Wall Street Week

“That's a very painful subject.”

Donald Drapkin has enjoyed a storied career as a Wall Street dealmaker, but, admittedly, Casablanca Capital’s activist campaign in Cliffs Natural Resources (CLF) has not been his finest hour. When Casablanca announced its 5.2% stake in and turnaround plan for Cliffs in January 2014, the stock was trading in excess of $20 per share. Despite the firm successfully driving a major shakeup of the United States’ largest miner of iron ore, today CLF shares trade for less than $3.

The following Episode Feature appears in the September 27, 2015 issue of the Wall Street Week Newsletter. Subscribe – it’s free.

In a world of convergent monetary policy and high correlations, investors have increasingly turned to activist strategies in search of alpha. Despite the growing popularity of activism, the plight of Cliffs is a stark reminder that nothing in the investment world is guaranteed and outcomes sometimes escape even the savviest manager’s control.

When identifying targets, an activist investor looks for companies with hidden value that could be unlocked through management changes and corporate restructuring. Prior to amassing a large position in a company, the manager may also analyze the odds of being able to effect change within the board of directors. When both conditions are present, the investor initiates the activist campaign under the premise that by exerting a greater degree of control over the investment, the odds of making money are higher than with a passive investment stake.

Casablanca’s master plan with Cliffs included recommendations to massively cut costs, spin out international assets, double the dividend and convert U.S. assets into an MLP. If the company did that, Casablanca said, shares should be valued at $53.00, a 2.5 times premium to the current price. The endeavor started positively for Casablanca, which after a six-month proxy fight successfully gained full control of the board and installed a management team with successful turnaround experience.

“We are one of only, I think, two companies in history with 8% of the company [ownership] that got 100% of the board and the vote. That's the good news,” Drapkin said. “The good news is we ran all our models and we brought in a guy named Lourenco Goncalves, who used to run Metals Inc. for Leon Black, and made 20 times their money.”

In the case of Cliffs Natural Resources, the primary conditions for an activist target were met, but an unforeseen circumstance prevented the company from being able to effectively service its high debt load: plummeting commodity prices. The most attractive activist targets fall in a range of reasonably predictable outcomes, but the reality is the most important assumptions underlying commodity-related investments rely largely on guesses. Bullish commodity prices following the financial crisis created the illusion of stability in an asset class exposed to a wide range of volatile factors.

Due to large amounts of leverage taken on by the company during the commodities boom, Cliffs’ management has been in a race against the clock to divest money-losing assets for pennies on the dollar in order to continue operations. It recently sold the ‘Ring of Fire’ chromite mine near Thunder Bay, Ontario, originally purchased for $550 million, for a mere $20 million. The company spent $6 billion over the last three years developing its Bloom Lake, Quebec iron ore mine, acquired in 2011 for $4.3 billion, with no profits to show for it. After unsuccessfully seeking a buyer for the mine, the company “ring fenced” the asset in February, relieving itself of all liabilities from the project, such as cleanup costs that could run as high as $700 million, under the Companies’ Creditors Arrangement Act (CCAA). At the time, Goncalves likened Bloom Lake to a cancerous limb that simply had to be amputated after chemotherapy was unsuccessful.

“Cliffs is a perfectly well-run humming machine. [Goncalves] got rid of the $6 billion noose around their neck. He's reduced debt. He's reduced expenses. He's reduced lifting costs. And he's okay for a couple of years,” Drapkin said. “But when the price of iron ore goes from $140 a ton, and you get BHP [Billiton] and other producers that can produce down at the $45 level, you're a commodities business. There is just nothing you can do about it.  Now, will anything bad long-term happen to Cliffs? I don't believe so. But you have to ride out the commodity cycle, and I wish I knew how long that was going to be.”

Since the Fed implemented unprecedentedly accommodative monetary policy post-2008 financial crisis, the market has fixated on the central bank’s every move. After winding down QE, many expected the FOMC to raise interest rates in 2014, but when that didn’t happen most observers considered 2015 rate hikes a sure thing. However, here we sit at the end of July and ZIRP lives on.  

While the Fed is expected to make its first rate hike in September, Omega Advisors’ Steve Einhorn believes investors have their eyes on the wrong ball when it comes to monetary policy. “[It’s] not so important when they increase rates the first time. It doesn’t matter and shouldn’t matter to the average investor whether they increase interest rates in September or December. What matters is the pace of the tightening and how quickly they tighten.”

Because the lengths to which the Fed has gone to emphasize its data-dependence, Einhorn believes rate hikes will actually represent a positive development for the US market and economy. 

“The initial phases of interest rate increases tend to be associated with better economic activity, better profit growth, and better income growth. The equity market flourishes as profits and dividends grow. It encourages merger and acquisition activity… and the income that is derived from better economic growth underpins a better consumer.”

Historical data supports Einhorn’s argument because “the equity market tends to increase or lift for about 30 months after the first Fed rate hike. [Also,] on average, in the 12 months subsequent to the first increase the market has advanced about 10%.”

However, while initial rate hikes are, in a way, bullish, a steep rise in interest rates could have a negative impact on the economy, as “it not only provides for an alternative to the equity market, but it also can threaten the economic expansion itself.”

In a fragile, slow-growth economy, investors should allocate more capital toward assets less sensitive to broad economic performance, said Omega Advisors Vice Chairman Steven Einhorn on Sunday’s Wall Street Week.

“We’re in an environment, [of] slower growth in terms of inflation and in terms of output in the U.S.” And when that is the case, Einhorn believes you can still find opportunities in sectors with “more open-ended earnings growth, that are less sensitive to the economic cycle, pricing flexibility, and good unit growth.”

Specifically, Einhorn advocates that there are still opportunities in the healthcare and technology sectors. These industries offer, “innovation, [while] generating above average growth, and growth away from the normal up and down of a business cycle.”

Biotechnology has been one of the hottest sectors in the market over the past decade, with the iShares Biotech ETF quadrupling since the beginning of 2011. Legendary investor Byron Wien of Blackstone Group, this week’s guest on Wall Street Week, believes even at current levels, investors are underestimating the transformative potential of biotech innovation.

“Most people still don’t recognize the gigantic implications of this phenomenon,” Wien said. “Major breakthroughs are going to be taking place in cancer, heart disease, Alzheimer’s, diabetes, multiple sclerosis and other diseases.”

The development and approval cycle for drugs has accelerated, and with it the profits of biotech companies. Regulation has also been kind to the industry, with Cowen Group President Jeffrey Solomon declaring on last week’s show that biotech has been the big winner of recent healthcare legislation.

