Kerry-Edwards discussion
GEOFF COLVIN: When John Kerry chose John Edwards as his running mate, he sparked a furious reaction from much of U.S. business. That's because Edwards was a plaintiff's attorney whose campaigns have been heavily financed by other plaintiff's attorneys -- and earlier this week Jerry Jasinowski, president of the National Association of Manufacturers, said "Enemy No. 1 for large and small business is not China, it's not terrorism. It's the extreme trial lawyers." The U.S. Chamber of Commerce, traditionally neutral in presidential elections, says it will now commit its considerable resources to beating the Kerry-Edwards ticket. How will such reactions affect the election? How worried should business be if a trial lawyer becomes the next vice president? And what should investors do now?
Greg Valliere is chief strategist of the Charles Schwab Washington Research Group. Michael Baroody is executive vice president of the National Association of Manufacturers; he joins us from Washington. Also in Washington is Gene Sperling, an adviser to John Kerry, who was chief economic adviser to President Clinton.
Gene, Senator Kerry has chosen as his running mate a man who made himself a multimillionaire by suing businesses. Why should business people see that choice as anything except bad news?
GENE SPERLING: Well, Abraham Lincoln was a trial lawyer, too, so I don't think it's a disqualifying credential.
Look, here's what people should know. John Edwards is a pro-growth centrist Democrat. He's an enormously reasonable pragmatic guy who has supported pro-growth efforts, pro-savings, pro-wealth creation. And when you come to, you know, this is really I have to say an attempt to smear by background instead of policy. John Edwards was a man who grew up and was the first person in his family to go to college and then law school. He represented individuals who were hurt in North Carolina. He never, and I repeat, never filed a single class action suit. He made his money by working through education and being an outstanding trial lawyer. And as a Senator, he has put forward a three-strikes-and-you're-out proposal that has said a lawyer who brings three frivolous suits should not be able to file a case for 10 years. Jonathan Alter at Newsweek said his plan would do more to stop frivolous litigation than President Bush's. So look at the man, look at the people who know him best. This is a pro-growth pragmatic, and I think you will find a pro-business Democrat.
COLVIN: Well, Michael, your organization, the National Association of Manufacturers, has a quite different view. It's issued a statement saying Edwards has "an inherent bias against innovation and the American entrepreneurial spirit that is essential to compete and create jobs." Strong language. What's your basis for the charge?
MICHAEL BAROODY: Gene couldn't have it more wrong. It's not a smear, and it's all about policy. The National Association of Manufacturers, every Congress has what we call a pro-growth and pro-manufacturing public policy agenda. In the last Congress, Senator John Edwards voted wrong by that reckoning 15 out of 16 times. It's the opposite of a pro-growth position that he takes on tax relief, on regulatory excess. He supported the ergonomics rule that the administration Gene served left behind at the 11th hour, which this veteran of the Labor Department knows was a scandal in terms of how quickly it was cobbled together. He's voted against sound energy legislation. Manufacturing we all know has been in a very rough patch over the last three or four years, and in fact the downturn in manufacturing began in August of 2000 with a spike in natural gas prices. Ever since, we've been crying out for balanced energy legislation.
Not only John Edwards, but frankly, Senator John Kerry has opposed it every step of the way, and I could go on, but the basic point here is it's not a smear. This is an argument about policy differences, and on policy differences neither John Edwards nor John Kerry was with us 15 out of 16 times in the last Congress.
COLVIN: Greg Valliere, you've said for a long time that John Edwards was the logical choice as the number two, so first of all, congratulations on getting the prediction right. Now, how big a concern is his connection with the trial lawyers?
GREG VALLIERE: I think that is a concern, and we've talked about this, but there's one area we really haven't touched on, Geoff. And talking to our clients, big institutional investors, I think there is a concern that Senator Edwards is quite the protectionist. If you listen to his rhetoric toward the end of the primaries in February, once Gephardt dropped out, Edwards became the protectionist in the race, unabashedly opposed to NAFTA. You cannot say he's a free trader, and I think on Wall Street that will be a concern.
COLVIN: Gene, the larger point here is whether Senator Edwards is pro-business overall, and you've heard a couple of people now say they don't think so.
SPERLING: Well, a few points.
Yesterday the campaign did a conference call. The president and COO of Bear Stearns, Warren Spector, who said he had known John Edwards for years, vouched for him as somebody pragmatic on tort reform, pro-business, somebody willing to listen. Endorsements came from the president and COO of Yahoo, Barry Diller. We've already had Lee Iacocca, Steve Jobs, Warren Buffett endorsing this ticket and still as excited with John Edwards. And I think it's a shame to see NAM, a fine organization, Jerry Jasinowski, a fine person, I think really tarnish themselves by getting into this level of politics.
