Rynecki interview
KAREN GIBBS: The stock market is up for the first two weeks of the year, the economy is growing, consumer sentiment is the highest it's been in over three years and investors are in high spirits. but what's driving those feelings of good cheer -- past performance or hopes for the future? I took a look at the most widely held stocks -- those companies with the most shares outstanding -- and how they performed last year. Take a look: Lucent technology is up a whopping 125 percent; Time Warner, better by 37 percent; Cisco Systems, up 85 percent; Intel, over 106 percent higher; Microsoft, better by 6 percent; and SBC Communications fell 4 percent; General Electric, up 27 percent; Big Blue -- IBM -- up 20 percent; and Pfizer better by 16 percent.
Now that's not a bad portfolio to have held last year, right? But what if you had bought these same stocks at the top of the market, as many of us did? Where do we stand now? Take a look at how those same stocks have performed since March 1, 2000, when the bear market started. Lucent, still down 91 percent -- it would almost have to double its price just to break even; Time Warner, still off 67 percent; Cisco, down 59 percent; and Intel, that semiconductor
blue chip bellwether, off 43 percent; Microsoft still down 39 percent; and SBC Communications off 35 percent; General Electric, down 27 percent; Big Blue (IBM), off 6 percent. Only Pfizer rewarded investors throughout the bear market and beyond.
Now, many think these household names can not only recoup their losses but move higher as the economy gathers steam. FORTUNE's David Rynecki joins us from New York with more. Why does smart money think that these household names and blue chips are poised to do better in 2004?
DAVID RYNECKI: Let me give you a couple of reasons, and let's start away from the blue chips. Let's take a look at the Nasdaq. The Nasdaq has a valuation of around 143 times earnings. It has a dividend yield of somewhere between 0.2 and 0.4 percent, so that means that the Nasdaq is really overdone once again, just like it was back in 2000. Then you look at the S&P 500 and the Dow and some of those great old blue chips in there. They are offering dividend yields, though not fantastic, in the range of 3 percent that are very attractive to investors, and they're really leveraged to economic growth, both in the U.S. and overseas. A lot of these companies like Procter & Gamble, they drive a huge percentage of their earnings from non-dollar-denominated currencies.
GIBBS: Well, taking a look at this economic growth, we're coming off a scorching 8 percent-plus rate of growth. That is expected to slow down. How is that going to affect small-cap stocks as well as these blue chip shares?
RYNECKI: I don't think that any sane person out there thinks that 8 percent or anywhere near it is going to happen again, as
you mentioned. There's no question, as well, that the small-caps are the companies that do well at the beginning of a bull run. They don't sustain that, though -- it's very easy to go from $1 to $2, but it's a lot harder to go from $50 to $100. That's one of the problems. Also, many of these companies aren't leveraged to the economic growth the same way as Gillette or Merck, Pfizer, some of those other companies that you mentioned earlier.
GIBBS: You talked about the falling dollar. How does that play into this scenario?
RYNECKI: Well, the falling dollar is going to be a short-term benefit for a lot of companies. However, long term it raises a lot of
questions about inflation. This has concerned the bond market considerably. If you consider that a 10 percent drop in the dollar adds about 1 percent to core inflation, as we see the dollar continue to fall -- and many people expect it to -- that's ultimately going to lead to inflation. In the near term, however, it's going to mean some good things for corporate profitability.
GIBBS: And how about the dividend play? Of course with the new tax laws, dividends are taxed less. Does that make it more attractive
for these household names?
RYNECKI: I think dividends are a fantastic way to go, especially when you consider that even the most bullish experts out there
are looking at upper single digit returns for stocks. If you can get 2 or 3 percent out of a dividend yield, that's about 50 percent of the gain you're going to be making.
GIBBS: David, we're going to switch gears from stocks to bonds. Bill Gross, manager of probably the world's largest bond fund, has said publicly that he is taking his own money out of bonds. What's behind it? You've talked with him.
RYNECKI: Well, to put it into context, Bill Gross is probably the second most influential person in financial markets around the world, the most influential being Alan Greenspan. When Gross says something, he has a lot of meaning behind it. He puts a lot of thought into it. What he's concerned about is that at the same time as the economy is picking up, we've also got the early signs of inflation, and that we are not acting realistically.