“I think biotechnology companies are actually winners [in the Obamacare Supreme Court ruling] interestingly enough, because the amount of time it takes to do drug discovery and the ability to get reimbursements is actually reasonably sanguine right now,” Solomon said. “I expect there to be something between 2,000 and 2,500 new therapies on the market in the next four years, that will take massive costs out of the system for Alzheimer's, diabetes and certain sub-sectors of cancer.”

The word bubble gets tossed around in the biotech sector due to high growth multiples, but Solomon dismissed that notion. “A lot of people talk about whether or not there's a biotech bubble. Things have gotten better and a lot of companies have come public. But here are some statistics: Since 2011, there have been about $65-70 billion of equity raised in the public markets, both from IPOs and File-1 offerings for biotech and tools of diagnostics. In that same time period, over $260 billion of M&A has come out of the market. When we talk about how things are valued, just fundamental supply and demand suggests that there's more money walking around today, assuming no new inflows into biotech, which we know is not true, and no new allocations from general funds into biotech, which we know is not true. I'm not saying we can't have revaluations of whole industries, but the biotech trade continues to be a very compelling one, just if based on nothing else other than supply and demand.”

Valuing technology companies has always been a difficult proposition. The rise of the Internet forced investors to construct subjective growth models, and tech bubble bursting in 2000 was evidence that exuberance spiraled out of control. Today investors grapple with the same questions as money pours into Silicon Valley. Biotechnology investment results can be even more binary. The high costs of research and development (R&D) and make-or-break nature of drug approvals mean small, one-hit wonder biotech companies, while offering high potential reward, carry tremendous risk. Institutional investors in biotech typically speculates on the space through ETFs or a basket of larger companies. Wien believes the potential exists within biotech for humanity-changing disruption. “Right now there are literally hundreds of small companies working on significant products. Many of them will fail, but a few will change the world the way Google and Facebook did.” The industry has seen significant consolidation in recent years, creating conglomerates with deep line-ups of cash-cow drugs. Wien likes to invest in larger biotech companies that spend heavily on R&D, but only if those costs remain at reasonable levels relative to revenues. He also emphasizes the need to take a thoughtful long-term view with biotech investments. “Probably the most valuable thing I can say to you today is this: the core of my investment philosophy is understanding what you own. Pick your stocks carefully, and hold them for a very long time. I've held some of these biotech stocks through '87, '90, through 2000, through 2007.” Asked by host Anthony Scaramucci about what biotech companies he like most, Wien named Biogen Idec ($BIIB) and Gilead Sciences ($GILD), which happen to be the most heavily weighted stocks in the iShares Biotech ETF (IBB) at just more than 8%. Gilead, the larger of the two, carries a market cap of almost $170 billion and expects to grow its revenue by around 15% this year to nearly $30 billion. Today, there are 44 biotech companies with market caps over $2 billion. Last year there were 26 and in 2011, 14. Wien also likes investing in biotech because of its relatively low correlation to broader markets, which is why he felt comfortable holding biotech stocks through painful financial panics. “Picking the right companies can produce impressive returns in a difficult overall market environment,” he said. Even during periods of weak economic growth, low price elasticity for healthcare means demand and cash flows remain fairly steady. Beyond evaluating healthcare stocks as potential investments, Wien also believes it's important to consider social and economic implications of the biotech boom. Baby boomers, for example, are living longer, healthier lives, further crowding the workforce and exacerbating issues with unfunded liabilities like social security. Biotechnology is changing the world, and if you want to achieve above-market returns, Wien believes you should allocate capital to the sector, as well as consider its broader impact on the world.

The following investment primer originally appeared in the July 12, 2015 issue of the Wall Street Week Newsletter. Subscribe – it’s free. 

In Episode 12 of Wall Street Week, Byron Wien talks about his use of technical analysis in making investment decisions, and how it helped to launch his legendary career on Wall Street. While technical analysis is often associated with day trading and a dirty word to many in the financial industry, Wien believes if used properly it can be a powerful decision-making tool.

Fundamental analysis

Fundamental analysis is a method of attempting to measure the intrinsic value of an asset. Fundamental investors assess factors like earnings, free cash flow, debt, growth rate, dividends and interest rates to determine fair value, which is then compared to the asset’s current price to determine whether it represents an attractive investment opportunity.

Fundamental analysts also analyze economic trends and weigh qualitative factors, such as product quality and management style, in an attempt to make future growth projections. Even though all analysts look at the same data, price targets may vary based on differences in the qualitative, forward-looking variables of fundamental analysis.

Technical analysis

Technical analysis, on the other hand, is a method of attempting to forecast future price of an asset based on historical data, especially relating to price and volume. Technical analysts eschew the fundamental notion of analyzing the underlying business, instead focusing on pattern recognition to construct seemingly favorable risk-reward scenarios.

In essence, technical traders believe fundamental factors are already baked into the price of an asset at any given time, and the only way to gain an edge is to look for favorable entry and exit points based on historical trends. Stock charts are used as the canvas on which technicians look to read and tell the story behind a stock’s movement.

How does technical analysis work?

Technical analysis can be simple or complex depending on the number of factors used in the process. Traders may choose to focus exclusively on price, or incorporate additional indicators such as moving averages, volume analysis and more.

Technicians either conduct automated screens for certain characteristics or peruse charts individually, looking to identify a certain patterns. Ultimately, technical analysts use a collection of indicators to measure factors relating to investor sentiment and behavioral psychology. 

A core tenet of technical analysis is the importance of price levels. The two most important price levels are support and resistance. Support is a level below the current price where a stock has historically had difficulty trading below. Resistance is a level above the current price where a stock has historically had difficulty trading above.

A stock could have difficulty trading below support or above resistance, but if its price does breach those levels, the expectation is for additional momentum and the start of a new trend. The majority of technical analysis strategies seek to identify and exploit trends - uptrends, downtrends and sideways trends, which are defined by a series of lows and highs. 

Technical analysts also study the volume of a stock, especially relative to corresponding moves in price. If a move in a stock is accompanied by above average volume, it is deemed to have greater significance. Large moves high on above average volume are known as accumulation days, as it appears investors are accumulating a large number of shares (a bullish sign). Large moves lower on above average volume are known as distribution days, as it appears investors could be selling shares back into the market (a bearish sign).

Technicians may use several different types of stocks charts, including line charts and bar charts, but most refer to candlestick charts. Candlestick charts create a more detailed story about the movement of a stock on a given time-frame. On a daily candlestick chart, for example, each candle represents one day, and has a body and a wick. The body of the candle represents the opening price and closing price, with the candle typically colored red for a down day and green for an up day. The wick on each candlestick then reflects the intra-day low and high of the stock. There are schools of highly complex candlestick pattern analysis, but generally candlesticks with long bodies are seen as more significant than those with long wicks, which represent indecision.

