Program summary
The week was filled with uncertainty over possible war with Iraq and warnings of "spectacular" attacks on the United States. And Wall Street was just as uncertain, given the resignations of Harvey Pitt from the SEC chairmanship and William Webster from the leadership of the new oversight board for accounting.
But one thing could be counted on, Geoff Colvin said: The Citigroup saga getting wackier every day. The program's recurring query of "Have They No Shame?" has never been more appropriate, Geoff said, noting that investigators found e-mails in which former star analyst Jack Grubman bragged about upgrading his AT&T rating in part to please his boss, Sandy Weill, so Weill would help Grubman get his kids get into a $14,000-a-year Manhattan nursery school. Grubman now insists his bragging e-mail was fiction, but in fact Weill did give the school $1 million from Citigroup, and admitted it was to help Grubman, and Grubman's kids did get into New York's most exclusive pee-wee prep school.
"It should all be hilarious -- except that millions of Americans invested their money, based on such recommendations, in stocks that have since collapsed," Geoff said.
Karen's market insight
The market is still caught between concerns about Iraq and a soft patch, with Federal Reserve Alan Greenspan tell a Congressional committee that falling stock prices and war worries are holding back a remarkably resilient economy, Karen Gibbs said.
Consumer spending remains remarkably resilient as well. While cheap auto financing deals may be losing their allure, we're loading up on everything else, Karen said. October retail sales, excluding autos, posting their biggest gain in 6 months, and raising hopes for a merry holiday shopping season.
But the "Will he or won't he?" question surrounding Saddam Hussein and weapons inspections and the constant threat of terrorism seem to be losing their market impact, Karen said.
The Dow Jones Industrial Average finished the week 41 points higher. The Nasdaq Composite Index managed to hold onto 51-point weekly gain. While the Wilshire 5000 tacked on 144 points.
Morningstar's style boxes showed large-cap growth stocks challenging small-cap growth for best performance of the week, thanks to tech giants and even telecom stocks.
Don't get too excited, Karen said. Despite a slight rise in the 10-year note yield this week, U.S. Treasuries continue to outperform equities. The Lehman Brothers US Aggregate Bond Index, a mix of investment grade corporate bonds and government securities, is up over 8 percent this year while the S&P 500 is still down more than 21 percent.
Rob Arnott interview
Karen interviewed analyst and money manager Robert Arnott, chairman of First Quadrant.
Arnott sees a perfect storm for stocks over the next 20 years.
Stock valuations aren't very cheap, Arnott said. Even with the bear market, stocks on average are trading at about 25 times reported earnings, almost as high as at their peak in 1929, and above all prior peaks other than 1929.
And those reported earnings are overstated because many companies are not including the cost of stock options in their income statements, while at the same time overestimating returns for their pension funds, Arnott said. A large number of companies are factoring in pension returns of 8 percent to 10 percent - an unrealistic assumption, Arnott said, given that bonds are yielding about 5 percent and stocks less than 2 percent. If companies used a "more sensible" assumption of returns about 6 percent, the earnings of American industry as a whole would be about $72 billion, or about $8 per share lower for the S&P 500, Arnott said.
Demographics is the biggest worry over the long term, Arnott said. As the Baby Boomer generation starts to retire over the next 10 to 20 years, there will be more people than ever selling assets to a proportionally smaller population. And there will be more people than ever buying goods and services from a smaller workforce, which raises the risk of inflation.
Stocks aside, Arnott believes there are good, long-term investment opportunities: emerging market debt; inflation-indexed bonds; commodities; and commercial real estate. And on a short-term, tactical basis, stocks are currently better than bonds, Arnott said.
Click here for Arnott's stock picks
Click here for a transcript of Arnott's interview
"In a secular bear market you can have small bull markets in the midst of a secular bear market, and I think that's what we're experiencing right now," he said, referring to the stock market's gains in recent weeks. "But if you compare stocks with alternative investments, alternative investments are more interesting still."
Technical analysis discussion
Geoff sat down with noted technical analysts Bernie Schaeffer, founder of Schaeffer's Investment Research, and Linda Bradford Raschke, president of LBR Group.
From a long-term perspective, Schaeffer said, charts of major indices clearly indicate that we're in a bear market environment, despite the recent rally.
"The moving average is a way of smoothing out the noise," Schaeffer said. "When you look at daily averages there's still a little bit of noise in there. We look at long-term moving averages, 10-month, 20-month and even as long as an 80-month moving average, and that can tell you strong facts about whether we're in a bull market (or) bear market."
Internet stocks are seeing stronger demand at this point, as indicated by the fact that the sector surpassed its August peak, Bradford Raschke said. "When you look at technical analysis all we're doing is measuring supply and demand," she said. "On the bottom, we actually had a number of indices that made higher lows. We've formed some type of base … and been able to take out the August highs."
Although technical analysis has many skeptics among market experts, it has advantages over traditional fundamental analysis, Schaeffer and Bradford Raschke said.
"With the technical analysis, I can quantify about 95 percent of what I do, in terms of momentum," Bradford Raschke said. "Is there impulse that shows there is stronger demand than supply? Are we seeing nonconfirmations? These are the types of things we can quantify."
For example, Schaeffer said, while every fundamental analyst rated Worldcom a "buy" even as the company's stock price fell to $15 from $60.
"There is no exit strategy for a fundamental analyst until and unless something comes out negative about a company," Schaeffer said. "Very often, the negatives are already in the chart well before they come to the fore, and well before the (fundamental) analyst gets you out of a stock, if he ever gets you out."
Schaeffer currently likes the technology sector for the next few months. When the tech-heavy Nasdaq outperforms the S&P 500, the overall market is rising, Schaeffer said, adding that the Nasdaq has been outperforming the S&P these days.
Bradford Raschke likes several Internet and technology stocks at the moment.
Click here for the stock picks of Bradford Rasche and Schaeffer.
Peterson interview
Earlier in the week, Karen spoke to Donald K. Peterson, CEO and chairman of telecom equipment maker Avaya. Excerpts of the discussion aired on Friday's program.
The past several quarters have been difficult for everyone connected with the communications and networking industry, but Avaya and other traditional telecom equipment companies were late in developing voice-over-IP products.
Although network equipment makers Cisco Systems and 3Com have a head start on voice-over-IP, Avaya can grab market share with its new offerings, Peterson said. "I'm very confident we're going to re-establish leadership in this space," he said. "But it's going to be more work than it should have and would have been, had we got there a little bit earlier."
Since the December quarter of last year, Avaya's sales have fallen "precipitously," said Peterson, who is hopeful that the company can get back to breakeven status by the March quarter of 2003. The key not only for Avaya but the sector and economy in general will be corporate profit growth, he said.
"They've got to get it, they've got to feel like it's going to grow from there, then they'll invest to get more of it and build the business back," Peterson said. "But until we see some profit and some quarter-over-quarter growth, I think we're going to continue to see this lagging situation on business."
Avaya needs to figure out how to get more float in its shares, Peterson said. The first thing that has to be done is boost the stock price, he said. "We're very widely-held and many of those holders actually only hold a few shares," Peterson said. "And even with a low price trade at $25, if you own 10 Avaya shares, you can't afford to trade; you can give your stock away, but you couldn't afford to trade."
Click here for a transcript of the full, unedited interview with Peterson.
Next week: Chuck Tennis of the Rydex funds.
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