... services and managed health care, The Travelers, by Ameritech, Ameritech's bell
companies and Ameritech's other communications businesses, creating better ways to communicate
here and around the world.
And by Prudential Securities, the knowledge and resources you need to help make intelligent
investments rock solid market-wise.
Produced Friday, May 24.
Our panelists are Frank Gaffiello, John Dessauer and Lewis Holland.
Tonight's special guest is Alan Gottesman, Media Analyst, Payne Weber, Incorporated.
Good evening, I'm Lewis Rukeyser, and this is Wall Street Week.
Welcome back.
Well, this was the week when three big league baseball managers were fired in three days,
which proves that these fellows just chose the wrong profession.
They should have been economists.
Being a baseball manager, you see, is a job where you either produce or leave, never mind
that no one sitting in the dugout ever actually hit a home run, converted a double play or
set them down swinging in the night.
In baseball, it's been said, there are only two kinds of managers, winning and X.
Now contrast that scary fact with the joys of being an economist.
Did things not work out the way you said they would this year?
Why never you mind, sweetie.
You just keep on coming up with brand new predictions next year, and there will be lots
and lots of reporters coming around to see what you're forecasting now.
As the late AFL-CIO leader George Meany once observed, economics is the only profession
where a man can have a lifelong reputation as an expert without ever being right.
And so this week, a bunch of economists who didn't see the recession coming and then
panicked in the belief that it was getting worse and longer than anyone suspected were
going around saying that actually come to think of it, it was looking like a pretty
routine recession that would be over long before the World Series.
And if that forecast doesn't work out either, why heck, the same set of absolutely official
recognized experts will be happy to supply you with an entirely new and then entirely
revised prediction.
So much nicer than having your genuine wins and losses tatted up each day in cold type.
Now to be fair to the economists, in the unlikely event that anyone thinks that is necessary,
it is getting harder and harder to be a certified genius on the future of the American economy.
First of all, there is what we might call the real world problem.
The theories that work out so impeccably on the computers and in the classrooms tend to
fall down embarrassingly when actual human beings are allowed to enter the equation.
And there is the undeniably conflicting economic news.
Industry gets better, but business failures don't and so on down the line, lending ferocity
to Federal Reserve Chairman Alan Greenspan's judicious assessment this week that economic
recovery still remains a forecast rather than a reality.
And finally, there is the government reporting itself, which changes more often than a baseball
team changes managers.
Just today, for example, the gloom gulch gang in the bond market, to whom every knock on
the economy is a boost in bond prices, were disconcerted when the Commerce Department
allowed us how its previous report of a 3% fall in building permits last month was actually
a 2.5% gain in building permits last month, but who's counting?
So if you get the impression that the forecasting efforts of most of our learned economists
will be more at home on a television sitcom, you'll be in the right few for our program
tonight.
Let's take a look at the businesses of broadcasting and advertising that seem to set so much of
the national agenda these days, but first let's check out some managers that possibly
should have been fired and see what happened in Wall Street in the week just passed.
And as the Dow Jones Industrial Average indicates, the meandering stock market meandered a bit
upward this week, though the volume was so light and the recent action either way so
tedious that you might have thought you were in the gold market.
At week's end, the Dow had gained back a little more than half what it lost in the previous
two weeks, up about 27 points at 2913.91.
And the comeback, such as it was, penetrated through the broader market indexes as well.
Our 10 chief elves stuck to their individual guns on the technical outlook for the next
six months, netting out again to a mildly bullish plus two.
But shed a tear for your poor congressmen, the fellows who were always so quick to commit
to complaining about some private citizen's perk faced the first increase in 15 years
in the price they pay to have their hair cut.
An increase has been requested from the present five dollars all the way up to ten dollars.
Wow.
Meanwhile, the price of trimming federal spending remains incalculable.
But not all is lost in Washington.
The Federal Reserve may be getting some badly needed humor.
Two weeks ago, while discussing all the dental images in the news, I mentioned the testimony
of President Bush's newest nominee to the Federal Reserve Board, Lawrence Lindsay.
Now I have a letter from Professor Lindsay, which I respectfully quote to you.
