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| ROLLERCOASTER MARKET | |
 October 18, 2000  |
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Charles Kadlec of Wall Street investment firm J & W Seligman and Vince Ferrill of investment advisory firm Spears, Benzak, Solomon and Ferrill discuss the market's recent ups and downs.
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RAY SUAREZ: Is that slowdown in the growth rate in earnings as large as the changes that we're seeing in the daily level of the index?
RAY SUAREZ: Charles Kadlec, what s your read of the events of today and previous weeks? |
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RAY SUAREZ: But when you see a market like this one, where there's a 400 point drop, for instance, after the opening bell this morning, doesn't that mean that people aren't taking your advice and taking that long-term view?
RAY SUAREZ: Vince Ferrill, are you as bullish as your colleague, Charles Kadlec? VINCE FERRILL: I'm longer term bullish. I think very, very short-term caution is called for. You asked earlier, the 400-point decline today indicates that people aren't listening to long-term advice. I think a lot of people are and should be, but remember the past few years gave rise to the day traders. People gave up their regular jobs, because you could make so much money in the market flipping stocks. Unfortunately, these people have to be carried out dead. You can't just wound them. They have to kill them. And while this is going on, you're going to have this incredible volatility. But the inherent strength of the U.S. economy is something I've always banked on. Just right now you want to be very, very cautious of what you go into, because you don't know what the proper valuation is for some of the stuff that you own. You thought that growth was going to be to the skies forever more. We're discovering it's not. So there is going to be a sorting out process, but in that sorting out process is terrific opportunity. RAY SUAREZ: But when you open up the financial pages of the morning paper, there's all this worry about earnings reports. Then on particular key companies, some of them weren't even that bad. They beat last year or matched last year, but the stocks fell anyway. Why does that happen? |
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RAY SUAREZ: Charles Kadlec, if this is a market that's squeezing out excess value, how do you know when it's over?
RAY SUAREZ: But, Vince Ferrill, does that mean that there are some innocent bystanders that are getting hurt, companies that really aren't doing that badly?
RAY SUAREZ: Vince Ferrill, Charles Kadlec, gentlemen, thank you both. VINCE FERRILL: Thank you. CHARLES KADLEC: Thank you |
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RAY
SUAREZ: First tonight, the market. Today's wild ride on Wall Street
was only the latest indicator of recent market tumbles. The tech-heavy
Nasdaq is off more than a third, or nearly 2,000 points, from its high
earlier this year, and the Dow Jones Industrial Average today finished
below the psychologically important 10,000 mark for the first time in
more than seven months. Here to help us sort through the ups and downs
on Wall Street is Charles Kadlec, managing director of J. &W. Seligman,
a Wall Street investment firm. He is the author of "Dow 100,000:
Fact or Fiction?" And Vince Ferrill, chairman and chief investment
officer of Spears, Benzak, Solomon and Ferrill, an investment advisory
firm. 
VINCE
FERRILL, Spears, Benzak: I think, Ray, there's a revaluation of the
price of stocks relative to the earnings expectations you have going
forward. The Fed has raised interest rates often enough to induce a
bit of a slowdown, and some months ago we were pricing stocks at a certain
level with the anticipation that their earnings would grow at a certain
rate. That growth rate is slowing down quite clearly, so we're struggling
to figure out what the proper valuations for stocks would be. And I
think it's going to take a little while yet before it sorts itself out.
VINCE
FERRILL: No. The volatility is perplexing and certainly upsetting, but
it's become a way of life. I think you have to try to take a deep breath
and step back from that incredible volatility, but it does give you
opportunities, on the other hand, to buy some world-class companies
at cheap prices. But we just got too exuberant in the past two years,
and we priced stocks for perfection. And we're discovering now that
it's not a perfect world. And we have to figure out the correct price
for the imperfection to go forward. But you can bet that we'll continue
in extremely volatile fashion because it just seems to be the way it
is. 