Moving averages are another popular tool of technical analysts, creating additional price levels for traders to measure the composure of a stock. Moving averages track the average price of a stock over a given time frame, and are reflected as lines on a chart. For example, a 200-day moving average would reflect the average price of a stock over the last 200 days. Stocks trading above moving averages are generally considered strong, while those trading below moving averages are considered weak. A flat moving average is indicative of a sideways trend, while upward/downward sloping moving averages are indicative of uptrends/downtrends.

As is the case with support and resistance, when a stock crosses above or below a moving average, it is deemed as a potential inflection point. The greater number of days in a moving average, the greater its significant to technical analysts. There are also two different types of moving averages: Simple Moving Averages (SMA), which give equal weighting to price on each day of the average, and Exponential Moving Averages (EMA), which give greater weighting to price on more recent days.

Technical analysts may also use more complex tools like Bollinger Bands, moving average convergence divergence (MACD), relative strength index and other oscillators and indicators.

The big picture: blending fundamental and technical analysis

While there are traders who exclusively operate using technical analysis, established investors who employ technical analysis typically use it in concert with fundamental analysis. While over-trading can adversely affect performance, technical analysis can also potentially help investors improve trade entries, exits and risk management.

In this week’s episode of Wall Street Week, Byron Wien talks about how he uses fundamental analysis and technical analysis to complement each other. For example, if he identifies a strong investment opportunity from a fundamental analysis, he will analyze technical signals in an attempt to buy at the lowest price and/or with the highest degree of confidence.

While technical analysis often associated with day traders, the majority of which dramatically underperform benchmarks, technical analysis can also be conducted on long-term time frames that ignore the short-term noise. Regarding risk management, important technical levels, rather than arbitrary drawdown percentages, can form the basis for stop-loss levels in long-term investments.

Following yesterday’s outage at the New York Stock Exchange, we sat down with Wall Street Week co-host Gary Kaminsky to discuss his views on what caused the issue, cyber-security and general market structure. 

Interviewer: Do you think the outage at the NYSE was the result of a cyber attack, or just a glitch as they say? 

Gary Kaminsky: I was reading an article on WSJ.com at the time the outage occurred, and my first instinct was there had to be a link. It just seemed like too crazy a coincidence. But given 24 hours to reflect, I have to believe the New York Stock Exchange would be incredibly foolish to mislead the investing public if this was anything more than a software glitch.

I'm going to take the NYSE at their word for now that it was something internal not caused by any outside infiltration to their systems. However, if weeks later it comes out that some organization executed a coordinated cyber-attack, I would not be terribly surprised. I have a skeptical nature regarding how I think about things.

If there was a hack do you think the New York Stock Exchange would be forthcoming given the panic and loss of confidence such news would cause?

I actually asked myself that question, and I'm sure that idea was being discussed in the middle of the day as they were figuring out the source of the problem. If in fact something from the outside compromised the integrity of the exchange, it would not only diminish investor confidence but also reveal major weakness in their security systems.

If in the future it does come out the NYSE was breached by hackers and they knowingly lied about it, what do you think the consequences would be?

I think the consequences would be fatal for the institution.

What is current importance of the New York Stock Exchange floor?

Yesterday was ironic for me personally because for many years I would walk into the New York Stock Exchange as Capital Markets Editor at CNBC to do a segment, and run into visitors who were shocked about what the floor had actually become. An outage like this lifts the curtain to the public that the floor is now nothing more than a TV studio. The fact that it’s a trading floor is a fallacy created by business networks. Many business TV guests are just floor brokers executing trades for clients, which could be done from an office anywhere in Manhattan or Montana the same way.

When I got my MBA from NYU back in the late '80's, the Business School was actually down on Wall Street. I used to visit my friend Larry Altman (who is a member of the Wall Street Week advisory board) when he was a specialist on the American Stock Exchange. I would watch markets being made as the specialist role was in full force and humans on the floor were setting the market. But even as far back as 1991, when I was an analyst at the hedge fund JRO Associates we were utilizing off-board trading such as the introduction of Instinet.

What is your view on human specialists versus the new electronic market making?

There's always something to be said for having human element involved. Not just for market making, but for investing and business in general. In any electronic system, there always has to be a built-in kill switches that can be activated by a human when red flags arise.  

When I visited the American Stock Exchange in the late '80's specialists were actually making markets and putting up their own capital on the other side of the trade. I may be a dinosaur but that's what I consider a trader. Not somebody who simply executes on behalf of somebody else.

Do you think that there need to be changes in the current market structure?

I think yesterday demonstrated we need to have multiple execution platforms as opposed to the '80's where 90% of stock trading took place on the New York Stock Exchange. We don't necessarily need more human involvement. What we need is multiple platforms that can absorb market share when institutions want to trade away from a monopoly-like platforms.

What role do you see alternative trading venues like IEX playing in the future of market structure?

Yesterday showed why platforms like IEX are so important given the fact each of these exchanges will somehow, someday, be subject to software glitches. Having multiple exchange redundancy allows for trading to continue when one of the systems inevitably has a problem.  

Byron Wien talked on Wall Street Week about how human nature causes us to focus on risks we've seen before. After 9/11 everybody expected another airplane to fly into a building. He believes we should be more focused on the type of risks that haven't played out yet, and are potentially even more catastrophic. What is your reaction to those comments?

Not only did that resonate with me, but in the episode with General Petraeus he talked at length about the grave threat of cyber-terrorism.  Whether the NYSE and other outages were a coincidence, it is a reminder of our vulnerability. I believe the biggest threat to our financial system is the potential for hackers to wreak havoc on a large financial institution or exchange.

Technology has provided tremendous personal and corporate efficiency and productivity enhancement, but I worry daily about how malicious or terrorist organizations could utilize the benefits of technology.

What are your general feelings on high-frequency trading?

Without skirting the question I would encourage all readers to watch Wall Street Week next week, with Brad Katsuyama from IEX. I came into that show not entrenched in a point of view about how high-frequency trading, but after filming I was much more educated on its negative ramifications. Without giving away too much I encourage viewers to watch the show as both Anthony and I got a great education about both the positives and negatives of HFT, as well as the progress IEX is in growing their platform and creating a level playing.

This weekend’s Episode 12 of Wall Street Week will feature legendary investor Byron Wien, but the following week we have another outstanding show on tap with Brad Katsuyama, the founder of alternative trading system IEX and subject of Michael Lewis’ best-selling book, Flash Boys: A Wall Street Revolt. Below is an excerpt from Katsuyama’s appearance in which he discusses the challenge of educating investors about HFT and market structure. 

Legendary investor Byron Wien authored a great post on the Blackstone blog in 2013 about life lessons he learned in his first 80 years. Wien will be the featured guest on this week’s episode of Wall Street Week, and during taping we circled back to one of the most personal lessons: how losing his parents at a young age helped shape him. 

