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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, April 26, 2002
Scott Roulston, CEO of Fairport Asset Management, discusses
the release today of the first quarter's GDP, the deafening silence surrounding
the inevitable departure of TRW's corporate headquarters, and the continued
decline of telecommunications stocks on Wall Street.
April Baer–Wall Street was just as volatile
as the weather this week. Buffeted one minute by losses at AOL/Time Warner,
then the next thing you know, the sunshine broke through on the markets
in the form of positive earnings from companies like GM and Coca-Cola.
The major indices did settle into the doldrums yesterday, though, with
the Dow taking a quick dip below the 10,000 mark yesterday before closing
at 10,035. That 10,000 is an important psychological indicator, if not
actually numerically significant. Scott Roulston of Fairport Asset Management
joins us every Friday morning to talk business. We have him with us on
the phone today. Good morning, Scott.
Scott Roulston–Good morning, April.
AB–Now, the Commerce Dept. is due to release
a big report today - the initial estimate for first quarter economic growth.
Word has it that the report shows a 5% rate of growth in gross domestic
product. So in other words, the economy is not going through a big boom
exactly, but rather something of a big recovery. That would seem to conflict
with the blue period we're seeing on the market and the words we've been
hearing from Fed Chairman, Alan Greenspan this week. What's the deal?
SR–Well, you're right. Gross domestic product
forecast is supposed to be around 4.95%. Now, that compares very favorably
to 1.7% in the fourth quarter, which was pretty slow.
AB–Yeah, that was really bad.
SR–That was not good. But what is still a
malaise hanging over the marketplace is what we've been talking about
the last several weeks (actually several months), which is capital spending
and corporate spending. You have to remember that non-defense capital
spending is still about 25% below what it was two years ago in 2000. 25%
below! That's a huge hit and it is the consumer that has been holding
up our economy. The concern is that unless we have some increase in capital
spending (which really isn't on the horizon), if consumers start getting
concerned and they start spending less, then we really could see a problem.
So Greenspan is very cautious in what he is saying because I think he
realizes that confidence is very fragile right now.
AB–This week, Scott, TRW held its annual meeting
in Lyndhurst. At that meeting, shareholders approved a resolution backing
the release of some confidential financial information to Northrup Grumman,
who of course is the big defense contractor based in L.A. that has been
working on a hostile takeover of Cleveland's TRW. You know, I know it's
kind of a different situation, but it's really funny how you don't see
the community rallying around TRW in its threatened state, the way people
did around LTV. Why do you think that is?
SR–That's a great question. You know, the
silence is deafening. We talk about getting high paying jobs to the community
and high tech jobs. Certainly all those people out in Lyndhurst and off
Richmond Road are in that category. We just don't hear anything in terms
of our regional politicians or leaders talking about it. Now that could
be for a couple of reasons. One of which is that it might just be assumed
to be a fait accompli - that this is a done deal, that somehow or another
we are not to going to see TRW around. Or it may be other reasons. I don't
really know, but the silence is deafening.
AB–No love for the white collar, huh? Well,
let's suppose for a moment that TRW is able to fend off Northrup Grumman's
advances. Do you think the company's future and its future in Cleveland
is safe then?
SR–The rumors are all around that there are
new suitors in the wings. We can speculate as to who that is, but we don't
really know. I think that Northrup is pursuing two avenues. One is they
are challenging the Ohio takeover laws and secondly, they are trying to
do it in the marketplace with their bid. It's not too difficult to identify
the possible bidders for TRW's satellite business. Lockheed Martin is
probably at the top of the list, but there is some speculation that the
government has asked Lockheed Martin to stay out of it. General Dynamics
and Boeing might be a couple of other suitors. So I think that one way
or another, the market is going to work it out. The TRW Board is going
to have to do something in order to get full value for the company.
AB–Let's talk just a minute more about the
mixed news on Wall Street. Some analysts are saying that the phone business
is the big wet blanket on some of the stock indices. Do you think the
Bells are getting a bad rap?
SR–Are the Bells getting a bad rap? Well,
the Bells and telecommunications in general has just been a horrible place.
If we take one stock, for example WorldCom, in the last year they've gone
from $20 a share down to $3½. And if you have that in your portfolio,
that really hurts. SBC that owns Ameritech locally has been one of the
stronger players, but they've gone from $47 as a high down to $32. So
you can see that it does throw a wet blanket on the market. When you have
some telecom communications in your portfolio and they go down like that,
it is kind of a downer. Not much has gone up, although I did see the other
day that Starbucks is up 24% in their revenue. Maybe that caffeine will
give things a jolt. (laughter)
AB–They're everywhere! Well, you know Amazon
is doing pretty well, too. Maybe all these '90's darling industries are
really turning out to be the strong ones. Thanks for talking to us, Scott.
SR–Have a great weekend, April.
AB–Scott Roulston of Fairport Asset Management
joins us each Friday to talk about the business news of the week.
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