Crossfire

Is the Worst Over for the Stock Markets?

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

MARY MATALIN, CO-HOST: Tonight, taking stock of the stock market. Is the worst over? Is there any reason for investors to be nervous? And what would an economic downturn mean for Al Gore and George W. Bush?

ANNOUNCER: Live from Washington, CROSSFIRE.

On the left, Bill Press. On the right, Mary Matalin.

In the CROSSFIRE, in New York, James Cramer, co-founder and contributing editor to TheStreet.com. And in Seattle, Bill Fleckenstein, president of Fleckenstein Capital.

MATALIN: Good evening, and welcome to CROSSFIRE.

Wall Street rebounded today after Friday's record-breaking rout. An institutional buy-back made up for the individual panic sell-off of last week. which marked the worst week in Nasdaq history. On Friday, both industrials and technology stocks plunged with Dow posting its biggest one-day point drop and Nasdaq plummeting a record 25 percent.

But today, though the market had been expected to decline, after a day of fluctuating prices a late-session surge produced record gains with tech stocks leading the comeback and industrials pushing higher. The ripple effect was worldwide. Foreign markets tumbled overnight, although European markets appeared less fearful than their Asian counterparts that Wall Street's bulls are going bear.

So, with the world's eyes on Wall Street, CROSSFIRE asks, are we in the middle of a tech-laden correction or an across-the-board crash? Has the fast-charging bull run its course or are more happy days still ahead? And, as in all things, are there any campaign 2000 political ramifications?

We turn to a bear, a bull, and a Bill.

BILL PRESS, CO-HOST: And actually I'm a bull, too, James Cramer, but I'm a nervous bull today. And I want to start asking about Nasdaq. I mean, on Friday we saw the largest point drop in the history of the Nasdaq. Today, the largest single-day gain in the history of Nasdaq. Isn't that fact alone enough to say that you can have no confidence whatsoever in this market?

JAMES CRAMER, THESTREET.COM: No, I believe -- and I was a heavy buyer on Friday -- that one-third of the stock market of the Nasdaq has already bottomed and is going right back up, one-third's groping for a bottom, and one-third is just groping for oxygen, and you can have every one of those.

PRESS: Yes, but what if you're in the bottom one-third? But look, James...

CRAMER: Well then you're in the wrong -- no, look, the major -- the major Nasdaq stocks came back, came back strong. The companies with earnings that are real are coming back. The companies with no earnings are not coming back.

PRESS: But even if you look at this recovery today, Nasdaq is still down 29 percent below what it was on March 10, the high of this year. So isn't the trend, Jim, definitely down, despite these ups and downs?

CRAMER: No, look, we had a very orderly sell-off until last Friday, which was anything but orderly. But we've had a series of pull-backs in the last 18 years, all of them look in some way, shape or another like this, which just hit a lot of the institutions. And some individuals panic. Cooler heads prevail, people come in, get an opportunity to buy the dip, and it works. Maybe it shouldn't, but it works and it worked again.

PRESS: But does it work, I guess the last question for you in this round, does it work for the individual investor? When you have such wild swings, is it something the individual investor can come up with?

Let me ask you to listen to a quick bite here from a -- a quick remark from Paul Cardillo, who's a market strategist, and just listen up to what he had to say about that?

CRAMER: All right.

(BEGIN VIDEO CLIP)

PAUL CARDILLO, MARKET STRATEGIST: This is really a great wake-up call, a wake-up call to all those novices that have come aboard in the past three or four years buying stocks Internet, reading all of these stories, looking at chat rooms and whatnot -- gee, I wonder where all those guys are today?

(END VIDEO CLIP)

PRESS: Bad news for individuals?

CRAMER: Give me a break. The individual has done very well here. There are people who got margined, there are people who borrowed way too much money. And they got hurt, they got killed. But the individual is much smarter than that gentleman certainly gives them credit for, and the individual doesn't need a wake-up call. It was the institutions that were too long going into Friday. I've got to tell you, I don't think the individual is done investing one bit. I think he's back, he's going to stay back, he's smarter than ever. I just don't buy it.

