Financial firms discussion
GEOFF COLVIN: After two years of scandal, indictments, resignations, and mammoth fines, Wall Street is laying out major dollars for an extreme image makeover. The major investment firms are multiplying their ad spending to hundreds of millions of dollars this year, trying to win back your trust and your money. What techniques are they using -- and should you believe the new ads? And by the way, are those financial firms themselves good investments for you once again?
Ron Berger is a lifelong ad-man, CEO of Euro RSCG Worldwide, New York. He joins us from New York. Anton Schutz tracks Wall Street firms as investments; he manages the Burnham Financial Industries Fund. Ron, there's a saying that you cannot talk your way out of a situation that you behaved your way into. Can good advertising get investors to trust the major Wall Street firms this soon after the scandals?
RON BERGER: It's extremely difficult. You know, one of the problems that Wall Street has is all the paid media dollars that they're putting behind these image campaigns for their own companies. It flies right in the face of the hundreds of millions of dollars of unpaid, negative media that is oftentimes on the same TV channels.
COLVIN: Meaning news coverage.
BERGER: News coverage, exactly, the front page of The New York Times or the lead story on CNN or any cable channel about corporate scandals and the New York Stock Exchange, Dick Grasso and thinks like that, you know. And then a commercial comes on a couple of minutes later that says trust us, in effect, because we understand and we care about you and your dreams and your family, just is a real hard thing for people to get over because trust is the largest issue in our country today in all institutions, and Wall Street is the largest of those institutions.
COLVIN: Let's take a look at a new ad from a firm that's at the very center, or was at the very center of some of the scandals, Smith Barney, part of Citigroup. This is a magazine ad you've seen. The headline is "Make sure your financial consultant is as familiar with the last train home as you are." Now when you look at this with your expert eye, what do you see?
BERGER: Well, I think it's, what they're trying to do in that ad is actually pump up the financial consultants, because the financial consultants in this case are the people who are the direct contact with the prospective clients. It's a tactic that says, it's like car dealers, you know, car companies saying how good the car dealers are. It's trying, it's their sales force in effect trying to make them feel good about the products they sell.
COLVIN: And humanize the whole thing.
BERGER: Exactly.
COLVIN: Anton, you follow the financial performance of these firms.
ANTON SCHUTZ: I do.
COLVIN: Is this working? Are customers buying the message and coming back?
SCHUTZ: Well, the interesting thing is, is activity certainly peaked last year again after many years of very slow business, and there was sequential improvement in the financials of many of these brokerage firms. Clearly people will follow the money. If there's money to be made in the markets, they will do business with them. There was a lot of money lost for a number of years, partially the responsibility of these firms, as well as people trading on their own, and they need more advice.
COLVIN: But so you're saying yes, last year was a tremendous up year for the markets.
SCHUTZ: It was.
COLVIN: People came back.
SCHUTZ: Sure they did.
COLVIN: It's a little going nowhere this year.
SCHUTZ: That's right.
COLVIN: So we've seen a commensurate leveling off of business.
SCHUTZ: Well, we've seen a leveling off just recently, I mean really this month. Volumes are lower. However, if we really see people not making money on their own, again, they're going to look for advice and they're going to look to try to either stop from losing money, yields are still very, very low in the banks. People always want to try to find a place to make money.
BERGER: I think what Anton said is true. You know, as Gordon Gekko said, "Greed is good," in the Wall Street movie. I just question the role that advertising plays in that and how significant it is, or is it more the fact that people are seeing that the Nasdaq is going up, or hearing about an IPO like Google and saying "I want to get back in on these kind of things." That is, sort of the American dream is to strike it rich. I just think that trust is such an overriding issue.
We did a piece of research last August, a nationwide study. More than half the people believed that the lyrics in an Eminem song are more credible and more believable than the word's in a President Bush's speech. And I think when you get that kind of loss of credibility and trust, it's something that the largest companies in the world that have been at the center of these scandals really need to sort of understand and pay attention to.
COLVIN: Ron, Charles Schwab was a firm that really was not the focus of most of the scandals or investigations. They largely escaped. They are running some very interesting television advertising now.
(video clip begins)
COMMERCIAL: I want someone to manage my portfolio for me. Can we get VIP service even if we don't have a huge portfolio? Not really. Do you have an account that has built-in portfolio checkups? No. This is where we come in. Introducing Personal Choice from Charles Schwab.