An incisor remark was your toothy comment about my confirmation testimony.
Lou, I've never been known to floss over issues, particularly in front of senators who won't
take lip from anyone.
Some commentators found me a hard-bitten hawk about money growth.
Others thought I would gladly fill our economic cavity with money.
In my view, trying to jawbone inflation down is about as effective as flapping your gums.
Instead, we need to prevent further decay before our economy needs braces.
If confirmed, I would consider rooting out inflation, the crowning achievement of my
term in office.
In any event, I'll be sure to brush up on the latest developments by watching Wall Street
Week every Friday night.
Sincerely, Larry.
Folks, if this guy isn't confirmed unanimously, there really is no justice in Washington,
D.C.
Capiello, what kind of impact do you think Larry Lindsay will have on the Fed?
I think very positive.
I think judging by his writings and his appearances, he gives you the impression that he thinks
a risk of a further recessionary trend is too high, and he thinks a more moderate increase
in money supply, lower rates, getting the economy moving is a better inflation fighter
than trying to squeeze the economy.
So I think he's going to go for ease, if I could use another pun, damn the torpedoes
full ease ahead.
Well, is it timely to ease now, or is that recovery already in place?
I think it's a 50-50 proposition whether we get another cut in the discount rate.
We've already had three.
That could be enough, but in another month or so, we may get another one, a surprise
for it.
The economy's still not out of the woods.
We're still targeting the late, I guess, summer or early fall, Lou, before we come out of
the recession.
The market worry you at all?
No.
The market is making its typical transition as it does coming out of a bear market.
And what it's trying to decide is now, do we get more interest rate ease, or can we
look for earnings?
And the earnings are a little too far off.
So I think if we're going to get this market up in the next month or so, what we need is
some more easing on interest rates.
But we'll get the recovery in the fall, and then the question is how strong will it be?
And I think it's going to be strong and expected.
Lou Holland, you'll get your free forecast.
Well, I think we're still in the bull market, Lou.
However, I do think the easy money has probably already been made.
Stocks aren't particularly cheap, selling at some 18 times earnings, yielding around
3 percent.
Bonds are yielding about 8.30.
So I think that the stock market is not cheap.
However, I do think by the second half of the year, I think the dollar will remain strong.
And I think for once, we may see some foreign money coming into the market.
And I think that that should help us move higher.
Tell me how to make some hard money.
Well, I think you can make some hard money by buying low, small cap growth stocks and
maybe some cyclical growth stocks.
Like what?
Possibly Kmart.
I like some of the regional banks, Bank One.
I like Compaq, even though I think that it may be a few quarters before, in fact, it
pops back.
But I do like it.
You're a likeable guy.
Thank you.
Don Desser, what do you make of what you've heard?
Well, I kind of agree, but with one additional input, and that is I think we're looking right
at the moment at least at more of a market of stocks than a stock market.
I think there's enough confidence that either the Fed has already cut interest rates enough
to bring the recession to an end or they will do so if necessary.
So we have that basic floor under the market.
When you say a market of stocks, isn't that equivalent to Lou saying that it's going to
be a little harder to make money, that you're going to have to pick the right ones now?
Yes, exactly.
I think the institutions and individuals are looking around and looking at stocks one by
one to assess their current earnings outlook and trying to figure out what's the right
price given this state of the economy and what's likely to come ahead.
What would you be buying now?
Well, three in three different industries that we kind of like are Apple Computer.
That's Compaq's opposite, I guess.
And then we also like Citicorp in the big bank area because I think they may have solved
their capital problem with asset sales coming up.
And then a discount retailer through catalog showroom types is service merchandise that
I think is still too cheap.
So you like some that have been beaten down pretty heavily lately?
I think so.
I think that's where the real money will be made as this market of stocks works its way
out over the next couple of quarters.
All righty.
In any event, panelists, it's time now to make a stop at the full service tank for our
viewers.
Capiello Lee Moore of San Angelo, Texas is suspicious of mutual funds that say they have
made certain purchases as hedges.
These are always shown as a loss on the balance sheet, he writes.
Why can't they tell us that this tactic ever proved profitable?
Could it be he asked that their hedges, like the ones in front of my house, merely serve
as ornamentation?
