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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, December 21, 2001
Scott Roulston, CEO of Fairport Asset Management, discusses
legislation introduced this week limiting company stock holdings in their
401K plans, Continental Airlines' resumption of flights to London from
Cleveland as one of many "sparks" in the economy, and Key Corporation's
fiscal warnings which included suspension of bonuses to top executives.
April Baer–After a burst of trading activity
at the start of Wall Street's session today, the DOW Industrials will
begin from 9,985 after losing just about 85 points yesterday. Holiday
shoppers will have one last weekend to exercise their wallets, as the
holidays move closer, and as the year winds down to a close, some disturbing
news has come out about personal savings portfolios. Scott Roulston of
Fairport Asset Management joins us every Friday to talk about issues like
this, as we review the business news of the week. Today is no exception.
Scott, good morning.
Scott Roulston–Good morning, April.
AB–A pair of Senators introduced a bill this
week to limit the amount of stock dedicated to just one company in 401(k)
plans. Now, this is coming after a lot of people lost a lot of money when
the Enron Corporation went bust and the company stock basically imploded.
I understand even some folks in Ohio were affected. Okay, so financial
planners should not load all their eggs in one basket. I can't believe
these plans got so lopsided. How do you think this happened?
SR–You're right. First of all, I think what
the Senators are trying to do is kind of shut the barn door after the
horse is out. You're quite correct, this is especially true with larger
companies that a high amount of their company stock is in their pension
plan. How quickly we forget. You remember back in the 70's and 80's when
the corporate raiders were doing their thing here in Northern Ohio. Sir
James Goldsmith was after Goodyear and putting company stock in friendly
hands was a good thing back then, because of course the employees wouldn't
vote with the corporate raiders. So that was one reason why companies
were encouraged to put company stock in the savings plan. There were other
tax advantages by doing so, and there are cash advantages. It is cheaper
to put your own company stock in and it doesn't cost you any cash, versus
putting in a publicly traded mutual fund.
AB–I believe the Senate proposal that is being
floated right now calls for only 20% of the company's stock to be included
in its employee portfolios. Do you think these kinds of remedies will
really fix the problem that we saw with the Enron situation?
SR–Individual investors really have to take
control of their own destiny. That's what this is really all about. If
the employees don't like it in some of these major corporations, then
they ought to be speaking up. I don't know what the end game is going
to be here. You're kind of damned if you do and damned if you don't with
company stock. I think it is not a bad thing for employees to have a fair
amount of their own company's stock in their pension plan. That certainly
keeps them interested in the company's success.
AB–There seems to have been a few starts in
the economy this week. A pretty nice ride on Wall Street, knock on wood.
Continental in Cleveland resumed its direct service to London. Seems to
be a period of recovery for them, following the September 11th slump.
Is it true that the U.S. economy is bottoming out and may be due to recover
in the first couple months of the year?
SR–I think it is too early to really say that.
We've been optimistic and have good reason to be optimistic, but I think
the market has perhaps gotten a little bit ahead of itself. The valuations
are a bit high right now. You still have record low savings and record
high debt. The short-term optimism may be a little bit ahead of itself.
This recovery, I believe, is going to come back fairly slowly. That's
the sign. Not withstanding that, it's great that Continental is flying
to Europe again and increasing their flights down south. I'm sure a lot
of us could use it this time of year.
AB–You're not kidding. One more thing before
you go. KeyCorp announced this week that it is going to absorb a hit in
its profits to the tune of over $400 million. Dividends, as I understand,
will still rise, but how worried do you think KeyCorp shareholders should
be?
SR–Well, I think KeyCorp shareholders are
worried and I think KeyCorp employees are concerned. You know, a few years
ago, Bob Gillespie the Chairman, said that the way we can ensure not only
bonuses (and of course they announced yesterday that the senior executives
are not going to get a bonus with this big write-off - I don't know if
that was reported but internally that was the word), but the best way
for KeyCorp to preserve its independence was to outperform in its peer
group - to be one of the top performing banks. Unfortunately, KeyCorp
really hasn't done that. You look at contrasting KeyCorp to National City,
National City has almost twice the market capitalization now that KeyCorp
has. I don't think people really know that. Part of it is because National
City has performed very, very well. KeyCorp really has to get their act
together and get out of the starting blocks. I'm sure it's very frustrating
for their management, but as one analyst said (I think it was the analyst
at Merrill Lynch) yesterday, we keep hearing about these non-recurring
events and at some point they just have to perform. I think that is important
for the community and important for the people who work and own stock
in the bank.
AB–Scott Roulston of Fairport Asset Management
joins us each Friday to talk about the week's business news.
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