Program Summary
Geoff Colvin opened the program by pointing out that as of Wednesday the current market became the worst bear market since the Great Depression. "And yet, no Great Depression," Geoff said. "Not even a Good Depression."
The economy is still growing, though it may be slowing. Sales were down at many major retailers, and that's compared with last year's awful September. But the week's big news was Congress giving President George W. Bush the authority to use force against Iraq. Despite today's market rally, the increasing chance of war clearly makes investors nervous.
This week's installment of "Have they no shame?" revisited Imclone, whose stock is down 90 percent and whose former chief executive is under indictment. Members of Imclone's board admitted yesterday they knew long ago that ex-CEO Sam Waksal forged bank documents and company documents. Yet far from firing him, they didn't even tell anyone about these apparent Federal crimes. The directors did show they had some backbone in dealing with Waksal, though. They testified yesterday they asked him, when buying wine with company funds, not to spend more than $100 a bottle.
And the Nobel Prize in economics went to two pioneers in behavioral economics. One of their findings is that investors don't like to take their losses. "I suppose someone had to say it, but who knew you could get a million-dollar prize for it?" Geoff said.
Karen's market insight
This week's market action could be a case of out of the frying pan and into the fire, Karen said. Just when investors dumped stocks to buy bonds, financial markets saw a resurgence in equities, specifically in General Electric and Yahoo.
The Dow Jones Industrial Average added 322 points this week, breaking a six-week string of losses, with GE one of Friday's most active stocks friday, thanks to a 25 percent jump in profits that erased some doubts about the conglomerate's prospects. The Nasdaq Composite Index hit a new six-year low this week before Yahoo lifted it out of its doldrums, thanks to third-quarter sales that jumped 50 percent. That helped the Nasdaq add more than 70 points this week.
And the Wilshire 5000 was better by more than 274 points this week, bolstered by broad-based buying.
Although stocks rose this week, it's worth noting that in nine of the past 20 years -- or almost half the time -- bonds outperformed stocks. The bond market has outperformed stocks for the past three years and is on track for a fourth -- an almost unprecedented event, Karen said.
Interviews and roundtable
Karen sat down with Thomas Atteberry of FPA New Income Fund and Timothy Leach of Wells Fargo Private Asset Management. Both men believe that it will be difficult for the bond market to maintain its gains in the near future, especially given bonds' currently low yields, which fall as prices rise. For example, yields on long-term Treasury bonds have gone from 9 percent in the late 1980s to 4.75 percent currently, Atteberry noted.
"To replicate that, you have to think in terms of interest rates falling again to the 2 percent, 3 percent level for a 30-year bond. We find that highly unlikely," Atteberry said. "The other thing to keep in mind, the risks have gotten tremendous in bonds here, really in the last year or so, but really much more so the last three months."
An increase in interest rates of just 100 basis points back to their June levels would result in a 3 percent loss on bonds bought now, Atteberry said.
Mortgage-backed securities also aren't very appealing right now, Atteberry said. With interest rates currently so low, mortgages have low coupons, and if interest rates start to rise, the average life of a mortgage that might have been been three or four years suddenly expands to seven to nine years, while the payout remains low. "It sets you up for negative return," Atteberry said.
One area where Atteberry does see value is junk bonds, an area difficult for individual investors to get into. The difference in yield between junk bonds and treasures is at levels not seen since the last recession in the fall of 1990, Atteberry said. One of his company's current junk bond holdings include contract electronics manufacturer Sanmina, a subcontractor for several large computer companies. "We don't necessarily deal in household names, but we deal in companies that deal in broad sections of the economy," Atteberry said. "It's a way to participate in the business with a company with more than ample cash to pay the bonds back, in a situation where the yield for a bond with two, three years to maturity, is 14 percent. We find that very attractive."
Although there is always substantial risk in the junk bond market, many companies these days are adequately compensating investors for that risk, Atteberry believes. The Lehman Brothers' high-yield index at the end of September had a yield of 13.6 percent, comparable to the return from small-to-mid-cap stocks, Atteberry said.
"We look opportunities where we find equity-like returns," he said. "At a period of time when we see the economy growing, credit quality improving ... The wind Is at your back."
Leach also believes the economy will continue recovering, which is why GE is one of his largest holdings. "We think GE is really well-suited to recover from here ... really kind of a benchmark for the U.S. economy as a whole."
Although possible war with Iraq is a huge concern in the market, people have already been dealing with huge concerns for some time now, Leach said. Sectors he currently favors include health care and financial services.
» Click here for more picks from Timothy Leach
Geoff interviewed Jack Brennan, CEO of Vanguard Group, the second-largest mutual fund company and one of the firms most responsible for the growth of index investing over the past 25 years. Brennan continues to champion index funds even though the average actively-managed fund has outperfomed the S&P 500 in the current bear market, according to Morningstar. Indices generally outperform active funds in non-bear markets.
"You can’t predict when a bear market is going to start or end," Brennan said. "You own a stock fund because you think it will appreciate in value. And we think, frankly, moving forward, where returns will be less than we experienced in the past once they turn around, the diversification value and the expense advantage become more compelling than they were over the past 10 or 20 years."
Brennan also talked about corporate governance and the structure of benchmarks such as the S&P 500.
» Click here to read Brennan's interview
Geoff and Karen also spoke with David Brancaccio, co-host of Marketplace, Minnesota Public Radio's business program. Brancaccio talked about the labor problems at West Coast ports.
"Pacific Rim trade is huge," Brancaccio said. "In fact, more than $300 billion worth of trade comes through the 29 ports along the west coast. But here's the thing -- if you want to get Asian freight to other places besides the West Coast in North America, you can't just fit through the Panama Canal. A lot of the new freighters, a lot of the new ships are too wide, so they have to come through the West Coast ports. So when the dock workers are unhappy -- and they still are unhappy -- it causes a major ripple effect throughout the economy."
» Karen Gibbs: Dock stagflation
Next week: Money manager Joan Lappin, unapologetic bear Bret Gallagher and former CEO extraordinaire Lawrence Bossidy
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