Program summary
Geoff Colvin opened the program with an apocalyptic view: Friday was judgment day for some of Wall Street's biggest firms - the day they learned how much they'd have to pay to settle with regulators and prosecutors. These are companies that publicly told investors to buy certain stocks while privately calling them dogs and other, less printable, names.
The scene wasn't about shame, but about what Wall Street understands best: dollars, in this case the largest fines in Wall Street history, though the actual details will reportedly be released the following week. And regardless of whether these firms have any shame, they do have plenty of money. If, as reported, Citigroup pays the largest fine, $500 million, that would be only about 3 1/2 percent of last year's profits.
But investors weren't fretting about payback this week. Though market fundamentalists say stocks still aren't cheap, it was party time on Wall Street. Even when General Electric, the ultimate earnings machine, said it would miss expectations for the first time in years, the stock went up. In the '90s there was mass hysteria, maybe now it's mass denial - ignore the bad news, don't open the brokerage statement, and do whatever it takes to feel good. It must mean something that one place profits did rise last quarter - up 55 percent -- was Krispy Kreme Doughnuts.
Karen's market insight
After a weak start to the week, equities roared back to life thanks to a bullish tech outlook.
Analog Devices reported increased orders for its microchips that could signal a return to leadership for the technology sector. Add a positive earnings report and rosy outlook from Hewlett Packard and you have the Nasdaq Composite Index up more than 57 points this week to its best level since late June.
Blue chip stocks took their cue from the Nasdaq, with the Dow Jones Industrial Average up 225 points this week for its seventh consecutive weekly gain. The Dow is now at levels not seen since late August.
Broader markets also rose to their highest levels since late August, with the S&P 500 adding 20 points for the week and the Wilshire 5000 picking up almost 200 points.
The Morningstar style box show a huge surge in the small cap growth index, supporting the theory that small cap stocks tend to outperform larger firms when fortunes recover.
Going to the mall
Karen earlier in the week joined retail analyst Marshal Cohen, of NPD Group, for a discussion about the retail sector as they walked through a mall in suburban Virginia.
Many stores will have a difficult time in this year's holiday shopping season, Cohen said. There is no single item driving consumers into stores, and some stores, such as The Gap, have in recent years lost touch with their core customer, he said.
Read more about Karen's chat with Cohen
Geoff talked to fashion accessories maker Coach CEO Lew Frankfort via remote television.
Frankfort reiterated his company's previously-announced prediction of sales and earnings growth of at least 20 percent and 25 percent, respectively. The brand is vibrant, with a growing and loyal consumer base, Frankfort said. "We are in a zone," he said.
Although Coach's product line has grown in recent years, the company remains mainly an accessories brand, Frankfort said. In the last quarter, Coach's sales rose 27 percent, yet in the the company's core segment, U.S. inventory increased only 1 percent. "We've been able to very effectively manage our product flow," Frankfort said. "We believe we're actually far less fashion at-risk today than we were at any time in our history."
Karen interviewed Jeff Kleinfelter, retail analyst with US Bancorp Piper Jaffray. Kleinfelter's latest national survey of teenagers indicates holiday spending in the teen category will be down about 25 percent from the spring and down from last year's holiday season.
"Parents are suggesting that they're contributing maybe 15 percent less to the teens," Kleinfelter said. "So, yeah, they'll definitely feel the impact, but we think it's even more important then to identify the brands that are going to outperform the other brands and take market share during difficult times."
This year has seen a return to spending on apparel, after a couple of years in which money flowed to electronics and entertainment products, Kleinfelter said. But profits for everyone could be lower.
"Most of the speciality retailers, the teen retailers we follow, don't have a lot of leverage on their balance sheets, so I think they will suffer in earnings," Kleinfelter said. "Clearly there's going to be a lot of markdowns if things don't pick up. So there will be an earnings shortfall, but I don't think there are going to be a lot of doors closing out there."
Read a full transcript of the retail discussion
Investor spotlight
Chuck Tennes, portfolio manager of the Rydex Funds, sat down with Geoff in this week's Investor Spotlight. Rydex features alternative investment strategies, but they're not for an entire portfolio, Tennes said.
"All of the Rydex funds are designed to be used as components in an overall asset allocation plan," he said. "Investing doesn't have to be just a 'Yes' or a 'No' decision. It's more than just 'in' or 'out' of the market. … You can decide to turn up the volume a little bit when you have confidence in the market, to not just go short, but reduce your beta to the market when you need to. You can really fine-tune that relationship to the market."
Rydex products can actually reduce the volatility of a portfolio when used properly, Tennes said. Some of the company's funds include short-selling funds designed to perform opposite popular indices such as the S&P 500 and the Nasdaq 100.
Rydex also has a sector rotation fund that tries to stay in whatever industries are the most popular. "We're not actually trying to predict the market, we're listening to what the market has already told us," Tennes said. "We know many times when a particular section of the market does well … it has a trend that it rides for months, sometimes even years. What we're trying to do is catch that trend early enough, ride along with it."
Karen talked to FORTUNE magazine writer David Rynecki via remote about rising stars among research firms' investment strategists. Rynecki pointed to Tom McManus of Banc of America Securities, Rich Bernstein of Merrill Lynch and Steve Galbraith of Morgan Stanley.
Read more about notable strategists
Next week: Rudy Giuliani and Jack Welch talk about leadership
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