Let me read you something that he wrote in the Washington Post this week. He said, "The United States is overextended. We are trying to do too much, borrow too much, spend too much, and sooner or later we will have to suffer the consequences." Those are pretty bold words coming from a guy who is generally conservative. His concern is that because we're not focused on keeping down spending, that's ultimately going to really hurt our economy, and it's going to mean bad things for the bond market and bad things for the stock market.
GIBBS: So where is he putting his money then?
RYNECKI: He's still got a lot of his money in bonds, but he has moved his money out of the Total Return Fund, which is his flagship fund, and he's put it into investments such as inflation-indexed government securities, known as TIPS. He's got some emerging markets. He's got a lot of money, he tells me, in commodities-related funds. The idea being that as the economy reflates, that's going to mean really good things for the price of commodities: Gas, silver, gold, all those sort of things that become the basics of major products.
GIBBS: David, thank you very much for joining us.
RYNECKI: Thanks, Karen.
Corporate Crime discussion
GEOFF COLVIN: Well, suddenly it's the season of justice for all kinds of accused corporate crooks and the millions of investors they allegedly hornswoggled. Andrew Fastow of Enron has just pled guilty to about 100 counts and will go to prison on a 10-year sentence.
Dennis Kozlowski's trial is winding up. Martha Stewart goes on trial in the next week or so. Also in the next month the Rigases of Adelphia go on trial, as does Scott Sullivan, accused of inflating WorldCom's profits by billions.
So who will go to the slammer and who will walk? And does sending people like Fastow to prison make you as an investor any better off? Laura Unger is a former commissioner of the Securities and Exchange Commission. Bill George was CEO of Medtronic for ten years, now teaching at the Harvard and Yale business schools. He joins us from Boston. Roger Lowenstein is a business journalist and author whose latest book is Origins of the Crash. He joins us from New York.
Laura Unger, first off, you were an SEC enforcement lawyer. Who's going to jail? Let's go through them. Dennis Kozlowski - what do you think?
LAURA UNGER: I hate to say, I never put anyone in jail at the SEC.
COLVIN: I know. That's not what you did at the SEC, but still, you're a lawyer watching these cases.
UNGER: Absolutely.
COLVIN: What do you think? Will Kozlowski serve time?
UNGER: I think it's appearing a little marginal. The case is not as exciting as the video clips apparently...
COLVIN: The toga party.
UNGER: The toga party, the shower curtain.
COLVIN: How about Martha Stewart?
UNGER: Martha Stewart, I think she better do some fast talking on the steps of the courthouse, otherwise I think she does face some potential prison time.
COLVIN: Scott Sullivan of WorldCom.
UNGER: I think that's pretty certain.
COLVIN: Is that right?
UNGER: Don't you think?
COLVIN: It looks bad. I have to agree. Now, Andrew Fastow's plea just this past week, do you expect as a result of that to see federal charges against either Ken Lay or Jeff Skilling?
UNGER: Yeah, and I think in fact the magnitude of what he agreed to, which is 10 years in prison and maybe $28 million penalty, will show how hard justice will come down on the rest of the participants there.
COLVIN: Roger Lowenstein, leaving aside the ins and outs of the law here, who should go to jail?
ROGER LOWENSTEIN: Well, I think Andy Fastow should go to jail. The plea is good for people who invested in Enron or the people who invest in what might be the future Enrons. I think Martha Stewart should go to jail. And if they don't convict Kozlowski and send him to jail, I think they ought to just, you know, unlock the prisons and let everyone out. I mean I think what he did was looting, and it's pretty clear.
COLVIN: Yeah. Bill George, you were a CEO. Do you find it chilling at all to see some of your…
BILL GEORGE: Leave Bill out of the list. Bill doesn't go to jail.
COLVIN: No, Bill's okay. Do you find it chilling to see some of your former colleagues as, not in Medtronic, but former corporate colleagues in court?
GEORGE: Well, I find it chilling, but I think there's a good reason why they're there, and I think the law has to be enforced. And the American people are asking why not? Why hasn't anyone from Enron gone to jail? And it's been over two years. So the Fastow case is a big break I think for the government, but also for restoring the trust in American people. And there are a lot of these other people that have done very egregious things. We'll let the jury decide if they're guilty beyond a shadow of a doubt, but certainly in my mind they've done a lot of bad things.