Look, on trade Senator Edwards is the senator from North Carolina. Did they mention that he voted for the China trade agreement? Did they mention that he voted for Senate passage of fast track initiative for President Bush and only dropped support after they dropped out amendments that he had supported? He repeatedly said during the campaign that he understands that you can't protect every job. And it was Senator Edwards who first called for the 50 percent accelerated depreciation bonus, a pro-business investment incentive that was very good for manufacturing and ultimately passed and close to the form he proposed.
If you look at the record instead of trying to smear him by his background, this is a centrist pro-growth Democrat. The Democratic Leadership Council that harshly criticized Howard Dean, worried he was bringing the party to the left, has embraced Senator Edwards as a pro-growth Democrat who actually called for cutting capital gains and dividend taxes for 98 percent of Americans, below the level where President Bush has proposed.
COLVIN: Michael, you know a couple of points there Gene has made, one, that Senator Edwards never was in the business of class action lawsuits; two, he has said he's against frivolous lawsuits, they should be stopped and are bad. Is he as bad as you have claimed he is?
BAROODY: But, Gene, that puts the lie to Gene's premise that this is a smear. What we're talking about is not his own practice. We're talking about policy differences that are pretty deep. I do think I heard Gene say that before John Edwards voted against trade promotion authority for the President, he voted for it. That seems to be a consistent strand in that campaign.
SPERLING: That's a cheap shot...
BAROODY: Let me finish. I don't think it's a cheap shot at all.
SPERLING: Don't misrepresent his record. You've done that enough already in the last few days.
BAROODY: This is not about a smear. This about policy differences that run very deep and apparently they have roots in history. The crowning achievement from our perspective at the NAM of the Clinton administration was getting NAFTA passed. John Kerry ran against NAFTA.
COLVIN: Okay, we may have to let that argument stand where it is right now, Greg, because I want to ask you, this race now looks very close to you, I gather. What do you think the implications for investors are of either side winning?
VALLIERE: Two points I'd make.
First of all, yes, I think it looks much closer. This is a brilliant pick. This is a very talented politician. I refer to him as a monogamous version of Bill Clinton. He's very skilled rhetorically and without the scandal. So I think the investors on Wall Street and elsewhere are going to look at uncertainty, an uncertain election for months to come. It's going to be that close.
The other thing I'd say very quickly, Geoff, is that they have gone a bit populist. You can't deny that. You can't have it both ways. I think going populist makes great sense in rural Ohio, places where you need to win votes. But if you're going to go populist, that means it's going to be a little less pro-business, and I don't think you can have the two together. They're exclusive, and I think this is a ticket that's a little less pro-business than we had thought just John Kerry alone was two months ago.
COLVIN: Right. I want to ask both Gene and Michael as well, what would be your advice to investors, investors who thought Kerry was going to win? Gene, you first.
SPERLING: Well, I think they should be bullish, and here's a couple of things you haven't heard. John Kerry has called for cutting the corporate rate from 35 to 33.25 percent. He's called for zero capital gains in equity investment that is held for five years. Despite what you've heard, Senator Kerry and Senator Edwards, even in the heart of the campaign when Dick Gephardt and Howard Dean and Dennis Kucinich were calling for protectionist messages never said that they would pull out of WTO or repeal NAFTA. What they've simply said is they want to promote open markets, but they want strong labor and environmental conditions, as we had in a virtually unanimous support for Jordan(?) agreement. That's the policy. I worked in the Clinton administration. I worked with both men. I think they can feel confident that there will be pro-open market, pro-innovation policies. I think the American public is again becoming concerned about deficits. And at least with a president Kerry, you have a president who will say the era of fiscal discipline should return, the era of bidding wars and fiscal recklessness should end. Senator Kerry, who supported the 1985 Gramm-Rudman-Hollings, who has a 20-year record of supporting fiscal discipline, would give a lot more hope than President Bush who has never met any initiative that he's been willing to pay for or make deficit neutral.
COLVIN: Okay, Michael, your advice, regardless of who you want to win, if an investor thinks Kerry's going to win, what's your advice?
BAROODY: Well, I would say they need to look at what people do, not just what they say.
We in manufacturing, and this is emblematic of the broader business community, are impressed that we're on the front lines of the most intense global competition the world's ever seen, about which a lot can be said, including you can't raise prices. If despite that costs continue to go up, for reasons that include what government does or fails to do, something's got to give. Our pro-growth agenda, the NAM's agenda, on which both Senators Edwards and Kerry were wrong 15 out of 16 votes in the last Congress, is largely about keeping costs under control. If we don't do that, structurally we've got a real impediment to durable growth into the future, and growth is going to be finally the determinant of how your investments do. Everybody knows that.