PRESS: All right.

MATALIN: All right, Mr. Fleckenstein, you do buy -- or you do sell it, more precisely. You've been a bear for -- a lonely bear for four years. And I don't usually call on the Clinton administration to back my opinion, but this is what his Treasury secretary had to say in response to Friday's rout. This is Larry Summers.

(BEGIN VIDEO CLIP)

LAWRENCE SUMMERS, TREASURY SECRETARY: The fundamentals of our economy, the basic picture that's brought us to the best combination of unemployment and inflation in 30 years, the factors that have led to that, those are things that are very much in place.

(END VIDEO CLIP)

MATALIN: So, Mr. Fleckenstein, he says the fundamentals are in place. And I would say, even after this rout, forgetting about today, Nasdaq and Dow are still left higher after the evaporation of paper profits than they were only a couple of months ago. We're still OK, aren't we?

BILL FLECKENSTEIN, PRESIDENT, FLECKENSTEIN CAPITAL: Well, you're right about the fact that the market is definitely higher, and the points that Mr. Summers made are precisely the points you'd expect him to make. And really at the moment the economy is fairly fine. The inflation rate's picked up, but it's not at astronomical levels.

The problem with the stock market -- and I think Jim and I might even agree on this part of it -- is in my opinion prices are completely detached from the underlying businesses. Remember, shares are fractional ownerships of businesses. People that have been successful in exploiting the opportunities in the market in the last few years have been able to say, well, I'm not worried about valuation. And that has worked. The question is: Are we going to go back to looking at shares as fractional ownerships of businesses again, or are they going to just be pieces of paper that are kited higher? And some folks -- we have watched a lot of speculation out of a lot of pie-in-the-sky-type companies. But most people aren't aware that even great companies like Cisco, just to pick one, sells at 30- some-odd times revenues. And if we went down the list, we'd find the many of these fine companies are selling at such absurd prices to revenues, much less earnings, that if we're going to value them as businesses again they could fall a lot further. Will they or won't they? We don't know yet.

MATALIN: But, Mr. Fleckenstein, isn't that just the point? We're still fledgling and groping around ourself to understand the Internet economy? And isn't this shake-out good? Because those fledgling Internet companies that are without profit will either fold or they'll -- they'll take longer to get to maturity before they go to an IPO. Isn't that good? And isn't that how the market fundamentals work? We're just in a different kind of economy that we don't quite know yet? FLECKENSTEIN: No, I don't think we're in a different kind of economy. I mean, let's face it, the Internet has provided a revolutionary aspect to lots of different businesses, but that's always been the case with technology. I mean, we can talk about every technological invention since the printing press and various different ones -- I mean, even air-conditioning was a big deal because of what it allowed -- where it allowed factories to go and things like that.

CRAMER: Bill, Bill, you know I've been on opposite sides of you when it comes to this valuation argument. Isn't it true that if we were to use traditional metrics that you would have cashed out of Cisco 200 point ago? You would have left Intel 100 points ago.

FLECKENSTEIN: That's absolutely right, Jim. And that's why I made the point that people that have successfully said valuation doesn't matter have been able to do well. And the question is: Have we broken the back of speculation, not just washed out the dot.coms and the biotechs? But one place where you and I might disagree is I think the level of speculation in margin debt that the individual investor has layered on, and credit card debt and second mortgages and things like that, might be high enough that while they are able to buy today's dip, maybe they can't. I mean, if the level of debt fores their hands some, then at some point you're going to force these things to be businesses again.

CRAMER: I wouldn't be surprised if margin debt went down during the month of April and that we saw a peak in margin debt in March and that this whole move was just taking out those speculators and it's a healthy shoot-out.

PRESS: I want to -- let me ask you -- see if we can get to the bottom line as a layman here.

Jim, start with you, I mean, what is the message? Is this a time to buy or sell?

CRAMER: Look...

MATALIN: And what should we buy?

PRESS: Yes.