(video clip ends)
COLVIN: Ron, what's going on there?
BERGER: I think there tend to be two categories about types of advertising in this category. One is companies that say we understand your dreams, we understand your hopes, and we can help you achieve those. Then you get the Schwabs who clearly have a point of difference in their business model, say we're not about your dreams; we're about your reality, and your reality is you can't get this from somebody else, you can't get that from somebody else. So it's a much more product focused, much more brand focused approach that differentiates Schwab from the big brokerage houses that are trying to tell you we understand your dreams and your hopes.
COLVIN: Anton, do firms like Schwab and TD Waterhouse and so forth that focus just on low commission trading, don't have the baggage of analysts and all the other things that were at the center of the scandals, do these firms have an advantage now?
SCHUTZ: Well, to some extent some of them do. Schwab's been named in some of the headlines in terms of market timing, but I mean I tend to favor more E-Trade and Ameritrade's models, which have even more of a stripped-down product base, and clearly those firms are gaining market share. They're doing very, very well.
COLVIN: One more interesting commercial, and we have to say, Ron, straight off, your firm has produced this work. This is for Oppenheimer, which is another completely different story. Let's have a look.
(video clip begins)
COMMERCIAL: You don't win a marathon in the first 100 meters. Success comes from weathering the challenges and going the distance, regardless of the conditions. At Oppenheimer Funds, we believe long-term investing is a basic principle. Oppenheimer Funds, the right way to invest.
(video clip ends)
COLVIN: So, Ron, here's a mutual fund company from an industry that last summer was at the center of some big scandals. What's the message? What's going on here?
BERGER: Well, a couple of things that are interesting about Oppenheimer. One is they've been, we've been basically running the same advertising campaign for the last 10 years, which is totally unusual in this category where people change their campaigns from one year to the next. One year they're selling performance; the next year they're selling trust. In Oppenheimer's case, the right way to invest, which is their corporate tag line, has been their tag line since 1995.
COLVIN: But one detail I've got to ask you about, the voiceover there, if I'm not mistaken, is Gene Hackman, and yet he is not identified. What's the theory there?
BERGER: And it's interesting the number of people who say what you just said, which is I know that voice, I think it's Gene Hackman, is it Gene Hackman? And the answer is yes, it is Gene Hackman, and he just brings a very distinctive, and he also represents the kind of values that the company espouses in the advertising and in investing overall.
COLVIN: Anton, you're looking over this whole universe of financial firms. Which ones are your favorites as investments worth buying today?
SCHUTZ: Sure. I like Citigroup. It's a global behemoth, but it has tremendous growth potential here from an improving world and domestic economy.
I like Merrill Lynch. Clearly I like some of these stocks a lot more. In the last month the whole brokerage sector has come down about 12 percent, so they've become a lot more attractive. And it's not just about the individual investor to those firms. The global corporate finance activity is incredible. The IPO pipeline is huge.
COLVIN: Coming back.
SCHUTZ: Coming back big time. There was literally no IPOs done last April, and we've certainly gotten some done. The pipeline's good, and M&A has really picked up dramatically.
COLVIN: Mergers and acquisitions.
SCHUTZ: Absolutely. And what happens is there's even a lag factor, because deals are announced, and then a year later people need to finance them. So you need come back to the bond market and raise money. Venture capital is becoming very, very important again.
COLVIN: So all the activities that generate lots of income for the big firms, the big investment banks, the Merrills, the Goldman Sachs, and so forth, those things are all coming back. Now as far as individual investors are concerned, we've read a lot lately about the big firms making a major push to attract the ultra-wealthy investors. Huge profit potential there.
SCHUTZ: Absolutely.
COLVIN: How important are sort of average, small individual investors to these firms?
SCHUTZ: Well, you know, they have multi-tiered marketing approaches to all of these, and I'm sure Ron can even comment on that, but what you've got is a targeting of the ultra high net worth because the fees are much larger, because they can do structure of products, they can do hedge funds, they can do fund to funds, much more difficult product structures, i.e. they make more money from servicing those clients.
BERGER: In this industry, it's a share-of-wallet marketing tactic, which is, people have X number of dollars invested usually in more than two or three places, and yet that becomes a headache for the individual to sort of manage that. So the goal of any of the brokerage houses is to get more of the share of wallet that they know investors have.