CHARLES
KADLEC, J. & W. Seligman: Well, I think the lesson of today's market
is the importance of having a longer term strategy that allows investors
to stay invested, stay committed to the good companies they own during
these inevitable periods of day-to-day volatility. What we know is that
from 1981 through 1999, the Dow Jones Industrial Average went up an
extraordinary tenfold, but people too quickly forget that in the midst
of that historic rise in the Dow, there was all kinds of short-term
volatility: the '87 crash, the 1990 Gulf War, in 1994, the worst bond
market in history. And yet investors who saw it through and had a long-term
strategy that allowed them stay committed to their investments achieved
remarkable investment returns. But if they had missed only the 30 best
days of those entire 18 years, they would have given up two-thirds of
the upside to their investments. So what we know here is the old verities
are coming back; the market is teaching us again the importance of diversification,
having a plan, working with a financial adviser to make sure the plan
is coherent with your individual circumstances. And I think you're going
to see people return to those verities between now and year end. 
CHARLES
KADLEC: Well, I think it underscores the importance of taking a step
back from the market and asking yourself the most important question:
Is our prosperity still intact? Is this bull market over? Our research
at Seligman says that our prosperity is going to continue. The fundamentals
remain positive. The economy continues to grow. With China's entry into
the World Trade Organization, we're going to have an expansion of free
trade, a reduction in tariffs in U.S. exports to China. That means more
exports from the U.S., more jobs in the United States as well as China.
And there is an overall commitment here to restoring stable prices in
the United States in spite of this short-term outbreak in inflation.
So from this longer-term view, the fundamentals here look very positive.
VINCE
FERRILL: Well, because we're starting to play too much of the micro
game of whether they meet estimates or beat them by a penny. It's a
reality that if you disappoint in the very short term, stocks get savaged.
So you do have to pay attention to that. You really want to sit back
and recognize that it is a long haul to wealth. It doesn't happen overnight.
What Chuck pointed out is that if you were out of the market for the
30 key days of the past 20 years, you gave up two-thirds of the gain,
that's something that people have forgotten and have to remember. We
do have to get away of this mania of looking at the quarterly earnings
and trying to dissect them. I don't think it's going to happen soon.
And that's why the volatility that we've seen is going to continue for
a while. And that's why we're going to have the gut-wrenching days.
I give you no short-term prescription for peace and quiet. It's not
going to happen. But at the end of the day, I think prosperity and higher
stock prices will be the end game. But it's not going to be an easy
road from here to there. 
CHARLES
KADLEC: No one knows when it's over. That's why you need a long-term
strategy. We're also learning the importance of active management during
periods like this. You know, the common sense, the conventional wisdom
at the end of 1998 was all you had to do is buy a passively managed
index fund and everything would take care of itself. Well what people
didn't see was the concentration of just 25 stocks, the largest mega
cap stocks driving those indexes. Those are some of the companies now,
the stocks that have corrected the most -- active managers, portfolio
managers who are evaluating specific companies, understanding the fundamentals
of those company, avoiding big losses and investing in good companies
will be seen in the last three quarters. Active managers now on average
in mutual funds have outperformed these indexes by about ten full percentage
points. So I think that's another lesson we're being reminded of that
was forgotten in some of that period which Mr. Greenspan called irrational
exuberance. I would rather characterize it as people recognizing the
underlying strength of the U.S. economy. That remains intact. This is
just a correction in a longer-term bull market. 
VINCE
FERRILL: On the very short term, Ray, yeah. Some innocent bystanders
could get hurt. But you tend to get what you deserve. Using IBM as an
example, IBM has rewarded their shareholders the past few years by buying
back stock, therefore reducing the number of shares outstanding. So
it appeared that earnings were growing. The truth is they weren't growing
their revenues sufficiently. And they came home to roost last night
with the report that revenue growth was really lacking what people had
hoped for. So is that an innocent bystander, or have they done the right
thing or are they truly a disappointment? The truth will be over the
next few months, the stock will find its appropriate level. But innocent
bystanders, if they're truly innocent, tend to get impacted on the very
short term, but then the truth will out. And the valuation that's appropriate
always prevails over a while. What's going on right now is the excesses
have been squeezed or are being squeezed out. I don't think we're done.
The 25 to 50 biggest stocks Chuck referred to that got exorbitant following
and prices that were just too high relative to the basic underlying
fundamentals are going to get corrected, and there will be some tragedies
in there where it shouldn't occur to that company. But that's kind of
the way the market operates. And that's why diversification of a portfolio
is absolutely critical.