CRAMER: I've been saying on my site that you have to buy quality, that nothing has changed. I've been saying for three months, take money off the table. Take money off the table. It's gotten too crazy. Well, geez, you know, the time to sell has happened. Now it's time to look at bargains. There are bargains everywhere. There are bargains in drug stock, bargains in computers. I see bargains in food stocks. I was buying International Paper today. I mean, you know, I see a lot to like.

PRESS: But are there any buys left, as Bill was just talking about, in these high-tech stocks, or has the bubble burst in the dot.coms that everybody's been so giddy about for the past three years? CRAMER: Well the dot.coms -- you can buy some of the dot.coms when they change through their the cash positions. Bill and I -- the two things that Bill and I have to agree on, one is that there are a lot of companies that have -- in the old economy -- that have gotten to the point where there's actually reason for managers to be able to buy those companies in leveraged buy-outs, they're so cheap...

FLECKENSTEIN: I agree.

CRAMER: And then the second...

FLECKENSTEIN: I agree.

CRAMER: ... you know, the dot.coms have gotten so crazy that they represent no value even down here.

PRESS: Bill, go ahead.

FLECKENSTEIN: Yes, Jim and I agree on that. And, I mean, there are stocks in the real economy that are cheap, and I agree with everything he said basically on those last two points. But there's a corollary to that, and that is that a lot of the dot.coms at the margin, as they built -- put in hardware and software and all these other things like that, helped put a tailwind behind some of the Ciscos of the world. I'm not picking on Cisco. I don't have an ax to grind there, but I'm just using it as an example.

So it's possible that if a lot of people own these stocks because they were backdoor Internet plays that had real fundamentals. So, I think that if the dot.com, IPO and funding environment dies or slows down dramatically, it can impact the rest of technology.

But I think the real point is, is are these things just pieces of paper that are going to be kited higher, or is valuation going to matter more than it has? I don't know yet. But I do know that if it's going to matter more than it has...

PRESS: We want to know.

MATALIN: But, Bill, look...

FLECKENSTEIN: If I knew the future, I wouldn't be here.

MATALIN: Bill, can we pick up on Jim's earlier point -- and this might just be a healthy thing that this shakeout shook out individual speculators who are the ones who make these crazy dot.com purchases. But the institutions, as we saw today, are sitting on a lot of capital, which is what you recommend be liquid, half capital, and they put their capital back in. Doesn't that stabilize the market, getting these little crazy investors out and big institutions in?

FLECKENSTEIN: Well, I think there's certain aspects of what you said that I would agree with. I mean, knocking out speculative marginal companies is part of capitalism. People that got overextended are not going to be very happy to have been knocked out. They're not going to think it's very great. But I think there is a quote-unquote "healthiness" to what happens. It's the way the markets work. But I'm just not so sure that there aren't more people that are more leveraged than most people think. The anecdotal evidence that I've seen suggests maybe they are. And maybe Jim's right, they're not.

CRAMER: But, Bill, these prices -- some of these stocks have come down so much, you know people have been slaughtered. People have been slaughtered. You know, some of the stocks are down 75, 80, 90 percent. They're obviously just being sold out from underneath the speculators by the brokerage houses trying to get back their collateral.

FLECKENSTEIN: I agree with you, Jim. I mean, there has been a lot of that. But then I've heard enough stories about, you know, wire houses that we won't mention their name of, where they send out say, 50,000 calls and 70 of them have been met -- 70 percent have been met. So that danger still might be there.

PRESS: All right, gentlemen, we're going to have to take...

CRAMER: It's still in the heavily speculative stocks.

PRESS: All right, we're going to have to take a break. And when we come back, of course politics has to enter into a CROSSFIRE debate about anything.

When we come back, if the market crashes will Al Gore crash too?

(COMMERCIAL BREAK)

PRESS: Welcome back to CROSSFIRE and a wild ride on the stock market roller coaster.

The meltdown of 2000 just last Friday and the miracle recovery already today. So is it a reason for confidence in the market or a warning to get out while you can? And would a market tumble change politics 2000?

