How Might Bush's Proposals Impact Your Portfolio?
TERRY KEENAN, HOST: Just ahead on the MONEYLINE weekend edition, it is finally over. George W. Bush will be the next president of the United States. We'll find out how his proposals might impact your portfolio. And the PC slump claims another victim: Microsoft delivers its first profit warning in more than 10 years. And buying Proctor & Gamble? We'll tell you why one of our Wall Street experts is hot on this stock.</s>ANNOUNCER: This is the MONEYLINE weekend edition with Terry Keenan.</s>KEENAN: Hello, everyone. We begin with the victory of George W. Bush, the Texas governor winning the White House five weeks after the election. Bush promised to unite the country and win the respect of all Americans. Perhaps one challenge facing the new president will be the slowing economy, as well as a turbulent stock market. Stocks remained turbulent this past week, as a flood of new profit warnings swept the Street, from Compaq Computer to J.P. Morgan. Microsoft also warned that quarterly revenues and earnings would come in below analysts' expectations. The company blamed slowing demand for PCs. Hear you see the sell-off in Microsoft. Compaq also blamed weak PC demand for its expected shortfall. J.P. Morgan blamed the weak financial markets. And General Motors announced a major restructuring and said its fourth-quarter earnings would fall far short of forecasts. Time now to bring in our team of market experts. With us this week, Bob Reitzes, the hedge fund manager with New Castle Partners; Todd Eberhard, he is president of Eberhard Investment Associates; and David Jones. you know him, chief economist at Aubrey G. Lanston. And, gentlemen welcome. Bob, let's start with the markets, because Wall Street wanted to see a Bush victory, but it was classic "buy the rumor, sell the news" this week.</s>BOB REITZES, NEW CASTLE PARTNERS: Right, so I mean, I think in your introduction about Microsoft, all these preannouncements, you have on the one hand, you know, a Republican administration, tax cutting, lower rates, followed on the other hand by horrible earnings and how bad does it get. So I think now the negativity is outweighing all the other positives. I think next week, and David can comment on it more, but I think next week what the Fed has to say will be very important for the market. We may have a rally if that gets some good news on that.</s>KEENAN: Yes, David, if the Fed has the election out of its way what happens next week?</s>DAVID JONES, AUBREY G. LANSTON: Well, I think Chairman Greenspan wants an orderly process here, so I see them moving to a neutral directive, recognizing the downside risks in the economy. But I don't think the Fed's going to move quickly in the direction of a rate cut. My guess is it could be March of next year perhaps before we get the first one. But once it starts, we could get as many as three after that.</s>KEENAN: And we might be in a recession by then.</s>JONES: Well, the Fed could well be behind the curve this time, because I think they feel we're in a soft landing. The Street is looking more at a hard landing. I think the Fed is talking more about a soft landing possibility.</s>KEENAN: And, Todd, one of the reasons the Street's looking at that is these earnings misses. They're not misses by a penny or two, they're misses by a mile.</s>TODD EBERHARD, EBERHARD INVESTMENT ASSOCIATION: Well, they are. Companies across the board -- and everybody has their excuse -- but the numbers are not being missed by one or two cents. But I hope you're wrong that it's March, I'll tell you that, only because I think Wall Street does expect something, not in December but the meeting after, that maybe a quarter point, so it shows the Fed is trying to stay up with the curve and not be behind it.</s>KEENAN: Bob, how are you positionings yourself in this market environment?</s>REITZES: Well, in the stock pickers 101, which I was reading last night, I think you want to own companies where they take advantage of interest rates coming down, like Freddie Mac and Fanny Mae. You want to own drug companies, the ones where you have bulletproof earnings. You want to own consumer nondurables, P&G; maybe, Kimberly. And you want to own stocks of that ilk, and then you might get a little bit more gutsy on King Pharmaceuticals, ICN, these types of stocks that are a little bit off the fringe which have some interesting earnings upside.</s>KEENAN: And, you know, for the fifth, sixth, seventh time, I don't know which one it was, but people were saying we put in a bottom on the Nasdaq at 2500. It doesn't look like maybe we did now.