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American Morning

Discussion with Vince Farrell

Aired September 04, 2002 - 07:38   ET

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

BILL HEMMER, CNN ANCHOR: All right, talk about your beatings, the Dow plunged 355 on the negative side yesterday, a worldwide stock retreat. The second biggest point drop in the year for the Industrials further fueling concerns about an economic recovery. The question today, should you still invest in stocks? And if so, where to?
Andy Serwer is going to join us a bit later.

But here to talk about the market drop from yesterday and what's happening on the markets, Vince Farrell, chairman of Victory Capital Management here in New York City.

Good to see you.

VINCE FARRELL, VICTORY CAPITAL MANAGEMENT: Thanks, Bill.

HEMMER: I'll tell you what's kind of strange to me, is that the Dow fell four percent yesterday. Five years ago, that leads every newscast and is on the leading headline of every newspaper across the country. Now, it's almost as if you know what, we'll see what it does today.

FARRELL: Well, the volatility we've had the past couple of years is such that a four percent move is not new news. It happens, unfortunately, with startling regularity. That's one of the things that I think discourages private investors, that sort of volatility is just not something you want to live with.

HEMMER: Tell me about yesterday. What happened?

FARRELL: A confluence of events. Tokyo was very weak because there's more talk about Tokyo banks being in trouble. And then when you came to work you read in the paper September typically is a very bad month. A couple of analyst's comments that were negative on Citigroup, Intel and Ford, which are great big companies.

HEMMER: Look at that chart, Vince.

FARRELL: Oh, remarkable. And then midmorning, 10:00, 10:30, you got a manufacturing number that was less positive than people had hoped. People were hoping that you'd get some good news, that you're going to see an economic pickup this fall. And this report, while not negative, was not as positive as people were hoping. So the selling fed on itself.

HEMMER: You mentioned September. Why is it? I normally think of October for down days on the markets.

FARRELL: Yes, you know, you have to go back, believe it or not, to the 1850s. And you used to get these fall slumps and they were tied to the crop cycles, believe it or not. You didn't have a national bank to kind of regulate commerce. So what you had were people pulling out money to loan to farmers and there's always a period of disruption. And then you had a panic in 1850 some odd, 1873, 1907...

HEMMER: You're going back a ways, yes.

FARRELL: And then you had the crashes, of course, in the 1929 and '87. But I think the real reason now in the modern era that you get these setbacks from the fall is that Wall Street is dominated now by very young analysts that have to kind of true up their estimates after September. In the beginning of the year when things aren't going quite as well they'll say well, the second half will pick up. Well, here we are into the second half and things aren't picking up.

This happens year after year after year, that after Labor Day they come back and they say well, it's not going to quite earn what I thought. It's going to do it in the first half of next year. It seems to be a recurring pattern.

HEMMER: Tell me this, right now you have WorldCom still out there. You have Enron still out there. How much is that still plaguing the markets and investors on a day to day basis? And as we talk about this negativity, we should also point out the housing market is still very strong right now. People are still spending money, maybe not as much as some bulls would like. However, they are still spending their cash.

FARRELL: Well, you hit on all the right points. I think the WorldCom and corporate scandals are getting very much behind us, because there's been a bit of retribution when you've had these guys do the perp walk, you know, where they arrest them and put them in handcuffs and you and I feel a little bit better that there's some justice in the system.

The housing cycle has been very, very strong and the fear is that there's a housing bubble. I do not think so, because the average house still trades at a multiple to income in line with normal averages looking over history.

But the consumer has carried this recovery. The consumer's two thirds of GDP. The consumer is going to have to continue spending because there's such excess capacity...

HEMMER: I mean listen, they've floated the market for how long now?

FARRELL: Well, forever. And probably they will not float the market, because I don't think the consumer can step up another leg on what you and I have been spending. But I think they'll maintain it. Consumer spending is not tied to the stock market well. It's not even tied to your housing status. It's more tied to income growth. And incomes are still growing OK. But if that were to falter, we'd have a problem.

HEMMER: Quick favorites, your choices, Comcast, SunTrust Banks?

FARRELL: Yes, I want to stay away from international things because the dollar can really hit you. Comcast I like because the management team is very good. They're buying AT&T's cable systems and it's trading at a very low price relative to what I think the private market value is. SunTrust is just a terrific bank located in the Southeast where there's population growth. They've managed their business very, very well. They're not going to surprise you all of a sudden with a great big Argentinean loss like Fleet Bank did a while ago.

HEMMER: Sure.

Thanks for coming in.

FARRELL: OK, Bill.

HEMMER: Good to see you.

FARRELL: Good to see you.

HEMMER: All right.

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