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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, August 16, 2002
Scott Roulston, CEO of Fairport Asset Management, discusses
the shivers in the airline industry as US Airways files for Chapter 11
bankruptcy, those jumping on the hedge fund bandwagon, and the phenomenal
earning power of the late Elvis Presley.
April Baer - The Dow Jones Industrial Average rose
Thursday nearly 75 points to finish at 8818. The NASDAQ Composite and
the S+P 500 each added almost 11 points. There were some big moments in
business this week as well. Hundreds of CEOs across the nation signed
off on the accuracy of their financial reports, complying with a new bill
designed to certify corporate accounting is really correct - no, really!
The Federal Reserve also met Tuesday, deciding to leave interest rates
alone. President Bush assembled an impressive slate of guests for an economic
summit out in Waco. Every Friday morning Scott Roulston of Fairport Asset
Management joins us to talk about the business news of the week. We have
him on the line right now. Good morning, Scott.
Scott Roulston - Good morning, April.
April Baer - Whew, a busy week! Why is it we need
to know about these three big events?
Scott Roulston - I'm not sure why some of them
are taking place. The Waco event was very much for show. You referred
to the certification day, which I heard someone refer to as "I am not
a crook" day. But symbols count for a lot these days. I think symbols
are important and investors need symbols to restore confidence. That is
going to come back slowly. The other thing I heard is that a lot of CEOs
were asking their division heads in direct reports to certify their financial
results and so a lot of that was going on all the way through a lot of
our big public companies.
April Baer - Is it safe to certify these big three
events as having contributed to investor confidence on Wall Street?
Scott Roulston - I think slowly, yes. It's contributing
somewhat, but I wouldn't put a lot of significance in any of the three
events, including the one about the Fed, which truly wasn't much news
either.
April Baer - Much of the commercial airline industry
shivered collectively this week as US Airways filed for Chapter 11 bankruptcy
protection and American Airlines announced a plan to cut 7,000 jobs. Now,
putting aside for a moment what this might do to ticket prices, the economic
problems facing the industry are no big secret. I want to know whether
this kind of bankruptcy is one that US Airways will be able to escape
as Continental once did?
Scott Roulston - US Airways is going to have to
fundamentally restructure and I think the Chapter 11 protection is going
to give them the opportunity to do it. But the industry has an even bigger
problem. United Airlines is not too far behind if they can't get their
act together with getting their costs under control. You know, here's
an interesting fact. Southwest Airline, which is the one airline that
is making money, has a $9 billion market capitalization. If you bought
all their stock outstanding, it would cost you $9 billion. That's more
than United, American, Delta and US Air combined, by far - like twice
as much as those combined. They are the only ones making money. The point
here is that the whole airline industry has to restructure, not just American.
And the government may actually need to get involved a little bit further
because there are going to be some anti-trust issues along the way.
April Baer - Strange days. Scott, last week we
talked a little bit abut the Charles Schwab firm getting into the hedge
fund business, which can sometimes be profitable but can also sometimes
be very dangerous. This week I wanted to continue that conversation a
little bit and talk about who's getting in on the act. This is kind of
a new thing for small fry investors, right?
Scott Roulston - You're right. Hedge funds up until
now were only available to what they called "sophisticated" investors.
Basically, in shorthand "sophisticated investor" would mean only over
a million dollars. Hedge funds are very risky because they make big bets,
they use leverage (which means borrowing money) and they are not regulated.
So you don't really know what's in them - there's no disclosure. So they
can have huge swings - up or down. The new hedge funds that we talked
about last week, like Schwab, are more like a mutual fund hedge fund,
which means they have to have disclosure. They aren't taking as big of
bets (which means they aren't incurring the leverage), so they are kind
of a kinder, gentler hedge fund.
April Baer - Interesting. As we finish up today,
Elvis of course died on this date 25 years ago. You've probably heard
a few of the stories running around based on this. I noticed also this
week that Elvis, in addition to being labeled the King of Rock and Roll,
is also the king of dead celebrities? He's the top earning deceased entertainer
in history! This guy brought in $37 million in record and licensing sales
last year. Now, just by way of comparison, John Lennon couldn't compete
- he only netted $20 million last year, as did racing legend, Dale Earnhart.
The late rap star Tupak Shakur earned about $7 million. I guess Elvis's
dominance is helped by that release of the remake of the '68 single "A
Little Less Conversation, A Littler More Action". You know, that was that
thing that kept running during the commercials during the World Cup.
Scott Roulston - Well, I knew you couldn't leave
Elvis alone! I saw him earlier this week…
April Baer - Again?
Scott Roulston - Yeah, he was down at the Gund
on Wednesday for the Springsteen concert. But seriously, Lisa Marie Presley,
she's the 100% beneficiary of the $37 million a year, so she's in pretty
good shape. Didn't she just get married or something?
April Baer - Yes, to Nicholas Cage. A nice wedding
present, I guess.
Scott Roulston - "The Flying Elvi" - that was one
of the greatest movies of all time, I thought.
April Baer - You know, if only Elvis had had the
forethought to sell stock in his work. I understand David Bowie is making
a killing that way. Well Scott, we'll see you next week and all I can
say is "Thank you very much".
Scott Roulston - Don't be cruel!
April Baer - That is bad! Scott Roulston of Fairport
Asset Management joins us on Fridays to talk about the business news of
the week.
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