UNGER: But I think that's exactly what we're seeing, is it's a lot easier to try people in the court of public opinion than it is in the actual courthouse. And the minutiae, the evidence and what it takes to actually make the case and prove the intent and that the bad conduct happened is a lot different.
COLVIN: Right. Well, now that gets to a very important point actually. I mean if you look at the damage that has been done here -- we've looked at some of the stocks of these companies, from before the scandal until today: WorldCom down 99 percent and change, it rounds to 100 percent; Adelphia down 99 percent and change, Tyco down a mere 53 percent, and that's even now after such a great year in the stock market last year. A huge damage to investors. The theory is that investors can't spot these frauds very well in advance, so we can scare executives out of committing them by prosecuting them and throwing them in jail. Roger Lowenstein, you've seen an awful lot of these cases over the years. Does that work?
LOWENSTEIN: Geoff, I think it does, at least for a good while. You know, if they started sending journalists to jail, it would certainly make me write my stories differently. You know, it won't last forever, but whether or not Fastow ended up going to jail or whether say Ken Lay is ultimately indicted or not, no CEO looking at these guys wants to be where they're sitting. They don't want to spend five years of their life with lawyers. They don't want to run the risk of jail. They don't want all their friends and family looking at them as another Ken Lay or Martha Stewart or Kozlowski. And they're not going to say, well, 40 percent of these executives didn't go to the slammer so I'll take my chances. Most people don't want to run that kind of risk, so I think it will have a deterrent.
COLVIN: Bill George, you were a CEO. What's the effect, I mean how does a CEO feel when they see these things happening?
GEORGE: Well, CEOs are always concerned about going to jail, but I don't think that's really the point. I don't think you can scare them all about going to jail. We put Mike Milken in jail. I mean that was well known. I think the real issue is we've been choosing the wrong leaders. We've got the wrong people in these jobs. If you look at the leadership of WorldCom and Tyco and Enron, we just had the wrong leaders. And investors need to be informed about the kind of leaders they have.
COLVIN: Well, and you've written a book about this called Authentic Leadership, and how would you define the kind of leaders that they ought to have?
GEORGE: Well, I think these are people who put themselves above their institutions. We saw it in the New York Stock Exchange, we've seen this in many institutions where people start thinking they are the institution, they're more important than the institution. I think we need to take leaders, choose leaders who are there to be good stewards, to serve. That's why Bill Donaldson is at the SEC today, that's why John Thain is with the New York Stock Exchange, not just to make a lot of money. And I think the same thing applies to corporate leaders. When you look at some of the corporate leaders we have today in the new era coming along, I'm encouraged by Sam Palmisano at IBM who realized his job is to restore IBM. It's not just to make a lot of money for himself. And he even gave back a $4 million bonus.
COLVIN: Who are some others?
GEORGE: Well, I think, I'm very pleased with the job that Jeff Imelt's doing in looking for the long term at GE and not just being caught up with quarterly earnings and transforming that place.
Some people that are less well known, Ann Mulcahy at Xerox is taking a company that had a lot of problems and is turning it around and doing
a spectacular job.
Amgen is emerging as one of the great healthcare companies under Kevin Sharer's leadership.
Or if you look at what's happened at Starbucks under Howard Schultz. These are companies with very authentic leaders that are really dedicated to building for the long term, and I think that's the kind of leaders we deserve. We don't need people that create $160 billion of value, like Bernie Ebbers did, and then destroy it overnight.
COLVIN: And then it vaporizes.
GEORGE: And investors need to be protected from that by the law, but they also need to be protected by good knowledge and information on the kind of people they're investing in, and I think Wall Street in many ways has failed them in that regard.
COLVIN: Actually that's a very good point, and I want to pursue it in just a second. Laura, though, I want to ask you about another point, which is how much of the protection that we all agree investors need can the SEC provide?
UNGER: I think you said it at the outset, that it's sort of a behavior modification in the rule-making and transparency about what people are doing. And then the very real, probably strongest, tool the agency has is its enforcement tool. As a civil agency, though, the SEC can't send people to jail. They can just take away their money and assess a penalty. So the real threat here that we're seeing that makes things different than what we've seen in the last 10 years in terms of corporate fraud is the zeal with which prosecutors are bringing these cases on a federal and state criminal level.
COLVIN: It is something we haven't seen before.