</s>REITZES: Well, I'll tell you, there's a lot of Nasdaq stocks out there -- some of them which we own. I mean, I'd be more, as I've been on this show, I'd be more than happy to go over every stock on my portfolio if it would help on Monday. But there's a lot of Nasdaq stocks that may have bottomed and that you never you when to buy them, like Intel, for example. The whole world knows the PC industry is lousy. We know the first quarter's going to be lousy and possibly the second quarter. However, we start getting easier comparisons in the second half of next year. It is a capital item. Maybe we have some new applications. And more importantly, one of the things -- there's going to be two things that are going to change next year. Microsoft's going to have a new OS, operating system, Whistler, that could change things. And the second thing is that you have now the ramifications of Y2K, where you had this major buying that's over and you might see corporations starting to upgrade their PC base.</s>KEENAN: OK, we are going to take a quick break. Another thing we will have in the new year is a new administration in Washington. We'll take a look at Bush and the economy and find out what the new year may hold for investors. Political analyst Greg Valliere joins us up next. A bit later, we will take a look at the top stock picks of our team of experts. Don't go away.</s>GEORGE W. BUSH, PRESIDENT-ELECT OF THE UNITED STATES: I was not elected to serve one party but to serve one nation. The president of the United States is the president of every single American, of every race and every background. Whether you voted for me or not, I will do my best to serve your interests, and I will work to earn your respect.</s>KEENAN: President-elect Bush giving his victory speech in Austin, Texas, this past Wednesday. That speech, of course, followed a concession by Vice President Al, Gore who lost the state of Florida despite numerous court battles. So what lies ahead for the next president? Joining us with some insight is Greg Valliere. He's the political analyst at Charles Schwab Washington Research Group. And Greg joins us from Washington. Greg, welcome back.</s>GREG VALLIERE, CHARLES SCHWAB WASHINGTON RESEARCH GROUP: Great to see you.</s>KEENAN: And congratulations, because you said this is basically how it was going to shake out. What's the buzz down there? Is the new president going to get an inauguration gift from the Federal Reserve in terms of lower interest rates?</s>VALLIERE: I think so, eventually. I think the mood right now, Terry, is one of tremendous relief in this city. I mean, this could have been worse. It could have dragged into early January. You and I could have been talking about President Denny Hastert on January 20th. There were all sorts of horrible scenarios, and it ended as well as you could hope for. And I think for the next few weeks there will be a bipartisan mood. Beyond that, though, I think that legislatively we're not going to get a lot done. I think if there's any stimulus coming from Washington to help this very feeble economy, it comes from monetary stimulus, not from any big new tax cut.</s>JONES: Greg, this is David Jones. On that subject, do you think there can be some kind of bipartisan compromise where Bush, though, is strong? Let's say he accepts some version of it -- gets some version of the tax cut through, but only if he accepts Democratic spending ideas. So, is it -- does it mean it's a complete dead end here, or is there some chance on the fiscal side? My view is that that will have some bearing on how Greenspan behaves, particularly with regard to how soon he gets into these rate cuts.</s>VALLIERE: Absolutely. I think, David, you're not going to get a big, sweeping across-the-board tax cut. That's very unlikely. But there's some ideas that the Democrats, I think, would go along with, estate-tax reform, something on the marriage penalty, maybe some savings incentives. So I think a modest tax cut can make it. I don't see anything in the next two years that would really hurt this tremendous budget surplus story. The numbers are just going to get bigger and bigger.</s>REITZES: Greg, Bob Reitzes, how are you doing?</s>VALLIERE: Hi, Bob.</s>REITZES: Two questions: One, make a guess. Who do you think is going to be the secretary of Treasury, No. 1. And No. 2, in addition to any fiscal reform, what do you think about Medicare and any kind of bills, Medicare, pharmaceutical industry?</s>VALLIERE: Well I think on the first one you need somebody who has some market savvy. There's been talk about Bill Archer, the outgoing ways and means chairman. But I think a Wall Streeter. In fact, I heard David Jones saying Roger Ferguson, the vice chairman of the Fed, would be a wonderful choice or Bill McDonough from the Fed. I think somebody who could get along well with Greenspan...</s>REITZES: I think David Jones was saying David Jones, right?</s>VALLIERE: Well, sure, sure.</s>JONES: I whispered that on another CNN show, but I think Roger Ferguson -- I'm glad to hear that you agree with that...</s>VALLIERE: Oh, he'd be great.</s>JONES: ... because I think the Bush administration needs a good relationship with Greenspan, and they're not necessarily starting off on the right foot, particularly on this issue of tax cuts.