I think, let me (cite) one specific (example) that's relevant to this whole conversation. Asbestos litigation all by itself poses a $250 billion drag on the ability of American manufacturers to fully compete and to grow as they ought to be growing in these dynamic economic times. The trial bar is the single reason, despite three different pleas from the Supreme Court that Congress fix the problem, that we have not yet fixed the problem. Something's got to be done. Senator Edwards and Kerry have not stepped up to that argument.
COLVIN: Greg, I want to finish by putting you on the spot. If you had to pick a winner today, who would you pick and what do you think the odds are?
VALLIERE: If the election were held today, I think Kerry and Edwards would win, but the election is not held today and the incumbent has enormous advantages. With national security warnings, a lot could happen between now and Election Day. If you put a gun to my head, I'd still say that Bush is the slight favorite, but we're looking at a 1 or 2 point race right to the finish.
COLVIN: Greg Valliere, thanks for your views. Gene Sperling, Michael Baroody in Washington, thanks to you.
FORTUNE 40 discussion
KAREN GIBBS: For the second year in a row, FORTUNE's model portfolio -- known as the FORTUNE 40 -- has beaten the market. The diversified group of small, mid- and large-cap equities returned nearly 26 percent compared to 21.5 percent gain for the S&P 500. While making money in the stock market last year was rather easy, the going is a lot tougher this year.
FORTUNE's Janice Revell joins us with 40 new investment ideas for this year. Jim Huguet, president of Great Companies America fund, also joins us with his take on the FORTUNE 40.
Janice, what's the secret to beating the stock market two years in a row?
JANICE REVELL: Well, as you said, last year it wasn't too difficult to pick winning stocks. But I think one of the reasons why we've been able to beat the market the last two years in a row is that our objective is not to time the market. We're not trying to trade and we're not trying to be momentum players. We're trying to find steady, solid companies with good earnings and great growth prospects, companies that you can hold onto for at least a year, and it's a formula that is tried and true and it's worked well.
GIBBS: What makes you so confident that this list will beat the stock market again?
REVELL: Well, the reason we're confident is that we start with a universe of about 4,000 stocks, and we put them through a very rigorous screening, both in terms of quantitative and qualitative analysis, and on the quantitative side, we look at two things: discounted cash flow analysis, which is generally how much cash do we think these stocks can crank out over the next few years. You know, accounting earnings can be manipulated, but cash is king. And they have to pass that screen. They also have to pass an earnings momentum screen that we look at, and once they get past the quantitative measures, we also look at what we call our qualitative gut check, so to speak, and we look at things like, you know, can we understand what the company does? Has management been coming out with consistent signals? Do they change their story every quarter? Is there a lot of turnover? All those kinds of things. It's actually a very rigorous screen, so at the end of the day, we're pretty confident.
GIBBS: Jim, as a money manager, what do you look for in a company?
JIM HUGUET: Well, we have a number of factors that we look for in a screening process. We look at the quality of management of a company. We think that's absolutely critical and that the CEO is really key in terms of determining the quality of the company. We look at the company's business, and we look for companies with a high return on invested capital. We look at protective barriers that the company has that protects their business and keeps competitors from taking it away. We also really think corporate governance is very important, especially in this environment. A number of studies have come out showing that companies with high corporate governance ratings outperform their peers, so we're looking at those kinds of things, global presence, a number of other factors in putting together the list of companies in our portfolios.
GIBBS: What's your average holding time, Jim?
HUGUET: We typically hold a company between five and seven years.
GIBBS: Well, let's look at some of the companies on the FORTUNE 40 list for this year. In the financial sector we have Allianz; American International Group, commonly known as AIG; Banco Latinoamericano and Prudential Financial. What's special about this sector this time?
REVELL: Well, one of the interesting things that we looked at was we went back and looked at the last six market cycles in which the Federal Reserve tightened rates, and interestingly enough, we found that the multi-line insurance companies as a group tended to perform quite well, and that's one of the reasons why we like AIG right now. AIG is a behemoth in the industry. They have property, casualty, life insurance, retirement products, you name it. And although they're a huge company, they're still growing, and their growth prospects are actually quite impressive. In China, for instance, they're making some strong inroads into that market, so that's one of the reasons we like that company and that group. We're being a little cautious when it comes to financial services, but there are still some outstanding companies.
GIBBS: Jim, what's your take on AIG?