Can you give him an unhedged answer?
Oh, Mr. Moore is so suspicious.
But actually, hedging is the proven investment technique, Lou.
What hedging does is to offset risk.
And in the case of mutual funds, what's being done is to freeze a price where at least there
would be a minimum loss and let the gain run or you can do the reverse.
But the point is to protect your profits.
So the loss on a hedge is typical to protect the gain.
I guess what I'd say is what you want to do is trim your losses so you can allow the gains
to grow.
I'm certainly glad you said it.
Well, Alan, Jules White of Stanford, Connecticut says he's a conservative investor who is thinking
of buying a so-called Ginnie Mae mutual fund.
He's not entirely sure, though, what he would be getting or whether this is really a good
idea.
I understand he writes me that these are pools of mortgages with low credit risk due to their
government backing and that their effective maturities are shorter than stated because
of the prepayment feature.
However, I do not understand how Ginnie Mae's respond to different market and interest rate
environments.
Can you help him?
Well, I think Ginnie Mae funds are excellent investments for people who are looking for
secure investments.
Again, they are direct obligations of the federal government.
They pay interest monthly.
They yield higher than a comparable maturity treasury.
And if you look from a sensitivity point of view, they're less sensitive to moves and
interest rates than the straight treasury.
So I recommend them highly.
I think when you're shopping, though, you should be careful to make sure that you check
the expense ratio.
And there are some no-load Ginnie Mae funds.
All right, John Dessa or Joanna Rooney of Susquehanna, Pennsylvania is one of our bright
young viewers.
She's about to graduate from high school.
She plans to continue her education in the travel and tourism field.
She wonders what the outlook is for airlines, both as employers and as investments.
Well, I think Joanna's got the right idea, but the timing may be not quite right in terms
of employment with airlines.
We do have Eastern gone now, some other airlines in bankruptcy, and even the big ones like
American and Delta showing losses.
So there are fewer jobs for a lot of people.
We might be better looking for employment in an area that's growing.
There are 30-some-odd cruise ships coming out in the next few years.
As far as investments are concerned, why then buying airline stocks as we're coming out
of a recession is typically a pretty good idea.
So there may be better investments than employers right now.
All righty.
Now, if you'd like to take off to a higher financial altitude, just make us your first-class
ticket to the wild green yonder.
Meanwhile, cool your jets, fasten your seat belts, and send your money questions flying
to our pecuniary pilots and terminal authorities here at Wall Street Week, Owings Mills, Maryland,
21117.
That's Wall Street Week, Owings Mills, Maryland, 21117.
Now, before we meet tonight's special guest, let's take the same kind of critical look
at television.
The television always likes to take at everybody else and see if this most powerful tool of
the 20th century is now actually a medium cooling.
The typical American street is still very much a street of television watchers.
More than 98% of American households have television sets, and 98% of those TV households
can now watch in color.
In 1989, the penetration of cable passed 50% for the first time, and today about 59% of
all households are wired.
But only 29% of TV households, or a bit more than one in four, shell out for any pay cable
channels.
And that's actually down slightly from last year's subscriptions.
Only a dozen years ago, if you were watching TV, the odds were 91 to 9 that you were watching
a commercial network program.
Today, the network share of the viewing audience has tumbled to 61%.
Moreover, all broadcasters have a significant new competitor in the VCR.
A dozen years ago, only one TV household in 200 had this equipment.
Today, 72% can play what they want when they want to.
This is not to say, though, that traditional network TV is dead.
Take the top two programs of this past season.
The show that came in first in 23 of the 30 weeks and earned approximately $20 million
for NBC was set in a small business in Boston.
My marketing surveys show that this neighborhood was in need of something like this.
People want to go to a place where they can just relax, you know, a nice, quiet, pretty
little place where they can just sit and talk.
Good one.
The program that led the ratings the other seven weeks and brought about $25 million
to CBS had an interesting lineup of its own.
I'm Morley Safer.
I'm Harry Reisner.
I'm Ed Bradley.
I'm Steve Croft.
I'm Meredith Vieira.
I'm Mike Wallace.