</s>VALLIERE: Absolutely, so to keep Greenspan happy is a big, big priority, as we've seen in the last eight years. Very quickly on your other question, I think that Social Security reform or Medicare reform looks real tough with Congress this divided. I'd be happy to see a modest tax cut make it.</s>EBERHARD: Greg, Todd Eberhard. Just a quick follow-through. The first 100 days is supposed to be a honeymoon. It doesn't seem like it'll happen, but what's the first thing he's going to try and get through Congress at this point, do you think?</s>VALLIERE: I think, Todd, probably something on education, something that everyone can agree on. I think he can't do anything very controversial at all. If he went right away with some huge tax cut, I think that would be the exact worst thing that you could possibly plan.</s>KEENAN: All right, Greg, we are out of time. Nice to talk, though, on concrete terms and not just hypotheticals for a change. Have a good weekend.</s>VALLIERE: You, too.</s>KEENAN: Just ahead, we will preview some of the key events for the coming week. We're going to take a look at plunging mortgage rates as well. Just where is this U.S. economy headed?</s>KEENAN: A recent rally in the bond market has helped to sent mortgage rates to their lowest level in 18 months. The average 30-year fixed-rate mortgage fell this past week to 7.42 percent. As for the outlook for overall interest rates, it may become clearer next week. That is when Fed policy makers meet. The meeting is on Tuesday. There is of course some speculation that the Fed will cut rates, either at this meeting or in the next couple months. As for the other events to watch next week, we get housing starts for the month of November, due out on Tuesday. On the earnings front, look for results from Goldman Sachs and Morgan Stanley Dean Witter. Palm is also slated to reported quarterly results later in the week. And, David, we're getting all this anecdotal evidence from the retailers that Christmas is incredibly soft. There's discounts galore out there. What do you think the chances are that we would slip into a recession in the first quarter?</s>JONES: They've doubled, Terry, from maybe 20 percent to 40 percent in my view. So there is a danger here. My guess is we're playing with the lower end of the soft-landing range, maybe around 2 percent here. But that's dangerous territory. If you drop below 2 percent, you start to get into that hard-landing territory, where the economy cannot grow fast enough to create enough jobs to hire all the people coming into the labor force.</s>KEENAN: Todd, do you agree? And does the labor situation kind of mask all the underlying problems in the economy? Because, I mean, unemployment's still at 4 percent.</s>EBERHARD: Unemployment looks great, but as David and I were speaking prior to the show, what we're seeing is it's a self- fulfilling prophecy. The more you talk about the R word, the R word, the R word, it actually could actually happen, just based on that alone. But I am concerned about potential bankruptcies, credit-card delinquencies and all the other numbers that we're going to be seeing probably growing in the next number of months. But unemployment looks great. So on that basis you could certainly argue no recession in sight.</s>KEENAN: Bob, what do you think?</s>REITZES: I think David and Todd are both right. I think we're going to see a very difficult period. If I were going to bet, I would say less than 2 percent growth, and I think the Fed is going to have to take some strong action. I'm not in the ability to predict the rate cuts, but I think that Greenspan is going to have to be very, very -- let's say more liberal than he would have wanted to be. I think the -- what you're seeing in terms of the cuts, in terms of earnings and sales is just -- I think it's happened so quickly it's almost breathtaking.</s>KEENAN: David, can you do that without hurting the dollar and without setting up a whole ripple effect?</s>JONES: No, and that's exactly the problem. And he's caught already. Once you turn that virtuous cycle that we were in for 10 years -- strong dollar, attractive foreign money into our dollar assets, including equities, strong growth, low inflation -- once you start to weaken that, and oil prices were the first villain to start to change that, and now the credit problems coming is coming in and then the dollar, that's like the nail in the coffin. And I think the dollar has had it. And I think it will weaken. I think it will tend to keep inflation higher than it should be. It's not going to be a runaway situation, keep the Fed from easing as fast as it should. So I would completely agree that the Fed, once it starts, it may be a bit late. But the economic consensus is two quarter-point cuts. I could say three or four once they start, if this situation doesn't deteriorate in terms of rate cuts.</s>REITZES: The one thing just, if we have a second, the dollar has been abnormally strong the last few years. To see it weaken a little bit, at least in terms of at least for the companies that we own or that we follow, I think they would find that quite to their liking. And I think the economy could help it. And so, therefore, I think a stronger -- a weaker dollar, obviously it's a balancing act, is not that horrible.