UNGER: And something that will stay beyond this crisis and beyond the recovery of the market and everybody being in jail is the new law that's in place. The Sarbanes-Oxley law brings higher penalties and it makes securities fraud a criminal act. And there are things, if a CEO falsely certifies their financial statements are accurate, they'll go to jail. So there's a whole host of new sanctions available.
COLVIN: Roger, Bill George mentioned the influence of Wall Street on the behavior of some of these CEOs. You've written a lot about this. Has Wall Street really been a bad influence on CEOs, sort of pushing them or tempting them to do things they shouldn't?
LOWENSTEIN: You know, I think it has. I don't think we can look to Wall Street to set the example. I think it's been said if you take the high road on Wall Street, there's not a lot of traffic. But seriously, I think coming out of the '80s, the period of all the mergers and leverage buyouts and the fees got so big, and when CEOs began to see people like Henry Kravis getting millions and then tens of millions -- for taking their companies away, by the way -- they began to say, "Hey, why don't I get this? I mean, I'm running these companies. Why do these pinstriped financiers get so much and I get left behind?" And that led to the option largesse, the stock option craze, where I think CEOs wanted to get paid like the Kravises and the Ron Perlmans of the world.
COLVIN: Not to mention rock stars and shortstops and things like that.
LOWENSTEIN: But there's a difference, because the shortstops get paid by owners.
COLVIN: Exactly, and based on performance, pretty strictly.
LOWENSTEIN: Yeah, so no shortstop can be worth more than his owner and he agree. But I think Bill said something very interesting when he said that CEOs believe they're the institutions, because there's a sort of an unseen or and invisible element in all this, which is the board. You know, the CEOs are not the institution. There is something called the board that's supposed to monitor them, but they haven't done their job for a long time.
COLVIN: Well, that's a great point actually, and it relates to something else we were talking about, because, Bill George, you were saying, well, CEOs really have to be able to stand up to Wall Street. You're on the board of Goldman Sachs, one of the premier firms on Wall Street. Do CEOs have to stand up to Goldman Sachs?
GEORGE: You bet, absolutely. I think CEOs have to play it for the long term. We've gone from a market where people used to buy companies, the stocks of companies, and held them for an average of five years. These days it's down to six months, so it's a 10 times turnover in trading. Today they're buying not companies; they're buying stocks. They're buying speculation. And I think Roger is on to a very important point: The CEOs bought into that and they got paid like it.
I recently chaired a blue ribbon commission in Washington on this whole question of CEO compensation. It's got to be brought back in line, and we need to pay CEOs for long-term performance, not for short-term stock price hype. And I think that's how we've gotten into a lot of trouble, by focusing strictly on the speculation game of stock prices, not building companies with lasting value that can sustain it for a long term.
COLVIN: Well, these are great points. And it really is something how a discussion of the prosecutions that are now underway leads us into all the big issues of corporate governance and performance and investor protection. We have to leave it there, so Bill George, Roger Lowenstein, Laura Unger, thanks so much.
E-prescriptions
GIBBS: Technology often promises to simplify life, when all it really does it make it more complicated. But suppose there was a device that could make your life easier, save money, and lives. By some estimates, nearly 7,000 deaths occur as a result of adverse drug effects and medication errors. Herb Greenberg of TheStreet.com has found a new industry springing up around a solution, and at least one company in the middle of it all.
Herb, we've been hearing that technology would streamline the doctor-patient relationship for years. What's different now?
HERB GREENBERG: What's different now is you have the ability for doctors to basically sit in their offices, in an examining room, fill out a prescription with a wireless network that now is dependable and fairly inexpensive, and batteries that work so they can carry these things anywhere they want to go, and basically send the prescription, after checking to see if there are any drug interactions or anything else, directly to your pharmacy over the wireless network. And that is a big deal, at least it will be a big deal very soon.
GIBBS: Herb, what type of problems does this new medical technology solve?
GREENBERG: Oh, my goodness. If you're the doctor, you don't have to sit there spending half your day or having your staff spend half their day going back and forth with either the pharmacy or dealing with the pharmacy benefit management companies, or the insurance companies rather, to find out who is covered for what and what pills they're covered for and deciding what brands you can write a script for. For the pharmacy, you don't have to spend time going back and forth to the doctor saying, you know, were they really covered for this? The insurance company is saying they're not covered for this. We need to get a refill here and there are no refills. That's going to be taken care of. And for the patient, when you go to the pharmacy, your prescription is going to be there.
