Opening thoughts
GEOFF COLVIN: The much debated, derided, defended, nearly-derailed tax bill is about to be the tax law. President Bush will sign it soon, and for investors it's major news. The bill's centerpiece is cutting the top rate on dividends and capital gains to 15 percent, the lowest rate in decades.
But that doesn't mean everybody's happy. In fact, hardly anybody's happy across the political spectrum: The Washington Post calls the plan "Yo-Yo Economics" because tax rates get cut and then pulled back up a few years later; The Financial Times calls the law "Tax Lunacy" for cutting taxes too much, while The Wall Street Journal said, "Let's hope this tax cut is large enough."
But on one point everyone agrees: For better or worse this is now completely the Republicans' economy through 2004.
A big week in the media biz. Advertisers spent over $9 billion buying commercials in next season's TV shows; that's a record. Fox's American Idol wowed the industry by snagging a huge audience Wednesday night, giving new zing to the reality show fad.
Fox's boss, Rupert Murdoch, testified in Washington that if rules on media ownership are relaxed, he has no plans for a media buying spree. Senators laughed out loud. They know this is an ultracompetitive industry ruled by just four barons: Murdoch, Michael Eisner of Disney, Sumner Redstone of Viacom, and Richard Parsons of AOL Time Warner. Who will survive? I'll lead a discussion at the roundtable.
You think you're a diligent investor? Karen will talk with investing legend Jim Rogers, who drove a custom-built yellow Mercedes convertible through 116 countries looking for ideas. We'll see what he bought.
And we'll look at the investing angle in the Annika Sorenstam brouhaha.
Karen, I think Annika got more publicity than the markets this week. How'd they do?
Market summary
KAREN GIBBS: Geoff, after three weeks of back to back gains, U.S. stocks markets fell. Maybe it was a lukewarm reaction to that tax cut package Congress passed or just modest profit taking before the long Memorial Day weekend, but it was a down week nonetheless.
The weakness in the dollar certainly didn't help, falling to the lowest level against the Euro since it was introduced, with the buck now worth only 85 cents.
And mortgage rates continue to fall to new record lows, the seventh time that's happened this year.
Altria was the Dow driver of the week, surging over 8 percent after a Florida appeals court threw out that $145 billion judgment against the tobacco industry. That cut the Dow's losses to almost 78 points on the week.
The Nasdaq continues to outperform the other major averages despite slipping 28 points this week. And the S&P shed only 11 points this week, supported by tobacco and home construction sectors.
Morningstar-style boxes show a distinct difference between large-cap value, the best performer, and large-cap growth, the worst, as investors continue to look for cheap, well-known names.
Roundtable: Media companies and videogames
GEOFF COLVIN: America still loves reality TV and will be getting a lot more of it, as the networks' newly announced fall schedules show. But will advertisers pay up for shows like Fear Factor and Extreme Makeover? Can even huge hit movies like The Matrix Reloaded make a financial difference to today's mammoth media conglomerates? Will those conglomerates get even bigger after the FCC's imminent decision on relaxing ownership rules? And can video games that your teenager loves and you hate be a good investment? We are touring the wild world of media with Spencer Wang, senior analyst at J.P. Morgan, who joins us from New York; Robert DeLean, an analyst with Morgan Keegan, joining us from Memphis; and my FORTUNE colleague, senior writer Stephanie Mehta.
Stephanie, American Idol was a huge hit all through the season, culminating in its finale this week when it got huge numbers, 38 million viewers, I believe.
CLIP FROM AMERICAN IDOL: After 24 million votes, the winner of American Idol 2003 is Ruben Studdard!
COLVIN: Well, a huge hit for Fox, which is owned by News Corporation, but News Corporation is a huge company. Can even something like this make much of a difference to them?
STEPHANIE MEHTA: Absolutely, and the operative word there is huge, and I'm not talking about Ruben Studdard's weight. Clearly for Fox a hit like American Idol following the success of Joe Millionaire has been so important to them, because if I'm, I believe I'm correct, they were able to
this year reverse losses in their television operations, largely on the strength of these hits. So there's no question that the successes of American Idol and Joe Millionaire are very important to News Corp.
COLVIN: Spencer, J.P. Morgan I know has an active role in a publicly-announced transaction with News Corporation, so I won't ask you to comment on the company. But what does the success of this program, American Idol, tell you about programming trends in TV now?