Below is the complete list of 20 life lessons. Skip down to #8 for the clip, which didn’t make it to air but we cut as a Web Extra. 

1. Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten Surprises, which I started doing in 1986, has been a defining product. People all over the world are aware of it and identify me with it. What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year-end. If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.

2. Network intensely. Luck plays a big role in life, and there is no better way to increase your luck than by knowing as many people as possible. Nurture your network by sending articles, books and emails to people to show you’re thinking about them. Write op-eds and thought pieces for major publications. Organize discussion groups to bring your thoughtful friends together.

3. When you meet someone new, treat that person as a friend. Assume he or she is a winner and will become a positive force in your life. Most people wait for others to prove their value. Give them the benefit of the doubt from the start. Occasionally you will be disappointed, but your network will broaden rapidly if you follow this path.

4. Read all the time. Don’t just do it because you’re curious about something, read actively. Have a point of view before you start a book or article and see if what you think is confirmed or refuted by the author. If you do that, you will read faster and comprehend more.

5. Get enough sleep. Seven hours will do until you’re sixty, eight from sixty to seventy, nine thereafter, which might include eight hours at night and a one-hour afternoon nap.

6. Evolve. Try to think of your life in phases so you can avoid a burn-out. Do the numbers crunching in the early phase of your career. Try developing concepts later on. Stay at risk throughout the process.

7. Travel extensively. Try to get everywhere before you wear out. Attempt to meet local interesting people where you travel and keep in contact with them throughout your life. See them when you return to a place.

8. When meeting someone new, try to find out what formative experience occurred in their lives before they were seventeen. It is my belief that some important event in everyone’s youth has an influence on everything that occurs afterwards.

9. On philanthropy my approach is to try to relieve pain rather than spread joy. Music, theatre and art museums have many affluent supporters, give the best parties and can add to your social luster in a community. They don’t need you. Social service, hospitals and educational institutions can make the world a better place and help the disadvantaged make their way toward the American dream.

10. Younger people are naturally insecure and tend to overplay their accomplishments. Most people don’t become comfortable with who they are until they’re in their 40’s. By that time they can underplay their achievements and become a nicer, more likeable person. Try to get to that point as soon as you can.

11. Take the time to give those who work for you a pat on the back when they do good work. Most people are so focused on the next challenge that they fail to thank the people who support them. It is important to do this. It motivates and inspires people and encourages them to perform at a higher level.

12. When someone extends a kindness to you write them a handwritten note, not an e-mail. Handwritten notes make an impact and are not quickly forgotten.

13. At the beginning of every year think of ways you can do your job better than you have ever done it before. Write them down and look at what you have set out for yourself when the year is over.

14. The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons. Short-cuts can be construed as sloppiness, a career killer.

15. Don’t try to be better than your competitors, try to be different. There is always going to be someone smarter than you, but there may not be someone who is more imaginative.

16. When seeking a career as you come out of school or making a job change, always take the job that looks like it will be the most enjoyable. If it pays the most, you’re lucky. If it doesn’t, take it anyway, I took a severe pay cut to take each of the two best jobs I’ve ever had, and they both turned out to be exceptionally rewarding financially.

17. There is a perfect job out there for everyone. Most people never find it. Keep looking. The goal of life is to be a happy person and the right job is essential to that.

18. When your children are grown or if you have no children, always find someone younger to mentor. It is very satisfying to help someone steer through life’s obstacles, and you’ll be surprised at how much you will learn in the process.

19. Every year try doing something you have never done before that is totally out of your comfort zone. It could be running a marathon, attending a conference that interests you on an off-beat subject that will be populated by people very different from your usual circle of associates and friends or traveling to an obscure destination alone. This will add to the essential process of self-discovery.

20. Never retire. If you work forever, you can live forever. I know there is an abundance of biological evidence against this theory, but I’m going with it anyway.

Here’s to 80 more years, Mr. Wien! Catch the full episode Sunday at 11 AM ET at wallstreetweek.com.  

Greece will move closer to a default and potential exit from the Euro by missing tomorrow’s deadline for a €1.54 billion payment to the IMF. On Sunday’s Wall Street Week, distressed debt investor Bruce Richards, CEO of Marathon Asset Management, said he believed there was only a 25% chance of a Greek default.

However, over the weekend and after the episode was filmed, Greece Prime Minister Alexis Tsipras took the controversial step of calling for a referendum on Europe’s bailout-for-reforms proposal, plunging the country further into turmoil. Given the magnitude of the news, Richards agreed to join Wall Street Week Monday for a special “Web Extra” follow-up on the recent developments in the Greek debt saga.

While acknowledging Greece has been led to the brink of calamity, Richards still believes common sense will prevail and the Greek people will vote ‘yes’ on the referendum.

"At the end of the day, I believe that they are going to vote the rational vote. The Greek people are smart, they are good business people, and they are going to vote for the most sane economic program for Greece, which is to stay in the Euro. If that were to happen then that's a vote against the party of Syriza and Alexis Tsipras. So he's probably out either way."

While there have been reports that the two sides could trade revised proposals this week, German Prime Minister Angela Merkel said today there will be no new negotiations ahead of the referendum. Instead, there will likely be campaigning from both sides hoping to sway Greek voters.

"Tsipras is going to vote 'no' and he's telling people to vote 'no'. All of the authorities around Europe, including the United States and Britain and the IMF, are going to be lined up saying, 'hey Greece, vote yes or it's going to be very dire for you'."

Richards also thinks the Greek people could be swayed this week by the scarring experience of capital controls, which could serve as an impactful preview of the economic conditions that would result from a Grexit.

“So if you're a Greek citizen you go to the bank to the ATM machine, there's a quarter-mile long, two-block long line and you can only get out €60 a day. You're limited in what you can charge on your credit cards. So credit is starting to shut down, which means, business-to-business, one business buying from a distributor is going to be very difficult. A few weeks from now, you won't be able to get much food from the supermarket and you won't be able to get gas out of the gas station."

While a Greek default could set a dangerous precedent, Richards believes the structure of Greece’s debt would limit the spread of contagion.

"European banks are not exposed to Greece. The IMF has exposure. The second party that has exposure is the ECB, they have invested roughly $100 billion. The third party that has exposure to Greece are the governments of Europe that own a lot of the Greek government bonds. And that's just a matter of a write-off that will require them to issue a little more debt to offset this."

The following feature originally appeared in the June 28, 2015 issue of the Wall Street Week Newsletter. Subscribe – it’s free.

A typical distressed debt investment might represent 1-2% of Marathon Asset Management’s portfolio, according to co-founder and CEO Bruce Richards. But when the $12.5 billion hedge fund really likes an idea, position size can grow to as much as 5%. Bonds in Puerto Rico, he said, fall into the really-like category thanks to their uniquely attractive value proposition in today’s yield-starved environment. Besides providing a valuable lesson in risk management, Richards’ thesis on Puerto Rico warrants closer inspection.