</s>KEENAN: OK, we're going to take a quick break. But when we return, we'll get some stock picks from our MONEYLINE weekend pros. Don't go away.</s>KEENAN: Time now for some stock picks that can weather the economic slowdown. We'll start with Todd Eberhard. Todd, what do you like here?</s>EBERHARD: Boy, talk about a difficult assignment. Some of the stocks that we're looking at -- and actually you sort of talked about it a little bit -- one is Proctor & Gamble I think is an excellent company at this point, where you do have potential with the dollar, as well as just people have to buy their products. You know, recession is recession if it happens. But other companies as well in the area, such as, like, Johnson & Johnson, Merck, those companies we think are the tried and true consistent performers and will continue to do well, especially with an aging population.</s>KEENAN: They've already had a great year, though.</s>EBERHARD: I think they're going to continue to have one. They've really bucked the trend of the markets, and I think that's going to continue if these markets remain either flat or down, which they seem to be at this point.</s>KEENAN: All right, Bob.</s>REITZES: Merck's been my best-performing stock this year, so I'm going to push American Home, which hasn't done quite as well. But, no, I agree with Todd. Basically consumer nondurables, and you can pick them, but I like the drugs because they have better growth rates than the Proctor & Gambles, although we own those. I like the Fannie and Freddie because they benefit from lower rates, and I'm going to -- I might be a little Buffet-esque and buy some tech stocks that are beaten up, like I think Sandisk could be a very interesting stock to have here. And I don't know how much time I have, so I can go through the other 35 stocks.</s>KEENAN: No, give us two more.</s>REITZES: I'll give you two more then. I think Vitesse could be like it's a French stock -- no, it's a U.S. stock. I think it could be extremely interesting because it plays into this whole broadband expansion. I think one other stock that looks interesting is SunTrust. It's -- I won't say a sleepy old bank because they could be watching, but, it's -- in fact, it's in your backwoods in Atlanta. But it's something like at 10 times earning. And these banks benefit when the rates go down from the spread. And that's how they make motion of their money. And I think you have the financials and the consumer non durables always lead stocks out of the recession. Am I right? Do you agree with that?</s>JONES: I do agree with that, especially with interest rates heading where they are. Sooner or later, those are the places that will do well.</s>REITZES: So we must be wrong. we've got two people agreeing.</s>KEENAN: Right, right. OK, and just ahead we're going to wrap it up. We'll get some predictions, including a prediction from David Jones on who will be our next Treasury secretary.</s>KEENAN: OK, time now for predictions. Let's start with Todd Eberhard -- Todd.</s>EBERHARD: You always come to me with the hard ones to start these things. Predictions at this point, I think the Nasdaq has seen the bottom going back a week or two. We think it's going to remain pretty flat and be a slow curve on the upside, but this year, 2001, I'm going with your prediction from last year is that we're going to see actually an up Nasdaq about 18-20 percent. And on the other side, we think rate cuts are coming in a quarter point. About six and a half weeks from now we think it's going to happen, and then two or three more for the rest of the year.</s>KEENAN: The first one in late January?</s>EBERHARD: I believe so.</s>KEENAN: OK -- Bob.</s>REITZES: I think we're going to have a lower dollar. I think we're going to have rate cuts, and I think the Nasdaq will rally and be very strong, at least by the second half of next year -- and we'll bite our nails through the first half.</s>KEENAN: OK -- and, David, you gave us one idea for Treasury secretary, but I know you have a few more up your sleeve.</s>JONES: Two from Wall Street: Walter Shipley, former chairman at Chase, and they're now talking a bit about Sandy Warner, who is involved in of course that merger, the J.P. Morgan-Chase merger. But I still would stick with my Roger Ferguson, Fed vice chairman as the smartest move that Bush could make, particularly with respect to his relationship with Greenspan.</s>KEENAN: So you don't think it's necessary to have somebody from Wall Street?</s>JONES: No, remember, we've had good ones from Wall Street -- Rubin, and I would say Douglas Dillon (ph) going back a bit further. But we've also had some problems from Wall Street. I'll leave them nameless.</s>KEENAN: All right, thanks, gentlemen, as always. That's going to do it for the MONEYLINE weekend edition. Have a great weekend everyone.