SPENCER WANG: Sure, Geoff. I think the growth in reality television, outside of the fact that there is a lot of demand from viewers for reality programming, also highlights the cost challenges within the broadcast programming business. Costs have continued to go up pretty astronomically over
the last couple of years. Reality programs tend to be a fair amount cheaper to produce, so I think that's been another factor in terms of driving the growth in reality programming.
COLVIN: It's great that they're cheap to produce, but will advertisers pay high rates to advertise in some of these shows?
WANG: I think what we're seeing in the market right now, Geoff, is that media buyers are being a little bit more discerning about what types of reality programming that they will pay for. In other words, I think that some of the more high quality reality shows, like American Idol and
Survivor, to a certain extent will continue to attract a lot of advertiser's demand. However, some of the more risque reality programs probably will fade off.
COLVIN: Even for the big networks, reality is attractive, but there's nothing for continuity like the success of a scripted series. I know that ABC in particular, which is the lowest-rated network, is banking on a new hit sitcom.
CLIP FROM BACK TO KANSAS: Hello. Oh, hey, Mom. Oh, family dinner and game night tonight? Ah, yeah, actually I don't think we can. Oh, it's a welcome dinner for us?
COLVIN: That was something from Back to Kansas, which is about a couple that moves from New York back to Kansas. Spencer, ABC has really been embarrassed the last couple of seasons about its ratings being so incredibly low. Are they going to be able to climb back to respectability?
WANG: We do think that over time that Disney will be able to improve the ratings at ABC. The good news I think coming out of this past TV season that was just completed is that they have stabilized the ratings at the network. They found some modest successes on the scripted side with Eight Simple Rules as well as According to Jim. So we do think they are starting to build a foundation and they should improve over time.
COLVIN: Well, that's great. And of course people should know, as you say, that ABC is owned by Disney. Now how do you like Disney as an investment?
WANG: Disney, I think, is making a lot of the right moves from a financial standpoint, stabilizing their broadcast networks and also trying to reduce costs where they can. They talked yesterday a little bit about reducing their exposure to the Disney store business, which we think is absolutely the right move for the company. That being said, a lot of the business for Disney is very linked to the economy and will largely go the way the economy goes.
COLVIN: Especially the theme parks, which are affected by travel and so forth.
Now another entertainment phenomenon of the moment is of course The Matrix Reloaded, this Warner Brothers movie that's done so very well, but of course it's more than a movie. It's also an extremely successful video game, and games are an increasingly important part of the entertainment industry. In fact, the game business is a lot bigger than you may think.
At $10.3 billion last year, it's now larger than total domestic movie ticket sales, and the players aren't who you think either. Forty-two percent of the most frequent computer game players are age 36 or older. Sixty-two percent of video game players are 18 or older.
Bob, this business depends on hits. Isn't that a danger for investors?
BOB DeLEAN: Well, Geoff, it certainly is. It's a hit-driven business, and that's why I think you see a lot of these products coming out that are based on huge franchises. The Matrix, for example, the video game was released last week. It will certainly be the biggest seller in the month of May. We don't know yet if it will be the biggest seller for the year, but it will be a big, big film. You've seen increasingly a lot of these tie-ins with movies. This year a few weeks ago we had the X-Men come out as a game, along with the movie. Still to come this year we have The Hulk, Terminator 3, we mentioned The Matrix. So again, because it's such a big, hit-driven
business, these publishers are looking for content that is already a huge franchise to base the video games on.
COLVIN: Now perhaps surprisingly, most of the video game companies are not part of these huge entertainment conglomerates. Among those video game companies, who do you like?
DeLEAN: Our favorite name in the group right now is Take-Two Interactive. They'd be best known for their Grand Theft Auto franchise. Another big franchise of theirs is Max Payne. Two of the big products they've got coming out late this year, one would be Manhunt and another
would be a game called The Warriors, which is actually based on the 1979 gang film. So you can see the tie in there even 30 years later, or 23 years later we're looking to tie into popular entertainment.
COLVIN: Well, these tend to be games that parents don't especially like. But leaving that aside, there are some issues with this company that investors ought to know about, yes?
DeLEAN: Yeah, I mean I guess to mention on that, this company does make very violent content that ties in with what you just said a minute ago about the demographics spreading, the age is getting older.
Again, we like the company based on valuation, based on the balance sheet, and based on the product line. Investors need to be aware, number one, it's hit-driven; number two, there's very short revenue cycles in this business; and number three, there's an ongoing SEC investigation from some restatement of accounting that went on 15 months ago. They had to restate seven quarters of earnings.
COLVIN: And you think they're past that.