Puerto Rico bonds have long been enticing because of their triple tax-exempt status. All municipal bonds are exempt from federal taxes, but only muni bonds in an investor’s home state are also exempt from corresponding state and local taxes. Puerto Rico bonds, though, are automatically exempt from federal, state and local taxes no matter where the investor lives.

Because it is a municipality, Puerto Rico’s debt is secured not by hard collateral, as it would be for individuals or companies, but rather by its taxation power. Municipal defaults, as a result, are rare. However, skeptics believe the commonwealth and its state-owned power authority could be headed for default due to ongoing political turmoil and lackluster economic growth on the island.

The S&P downgraded Puerto Rico general obligation (G.O.) bonds in late April from B to CCC+ with a negative outlook, putting further pressure on the embattled government. The island’s debt load of nearly $80 billion has now been in distress for more than a year without meaningful restructuring and reform. However, a groundswell of support continues to build from hedge fund managers in desperate search of fixed income yield.

Among those betting on Puerto Rico are Paulson & Co., which has invested over $1 billion in real estate projects. York Capital Management, NRG Energy Inc. and ITC Holdings Corp. are discussing investing up to $3.5 billion in the commonwealth, much of it to modernize Puerto Rico’s energy infrastructure. DoubleLine Capital’s “bond king” Jeffrey Gundlach, the featured guest on Episode 1 of Wall Street Week, has also been outspokenly bullish on Puerto Rican debt.

Speaking at the Ira Sohn Investment Conference in May, Gundlach made Puerto Rico G.O. bonds his “best idea” due to the fact he believes many of its problems are already priced-in. DoubleLine’s Income Solutions Fund holds nearly $50 million in Puerto Rican debt maturing in 2035, which at the time of his presentation were trading at around 80 cents on the dollar and yielding close to 11%. Gundlach has stated intentions to increase the firm’s exposure to Puerto Rico in the case of further weakness, which he believes a likelihood.

While he likes Puerto Rico G.O. bonds, Richards is more excited about the opportunity in debt of the commonwealth’s state-owned power company, the Puerto Rico Electric Power Authority (PREPA). Essentially, Richards and other fund managers believe PREPA can avoid restructuring its $9 billion debt by accepting a $2 billion cash infusion from a group of financial institutions, an arrangement would allow creditors to avoid principal reductions on debt. He emphasizes that PREPA is a solid company and valuable asset that can be saved with long-term investment in modernizing facilities and increasing efficiency.

As is the case with many large-scale direct distressed debt investments, Marathon is not simply putting money in and crossing its fingers, the firm and its partners are taking a proactive approach in order to improve the deal’s likelihood of success.

“We look at Puerto Rico and we say there’s a better way to run the energy platform in Puerto Rico than what’s currently being run, so we’re trying to work with the authorities in Puerto Rico,” Richards said. “We have a plan to put $2 billion of new money in, along with GE, to build a power plant on the island. That’ll do three things. Number one, it’ll create jobs. Number two, it will bring down, we believe, the cost of energy, and supplying energy, and also allowing Puerto Rico to be energy self-sufficient.”

Gundlach’s expectations for even lower prices on Puerto Rican debt are being met this week as Puerto Rico’s junk-rated G.O. bonds hit a new record low ahead of a precarious bond payment for PREPA. The sell-off intensified Wednesday when the chairman of Puerto Rico’s Government Development Bank (GDB) resigned for “personal reasons.” Puerto Rican legislators also met with creditors in New York this week in an attempt to hash out restructuring of PREPA debt. The utility is an estimated $150 million short of reserves required to make a $416 million July 1 interest payment.

In testimony before the U.S. House of Representatives this week, Puerto Rico’s Attorney General Cesar Miranda Rodriguez said, “The fiscal and economic situation in Puerto Rico has reached a tipping point. The situation is truly dire.” Rodriguez is pushing the U.S. government to allow the commonwealth to be treated as a state under Chapter 9 bankruptcy code, which would allow public corporations (like PREPA) to go into bankruptcy, but such a scenario appears unlikely for now.

Posturing takes place in almost all debt negotiations (see Greece), but recent desperation from Puerto Rican officials highlights the volatility involved with distressed debt investments. The night is darkest before the dawn, and Gundlach believes that because much of the commonwealth’s pension obligations are held by the island’s residents, there are deep incentives to avoid a default that would wipe out much of the population’s savings pool.

Greece and its creditors head into the weekend with perhaps the last, best chance to hammer out a cash-for-reforms bailout deal. In recent comments to Wall Street Week, Marathon Asset Management CEO Bruce Richards said he is optimistic the finish line is in sight. 

“The last thing that the Europeans want or the Americans want is for Greece to break away from Europe, and to be a haven for Russia,” he said. “I don’t think they’re going to default. I think the markets are telling you it’s 50-50 right now. I think the odds are more like 75-25.” 

The troika has been exceedingly patient with Greece’s current populist regime, but its tolerance for the Syriza party’s high-stakes game of chicken is wearing thin. Greek officials are proceeding with an alarming lack of urgency about preparing contingencies. Richards offered a reminder about how Europe reached the current point of no return. 

“There [was] around $250 billion of debt [in 2012] on Greece, about $100 billion of that was to the private sector and $150 billion of that was to the public sector. So rather than negotiate the debt with all of their creditors back in 2012 when they did default, they only renegotiated their debt with the private sector. They took about $100 billion of debt down to $30 billion to $40 billion, but the other $150 billion they kept in place. The Greek authorities have taken that number from $150 billion to $300 billion… The last thing [Europe] wants is to take a $300 billion hit to their balance sheet.” 

Greece has a very small impact on the EU economy, but European officials are worried about setting a precedent that could entice other debt-ridden countries, such as Italy, Portugal, Spain and even France, to more seriously consider default. However, while acknowledging that a bailout deal is the best outcome for all parties, Richards downplays the long-term consequences of a Grexit. 

“The last thing Euro member states, including the ECB, which has lent $84 billion to Greek banks, want to see is for Greece to default. It will cause some level of contagion, but we think that it won't, in fact, impact the greater Europe in the long run. In the short run, it's going to be risk-off for the markets, if Greece were to default.” 

Billionaire Ken Langone and his Home Depot (HD) co-founders, Bernie Marcus and Arthur Blank, built a business empire by coming up with a simple concept and creating a strong corporate culture. When it comes to formulating investment ideas, Langone adopts a similar thought process – buy top companies in important industries run by good people.

