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Karen Gibbs and Geoff Colvin Karen Gibbs Geoff Colvin Geoff Colvin Karen Gibbs
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Air Date: Nov. 8, 2002
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Relevant Links
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» Election 2002 roundtable transcript
» Gibbs: Elections and the market
» Jenner: Prognosis for the health sector
» FORTUNE 40, Nov. 8: S&P stays on top
» Nov. 8 stock picks
» Summary of Nov. 1 broadcast

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Program Summary

The week’s biggest winner was President George W. Bush, and his consolidation of power in Washington means a lot for investors, Geoff Colvin said at the top of the program.

"Trouble is, no one is sure exactly what," he said. "A big tax cut? A little one? No more taxes on dividends? Higher limits on 401(k) contributions? They’re all possible."

Geoff said that the week’s biggest loser, aside from several Democratic candidates, was surely SEC Chairman Harvey Pitt, who tried to leave town without anyone noticing by announcing his resignation at 9 p.m. on election night -- but it was still front-page news around the world. And the sad fact is, it was good news for virtually everyone but him, Geoff said. President Bush will have an easy time getting a replacement approved by Congress, but may have a hard time finding a qualified candidate willing to take this white-hot assignment.

In all the week’s big news, it was easy to miss a new report from former U.S. attorney general Richard Thornburgh, the bankruptcy court examiner in the WorldCom case. But read it, and only one thought comes to mind: Have They No Shame?

The report tells how WorldCom under CEO Bernard Ebbers would routinely look at its financial results each quarter, compare them with what the company had promised Wall Street, and then simply cook the books to fit the promises through accounting the report calls "brazen and fraudulent." And if you think that’s bad, the report says tantalizingly, there’s much, much more yet to be told. We can hardly wait.

Karen's market insight

Wall Street didn't have much time to celebrate the Republican victory in Congress, as saber-rattling and profit warnings reclaimed center stage, Karen Gibbs said.

The UN Security Council's unanimous approval of a new resolution against Iraq brought the United States closer to war and renewed the argument of bonds versus stocks. The yield on 10-year U.S. Treasury notes fell to its lowest level since Oct. 14.

A profit warning from from Dow Jones Industrial Average component McDonald's took the wind out of blue chips' sails. The Dow posted a modest gain of 19 points for the week.

And a gloomy outlook from networking giant Cisco Systems derailed the recent rally of the Nasdaq Composite Index, which ended the week 1.5 points lower.

Broader markets succumbed to light profit-taking, with the S&P 500 down more than 6 points for the week. The Wilshire 5000 shed more than 63 points for the week.

Even the Morningstar style boxes showed across the board weakness, with every investing style losing ground, despite aggresive monetary easing this week by the Federal Reserve Open Market Committee.

Election 2002 and health care discussions

Sam Stovall of Standard & Poor's, Charles Gabriel Jr. of Prudential Financial and Jeffrey Birnbaum of FORTUNE magazine sat down with Karen to talk about the week's election results.

"The lesson was that it isn't the economy, stupid, at least in this mid-term election," Birnbaum said. "President Bush gave them a chance to agree about the importance of national security. That clearly trumped the economy as the top issue, and Republicans swept as a result. ... We're likely to see more in the way of tax cutting, less in the way of regulation, and probably as much military spending as the President wants or as the Pentagon could ever imagine."

Attempts to use Wall Street's scandals to fuel voter discontent failed, Gabriel said. "To some extent that fever broke a bit," he said. "Nobody lost an election on Tuesday because they were seen too close to big business or Wall Street."

Two companies that may benefit from a Republican government are Philip Morris and Target, Gabriel said. Philip Morris not only gets a bit of relief from regulation, it also would do well if Congress ends double taxation of dividends, he said. Target could get a boost because a Republican Congress is less likely to raise the minimum wage, and could push through tax rebates that would increase spending power for lower income individuals.

Financial services firms could do well, Stovall said.

"If we do have bankruptcy reform go through, then it basically implies that the consumer can't really just say, 'Well, I'll run up some bills and then say I'm bankrupt, and so you can't come and get me,' " Stovall said. "So overall, if there is that possibility of reform passing, it will benefit companies like MBNA, which is a major credit card provider, also companies like Capital One, Household International and American Express."