DeLEAN: Yeah, the company's hired a new CFO, a new CEO. They've done a forensic audit. There's really not a lot left to do. Today the company practices very, very conservative accounting, and we just don't think there's a lot there. We don't believe that the SEC is out to punish current shareholders.
COLVIN: Okay, thanks.
Stephanie, we mentioned earlier that senators actually laughed when Rupert Murdoch said yesterday that he didn't have any expansion plans, didn't want to go on a media buying spree in the United States. What do you think he really does want to do?
MEHTA: Well, I don't think that he wants to go on a media buying spree in that he's probably not going to look to make a big acquisition of another media giant and do another, you know, big conglomerate merger like the ones we saw between AOL and Time Warner. I think rather what Murdoch is probably likely to do is acquire properties in key markets. I think he has
also said in the past that the real money and the real profitability is in ownership of individual stations in markets like Los Angeles and New York. So while it's unlikely that we'll see a big spree, what we probably will see are some very selective and important acquisitions.
COLVIN: Spencer, this really is a clash of titans. The four big players we mentioned earlier, AOL Time Warner, Viacom, Disney and News Corporation, if you were to look five years out, how do you think that landscape looks?
WANG: I think the landscape will look increasingly consolidated. I'm not sure within five years you'll necessarily see a combination of one of those top four media companies, but I do agree with Stephanie that you will see some smaller tuck-in acquisitions. Consolidation has been a theme we've been talking to investors about heading into 2003, really driven more by non-core asset sales more than anything else, though.
COLVIN: Spencer, who do you like as far as stock picking is concerned?
WANG: Sure, Geoff. Our favorite name is actually AOL Time Warner, and I know that is a bit of a controversial company at this point. But our view is that the problems at AOL, specifically that division, are fixable. The Time Warner businesses are trading, are worth a little bit more than the current stock price as it is without fixing AOL. And all the balance sheet and other risks are manageable in our view.
COLVIN: Well, that's as good a cue as any for the many disclosures that have to be done when you do a segment like this. For starters, I'm an employee of FORTUNE magazine, which is part of AOL Time Warner. Stephanie?
MEHTA: As am I.
COLVIN: The same goes for you. Spencer, what other disclosures do you have to make if any?
WANG: Sure. I don't personally own any shares of the stocks that we've mentioned. JPMorgan has done or may do banking with the companies I've discussed. And a Viacom executive does sit on the board of JPMorgan Chase.
COLVIN: Bob, how about you?
DeLEAN: On Take-Two, I don't own it personally. To my knowledge, Morgan Keegan does not do any investment banking with the firm, but we do make a market in the security.
COLVIN: Okay. Bob, Spencer, Stephanie, thank you all for your views.
Investor spotlight: Jim Rogers
Note: The May 23 broadcast showed excerpts from Karen Gibbs' interview with Jim Rogers. Click here for the complete, unedited interview and a link to the video.
KAREN GIBBS: U.S. investors may not want to travel abroad right now, but their certainly willing to their money overseas. So far this year 61 percent of all new investment dollars have found there way into soaring international stock funds. If the dollar continues its slide, international stocks could do even better.
But let's face it, the only thing riskier than traveling to some of these countries, is investing in them. So as our tour guide, we're turning to Jim Rogers, renowned international investor and world traveler. His latest book, Adventure Capitalist, recounts his experiences on his second record breaking trip around the world.
Jim what did you learn differently about the global economy this time around?
JIM ROGERS: Well, that the world is always changing, there are new opportunities. Things that we think are true five years ago will not be true today, and things that are true today five years from now will be changing. You have to be flexible if you're going to be in the investment world. In fact, you have to be flexible if you're going to be in any world.
GIBBS: In fact, you also say you have to be right, but you also have to be a little contrarian. And you definitely are contrarian in some of your investment picks around the globe. Let's talk about China. Why is it so great to invest in?
ROGERS: Well, they call themselves Communists, Karen, but they are among the best capitalists in the world right now. They save and invest 35 percent of their income. They work from dawn to dusk. Here in the United States, we save 2 percent of our income. You know, we're always looking for an extra day off. They have unleashed capitalism again and entrepreneurship, and they're on the rise.
GIBBS: Now, you fortunately made it out of China before this recent attack of SARS. How is that going to impact the whole Asian economy?
ROGERS: Well, it has affected the economy. Nobody's flying. The hotels are empty. The planes are empty. The restaurants are empty. But in my view, it's a temporary thing. It's probably a great buying opportunity to buy companies there, especially travel-related companies.