Schlumberger (SLB) was the first name that rolled off Langone’s tongue when asked by Wall Street Week co-host Gary Kaminsky if there was another Home Depot-caliber investment out there today. He believes no matter what happens in the energy market, Schlumberger, the world's largest oilfield services company, will continue to thrive. Oil is going nowhere as a resource and we will still need the company’s technology to retrieve it, he said. Langone sees recent weakness in the stock as a buying opportunity, and believes rebounding oil prices could have a slingshot effect on SLB’s performance.

Langone also likes two smaller oil and gas exploration and production plays: Adobe Oil & Gas, Inc. (AOG) and Whiting Petroleum Corp (WLL), who he believes will benefit from ongoing well-cost reductions. Within the industrial space he shared two favorites: Parker-Hannifin (PH) and Eaton Corp. (ETN).

While he may not use social media personally, Langone believes tech giants Facebook (FB) and Google (GOOG) have bright futures because each is run by great people. The same goes for Starbucks (SBUX), whose margin of safety is driven by strong management and brand equity.

By: Anthony Scaramucci

Income inequality is the most important problem facing America today, but in order to create sustainable solutions we first need to understand the root causes. The debate is not personal, as some populist politicians make it out to be, but simply a matter of policy. Recently there have been calls for a return to greater unionization, which is most certainly not the answer. The ultimate goal is to improve quality of life for all Americans, and to do that, growing the pie is just as important as restoring labor’s slice.

From 1940 to 1980, labor’s share of national income hovered around 65% while a fast-growing pie led to dramatically improved living standards. But since 1980 labor’s share has steadily declined to around 60% while the overall economic pie has started to grow more slowly – a combination has led to worsening living conditions for the lower- and middle-classes.

While there is a correlation between the decline in union membership and the downturn in labor’s share of the pie, causation is a stretch. Several factors have contributed to the shift:

Demographics. Baby boomers are living and working longer than expected because of advancements in healthcare, keeping the bargaining power in the labor force skewed in favor of capital.

Automation. When deciding between automation and hiring, companies today automate with an elasticity of around 1.3, tipping the balance of power further toward capital.

China. The beginning of labor’s decline around 1980 coincides with the rise of Chinese economy and outsourcing of unskilled labor. The problem is not China’s rise, but rather its brazen violations of free and fair trade agreements. According to free trade theory, the Chinese Yuan should have tripled from 1990 to 2013, but instead lost half its value. Unfair Chinese trade practices create distortions and grow corporate profits at the expense of American labor. 

Rapid earnings growth. Earnings have grown well beyond the historical norm in recent years due largely to accommodative central bank monetary policy, which allows companies to shore up balance sheets and perform share buybacks, but has less incremental benefit for labor.

Less unionization. While unions do increase labor’s bargaining power, they create distortions and shrink the economic pie because they are uncompetitive.

Skills mismatch. Demand for skilled labor has grown considerably while there has been deterioration in the quality of the US education system.

Poor policy. The lack of fiscal stimulus during a period of zero interest rates is the greatest missed opportunity of our generation. Legislators have squabbled over personal income tax levels when the focus should have been on corporate tax structure. Obamacare has then exacerbated labor issues by creating incentives for part-time hiring in lieu of full-time employment.

There are ways the labor/capital balance could naturally correct itself: 1) companies begin to increase entry-level salaries for competitive reasons (which we have started to see), 2) rising interest rates make labor more attractive relative to capital (reversing a 30-year trend) and create a mean reversion in corporate profits, 3) stronger currencies and wage growth in emerging markets alleviate the pressure of a strong dollar on the US labor force, 4) demographic shifts restore labor’s bargaining power with management.

However, this issue is too important to leave to chance. We can super-charge the recovery by undertaking measures to grow the pie and labor’s share of it.

Infrastructure spending. Put millions of people and cheap capital to work rebuilding American transportation and energy infrastructure. The money will multiply in our economy and leave the country better off for our children.

Crackdown on currency manipulation. China is slowly allowing the Yuan to float, but not to equilibrium. In fact, we need to confront China on a number of fronts, and hopefully our recent strategic alliance with India is evidence we are growing a stronger backbone. 

Education reform. We need to push more middle- and high-school aged kids to gain technical skills. In Germany, for example, almost half of high school students have technical apprenticeships, while that number in the US is 0.025%. We need to properly educate our workforce to fill the skilled jobs demanded in our increasingly technological society.

Tax reform. Dramatically lower corporate tax rates, which would spur hiring, domestic business activity and tax revenue.

The following is a guest post from Peter Boockvar, Managing Director and Chief Market Analyst at The Lindsey Group LLC

In honor and reverence to one of my favorite comedic personalities, David Letterman, and the end of his talk show career, here is my own financial markets Top 10 List.

Top 10 list of the most questionable Wall Street sayings:

10) There is a lot of cash on the sidelines. There is always a lot of cash on the sidelines and that never changes. The buyer of a stock, thus taking cash off the sidelines, gives it to the seller who puts it back on the sidelines.

9) There are more buyers than sellers or vice versa.  Maybe technically there are more bodies buying or selling than the other side but the number of shares traded has to be exactly the same as for every share bought is a share sold. It’s the aggressiveness of one side or the other that matters.

8) Stocks are attractive because they aren’t quite as overpriced as bonds.  If bonds are artificially priced, shouldn’t stocks be? Overpriced though can of course remain overpriced.

7) The higher stocks go the more attractive and less risky they are. For long-term investors, the more one pays in price today with respect to valuation, the less return they should expect in the future.

6) Stocks aren’t expensive because they are still cheaper than the valuations seen in March 2000. Really?

5) There is no alternative. In bull markets there is always no alternative to common stocks. In bear markets, there are always alternatives.

4) Markets can’t go down as long as the Fed is easing policy (aka don’t fight the Fed).  While that is many times the case, the Fed started cutting rates aggressively in January 2001 and in September 2007.

3) We’re going to get a rotation into stocks and out of bonds. For every portfolio rotating out of bonds has to see someone rotating in and that buyer of stock has someone rotating out. Again, it’s the aggressiveness of the moves that matter.

2) The selloff in stocks was profit-taking.  Does anyone refer to a rally as profit seeking?

1) The US economy is in a new normal or plagued by secular stagnation.

By: Anthony Scaramucci

When you buy a stock, you become a business owner. This fact has been lost on too many of today’s investors. The mentality of market participants has shifted away from purchasing equities for patient long-term wealth creation toward renting tickers for skittish short-term speculation. Activist investors are sometimes accused of being part of the short-termism problem, but as JANA Partners’ Barry Rosenstein explained in his appearance on Wall Street Week, activists have actually become a big part of the solution.

Watch the full, uncut Wall Street Week interview with Barry Rosenstein:

The evolution of financial media has also no doubt played a role in this perversion, with around-the-clock programming and daily flippant “trade ideas” from pundits with little skin in the game. Long-term investment theses shouldn’t change on a day-to-day basis, thus nor should the nature of media coverage of markets. The absence of a level-headed outlet for discussion of long-term investing was our motivation for reviving Wall Street Week.