Tonight, market and politics with bull James Cramer, co-founder and contributing editor of TheStreet.com, joins us from New York; and bear Bill Fleckenstein, president of Fleckenstein Capital, out in Seattle -- Mary.

MATALIN: Mr. Cramer, I'm going to switch to you for just a second. And I don't want to expose you, but you did volunteer in your pre-interview that you're a big Democratic contributor. So let me ask you this. Your colleague Mr. Fleckenstein says that if this is a downturn -- and he says that it is -- it's not going to be pretty. It's going to be most unpleasant. As you know, your candidate Al Gore is running his entire campaign -- other than attacking George W. Bush -- on taking credit for this recovery. If he takes credit for the recovery and there's a downturn, isn't he going to have to take the blame for the nonrecovery?

CRAMER: Mary, I've got some bad news for your thesis. OK, first of all, this is the most perfectly timed sell-off for Gore. Here's why: Consumer spending will notch down a little bit. That will get Greenspan, who is the man who has been ratcheting and ratcheting and ratcheting up rates, gets him off the back of this market, which allows the market to kind of gently go back up. And by November, all- time highs once again and Gore's in. Sorry, that's the way it's going to be.

MATALIN: All right, follow-up question -- and you're not as even remotely as sorry as I'm going to be if that's what actually happens -- but Alan Greenspan has said that this miraculous recovery in the economy is the result of an unexpected surge in technology from the attendant surge in productivity. So what does any Al Gore or Bill Clinton -- should they take credit, or should the risk-taker and the worker be able to get the credit for this?

CRAMER: Look, I mean, if you want to give credit to someone, give credit to Bob Rubin. I mean, we -- once we got the government out of the business of borrowing a lot of money, you saw how rates could go lower and that reliquified the whole nation.

I don't think anybody can take credit -- one person can take credit for this recovery, though, because a lot of what's happened is it's just American business reclaiming the mantle from Japan and Germany just through sheer intellect, guts, power, whatever you want to call it. But it's been a remarkable renaissance, and I don't want any politician to take credit for it.

PRESS: Bill Fleckenstein, let me come to you while we're talking about politics here. I know that the common wisdom, as Mary just articulated, is a downturn in the market, rather, is bad for Al Gore. But let's be honest. If you look historically, market goes up, market goes down. It has little impact on presidential elections, isn't that correct?

FLECKENSTEIN: You guys are the political experts. I suppose. And I don't know -- I think what you're getting at, though, is my belief is -- if I'm right -- and if Jim's right, he'll be right -- but if I'm right, and we've burst the back of the speculation, it's going to be more severe. The stock market has never been more intertwined in the economy than it is today, not just the amount of people that are involved in the market but the way employees are paid in stock options, the CPAs...

PRESS: OK.

FLECKENSTEIN: ... the attorneys take stock options, all that. So it will have more of an impact if it happens.

PRESS: But if you're right and if it's going to be as bad as you foresee that it's going to be, it still, I would argue and I would like your response to it, that it's a time when people are going to look for a steady hand, namely an Al Gore and not for somebody who needs on-the-job training, namely a George Bush, right?

FLECKENSTEIN: You know, I don't have any idea. I'm out of my league. I have enough trouble doing what I do for a living much less pontificating on politics. Ask Jim, he knows about that stuff. CRAMER: Look, if he's like his dad, I mean, Bill, you and I were trading during the period when his dad was president. Man, it was tough to trade everything. We were taking -- every single day could have been a crash. There was always a lot of disinformation coming out of the administration about everything from credit cards to savings & loans. You know, I don't know what the Republicans always had the edge on us in terms of the stock market, because, boy, I tell you, I have no desire to go back to that regime.

PRESS: Jim Cramer, let me ask you this question, just again as a layman. You just talked about disinformation. I've been listening -- watching television all day today. There are so many experts in this economy -- on this market. They all start out by saying, we don't know what's going to happen, and then they tell you what's going to happen. And some say buy, some say sell, some say stay in and hold, some say get out. How does a layman know who the hell to believe?

