BUSINESS WEEK ONLINE Transcript of June 8, 1997, online conference PLAYING THE AMAZING STOCK MARKET Bill Wolman, BW's chief economist and popular CNBC commentator, fielded questions on strategies for the sizzling stock market and other hot investment arenas in the BW Online June 8 conference. The host was Bob Arnold of BW Online (BobABW). Copyright 1997 America Online, Inc. OnlineHost: Material entered into AOL by persons other than those identified as Business Week's employees or authorized representatives, acting on behalf of Business Week, is material for which Business Week assumes no responsibility. OnlineHost: Welcome to Business Week Online and a discussion of the sizzling investment climate as midyear approaches. Our guest tonight is BW chief economist and CNBC commentator William Wolman (WolmanBill). Bill oversaw the preparation of this week's BW Cover Story, "How To Play This Market." This package plus Bill's advice should help you make wise decisions in a tricky market. BobABW:Hi Bill, and welcome. WolmanBill: Hi Bob, thanks for having me on tonight. Let's get going... BobABW: So, since we've mentioned it....What's your advice for investing in this hot and tricky market? WolmanBill: The argument of our Cover Story is that the economy is still strong enough and inflation low enough so that there is a strong probability that stocks will continue to rise for the rest of the year. To me personally, the most encouraging sign is that long-term interest rates have fallen over the past few weeks rather than rising as most bond market analysts had expected. It makes for an exciting and interesting scenario. BobABW: Here's a question that bears on one of the stories in BW's midyear investment guide: Question: Can you recommend any good REIT (real estate investment trust) stocks to invest in? WolmanBill: The answer to that question is yes. However, I'm reluctant as a journalist to mention particular stocks in a forum like this. But there is a neat list of the REITs that we like as a magazine in the current issue on how to play the market. So take your pick from that list. BobABW: Buddy2 is interested in a prediction of a more generic nature: Question: What criteria are used to decide when a stock split will take place? Is there a rule of thumb that indicates when a split is about to happen? WolmanBill: There's no general rule. However, one intuitive guide is if the stock is up 50% or more since the last split. So that should be your "guide." By the way, there is no evidence that over the long run a split increases the real value of the stock of a company. Just look at what Warren Buffett has done with Berkshire Hathaway. BobABW: Dellarill is next: Question: Your opinion, please, on tech stocks -- near-term and as we approach the end of '97. Thank you. WolmanBill: A few weeks ago, BW did a Cover Story called "The New Business Cycle," which argues that any dynamic industry -- like the computer and software industries -- goes through cycles of slow growth and fast growth. We further argue that it is likely that the high-tech industries are entering a period of slower growth. Earnings alerts, warnings of an earnings slowdown in the second quarter, have already been issued by some important companies in high tech, including Intel. I would take these warnings a little seriously. My opinion is that the safest places in the market now are in industries like banking that benefit from interest rates coming in lower than expected. BobABW: CDHORTON seems to have an interest in gambling: Question: Wade Cook has written a book about rolling options -- what do you think about this type of investment in the market? WolmanBill: I hate to admit a lack of total omniscience in these matters. But I've not yet read Wade Cook's book on this topic. So I'm reluctant to comment. I hope you're not taking my remark about omniscience seriously! BobABW: HardLux wants to know how you would balance a portfolio at the moment: Question: What is your advice on the amount of stocks to buy on any particular company? WolmanBill: My own personal preference at the moment is 40% in domestic U.S. stocks; 40% in mutual funds with a good record, and mutual funds that invest in foreign stocks; and 20% in bonds. Foreign markets could have some tough sledding with all the uncertainty about France's role in the European Monetary Unit. But the potential is so enormous in a diversified portfolio of foreign stocks that the risks are acceptable. BobABW: Here's a simple question from BBowers10. Does it have a simple answer? Question: Where is Intel headed? WolmanBill: Answer: BW editors cannot comment on individual stocks. But our magazine has been filled with stories on Intel. These stories will surely help you. BobABW: How about the semiconductor industry, Bill? WolmanBill: About the semiconductor industry, I've already argued that there is something of a slowdown in incoming business for the chipmakers. And I reject the notion that it's nothing but the usual summer lull. So I'd be a little careful here. BobABW: Are closed-end funds really the dullards