The most troubling aspect of this shift is that according to a Bankrate.com survey, whose results were released earlier this month, more than half of Americans are not even invested in the stock market. They are still after suffering from what I call “post-traumatic economic stress syndrome” after the financial crisis of 2008. While equity and fixed income markets have enjoyed massive gains since the crisis, the fact that so many Americans have missed out on the party has given this “economic recovery” a hollow feel.

To begin to rehabilitate investors, it’s important to remind people the purpose for which the stock market was created – as a means for business expansion, for companies to raise capital and disperse risk without having to issue debt. Speculators are free to attempt to exploit inefficiencies if they believe themselves capable of outsmarting the market, but history tells us it is always better to be the house than the gambler.

Mr. Market, as famed value investing forefather Benjamin Graham affectionately called the schizophrenic herd-driven financial markets, can be irrational for anywhere from a few days to many years, but in the long-run ultimately reverts back to fundamentals. The market is a voting machine in the short-term and a weighing machine in the long-term, he said. If you understand that the current market value for a stocks simply represent a present-day investment in exchange for a future stream of expected cash flows, then you gain valuable perspective.

The key factor to consider during market cycles is the difference between risk and volatility. Risk is shaped by the characteristics of the companies you buy, as well as how you respond to volatility. The more financially-sound the company you own, the less you have to worry about the inevitable ebbs and flows of the market, which are the result of emotional human decision-making. Benjamin Graham called this idea of investing in financially sound and intrinsically undervalued companies the “margin of safety,” which is a core tenant of value investing.

“The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all; for he would then be spared the mental anguish caused him by other persons' mistakes of judgment." –Benjamin Graham, The Intelligent Investor

If you own equity in a sound business at an attractive price below its intrinsic value, you can largely ignore storms that blow through the market. In fact, long-term investors should welcome and embrace market corrections because they could provide a chance to improve cost-basis for shares thanks to dollar-cost averaging. If you invest in companies with a good margin of safety, 1) being patient becomes much easier and 2) you don’t have to concern yourself as much with the current valuation of stock market indexes.

While it’s possible to hit the occasional home-run speculating on high-growth stocks, in the long-run you put yourself in the best position to create wealth (and sleep) if you take a long-term view using fundamentals. If a company has characteristics of a sound value investment but trades below its intrinsic value, one of today’s growing ranks of activist investors could very well be close behind ready to shine the spotlight on underperforming management with misaligned incentives.

Regarding activism, Rosenstein responded on Wall Street Week to a perceived attack on the practice from Blackrock CEO Larry Fink, who two weeks prior had sent a letter to every S&P 500 CEO lamenting excessive short-sighted shareholder-friendly actions like dividend increases and share buy-backs. In a chance meeting, Rosenstein and Fink actually ran into each other outside a restaurant the day that news of Fink’s letter broke. According to Rosenstein, the letter was largely misconstrued: “I think [Fink’s] just saying that companies shouldn’t just knee-jerk, just return capital. They ought to determine what the best return on invested capital is.”

By: Anthony Scaramucci

“This show has never been solely about investments. We’ve talked about anything that affected people and their money.” – host Louis Rukeyser on the original Wall Street Week

Financial markets are largely, but not perfectly, efficient, or else all of us in the investment business would be wasting our time. Look, I’m a strong proponent of the Benjamin Graham school of value investing that Warren Buffett studied and perfected. In the long-run, I believe that investing in companies that are fundamentally undervalued relative to their peers will lead to the greatest and most predictable returns. Compounding interest is no doubt the eighth wonder of the world. 

However, that doesn’t mean there aren’t situations, usually in the case of growth stocks, where a bit of qualitative analysis serves as a great complement to quantitative metrics.

The great Peter Lynch was a frequent guest on Wall Street Week with Louis Rukeyser. Lynch popularized the notion of “invest in what you know,” meaning if you take note of a product, service or industry in your daily life that you think could have significant potential for the future, invest in that company. Avoid investments you don’t understand. While I would not blindly recommend that mindset, there are many cases in history (with the help of hindsight) where Lynch’s strategy paid off handsomely. 

Louis Rukeyser understood the need to look at the world analytically beyond just the walls of the Street, because analyzing things like technology can help unlock tremendous value for investors. 

One of the most famous non-finance interviews Rukeyser conducted on Wall Street Week was with Apple co-founder Steve Jobs. At the time of the interview in late 1996, it had been more than 10 years since Jobs had been forced out of the Apple, a decade during which time he started another computer and software company, NeXT, and invested heavily in Pixar, the animation studio he bought from George Lucas.

Soon after the interview, NeXT was acquired by Apple for $425 million and 1.5 million shares, and Jobs was re-installed at the head of the then-floundering tech company. Knowing what Apple is today, it’s hard to fathom Rukeyser’s question to Jobs:

“You first came to public attention with Apple. In recent weeks it’s been one of the failure stories of Wall Street and indeed the American economy. What went wrong?”

History tells us Jobs will go down as one of the greatest innovators and leaders of all-time, but at that moment NeXT was considered a lukewarm success, while Pixar euphoria (and stock price) had subsided considerably. NeXT’s focus on software proved most fruitful:

“[NeXT’s] sophisticated but expensive black box never caught on, and the project was abandoned. NeXT, still privately-held, moved on to developing the new software writing technique that some technology buffs believe will eventually turn the internet into an indispensable tool for doing online business.”

NeXT software laid the groundwork for what would become Apple’s operating system, and the buy-out also served a dual purpose: bringing the mercurial Jobs back into the company he put on the map. On Wall Street Week he laid out his view of Apple’s need to innovate so eloquently it would have been pure hubris for Apple executives not to restore the king of innovation to his rightful throne.

I wouldn’t be surprised if the interview with Rukeyser, whose program at its peak in the ‘80s and ‘90s was viewed in more than four million homes each week, played at least a small role in Jobs’ return to the company:

“I still think Apple has a future. There are some awfully good people there and there’s a tremendous brand loyalty to the company. I think the way out is not to slash and burn, but to innovate—that’s how Apple got to its glory and I think that’s how Apple could return to it.”

We look forward on the new Wall Street Week to following Mr. Rukeyser’s lead in focusing on “anything that affects people and their money,” a category in which technology falls more than ever.

Watch the full Steve Jobs interview on Wall Street Week with Louis Rukeyser below: 

By: Anthony Scaramucci

Wall Street Week is back! We are honored to be custodians of the best brand in financial television and excited to bring back a forum for thoughtful discussion on long-term wealth creation, which has been sorely lacking over the last decade. Legendary host Louis Rukeyser is truly irreplaceable, but on Sunday it was great to see that iconic MICR font back on TV and computer screens.  