COLVIN: Anton, what do you think about the larger significance of this interesting fact that Merrill Lynch, the house of Henry Blodget (and) Citigroup, which includes Smith Barney, house of Jack Grubman -- these firms, which were at the center of these scandals, are now favored investments?
SCHUTZ: Okay, it's a great question. And I think Citi has really been a leader in acknowledging their problems, settling very, very quickly. They brought in Sallie Krawcheck to come in and clean things up. And I was particularly impressed with a reaction that Citi had to a situation, a stock that I own, where the company made an announcement that they'd hired Citi as one of their investment bankers to explore strategic alternatives, i.e. maybe a sale, and within a week the analyst at Citi who covers that name actually downgraded the stock. And I think, you know, in the bad old days you would have never seen that.
COLVIN: It never would have happened.
SCHUTZ: That's exactly right. So that was impressive to me in Citi's case, and I think in Merrill's case as well. They've been very, very quick to address things. It's obviously critical these people are no longer at these firms and the compliance measures have tightened up considerably.
COLVIN: Ron Berger, Anton Schutz, thanks for shedding some light on a very interesting situation.
BERGER: Thank you.
SCHUTZ: A pleasure to be with you.
Greenberg interview
KAREN GIBBS: Remember this catchy tune? "Don't Worry, Be Happy" In 1988 that song was everywhere, but Bobby McFerrin only reached the top of the pop charts once. In the music world it's called a one-hit wonder. On Wall Street, it can be called an investing disaster.
You've seen it before: A popular product sweeps the country. Think of all those George Foreman grills sitting in your neighbors' kitchens.
But according to marketwatch senior columnist and Wall $treet Week with FORTUNE contributor Herb Greenberg, a popular product does not usually translate into a smart investment. Herb, this sounds almost sacrilegious. It goes against the Peter Lynch theory of investing, which is buy what you know.
HERB GREENBERG: Well, actually, Karen, Peter Lynch would also tell you make sure the company's doing well when you buy the stock. You know, in most of these cases with one-hit wonders, the one thing you have to do is be on the right side of the hit. In other words, when a product is doing well and still continuing to grow. The trick is when it gets over the hill there or it's about to get over the hill, and then you have to wonder if the company can recreate itself
GIBBS: Well, Herb, Salton has purchased the George Foreman Grill, but George Foreman is probably one of the most popular and successful
pitchmen of all time. Can't he deliver a knockout for Salton?
GREENBERG: Well, he did, and Salton did fabulously well for quite a bit of time. But, you know, man, or Salton, does not live by the George Foreman grill alone, and they have a ton of other products. And in the end, once everybody had a George Foreman grill, well, it got back to being just another house wares company, a house wares manufacturer, and that's a very difficult business in the best of times. So, when you get in the worst of times, it's even worse, and they've had a lot of issues, very recently in fact.
GIBBS: Well, how difficult is the exercise equipment business? Nautilus had Bowflex. Now it has a new razzle-dazzle product. Is summer just a bad season for exercising, or can we expect a New Year's resolution rally?
GREENBERG: No, you end up with another situation where
the Bowflex was a fabulous product, did very well. Still a good product,
except you hit the saturation point, and once you hit the saturation point,
the company's sales started to fall.
The company didn't earn the kind of money people thought they would earn,
and the stock ended up, well, not looking like a great stock anymore.
And so the company's trying to recreate itself with a new sort of a tread
master type of a product, something a little different than the Bowflex.
It's more of an aerobics product. But still the question is, can lightening
strike twice? In most companies it does not when you have a big hit like
that.
GIBBS: Well, what about Leap Frog? That was the hot toy or the hot product this past Christmas. It's got new management. Any new ideas there?
GREENBERG: They're trying to extend themselves into
the school industry. It's their latest big hit to get schools to buy their
products. But I say that the issue with Leap Frog, and we've talked about
it on the show a few months ago, is that again, they're going after say
the four to eight year old market.
Once all the, once you've sort of saturated that market, you're going
to sell new products and you're going to sell add-on products and you're
going to sell tapes, but you're not going to grow at the same rate. So
you become, in this case, well, another learning toy company. And if you
look at the history of companies in that business, you know, the growth
is somewhat shaky after the big explosion. But Leap Frog did fabulously
well.
GIBBS: You know, they've got some very big names behind
them, Larry Ellison and Michael Milken.