CRAMER: OK, I think if you step back from all the talking heads on TV and you just buy quality companies and you sit back and say, you know something? Intel is a great company. Microsoft, maybe when the Justice Department has finished its work, will be a great company again. Sun Micro, a lot of the companies that Bill may think are too high because they are pieces of paper but we know are going to generate excellent profits, if you take a longer-term perspective on those, you'd do quite well. And forget the talking heads. Half the time, the talking heads are looking at the chart of the stocks and they're just too nervous.

FLECKENSTEIN: Well, you know, that's a good point, because I think too much of what people have been doing is looking at the chart of the stock. And I think that while buying quality companies is a fine strategy, I still think one needs to look at the price you can pay. And I think probably Jim and I can sit down and find bunches of quality companies that actually trade a fair price...

PRESS: OK.

FLECKENSTEIN: ... But a lot of the household names trade at extremely ridiculous prices.

CRAMER: Oh, but you -- remember...

PRESS: Go ahead.

CRAMER: ... there's a whole part of this economy that is so cheap that I cannot believe the managers aren't going to Chase Manhattan bank right now and getting loans and taking over the companies.

FLECKENSTEIN: They probably are.

PRESS: Whoa, whoa, wait a minute. Are you suggesting that people ought to borrow money and buy stocks? I mean, that's -- isn't that irresponsible?

CRAMER: No, I think managers should go get leveraged buy-out loans, because some of these companies are selling two or three times cash flow, and they're presuming that the economy is going into recession. I don't see that going to happening.

PRESS: Bill, borrow?

FLECKENSTEIN: Well, I will agree that some of these are cheap. I don't think it's a very good time to do an LBO, because I got a different outlook on what the market may do and how that will impact the economy. But if Jim's right, then they can go do those LBOs. I think...

PRESS: But...

FLECKENSTEIN: I think it will make things more dangerous, but we'll see if they do it.

PRESS: But, Jim, I want to come back. Let's talk about individuals. You're not suggesting it's wise for individuals to borrow money and...

CRAMER: No, no...

PRESS: ... use that money to buy stocks?

CRAMER: ... I am so anti-margin it's scary. I mean, I'm like a throwback to the guys in the '30s. I think margin is the bane of all evil for this market. And all these speculators who used it to the hilt, they're vaporized.

MATALIN: All right, Mr. Cramer, you might be a great investor, I don't know about political skills, given your candidate for the fall. Mr. Fleckenstein, thank you for joining us -- and go get bullish.

And when we come back, the more bull from Bill and Mary.

Stay with us.

(END VIDEOTAPE)

PRESS: Mary, I hate to get political, but when the market is shaky like this, it's the last thing we need is some ridiculous across-the-board gigantic tax cut scheme. I was glad to see while I was away that your candidate reversed himself and met with some gay Republicans. I hope he now reverses himself and dumps that ridiculous tax cut plan of his.

MATALIN: He always had gays on the campaign. The gays that wanted to meet with him in the primary were supporting another opponent. I'm glad you brought up taxes, this wonderful tax cut that will continue to fuel the economy. I would have loved to have bought today. This is a great buy day. But you know what I was doing? Writing checks to Uncle Sam -- not to Nasdaq. We are paying a greater percentage of the GDP in taxes than we have since World War II. The top 20 percent of earners pay 65 percent of the taxes. You want to continue fueling this economy, give the money to the people who will put it back into the economy. PRESS: And the last -- no, the last thing we should do is giving tax cuts to people who don't need it, who don't deserve it and who don't even want it now.

MATALIN: Don't deserve it?

PRESS: This is a time...

MATALIN: Don't deserve it?

PRESS: ... as John McCain said, to fix Social Security, fix Medicare, to fix the roof...

MATALIN: You who work hard out there don't deserve it.

PRESS: ... while the sun is shining.

From the left, I'm Bill Press. Good night for CROSSFIRE.

MATALIN: I missed you anyway. From the right, I'm Mary Matalin.

Join us again for the rest of the week for more CROSSFIRE.

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