as conditions improve. Thanks very much Don Regan you are rare on Wall Street in that you always speak up for competition which sometimes seems to be the bugaboo to many people up there. So it's always a pleasure to have you with us. Thank you very much panelists. I hope you'll be back with us next week. My guess will be one of the nation's most prominent economists Otto Eckstein man who used to advise presidents but now finds more sense in computers. As the head of data resources he's been a pioneer in the

new field of econometrics. And he says it has given him some surprising insights into our future. Let's see what he sees together. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Goodnight it. If you would like to obtain a written transcript of tonight's program. Send $1 to transcripts Wall Street Week Owings Mills Maryland 2 1 1 1 7. That's $1 to transcript. Wall Street Week Owings Mills Maryland 2 1 1 0 1 7. Residents of Maryland Please include four cents sales tax. Wall Street wake was produced by the Maryland Center for Public Broadcasting which is

solely responsible for its contents and was funded by public television stations the Ford Foundation and the Corporation for Public Broadcasting.