GREENBERG: Yeah, and actually Michael Milken sold stock
a few months ago. You know, he still owns so much stock it's unbelievable,
but he sold some, and when he sold some, it's interesting, you should
have been selling, too.
GIBBS: How about Take-Two? They're known for their Grand
Theft Auto game. Tell me about that.
GREENBERG: Take-Two has always been sort of a company
with some controversy around it, mostly because they've had some run-ins
with the regulators. They're under investigation by the Securities and
Exchange Commission. But, you know, despite all that trouble, Grand Theft
Auto, the first Grand Theft Auto was a huge hit, brought in tons of money,
enough to make the company look better than its critics ever expected.
They came out with a sequel. It did okay. Now the company has disappointed
Wall Street, just recently disappointed Wall Street on earnings. It had
some earnings guidance that was lower than people expected.
But you know what the critics say, the fans of the company say? They
say it doesn't matter, because in October when the new Grand Theft Auto
comes out, it's going to take care of all of this company's problems.
Well, let me tell you something. The video game business is having somewhat
of a rough time, and if you have to wait for one product, that's putting
all of your eggs in one basket hoping for one more speculative hit out
of this company.
GIBBS: But you know, Herb, there's a little bit of a
kid in all of us, and I mean Activision and Electronic Arts are doing
pretty good to that market.
GREENBERG: They've been able to I think transcend just
being one-hit wonders. Electronic Arts has a broad library of products,
and Activision, which was heavily tied to Tony Hawk and still is tied
to the Tony Hawk games, still has been able to I think do a much better
job at execution with what appears to be a little bit more conservative
financials.
GIBBS: Herb, I want to revisit a company that you mentioned
when you were with us in January. It's Zix Corporation, the company that
was behind the e-prescriptions where doctors could e-mail the prescriptions
to a pharmacy. It's higher than it was when we were here in January, but
it has seen a sharp sell-off since late April. What's going on?
GREENBERG: Well, the company came out with earnings, and there was a disappointing number in the number of doctors they thought would basically have signed up for their service. In fact, it was a pretty big shortfall. And in this kind of a situation, you know, I looked at it, and I was a little concerned because that was a number they were pretty confident about. Now I talked to the company. They said they had just, they had overestimated what they thought they could do so early in the game. And in a company like this, which is a speculative company to some extent, but there's an interesting and promising technology, you almost have to say you have to cut the company some slack, see if the management can deliver, and at that point you have to reassess it. But that's the risk with any company like this, where again it's promising and hoping it can do something. You know, it has competition. And the people I know who like this company think when this company delivers it's going to surprise its critics in a bigger way than anyone ever expected.
GIBBS: Herb Greenberg, it's always a pleasure. Thanks for joining us.
GREENBERG:Greenberg Sure, it's always a pleasure, Karen.
Emerging markets
GIBBS: There was a time when most investors could rely
on just these three indicators for an update on how their own investments
were holding up. Not anymore. This week surprise reaction from an election
halfway around the globe in India shocked investors around the world.
U.S. investors have been pouring millions into emerging market funds,
up a blistering 40 percent in the past year. They're down more than 12
percent in just the last month alone.
Arjun Divecha makes it his business to avoid such shocks as manager of
the GMO Emerging Markets Fund. He joins us from San Francisco. Arjun,
in your opinion, was the sell-off in India just the tip of the iceberg,
or an overreaction?
ARJUN DIVECHA: Well, I think that there are many forces that are driving kind of volatility in the markets right now, including kind of problems that seem to be coming out of China, the prospect of raising interest rates in the U.S., oil prices reaching all time highs. So there's a lot of nervousness, and when you combine that with kind of the surprise election results, that caused a fair amount of volatility in the Indian market.
GIBBS: Do you think we're going to see a domino effect? Because we did see the cascading reaction initially.
DIVECHA: Yes, we did, but I don't think so. I mean my sense is that, you know, things have kind of calmed down a little bit right now. I think the problem, quite frankly, is that quite a lot of markets around the world, especially in the developed markets in the U.S., are quite expensive. And so, you know, we're not very bullish on those markets. We do like some of the emerging markets, though.
GIBBS: What countries would you be avoiding?
DIVECHA: Well, the countries we're kind of avoiding
right now are Russia, to some extent China, and Mexico are kind of the
three countries that we don't have a lot of money in. The countries where
we do have a lot of money are places like Brazil, Turkey and Indonesia.