GIBBS: China has always been very, very closed, though, to individual investors. Have you seen that change now? And how could individual investors take advantage of China?
ROGERS: No, no. They are opening up. They are very excited to have foreigners invest there now.
There are several ways. You can go there and open an account, which is what I did. There are many Chinese companies which trade on the New York Stock Exchange, on Nasdaq here. There are mutual funds; I don't know the mutual funds, but I know they exist. There's always a way to invest in a new market.
GIBBS: How about Africa, particularly Angola? I mean is the 20-year civil war over? Are you interested in that country?
ROGERS: Karen, if there were six of me, one of me would be in Angola right now. I am so excited about Angola. One of the things I've learned from my investing career and from history is, when a long, vicious war ends, if you go there, you're going to make a fortune, even if you're a dimwit -- and I'm a dimwit, so I definitely would like to go there. It's just an enormous opportunity. They're going to be the largest producer of oil in Africa within a few years. They've got diamonds, they've got agriculture. There are only 10 or 12 million people. It's a beautiful country. Enormous opportunities.
GIBBS: I saw you with pictures of Angolan soldiers, and I wasn't sure if they were friendly or not. What was going on?
 ROGERS: They were not friendly at first. We went though several war zones. The general made us stop and camp with him on the side of the road. They were protecting the city.
In the end, we became good friends, we took Polaroid pictures and gave them to them. The general loved the Polaroid picture of himself. And all his little soldiers did too. It was one of several war zones through which we went.
GIBBS: In fact, you've got war going all over the world. Do you see any other opportunities in these war-torn countries?
ROGERS: Well, if you look at Ethiopia, Ethiopia is another country that's had a long war. I'm optimistic about Ethiopia.
GIBBS: Didn't the World Bank call that like, the second-poorest country in the world?
ROGERS: They do, but if it's the second-poorest, that means it can only get better. You know, the trick to getting rich is to buy low and sell high. I know your parents taught you that, Karen. I've known you for years. You know how to buy low, for goodness sakes.
Yeah, you go to these places when they're poor and when they're downtrodden, because then they want to get rich. And that's when everybody's demoralized, there's no capital there, and that's where the opportunities are.
GIBBS: Looking at Tanzania, you see wonderful opportunities there. Is it because of the raw material?
ROGERS: Yes, there are enormous raw materials, and I'm very bullish on raw materials.
But Tanzania has been a country which has been closed off for decades. And if you want to go to Africa and you want a tourist experience in Africa, it is the single-best country. It's got everything. You'll see the best game. They've got Zanzibar with the Arabs and the spices. We climbed Kilimanjaro on our trip. They've got black Africa, they've got Arab Africa, they've got beaches. I mean it's all there, Karen.
GIBBS: Take another one, Myanmar, the old Burma, and there's a lot of unrest there. Tell me why you find that so attractive.
ROGERS: In 1962, it was the richest country in Asia. It closed off and deteriorated, collapsed. But now they're trying to open up again. It has been a nightmare.
But the new generals -- the old generals were terrible guys -- they're trying to open the country up again. It's very cheap. They have a disciplined population, they have an educated population, huge natural resources. Their neighbors are India and China: pretty big markets. And the Japanese are pouring in. Everybody's pouring in there with money now. So we should all go there.
GIBBS: None of the countries that you've mentioned are involved in Europe, and I want to bring up the dollar and the euro. And you have said that you thought the euro was pretty flawed. Do you still feel that way?
ROGERS: I own the euro, and in my new book I explain I own the euro, but I also explain that I don't expect the euro to survive. I think 10 years from now, 15 years from now, it will fall apart.
Yes, the world needs a replacement for the dollar. The dollar, we have the largest debt the world has ever seen. We have a huge balance-of-trade deficit. It's not getting any better.
Europe, the euro, has the opposite. They are creditors and they have a balance-of-trade surplus. So the world needs something like the euro. Unfortunately, they put it together in a bad way.
GIBBS: Now a lot of people here in the United States, because of the dollar's decline and the euro's strength, are screaming deflation. Investors are wondering what in the world to do with their money against this back drop of deflation. First, do you believe that deflation is a problem? And second, what should U.S. investors do?
ROGERS: Karen, now you know everybody watching this show, they go shopping, they buy insurance, they go to the movies, entertainment, education -- prices are going up out there. The government tells us they're not, but everyone knows prices are, in fact, rising.