that Bob188184 feels they are? Question: Why are closed-end funds so steady? They don't move up. WolmanBill: Actually, what you are saying is not entirely true. Some of the top-performing funds this year have been closed-ends, including those investing purely in Mexico and purely in Russia. Closed-ends are pretty well recognized as an excellent way of investing in specific foreign markets if you get a yen to do so. It is true, however, that the domestic closed-ends have been frustrating investments, particularly to those investors who know that they often sell at a discount to net asset value. I wish I had a total explanation, but those things are out of fashion. BobABW: ELowell89 has a pertinent question (perhaps) for this point in a bull market: Question: Where is the best place to "park" cash for two to three months? WolmanBill: The same answer as usual: a good money market fund with an extremely short average maturity. If you are really rich and really venturesome, there are some wonderful hedge funds that use arbitrage to get very high yields on short-term money. BobABW: Answer AltGlen's question, and you'll be the Babe Ruth of investing advice: Question: How much longer do you think the bull market will last? WolmanBill: I can't really say. I see nothing on the horizon that will knock the market off course for the remainder of this year -- barring some really bad news on the inflation front, which I do not expect. In the longer run, I think it is a delusion to believe that we will not have a bear market. All I can say is that when I see one I will say so, recognizing, of course, that I could be wrong at that point. BobABW: MixSound is seeking some historical perspective. Is past prologue, Bill? Question: Bill, I've heard that as the Federal Reserve Board tightens monetary policy, the market is likely to fall, and as it eases, the market is likely to rise. Has this been your experience, and where do we stand currently, with regard to the Fed's actions? WolmanBill: There is some difference of opinion at BW on this. However, on average, we have been among those that have argued that the Fed wants to hold rates steady. And we've been right four of the past five FOMC meetings. As of the moment, I do not expect the Fed to raise rates at its meeting on the 2-3 of July. There is a great myth particularly popular among bond traders that when the Fed moves to raise short-term rates, it causes long-term rates to fall. This perception is, however, almost always wrong. The basic rule in investing is, "don't fight the Fed." One reason I'm expecting the market to rise on average for the rest of the year is that I expect to the Fed to be reluctant to raise rates. BobABW: CDHORTON has an question whose answer will interest us all as 2002 approaches: Question: Is a balanced budget good for the stock market? WolmanBill: Under most conditions, the answer is yes, indeed. One reason that interest rates have been quite stable or declining recently is that the federal budget is close to balance. This reduced the supply of bonds coming on the market, raising their price and reducing their yield. It is also extremely helpful to the market that many state and local governments are running surpluses. This is reducing the supply of bonds relative to the demand for them and is very neat indeed for bond bulls like myself. BobABW: InvstWell is next, with this interesting question on index funds: Question: What effect do you foresee with the mania in index funds? Both going up -- and in a down market? Especially with so many new investors. WolmanBill: This is another one of those great questions, to which I wish I could give a definitive answer. My own instinct is that the current period in which the index funds are beating the pants off the managed funds will come to an end. This is the great argument for moving into small-cap stocks, which have been underperforming badly. Eventually, they will catch up. I notice with great interest that Dow Jones will begin licensing the use of its indexes to index fund managers for the first time. To a sometime-contrarian like myself, this is a sure sign that the heyday of the index fund may be coming to an end. BobABW: Bill, in answer to Taherza's question, can you tell us which way you expect the dollar to go? Question: What would be the impact of a 10% drop in the dollar vs. yen on the stock market environment? WolmanBill: In general, I expect the dollar to be relatively stable in value as compared to the European currencies, since it has gone up quite a bit. I also hold the unfashionable view that the dollar is still overvalued as compared to the yen. And that in some reasonable period, the yen and other Asian currencies, for that matter, will rise against the dollar. The impact of a drop in the dollar against the yen will in general be beneficial for companies that compete head-to-head against the Japanese in industries like the auto industry and some parts of the electronics industry. BobABW: UJ178 wants to know: Stocks or mutual funds. (Or do you have to choose, at this point?) Question: Would you invest in a good stock or a good mutual fund? WolmanBill: I would not invest in one stock. But if I could diversify among, say, six or seven stocks, I think that I could make a pretty good match against mutual-fund performance without taking an undue risk. It is surprising what statistical analysis shows about how much diversification you get with portfolios of only 7 or 8 stocks, providing, of course, that they're not all in the same industry. BobABW: Bill, you've said (I think) that you believe the Fed will stand pat. What then of BDBeals' question: Question: What will Greenspan do with interest rates considering the continuing decline in unemployment? WolmanBill: As I've said, my best guess is that he will not raise rates at the next FOMC meeting. It's also interesting to me and economics statistics nerds that despite the falling unemployment rate, the length of the workweek for those already employed has not risen for the past couple of months. It could be, and I think it is, evidence that demand for workers is slowing some. I hope these are not famous last words. BobABW: Setting Travelers aside for a sec, Finesecre seeks your view on the insurance industry: Question: What is your opinion of investing in insurance companies like Travelers? WolmanBill: Insurance companies tend to benefit from falling interest rates. So I like 'em. BobABW: Bill, can you reach back to your academic days for ELowell89? Question: Do you support efficient market theory? If so, strong, weak, or semistrong? WolmanBill: Good question. As an economist, the efficient-market theory has a great appeal to me. As a reporter, I am constantly amazed at how much information, not inside information, is not fully assimilated into the market. You know the famous story about the two economists walking down the street and one saying to the other there's a $20 bill on the sidewalk, and the other one, a true devotee of efficient markets, saying it can't be a $20 bill because someone would have picked it up if it were. As a reporter, I gotta tell ya, there are lots of $20 bills on the sidewalks! BobABW: How would you prepare for doomsday, Bill? Tphul would like to know: Question: If a crash were to occur, what stocks would you invest in now to take advantage of the event? WolmanBill: The answer is if you believe that a crash is coming, you should not be in stocks, but in short-term and even long-term safe government bonds. BobABW: Bil -- the answer may be enlightening to the reading public: Question: Do most journalists that you personally know invest a lot in the stock market? BobABW: That's from CDHORTON. WolmanBill: That's a good question, and you should clearly understand that there are complex rules governing stock investments by journalists. As a matter of fact, the rules are so complex for someone like me who works for BW and freelances for CNBC that I do not buy or sell individual stocks except of the companies that employ me. That doesn't mean to say that I don't invest in diversified mutual funds, as I sure as heck do. But I don't manage those funds or talk to those who do. BobABW: KXP2130 has a multipart question: Question: Will the delay in European unity have an impact in Latin American markets? Also, which Latin markets do you like best at this time? And finally, is Mexico out of the soup it got into a while back ? WolmanBill: I notice with great interest that the Mexican market really boomed last week. I have not really analyzed these affairs, but it seems that anything that makes Europe a more dubious place to invest makes other markets more appealing, including Latin America. BobABW: Here's Srw1111: What's the next top, and when, Bill? Question: What are your thoughts on the market for the next year? How high do you think it will go? WolmanBill: We will be issuing a yearend investment outlook issue in December, but as I've already said, I don't see anything on the horizon that will bring an end to the bull market. When I do, I'll try to find some way of letting people know. BobABW: Bill, you mentioned small-caps earlier. Here's Dellarill again: Question: When do you expect to see the small-caps catch up with the rest of the market, if at all? WolmanBill: Up to the past couple of days, small-caps have been doing quite well as compared to the biggies. And that has been true since the end of the April correction. I think the catch-up will be hard to come by in the sense that it will take a long time for small-caps to totally catch up, but I think there will be some catching up for the remainder of the year. BobABW: That's a wrap for tonight. BobABW: Thanks, Bill Wolman, for your time and your insights. And thanks to all of you in the AOL audience for your many questions. We'll post the transcript of Bill's conference soon in our Talk & Conferences area, where you can also find our calendar of coming events. WolmanBill: Thanks a lot, Bob, and to everyone who sent in the good questions. BobABW: Thanks again, and goodnight. Copyright 1997, The McGraw-Hill Companies, Inc. Subject type: AEPIF File name: CON70608.TXT