HUGUET: A terrific company, probably the best insurance company in the world, some of the best management out there. There are concerns about Hank Greenberg's replacement, but this is a company that is very, very deep in management talent, the best managed insurance company out there. We are very positive and have owned them in our portfolio for over six years.
GIBBS: We've got a lot of health care/biotech coming on the list, and I assume that might be a demographic play, anything from Andrx to the foreign company, AstraZeneca, of course Bristol-Myers Squibb, Cephalon, Diagnostic Products. What's the story behind this, Janice?
REVELL: Well, as you said, Karen, health care is, in terms of demographics, you know, all the key performance indicators are moving in the right direction. You've got 77 million baby boomers hurtling towards retirement and old age, so that can only spell good news for these companies. The key, though, of course the market understands that, so the key is finding health care and biotech companies that aren't wildly overpriced at this point, and that of course was our screen.
GIBBS: Jim, in the biotech arena, what really attracts your attention?
HUGUET: Well, you mentioned, one of the companies that's in there is Cephalon, which is an unusual company. They built their own business, which I think is really key, as opposed to out-licensing product. And a lot of their products are really focused on keeping people awake, interestingly. As we go into an environment where people are working very different hours, I mean if you've got a call center in India, those people are working in what's the middle of their night, the middle of our day. And keeping those people awake and functioning is really key, and that's one of the key areas that Cephalon has targeted. They've got some other products coming out for very sick people that are in significant pain, but they really have created a niche that's really unique in their industry.
GIBBS: I guess the days of coffee and a No-Doze are over.
HUGUET: For sure.
GIBBS: Well, the consumers have been keeping this economy rolling and buying all sorts of things, but you've got some very interesting companies on this year's FORTUNE 40. Ball Corporation, I knew them from the jars and the lids from doing home canning, Imagistics International, Interpublic Group, of course some of the old standards, McDonald's, Safeway, Time Warner, Walt Disney. Tell me an interesting story in this arena.
REVELL: Well, Ball, as you mentioned, is not a glamorous company, but it's been around forever.
They make cans for soft drink companies. It's just a steady, reliable company, and a lot of the companies that are its customers, whether the economy hits a downturn or not or whether rates go up, people are still going to buy soda.
The other interesting company in this segment is a smaller company called Sanderson Farms.
They're the nation's sixth largest chicken producer, and as you might expect, they've been a prime beneficiary of the whole Atkins phenomenon. If you've gone to the supermarket, you may have noticed that the price of chicken has skyrocketed by up to about 80 percent. So they've been a great beneficiary of that whole pricing trend as well.
GIBBS: Jim, she mentioned the supermarket business, and of course I go to the Safeway and I see the Sanderson chickens and things like that. What do you think about Safeway?
HUGUET: Well, the supermarket business is probably the most difficult business you can be in. And Safeway has had some issues in terms of corporate governance and overlapping on the boards of directors. There's been some shareholder concerns about the CEO. I would stay away from Safeway, not necessarily for shopping, but from investing.
GIBBS: Talking about shareholder concerns, Disney kind of jumps out like a sore thumb on that one, Jim. What do you think about Disney?
HUGUET: The same kind of issue. I mean we have concerns about management there. There are issues, the shareholders have been very active against the present CEO. It's a company that I think is going to do better in this environment. I still think they have some issues with ABC and some of the other businesses that they're in, so I have some concerns about Disney, frankly.
GIBBS: Janice?
REVELL: The governance issues, I agree with everything you said, but I think the governance issues have been out there for a long time now, and the stock has been beaten up because of it to a certain extent. And, you know, when we look at the prospects going forward, it's such a strong brand, and the economy certainly looks poised to be able to maintain the demand at the theme parks and so forth, so we think at this level that it's actually a pretty good buy.
GIBBS: Are there any companies that were not on the list that you would be buying?
HUGUET: Yeah, there are several. Citigroup in the financial services area we think is probably one of the best managed financial services companies in the world.
They're in nine different business sectors. They're global leaders in three of those sectors. They're in the top five of seven of those sectors. They're on a roll. They've got a terrific CEO in Chuck Prince. We think it's a wonderful company that's undervalued by slightly over 20 percent.
We also like Symantec in the technology sector.
As computer viruses become a bigger issue out there, and we see them all the time, Symantec I think is extremely well positioned. The stock's been hit a little bit lately because Microsoft announced they're coming into that sector, but Symantec is so strong and has such an outstanding management team, I think it's going to be difficult for Microsoft to really get significant share in that business.
GIBBS: Jim Huguet, Janice Revell, thank you very much for joining us.
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