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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, May 24, 2002
Scott Roulston, CEO of Fairport Asset Management, discusses
the settlement between the New York Attorney General and Merrill Lynch,
the testimony presented to Congress this week concerning the Gruttadauria
case, and the move by the Stanley Works to headquarter the company overseas
to avoid US taxes.
April Baer–Investors will head for the holiday
weekend with some new economic data to consider. Reports are going to
be released today on the first quarter's economic growth and the month
of April's new home sales. On the markets, for the second straight day
Thursday, stocks capped a lazy session with some nice late gains. The
Dow Jones Industrial average will open today at 10,021, after advancing
58 points yesterday. The NASDAQ Composite was up by 24.
In the headlines, the financial sector took a few hits
this week. Here with us to analyze the news is Scott Roulston of Fairport
Asset Management. Good morning, Scott.
Scott Roulston–Good morning, April.
AB–Merrill Lynch, it seems, has made a settlement
with the New York Attorney General's office. This is a case that had a
lot of financial firms a little bit spooked. The State had been after
Merrill for misleading investors with inflated stock ratings. I understand
the company will now pay a $100 million fine - and apologize. It sounds
like that punishment is not very severe.
SR–For Merrill, it really isn't that severe.
I think there was a New York Times article that said that $100 million
is less than one-third of what Merrill paid for office supplies last year.
AB–Wow.
SR–So really there is no big change in their
restructuring. There were two parts - there was the fine and there was
the requirement to restructure how their analysts provide research and
recommendations. There were really no big changes but it does allow Merrill
now to say they have new religion and it gets Spitzer, the Attorney General
from New York, off their back. But I think Spitzer was really very politically
motivated. After all, none of that $100 million is going to the investors.
You know, it could have gone into a restitution fund. It isn't. It's going
into the State's general fund. Meanwhile, those who invested in Merrill
Lynch stock have lost 8.6 billion dollars in their market value. So, it
just creates an environment for more lawsuits. I don't think it settles
a whole lot.
AB–Well, what about the fear factor? Do you
think his investigation is going to - has really stopped the problem or
put other firms on their toes?
SR–It will put other firms on notice and like
I said, it will create an environment for litigation. You've already seen
some other firms take some actions in terms of separating this compensation
issue. In other words, analysts won't be paid for doing investment-banking
deals. But we'll see. You know, right now there aren't any investment-banking
deals being done. I mean, the IPO market is pretty flat. We'll see when
that heats up whether this really takes hold.
AB–Let's switch over to Washington for a minute.
This week Congress heard testimony from some Clevelanders who lost money
they entrusted to Frank Gruttadauria, the disgraced investment broker
who used to head the local Lehman Brothers office. Based on what we read
about the Thursday hearings, who do you think Congress is really trying
to get after here? Is it trying to go after the brokers - Lehman Bros.
and SG Cowen, or is the bigger target the Securities & Exchange Commission?
SR–They should be going after both. If you
look at how the investment industry is set up, a lot of the responsibility
for keeping brokers behaving went on the industry itself. We have self-regulatory
organizations - the NASD (National Association of Securities Dealers)
is an example of that. So the brokerage industry is supposed to be policing
itself. Certainly in this case there are some real concerns about Cowen
and Lehman supervising Mr. Gruttadauria. And I think there are questions
about the system itself. But on top of that, the SEC, the New York Stock
Exchange and others are supposed to make sure firms do that and it looks
they were asleep at the wheel, too.
AB–Scott, I saw a report this week on companies
who move their operations offshore. Now, aside from the lovely scenery,
having your headquarters in Bermuda can provide some big tax relief. But
I've got to wonder about this. With the economy still in a downswing,
and patriotic feelings running high on at least some levels, wouldn't
any company doing this look a little cynical?
SR–It sure looks cynical right now. I think
what you are referring to is earlier this week, Stanley Works out of Connecticut,
a hardware manufacturing company, was in the news about this. And Stanley
Works is going to do this, April, because just by simply changing their
mailing address they can lower their taxes by 12%. Now, if you were going
to lower your taxes by 12% by changing your mailing address, it might
cause you to consider that, at least. Looking at it another way, they
are competing against foreign companies who are paying 12% lower taxes.
Now, Stanley Works has 17,000 jobs in the United States. We have to be
concerned about our tax code, but the timing is bad. Like you said, it's
unpatriotic. So, I think this issue is going to be in the spotlight for
a while.
AB–Scott, thanks very much.
SR–You're welcome. Have a good weekend.
AB–You, too. Scott Roulston of Fairport Asset
Management joins us on Fridays to talk business.
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