Market Roundtable

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This is a partial transcript from Your World with Neil Cavuto, August 8, 2003, that was edited for clarity. Click here for complete access to all of Neil Cavuto's CEO interviews.

Watch Your World w/Cavuto weekdays at 4 p.m. and 1 a.m. ET.

NEIL CAVUTO, HOST: For the past couple of months now, stocks have been really pretty much in a rut. But, since the economy is on the path to recovery, the markets can’t be far behind, right?

Well, maybe, but Price Headley disagrees. He says that, over the next several months, we should expect a 20-percent drop in the Nasdaq (search), maybe up to a 15-percent pop in the Dow and the S&P 500. That would be a lot of points.

All right. Joining me now, the aforementioned Price. He’s the founder of Tony Dwyer here as well. Tony’s at FTN Midwest Research. And that handsome devil Tobin Smith, the chairman of Changewave Research. And last but certainly not least, all the way out in L.A., Ben Stein, the former adviser to President Richard Nixon.

Ben, I ended with you. Let me begin with you. What do you make of just this kind of, you know, can’t-get-much-traction market?

BEN STEIN, FORMER NIXON ADVISER: I make of it the fact that we had a huge recovery since last October in the stock markets, especially the Nasdaq. They’ve already discounted the recovery. The recovery has not been robust, but it’s certainly there. It’s a real economy. It’s walking briskly but not running.

And the market has already discounted a substantial recovery in corporate profits, and I don’t think there’s going to be much more stock market movement until there’s a dramatic upward movement in profits, and that may not happen.

CAVUTO: So, Price, you’re saying it’s going to be actually pretty bad in the near term.

PRICE HEADLEY, BIGTRENDS.COM: I think so, Neil. I mean we’ve seen a lot of complacency among investors. You know, usually, when the summer lulls and everybody starts to not worry about the market anymore, it gets a little bit time to worry.

And so we’re expecting that the next few months could be time to go to a safe haven portfolio, looking for stocks like Newmont Mining (NEM), for example, as a gold stock. The S&P is up 10 percent.

That’s a great place to be over the next year. I’m saying watch out below.

CAVUTO: What about you, Tony?

TONY DWYER, FTN MIDWEST RESEARCH: Yes, I don’t buy the big sell-off. I mean to get a big sell-off, you’re going to have to have bad news and not just complacency. You’re also going to have to get bad news, and the news is not getting worse. The news is getting better.

Now I think certain IT companies like Microsoft (MSFT), for instance, have been sort of overvalued based on their growth.

But I don’t think there’s enough bad news to come in, and I think what you’re going to see is you’re going to see companies that have lagged move up and you’re going to see the ones that are sort of ahead sort of catch their breath.

But you know, you’re a technical analyst. I’m a fundamental guy. I just don’t see that big a drop.

CAVUTO: All right. Tony, I apologize. The name of your firm is FTN Midwest Research? Is that right?

DWYER: Correct.

TOBIN SMITH, CHANGEWAVE RESEARCH: He gets paid every time you say the name, so...

CAVUTO: Exactly. Ca-ching.

But now, what do you make of this, Mark? We’ve got the bears here. We’ve got a slightly bullish view. What’s going to happen?

DWYER: Interestingly, I’m a fundamentalist and a technician, but I like to call this the "Hong Kong Phooey" correction. You remember that cartoon. Hong Kong Phooey winds up, and it looks like it’s going to be a brutal karate chop, and, at the end of the day, nothing much happens.

CAVUTO: Well, I’m very young. I don’t remember that.


DWYER: And that’s what I think is happening for those that are out there. I think we’re going through a correction, and we’ve suffered a dramatic decrease in the bond market and a spike-up in yields, and that wasn’t enough to do it because yields had gotten abnormally low.

So I think, fundamentally, we’re in a good enough period. The fundamentals are good enough to keep prices up but not enough quite yet to kick-start a new rally, which I do believe will happen in 2004. Nobody believes the economy can actually improve in ‘04.

Now the second half’s OK, and they’re already saying, well, it’s not going to continue.

CAVUTO: Ben Stein, you have argued that the economy is one issue which you don’t argue is doing all that bad lately, but the market had already priced it in. In fact, the market’s richly priced in a lot of stuff in...

STEIN: Very richly priced in.

CAVUTO: So where do you see us going?

STEIN: Very, very richly.

Well, I think the market is so high that from these levels, a recovery to even higher levels would be historically unprecedented. When you start out with the Dow at close to 30 times earnings, there is very little precedent for the Dow to go higher than 30 times earnings. Unless there is an enormous recovery in earnings, a 30-times-earnings multiple simply cannot be sustained.

If there is going to be a giant leap forward in our earnings, the market will say, all right, we’ll take a gamble, and we’ll bid it up even higher in anticipation of future higher earnings. But, without some sign of that, the market is just awfully, awfully rich by any historical measurement.

SMITH: Yes, but, Ben, historical measurement -- you’ve got to look at the bottom of the business cycle. When we’re at the bottom of the business cycle as we’ve hit over the last six months, you’re looking backwards. When you look backwards, P.E.s have been very high, you know.

STEIN: Sir, with respect sir, with respect, usually at the bottom...

CAVUTO: Be careful when he starts that.

Go ahead, Ben.

STEIN: Sir, with respect, at the bottom of the business cycle multiples are usually something like seven, eight, nine, 10 times earnings. For the...

DWYER: Because interest rates are still high.

STEIN: ... market to be at 30 times earning at the bottom of the business cycle -- and we’re not at the bottom, by the way, or anywhere near the bottom. For them to be at 30 times earnings at this stage of the business cycle is very worrisome. They should have been a lot lower instead of higher.

CAVUTO: Tony, what do you say?

DWYER: Well, here’s your potential catalyst. Let’s look at what happened with Caterpillar (CAT).

Our independent research was suggesting that all the dealers were saying business is better in the machinery stocks. All of a sudden, Caterpillar comes out and blows away the numbers to an extent that I think even probably surprised the company, and, all of a sudden, you...

CAVUTO: So we’ve got a lot more of that kind of stuff to justify these multiples.

Do you buy that, Price?

HEADLEY: Here’s the problem. The Nasdaq had been leading us on the way up, and, basically, that’s a good sign on the way up the last few months. Now it’s starting to actually go down. You saw it down three days in a row.

The growth stocks got pummeled in the last week in terms of Chinese Internets, Satellite Radio stocks. Where all the money was flowing, those things got hammered. I think you’re going to see a big shift into more value and much more of a safe haven mentality like...

SMITH: And that is not bad, Price, by the way. Listen, I’ll take a stock that’s...

HEADLEY: It’s bad if the Nasdaq leads us down, Tobin.

SMITH: Well, if I have a stock like Satellite Radio, XM Radio (XMSR), that we said went from $1.50 to $12 and I take a horrible crash and go to $10, I’ll take that any day, number one.

HEADLEY: That’s the start of it, though, I’m saying.

SMITH: All right. Well, you know, those businesses are growing rapidly, and I think you have to look at rapidly growing businesses in the business cycle, Mr. Stein notwithstanding.

CAVUTO: All right. Well, it’s fair market for fair opinions.

Tobin Smith, final word on the subject.

I want to thank Ben Stein out in Los Angeles and Tony Dwyer, Price Headley.

We got your firm right now. You don’t sue us, send us legal papers.

DWYER: Was that FTN Midwest Research?


CAVUTO: Oh, for God’s sake. Shameless. Shameless. It’s like me promoting the Business Block.

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