Not every hour was 60 minutes, however, and my guest estimates that CBS did no better
than break even last year, which itself would be better than the network's official claim
of a loss, while he estimates that ABC made between $200 and $250 million and NBC about
$400 million.
Is there still some money to be made here by the customers?
And if so, will it be enough to compensate you adequately for the frequent ordeal of
being a viewer?
There's some thoughts on that and other questions of medium importance.
Let's go over now and meet tonight's special guest, Alan Gottesman.
Alan, welcome.
Nice to have you with us.
Nice to be here, Luke.
Please have a seat.
Thank you.
Alan Gottesman covers two key and umbilically related industries, broadcasting and advertising
for Payne Webber, and he's currently the number one ranked advertising analyst in the game.
In his spare time, he enjoys carpentry and ham radios, two activities that have the advantage
of keeping him away from his television set.
Alan, what is the future for the TV networks?
That's a very generous way to ask the question, Lou.
Most people who ask me say, is there a future for the television network?
We're soft-talking about here.
What the networks do and what they do uniquely is distribute advertising message as widely
as a truck can distribute a product.
And although their ability to do that, the efficiency with which they do that has been
impinged upon and will likely to continue to be, there still isn't anything that's
replacing them.
It's kind of nibbling.
But there still hasn't been a full-fledged substitute.
And until and unless there is, there'll be room for them to have a future.
The networks have just had a setback in Congress.
Why don't you explain that?
Well, it wasn't a setback in Congress.
It was in Washington.
It was at the Federal Communications Commission, which is the rule-making body.
The real money that's being made in the television business now, as far as the networks are concerned,
is in the program production and distribution.
Not so much of the new shows, but of used shows.
There's a tremendous business in recycling television shows.
And these are put on at network expense, at network risk.
You put something on, you're not putting something else on, so you take the risk, you put up
the money.
And then when the thing becomes a hit, somebody else gets to sell it over and over and over.
You can still find Lucy and MASH, and somebody's making money, but not the network that's possible.
Well, that's why Fox has limited its programming so as not to be qualified as a network by
their rules.
Well, one reason was that they couldn't get enough programming to fill up the night.
There's 22 hours of prime time a week, and not every show is one hour.
Program picking is tough, and I mean, in the 20 years that your show's been on, Lou, the
street networks have had 47 shows opposite you, and 44 of them are history.
It's about time they gave up, isn't it?
What do you think of the stocks of these broadcasts?
I'm neutral on the stocks, because that dynamic that we've been discussing is not a new factor,
and I think it's something that the networks, as they slim down, are learning to manage
with.
The real problem that I have with the stocks right now, frankly, is advertisers reluctant
to spend, and as they are reluctant to spend, television, network television especially,
Lou, is a negotiated medium, and when the tone of the auction sedates a little bit,
prices come down.
So, not only are they spending less and buying fewer units, but the prices are coming down
and the thing kind of is cascading.
So, the business is going to be pretty yucky, I think, for the balance of the year in terms
of the pricing structure.
When as and if it comes back, there will be money to be made in the business, but I don't
see it happening, at least for the balance of this year.
Are NBC and CBS for sale?
I don't know, how much money do you have?
The rate they're going, I mean, I'd take that much.
Well, it's a good question, something that caught them away, no matter what you want
to do with them, there's going to be something involved.
I would think that the idea that here's a two or two and a half billion dollar business,
which is approximately the revenues of a network, somebody somewhere says there must be something
I can do better that's going to make some money here.
And I would imagine if you're willing to pay up, perhaps in the case of CBS more, there
might be a deal, but I don't know that there's anybody who really would be wanting to pay
a premium.
Two and a half billion is a little high for me, unless Frank would go along, but meanwhile
let's turn to the other business you cover.
If you're neutral on the networks, are you any more enthusiastic about the advertising
industry?
Well, no, and for the same reason, quite frankly.
What we've been seeing is that advertising volume in the United States has been very,
very soft.
It's been in its own private little recession, almost wallowing around since 85, and the
spark plug for some of these agencies, which has been advertising outside the US, is now
beginning to slow down as well.
UK's been slow for a couple of years, the rest of Europe is slowing down.
