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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, August 9, 2002
Scott Roulston, CEO of Fairport Asset Management, discusses
the introduction of a mutual fund, which uses a controversial "shorting"
technique, the recommendation by Muriel Seifert to allow greater contribution
to IRA's and 401k's to help stimulate the markets, and the Plain Dealer
article which claims that former clients of Frank Gruttadauria have shown
sympathy for the rogue broker and that they would support his release
pending trial.
April Baer - This week the stock market enjoyed
a triple play of triple digit gains. Thursday night the Dow Jones Industrial
Average rose another 255 points to close at 8,712. The NASDAQ Composite
added 35 to end at 1,316. The S+P 500 went up 28. Lots of investors out
there breathing just a little bit easier this week. Can the rally continue?
It's not certain. Many analysts are predicting some selling today. Also,
a little financial data is due. The government reports on second quarter
productivity this morning. Analysts are looking for a gain of less than
1%. Every Friday morning Scott Roulston of Fairport Asset Management joins
us to look into the crystal ball and talk over some of the business news
of the week. He is with us now by phone. Good morning, Scott.
Scott Roulston - Good morning, April.
April Baer - I see that Charles Schwab has introduced
a new mutual fund that includes the controversial "shorting" technique,
which actually makes money on the downfall of stocks. What can that possibly
mean?
Scott Roulston - Maybe it's the downside of the
market. Maybe we have hit bottom. I don't know - that's just kidding.
Hedge funds can be very tricky, even dangerous. I like Schwab in general.
I think it's a good firm but they've been going through some tough times.
They're off their peak in 2000. I think they've let go of about 7,000
people and there are rumors they may cut more. They really are doing a
good job going toe-to-toe with Merrill Lynch. They're running an aggressive
ad campaign, to say the least. That "put lipstick on the pig" commercial
that you may have seen…
April Baer - Right…
Scott Roulston - …but this strategy they have involving
the shorting, as you say, and borrowing stock and selling it, hoping the
price goes lower so you can buy back at a lower price. This has increased
the volatility of the market lately. As a matter of fact, the last three
days that you were just talking about, a lot of people are saying it's
the "short sellers" covering their positions and being concerned that
the stock prices are going up. They're going to try and protect their
position. I think it's a dangerous move for investors who don't really
know what they're getting into to get into a hedge fund.
April Baer - I saw a commentary this week from
Muriel Seifert, who is a former New York state banking superintendent.
She now runs her own investment corporation. She thinks that if the government
- the Federal government, that is - really wants to stimulate the markets
and the economy, it should allow people to put more money into tax sheltered
401(k) plans and IRAs - or at least, more than they are allowed right
now. Do you think that would have a measurable effect?
Scott Roulston - Absolutely. I think there are
positive and constructive things that Congress could do and that's one
possibility - increasing the amount of 401(k)s. You know, rather than
get into this kind of "capitalist bashing" that I think some have been
tempted to do, increasing 401(k)s right now along with IRAs (you know,
if you're not employed you can do an IRA) is another way to set aside
money on a pre-tax basis and have it grow over time without being taxed.
And I think increasing 401(k)s is an excellent way to stimulate investment.
We need in this country to save more and invest more. Congress can do
other things, such as eliminating double taxation on corporate dividends.
They could look at the capital gains tax laws. I hope that Congress, when
they come back in session, could play a constructive role to restore investor
confidence.
April Baer - I wonder if that would mean a big
tax revenue loss, maybe. Is that why it hasn't been done already?
Scott Roulston - I think they already are suffering
through a big revenue loss this year because not too many people are selling
stocks with capital gains. So the key is long-term - looking past just
a one or two year window and trying to encourage saving and investing.
I think that increasing the limit on 401(k)s could be a constructive role.
April Baer - Yesterday did you see the big headline
in the Plain Dealer proclaiming that some of the investors who
lost money to Frank Gruttadauria, the former Lehman Brothers bureau chief
here in Cleveland, that these investors now say that they think he should
go free until his trial?! That sounds a little strange to me. We spoke
with some of those investors and that group was just absolutely furious
with Frank Gruttadauria - now they're ready to cut him some slack?!
Scott Roulston - That headline was an eye catcher.
I thought it was misleading, frankly, and I was a little bit surprised
that they ran it. I mean, Frank is cooperating right now. I've talked
to some of these folks too, and Frank Gruttadauria is cooperating with
some of the victims. I think his lawyer got a few letters from some of
these victims saying they would not oppose or stand in the way of his
release, but the victims are doing everything they can to get their money
back. They didn't express a strong desire to have him let go, they just
said they would not get in the way. So I think the lawyer got a good PR
move going there. But what I'm surprised at, April, is that the SEC and
the U.S. Attorney are just taking so long on this case. These people are
really fit to be tied over trying to get their money back.
April Baer - Well, that brings up an interesting
point. If they're saying that he should be freed until his trial (and
that is the question being raised), when is that trial going to be?
Scott Roulston - That's a great question. I mean,
the SEC and the U.S. Attorney could be doing so much and why haven't they
pressed charges against him for theft? I don't understand.
April Baer - Scott, thanks for talking with us
today.
Scott Roulston - Have great weekend. Talk to you
next week.
April Baer - Scott Roulston with Fairport Asset
Management.
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