GIBBS: Let me go back to the countries that you're not particularly into, in Russia. Why Russia?
DIVECHA: Well, the market is kind of fairly valued, but quite frankly, one of the sayings that I have is that you make more money when things go from truly awful to merely bad, rather than when things go from good to better. So Russia is a place where things have been going really well. Economically they've had, you know, three or four of the best years they've ever had in their existence. So the question is that are things going to get better? And, quite frankly, we're skeptical. We prefer places where things are pretty bad and we think are going to get better.
GIBBS: Well, what's wrong with Mexico? They're full of oil aren't they? Isn't that a good thing for Mexico?
DIVECHA: It's a good thing for them, but I think that they've had, until pretty recently, quite an expensive currency which has caused them problems. They've lost a lot of competitiveness to places like China, and so they've had problems in their manufacturing sectors because of that.
GIBBS: And why would you be a little cautious on China? Everybody is looking at this sleeping giant. They're salivating at the possibilities of investing there.
DIVECHA: China actually is the place that I'm most worried about, quite frankly.
GIBBS: Why?
DIVECHA: The problem really is if they have a hard landing, what is the impact on the rest of the world? And that is something I think one has to think very seriously about. For example, China represents about 4 percent of the world's GDP, but it consumes 8 percent of the world's oil and something like 40 percent of the world's cement, 30 percent of the world's steel, 25 percent of the world's aluminum, copper and things like that. So any major slowdown in China will have a pretty profound affect on producers of these commodities, and I think a knock-on effect in a lot of countries, including the U.S. and Japan, Korea, places like that.
GIBBS: Well, I know unlike many money managers here or portfolio managers, instead of looking at a company from the bottom up and their financials and internal things like that, you look from the top down, big countries, and then big sectors. What are the countries you like?
DIVECHA: The countries we like right now are Brazil, Indonesia, and Turkey. Those are the three which are our favorites.
GIBBS: Let's start with Brazil.
DIVECHA: Brazil basically is a country that is coming
out of a crisis. They had a fairly big currency crisis about two or three
years ago. They're starting to get their act together. Because the currency
got cheap in the crisis, they've been able to export a fair amount. And
so they're running a pretty big trade surplus, and the economy is recovering
from that crisis. And so in some sense that's the place we want to be,
where things are getting better, rather than where things are already
very good. The only thing that we would be worried about in some sense
are the sectors that are connected to China, that is steel and commodities
that, you know, where they're selling stuff to China.
GIBBS: You mentioned Indonesia. Now they have, well, the world perceives a problem with East Timor. Does that not play into your scenario in investing in Indonesia?
DIVECHA: Well, I think that political risk in Indonesia is in some sense the dog that didn't bark during this latest election. A lot of people are worried about what's happening in Indonesia. A lot of people were worried there was going to be violence in the election. It didn't happen.
GIBBS: So what sectors are attractive in Indonesia?
DIVECHA: Specifically we like the telecoms and we like the banks, but the telecoms are something, and especially the cellular phone companies, is kind of a team across the globe we like, that is we like cellular companies in emerging markets. Why? A very simple reason. The penetration level is very, very low. In India only 3 percent of the population has cell phones. In Indonesia, it's 8 percent. It's inevitable that in the next few years these numbers are going to grow.
GIBBS: Well, let's talk about Turkey. It's located in a pretty unstable part of the world right now. How do you see that playing out in its economy?
DIVECHA: In some sense, it's very similar to the Indonesia and the Brazil story. They have also had an economic crisis in the last three or four years. They're finally starting to get it right. For example, inflation in Turkey is about to hit single digits. It's about 10 percent, the latest reading. This is the lowest inflation number we've seen in about 20 years in Turkey. They've typically had 70, 80 percent a year inflation. You've got an economy that's recovering because they've basically implemented very sound fiscal and monetary policies. There is political risk for sure, but you know there's political risk in all the countries that we invest in. You saw what happened in India this week, for example. But that's just kind of par for the course in the places that we invest in.
GIBBS: Arjun Divecha, thank you very much for joining us.
DIVECHA: Thank you.
Next week
COLVIN: One way investors try to minimize risk is to
follow the lead of the truly great investors… names like Warren Buffett
and Benjamin Graham. Next week we're going to introduce you to a computer
that's generating huge returns investing like the legends! So long, we'll
see you next week!
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