But the hottest area for investors could be the prospect of dividend tax relief, Stovall said. Birnbaum said the likelihood of a complete elimination of double dividend taxation is unlikely, but even a partial easing would help a great deal, Stovall and Gabriel believe. "Every time I give presentations about dividends, they are the most well received," Stovall said.

One other industry that should do well is health care, Stovall said.

Speaking of which, Geoff interviewed Kris Jenner, manager of the T. Rowe Price Health Sciences fund, and Ron Pollack, executive director of Families USA, an advocacy group for health care consumers.

There will definitely be a prescription drug benefit program enacted, Jenner and Pollack said, because both parties have been promoting a version of the idea. The key point for the financial market is how it's carried out, Jenner said. "That's the issue of separation: is it a market-based free pricing mechanism, or does the power reside largely within government?" Jenner said. "The market is very sensitive to a mechanism of administration where the power resides heavily in government."

Drug companies have done poorly in recent quarters because their patents on key drugs are expiring and the firms' research and development hasn't produced new drugs with comparable profits, said Jenner, whose three favorites are Pfizer, Eli Lilly and Wyeth. But the large pharmaceutical firms have put up obstacles to generic drug manufacturers, Pollack said.

"When the 20-year patent comes to an end, they file a new patent," Pollack said. "It's usually a frivolous patent -- the color of the pill, the shape of the pill -- and they do that because they want to stop a generic drug from coming to market. They sue the generic drug company for violating that new frivolous patent, and even if that lawsuit is a frivolous lawsuit, under current federal law, the moment you file the lawsuit, you prevent the generic drug from coming to market for 2 1/2 years. And they repeat that cycle."

Although the Senate recently voted by a wide margin on a measure calling for an end to drug companies' attempts at patent extension, the full Congress has yet to vote on the issue, Pollack said.

Politicians' investments

Geoff also looked at the portfolios of leading political figures, according to data from the Center for Responsive Politics, Legg Mason Wood Walker and the U.S. Office of Government Ethics. Financial experts graded political officials' investments:

Last year, Sen. Trent Lott, R-Mississippi, was balancing his stock market investments with real estate and cash. He favors individual stocks over mutual funds, raising his risk and leaving him vulnerable to poor stock picks. "You can tell he's not watching the market, because he does report owing Worldcom stocks," financial planner Susan Freed said. "By and large, the stocks he owns are very widely-held: GE, Amgen, Intel, America Online, Cisco -- very, very popular stocks."

Four of those five stocks lost ground last year. Lott, the incoming Senate Majority Leader, portfolio of a few hundred thousand dollars is completely tied up in large-cap stocks, and has nothing outside of the United States, said Michael Freiman, of Legg Mason Wood Walker. "It's not very well diversified," Freiman said.

House Speaker Dennis Hastert, R-Illinois, chose real estate and cash over stocks last year, when he invested in only one mutual fund. Although he rated poorly on diversification, he did well in terms of actual performance. "He didn't lost money last year, (so) by default, he probably did the best performance-wise of the entire group, because 2001 was a down year for those who were in the (stock) market," Freed said.

The $65 million portfolio of Treasury Secretary Paul O'Neill, former CEO of Alcoa, is in a league of its own: well-diversified and performing well. O'Neill keeps most of his money in stocks, and relatively little in bonds and cash. "He's willing to take risk, and he's looking for long-term growth in the stock market," Freiman said.

At least $25 milllion of O'Neill's assets were in the Vanguard Institutional Index Fund, which lost 12 percent last year. But three other funds in which O'Neill placed at least $5 million each -- Berger Small Cap Value, Dodge & Cox Stock, Scudder Dreman High Return -- gained 20 percent, 9 percent and 1 percent, respectively.

White House Economic Advisor Lawrence Lindsey was keeping a large chunk of his roughly $1 million portfolio in bonds and cash, and only a small piece in stocks. "He's making a conscious investment decision: very sophisticated, and yet it's elegant, it's simple," Freed said.

A former Fed governor and well-known for a gloomy view of the economy, Lindsey said he bailed out of most stocks in 1998. His 2001 portfolio featured Fidelity Utilities fund, shares of Barrick Gold and Newmont Mining and U.S. Inflation-Indexed Bonds: all defensive plays that hedge against inflation and stock market volatility.

"It's a very interesting commentary," Freiman said. "I hope he doesn't know something we don't know about the economy."

Next week: A look at technical analysis.

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