I just think we're going through a period of malaise.
People come out of it, but not this year, I don't believe.
So you'd be neither a buyer nor a seller at this point?
That's exactly right.
Okay, let's bring in our own ploney, starting with Frank Cappiello.
Thank you, Lee Ortiz.
I'm really going to be shocked because I think you're going to be the only guest that we've
had that won't recommend a stock, doesn't like any of the stocks in this industry.
So let me ask you, what's the most speculative stock that we have in advertising or in broadcasting?
In the advertising sector, if you look back over the history of the industry, I'm not
aware of any major advertising agency that's ever managed itself into oblivion.
Somehow they've always managed to muddle through, and we do have a couple of stocks, both of
them based in Britain, which did get in trouble, but not operating trouble, financial trouble,
head office trouble, holding company trouble, and a lot of that stuff has worked itself
out.
What do you think that means?
Saatchi & Saatchi has won the ADR's trade for one whole dollar on the New York Stock Exchange.
And if you wanted something that was really speculative, really speculative, like a warrant,
that would be the name.
Saatchi & Saatchi.
Yes, sir.
Alan, advertising stocks and media stocks are very cyclical.
I mean, you're not bullish on any of them, so when is the appropriate time to buy these
stocks?
Well, I don't know that the business is that cyclical.
If you look at advertising in the aggregate, all of advertising, from two lines you might
take out in the Baltimore Sun to sell your 1988 gray Volvo station wagon to an $850,000
30-second spot on the Super Bowl, every bit of it is less than 3% of the gross national
product.
What I have seen is that the business tends to follow its own cycle, and we can see that
the business in America has been slowing down since 85.
This recession that everybody else is feeling is all hat to these guys.
So I don't know that it's cyclical, per se.
The time to buy them is when you see business starting to come back and nobody believes
it, because there is a significant amount of leverage because of the pricing factor.
Once demand comes back, people will be crowding into the same door they're now slinking out
of, and the business will come back pretty quick, could come back pretty quick.
Alan, next year is going to be a presidential election.
We've got Europe 1992 going to kick in, and maybe the recovery here will be going on.
Don't you think we ought to accumulate some of these advertising stocks now to be ready
for next year?
Well, what normally happens as far as the election is concerned is the presence of political
advertising tightens up inventory.
But right now, it isn't going to be enough.
There really isn't very much demand for inventory.
The 1992 phenomenon is interesting, too.
It's a creation of advertising, because the 1992 is December 31, 1992, so nothing's going
to happen until 1993.
And I really just want to hear the rumblings before I say, let's go.
Alan, we only have a minute or so left.
How much further deterioration do you expect of the network's inroads?
We said it's now 61% of the audience.
Probably not a lot, because every new thing is going to chip away at everything that's
already there.
And since there are so many other things, they're going to be the main chippees.
And there's also something else we've got to understand, is that although on a given
evening maybe 60% of the audience is watching network television, over the course of a week
they can still get everybody, and they are the only medium that can still get everybody.
What trends do you see come in the next 10 years that will be different?
Probably the most important trend, and the thing we really should be aware of, is that
right now, Lou, half the advertising on the planet is created in the United States, it's
bought in the United States.
We don't account for half of most anything else.
And I think we're going to see tremendous growth of consumer economies outside the United
States, and it's going to carry with it, inevitably, a higher advertising content.
I thought we only led the world in lawyers, you say, and hucksters as well.
I also understand disposable diapers, now there may be a connection there.
And in terms of networks, are we going to have three?
At least.
Well, how about Fox?
Is Fox going to be a real fourth network?
Well, the concept of network, Lou, is showing a show simultaneously, and we've got an infinite
number right now.
Thank you for your infinite wisdom, Alan Gottesman, thanks, too, to our panel.
Hope you'll be back with us again next week, then my guest will be one of the most influential
men in the world of money.
He's William Donaldson, chairman of the New York Stock Exchange, and we'll be asking him
whether the exchange is really coming to grips with its problems and challenges, and what,
if anything, it plans to do to bring disaffected small investors back into the marketplace.
Meanwhile, this has been Wall Street Week.
I'm Louis Rucasa.
Good night.
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