Now the Federal Reserve -- Greenspan and the other governors -- have said we are not going to let there be deflation in the United States. We will print as much money as we have to. We will buy bonds, we will buy gold mines, we will buy real estate -- we will buy anything we have to, to drive prices up.
GIBBS: Well, against that backdrop then, where do you see our U.S. stock markets going?
ROGERS: Well, I own U.S. shares. I have no shorts (short-selling positions), as you know...
GIBBS: That's unusual for you.
ROGERS: Yes, we have known each other a long time, haven't we? I almost always have sold something short as a hedge, if nothing else. At the moment, I have no shorts.
GIBBS: That means that you're kind of bullish.
ROGERS: That means that I have been very bullish. For several weeks or months, I have been extremely bullish.
There was a lot of hysterical selling in the market last summer and fall, a lot of sloppy -- a lot of panic selling. Stocks came down. Since then the Federal Reserve has been printing money, Bush has been spending money as fast as he can. All of that means the market -- meant and means the market will do better. So I own shares at the moment. We've had a good run.
I may start selling next week, next month, I don't know. There's an old adage in the market: Sell in May and go away. We still have a few more days in May, so I may wind up selling some in May. But not yet.
GIBBS: And how about those that dumped the stocks and jumped into bond funds? Did they do the wrong thing at the wrong time?
ROGERS: Yes, yes. Unfortunately, I wish I had -- It's like my mother, I tell her all the time, "Mother, don't buy what everybody else is buying," and right now everybody is buying bonds. I'm not optimistic on bonds. I own some bonds, I have started selling bonds as a hedge. I would not at this stage jump into bonds in a big way. And we've had a move, bonds have skyrocketed for 20 years.
GIBBS: I've read your book. It's a wonderful read. I've been around the world with my own Phineas Fogg, the modern-day version. But let's talk about some of the fun things that you did. I saw that you corrupted the monks, and I believe that was in Ethiopia, wasn't it?
 ROGERS: Yes I did, you're right. I was in Ethiopia. We stumbled into this little village on the most important religious holiday of the year, called the Finding of the True Cross and these young men had just become monks and I said, "Well, let's have a beer," and we started drinking beer. And these guys held their beer better than I did, I have to say. Maybe just becoming a monk will help you hold your liquor.
GIBBS: What was the most surprising thing you found on this most recent trip around the world?
ROGERS: That we made it back alive. We shouldn't be alive, Karen.
We went through jungles and deserts and epidemics and blizzards, wars. I look at the map now, and say, "How did we do that? How did we make it?" Even any single continent. We shouldn't be alive. 152,000 miles, 116 countries.
GIBBS: It's amazing.
ROGERS: Well, we're very happy to be alive, I promise you. We're surprised and happy.
GIBBS: Wonderful. Jim Rogers, It is such a pleasure to see you again. Thanks for joining us.
ROGERS: Thank you, Karen and you come with us on our next trip.
GIBBS: I certainly will, I'm right there with you.
Sorenstam sponsors
COLVIN: Well, in news somewhat closer to home, the big story this week was Annika Sorenstam competing in the Colonial Tournament in Fort Worth. The coverage that has received just today has been almost beyond belief: USA Today, front page. Here's The Washington Post, front page picture; the New York Post, front page picture; The New York Times front page picture; Investors Business Daily front page picture. And of course in every case it's almost the same picture.
Now Annika Sorenstam, like every professional golfer, is really sort of a walking billboard. And when you see these pictures, what you see is Callaway Golf, Mercedes-Benz, Cutter & Buck, and her Oakley sunglasses up on her hat. She also has some other big company sponsors, like Microsoft and Kraft. But the publicity, I don't know what they paid her for these endorsements, total endorsements for her about $2.5 million. But I think today alone they got more than they ever imagined.
GIBBS: You're right, Geoff. That type of publicity is priceless. And as you say, some of those sponsors are larger, well-known companies, but there are a couple of small-cap companies worth taking a look at. Cutter & Buck makes sportswear for women and men. This stock is trading at about four-and-a-half bucks, now poised to get a boost from her appearance.
And you rarely see her without her trademark Oakley sunglasses. This is not a company Wall Street has loved, but as they expand from trendy sunglasses into shoes and clothing, she made just provide the right publicity boost.
COLVIN: That's the program for tonight. Thanks for joining us. Next week we will attempt one of the most difficult feats in the investing world, identifying the best analysts on Wall Street.
GIBBS: And coming up next on many of these PBS stations, Now with Bill Moyers. Have a wonderful holiday weekend.
COLVIN: So long. We'll see you next week.
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