Program Summary
Geoff Colvin started by pointing out that retail investors' worst suspicions about initial public offerings were confirmed this week -- twice. Eliot Spitzer, attorney general of New York, sued five telecom executives for $1.5 billion, claiming big investment banks gave them shares in hot IPOs in return for banking business, shutting individual investors out. Then, a congressional committee put together evidence showing the same thing. "On Wall Street this practice is called spinning, though individual investors might use a different verb," Geoff said.
In other news, a former Enron executive was hauled before a judge. This week's manager in manacles was Andrew Fastow, the ex-CFO, who's charged with fraud, money laundering, conspiracy, and more. He made bail by pledging his investment account and several homes, including that of his parents.
This week's edition of "Have They No Shame?" featured the new CEO of the Gap, former Disney executive Paul Pressler. His new employer will give him options on two million shares at half the market price, so even if investors lose their khaki shorts on his watch, he could still make money on those options. Investors will never hear the company's name the same way again.
And in the category of it never rains but it pours: Just as stocks were plunging this week, a bizarre clerical error pulled them down further. Bear Stearns put in an order to sell $4 million worth of stocks, but someone heard it as $4 billion. Hundreds of millions of dollars of shares were dumped on the market before the error was caught, nudging the major indexes down. "Do speak clearly when you call your broker -- the economy may depend on it," Colvin said.
Karen's market insight
October may be the month that marked the crashes of 1929 and 1987, the 554-point sell off in 1997, and the 7 percent Friday the 13th sell off of 1989, but the month is also a bear killer, Karen Gibbs said. October is the month that ended the bear markets of 1946, '57, '60, '62, '74, '87, '90 and '98. October is also the month in which the market has historically shaken its annual slide.
However, this week was decidedly down, capped by a mixed unemployment report. The jobless rate fell, but so did the number of jobs created. The resultant confusion left the Dow another 173 points lower for the week.
The Nasdaq Composite Index was down 59 points. The S&P 500 shed almost 27 points. The Wilshire 5000 tumbled nearly 274 points.
The Morningstar style boxes were awash in red ink, thanks to weakness in technology and financials of every size -- small, mid-cap and large. But telecommunications stocks of all sizes were elite gainers, led by Verizon, SBC Communications, Level 3 Communications and Nextel.
Roundtable and Abby Joseph Cohen interview
Karen earlier in the week interviewed Abby Joseph Cohen, chair of Goldman Sachs' investment policy committee. Cohen, known for being one of Wall Street's most vocal bulls in the 1990s, sees a market rebound over the next year-and-a-half. "The undervaluation that shows up in our model is very substantial," Cohen said during the interview, portions of which aired during Friday's broadcast. "Over the past, typically we will get the mispricing adjusted over a 12-to-18-month period. So if you allow me to look that far into the future, we’re talking about returns that are dramatically into double-digit territory. Dramatically more than 10 percent."
Cohen was unapologetic for being optimistic about the market's long-term prospects, even during the bear of the past two and a half years. "The analysts that I work with are very anxious in calling it right," Cohen said. "And it doesn’t mean that we won’t make mistakes, but they’ll be honest mistakes."
This week's roundtable members, money managers George Jacobson and Randall Eley, were also cautiously bullish on the market. There will be improvement between now and the end of the year, said Jacobson, one of the few fund managers to correctly call the bear markets in 2000 and 2001 ahead of time. "We're going to see a lot of choppiness...(but) I think the time has come to stop calling me bearish," Jacobson said. "We're looking at a gradually improving economy that will be described as gradually improving six months from now. So I don't think there's any point that investors as a whole will be able to say, aha, the moment has arrived. They need to do some buying now."
Sectors that Jacobson currently favors include food, energy, railroads and defense.
War will be a drag on the market, but the economy will be fine in the long run, said Eley, a large cap value manager. "Pricing power is coming back into industry in general," he said. "And long term, that's good news for the economy."
Sectors favored by Eley include financials and telecom.
Assessing risks
Riskmetrics' Michael Thompson talked about the risks of a market shock such as war with Iraq. Based on data from the Gulf War in 1991, the least risky stocks in an Iraqi war scenario are General Electric, Johnson & Johnson, Merck and Pfizer, Thompson said. The riskiest stocks in a Middle East war might be AT&T, Lucent, Avaya and Citigroup, he said.
Although most actively-managed funds underperform indexes during normal times, the opposite is true during "5 percent" events such as war or other rare scenarios that only happen a few times a year, Thompson said.
"Perhaps the reason for this is because, unlike indexes which remain fully vested, fund managers have the ability to anticipate and they do hold on to some level of cash to cover redemptions as a part of the normal course of business," Thompson said. "Perhaps because they tend to be opportunistic in their normal course of operations, they outperform the Indices across the board."
Viewer mail
Chuck Slagle of Indianapolis, Ind. wrote: "I've read that mutual funds over a certain size, say $3 billion, should be avoided because of their inflexibility in responding to market conditions. Still true?"
Bigger funds actually outperform smaller ones, Geoff said. According to Lipper Financial, funds with more than $3 billion in assets consistently did better than funds with less than $3 billion, including during the recent bear market, the bull market before that, over the past seven years and the past 10 years. Rather than worrying about fund size, look for a fund manager who was in the top 10 percent during the run-up and is still in the top 10 percent now, Geoff said.
Next week: Vanguard CEO John Brennan, and a look at how bond funds could be the next big investor risk.
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