We were thrilled this Sunday when bond king and famed contrarian Jeffrey Gundlach made waves across the financial world of with a bold call on a potential crisis looming in the high-yield credit market. Gundlach also turned heads with his colorful criticism of Fed policy, gloomy forecasts for MLPs and shopping mall REITs, and choice of gold $GLD his favorite actionable investment over the next 6-12 months.

The other two panelists this week - Liz Ann Sonders, Chief Investment Strategist for Charles Schwab and former contributor to Rukeyser’s Wall Street Week, and Jonathan Beinner, Head of Global Fixed Income at Goldman Sachs Asset Management who is responsible for around $600 billion in assets - are titans of Wall Street in their own right and delivered great insights. 

Sonders expressed dismay over the implications investors’ desperate search for yield and the persistent abundance of anxiety among would-be market participants. She opined that diversification out of the US and into foreign market assets, along with more frequent re-balancing, would be the best approach over the next year. 

Beinner made a more specific and somewhat contrarian call that emerging market local currency debt is the best place to turn right now. While acknowledging risks in emerging markets, he believes those assets have simply reached attractive risk-reward levels after a sustained period of weakness. Overall, Beinner shared a more upbeat view on markets and the economy than did his fixed-income counterpart Gundlach.

WATCH THE EPISODE

Part of our strategy with the new Wall Street Week is to make the content more accessible than any other financial TV program by offering digital viewing options across multiple platforms alongside the Fox broadcast in select major markets. You can stream the show on Sunday mornings and watch on-demand anytime thereafter on our website WallStreetWeek.com, where you can also find exclusive web extras. 

But we are also sharing the show across social platforms, including Facebook and YouTube, to allow our viewers the choice to consume our content wherever and whenever they want. So without further ado, watch the new Wall Street Week | Episode 1 below:

By: Anthony Scaramucci

The more financial markets change, the more they stay the same. I’ve been reminded of this fact while watching episodes of Louis Rukeyser’s “Wall Street Week” in preparation for my role as host of the iconic financial television show’s revival. In order to do the show justice I have felt the need to deeply familiarize myself with its fabric, and the experience has been fascinating.

Although the characters in the stories are different, the narratives are largely unchanged. In the ‘80s and ‘90s, the debate about tech stock “bubbles” focused on this crazy idea called the Internet, now it’s on social media and the sharing economy. Back then it was on the implications of portfolio insurance, now it’s on unintended consequences of a highly-electronic tape. Controversy surrounding the Federal Reserve is not a new phenomenon, either.

One historically significant clip I found particularly interesting was the first segment of Wall Street Week on Friday, October 16, 1987—the Friday before the infamous “Black Monday” crash.

Many speculate that today’s Fed is holding off on a rate hike for fear of an extreme, 1987-style stock market dislocation. While I don’t expect anything resembling a repeat of that 22% crash, it’s impossible not to recognize parallels between that moment and history and today.

Below are excerpts from the transcript, starting with Rukeyser’s always-witty opening monologue: 

“Louis Rukeyser: Is it any wonder that a study this week reported that Americans’ favorite color is blue? They must have done most of their polling in brokerage offices… But before we all turn the color of Smurfs let's stop and consider what caused all this and where we go from here.

First, let's round up the usual suspects. Interest rates are moving up, a development that hit stocks with a double whammy of higher rates cutting into corporate profits and deterring expansion. In addition [higher rates] increase the attractiveness of other investments that compete with stocks…

Second, jitters over new incidents in the Persian Gulf gave already-nervous traders a fresh excuse to keep on selling.

Third, the political situation was scarcely encouraging – not only the concern over leadership in both parties, but a new tax increase package in the House Ways and Means Committee that would further penalize investment and savings. Nice going, guys.

Fourth, Wall Street itself seemed in disarray with scary layoffs at two major firms and the growing evidence that the mindless computer-driven program trading by the big institutions can turn worry into panic and prudent selling into wholesale desertion.

... thoroughly ignoring, among other things, reassurances about the economy from Treasury Secretary James Baker and Federal Reserve Chairman Alan Greenspan.”

Interest rate anxiety, geo-political concerns, American political ineptitude, financial industry upheaval, market structure cracks and central bank reassurance. Sound familiar? Yes, these are factors that always drive financial markets, but noting how much the bullet point collectively rhyme with today’s Wall of Worry does cause a tinge of angst. 

In the panel discussion segment, regular guest Martin Zweig, as he often did, came out looking prescient – not just about 1987, but about market cycles in general.

“LR: Tonight many commentators have been saying, to quote one on-air analyst, the bull is dead. Marty Zweig, one who has been correctly worried about this market lately, do you agree with that comment?

Martin Zweig: Yes. I haven’t been looking for a bear market, per say, I’ve been really in my own mind looking for a crash. You don’t want to talk about [a crash] publicly because it's like shouting fire in a crowded theater. There are other ways to play it - you just tilt your strategy negatively and shut your mouth. I think we're in the middle is something reminiscent of 1946 or 1962, which were very similar, and, to some extent, 1929, but it won't be as bad. And I think we're in the middle, to somewhat beyond middle, of this break and there will be some violent rallies. In fact, by probably early next week I expect a violent rally… I don't look for a long bear market here, I only really look for a brief decline, but a vicious one. In 1962 the damage was done in two months. In 1929 it was done mostly in 10 weeks. And I don't think it's going to drag on any longer than that here. It will just go down more and then turn around. …

LR: How should people play it?

MZ: Very cautiously. I think you’re going to be hurt no matter whether you’re bullish or bearish. There are too many traps to fall into. We should have a selling climax—probably two of them—and after a selling climax they always go back lower. So you’d have, I'd say, three gigantic rallies within the next month or so, and every one of them could be a trap, except for the last one of course [laughs]. But whenever that comes, you don't know. It's hard.

LR: Marty, in his affable way, has used that nasty word crash. Do you accept that [Mary]?

Mary Farrell: No, and I wouldn't accept the estimate that the bull market is over either. Certainly we’re in a correction and that's been more than obvious. I think you have to remember here that we're not dealing with real buyers and real sellers making real buy and sell decisions like the old stock market because you do have this computerized program trading and portfolio insurance really making these very extreme, very rapid decisions. … LR: [to MF] Tell us why you don’t think the bull market is over.

MF: Well I think interest rates are the real key here. At these levels I would have to see some interest rate relief to see the bull market continue into another leg and I don't think that's out of the realm of possibility. We could see some rate declines by next year and that would certainly be a positive at these levels, though I would agree with Marty that we are in for some rough sledding and the risk here really is that interest rates don't give you that relief and then you would continue with more the same.”