GIBBS: Well, to see how the product works on the front lines, we asked a doctor and a pharmacist for their assessments.
DR. EDWARD TAUBMAN: We probably issue about 20,000 prescriptions a year through this office. Before PocketScript, we were probably getting as many as 90 calls a day from pharmacies for refills and questions about prescriptions or interactions or the fact that the prescriptions were outside the so-called formulary of the person's individual insurance company, and that has dropped to just maybe a couple of calls a day, if that much.
So it's really cut down that back and forth. The pharmacists really like it.
MUENDLEIN (pharmacist): The convenient thing about receiving prescriptions via fax or electronic transmission is the main factor that all prescriptions are legible, directions are clear, the name of the drug is clear, and the patient's name is clear, so you make sure you do get the right medicine to the right patient all of the time.
TAUBMAN: We have an obligation to see a lot of patients, and we want to spend quality time with them. And this gives us more doctor time and more nurse time to be spent with the patients.
GIBBS: Now what company is behind this method right now that is at the forefront?
GREENBERG: Okay, there are several companies. The company that I consider the pure play is a company called Zix Corporation.
It's a Texas company. It started out with an encryption e-mail software that it sells to a lot of healthcare insurance companies. But this company bought a company -- you heard the doctor mention it earlier -- it's called PocketScript, which is basically, got its own technology that hooks into the insurance companies and the pharmacy benefit companies. And it is one company that is basically sitting there with a potential revenue stream that is, it's astounding when you hear it. It almost is too good to be true, but in this case you're talking about a company that by next year hopes to say have 10,000 doctors signed up. But for each doctor, it may earn $2,000 or $1,500 in transaction fees and in servicing fees for the doctors that are paid, and by the way, much of this is paid by the insurance companies, because they save so much money they believe it's worth paying the doctor's cost of getting a pocket PC and their membership fees to this thing.
GIBBS: I was going to ask you about pharmacy benefit managers and insurance company participation. Any big names that have signed on?
GREENBERG: Well, most of them have actually signed on. The insurance companies have signed on with Zix Corp. you've had a number of the Blue Crosses sign on. But this is still an evolving business, Karen. Massachusetts right now is sort of a battleground for some of this. And you have to understand one very important thing. There's a lot of competition, or there is some competition, I should say, out there for this business. Zix isn't the only guy. Other companies that provide bigger software packages are including this e-prescription service as part of their package. One of those companies is Allscripts, which is a public company.
WebMD is talking about it, though I haven't yet seen them come out with anything, or they certainly didn't get back to us talking about it. And also something to consider, there's a private company out there, there are a few private companies. One of them is called Dr.First. So there are a lot of guys jockeying for the same business, but from the pure play standpoint, Zix will tell you we don't need many doctors to make a lot of money, and that is just what seems to be happening. And the company is going to be announcing earnings I think on February 6th, and there's going to be a little more guidance related to this, to the numbers projected from this, when they do announce those earnings.
GIBBS: So there is an investor angle, both in terms of publicly traded companies and potential private companies that may go public.
GREENBERG: Yes, absolutely. And that investment angle, I have to tell you, there are people betting against companies like Zix. There are people who say there is too much being made of this. But I say that after all the research I've done, that there's going to be a lot of players, or a number of players that are going to be jockeying for position here, and there's going to be enough of the pie for each of them. In fact, let me just say one thing. Just this week, Wellpoint, which is the second-largest insurer out there, basically said it's going to give away the software and technology that doctors need to be able to do this e-prescribing business.
GIBBS: How about on the patient side? Are the cost savings going to be passed on to them, and is there any benefit in terms of managing
their health care?
GREENBERG: Well, actually, if you talk to Zix, they say the great part about this is that you can end up hooking in educational programs, or really what's really interesting is disease management. And they can actually help the insurance company and the doctors find out if somebody's taking their pills, because you go, they give you a script and you take it and you never fill it, and you keep coming back and saying I'm sick and I'm sick, and the doctor doesn't know you're not taking your pills, but now they could actually check and they could say, well, Mrs. Jones, you weren't taking your pills, what do you expect? And I think that could actually lead to some sort of a crackdown on insurers, and there's a cost there because people aren't getting better. So that's going to be an interesting part of the story to watch.
GIBBS: Herb Greenberg, thanks for joining us.
GREENBERG: Sure.
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