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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, August 23, 2002
Scott Roulston, CEO of Fairport Asset Management, discusses
the consumer's choice of automobiles as their big-ticket selection, the
continued boom in mortgage markets, and the possible improvement in the
local economy with the announcement that ISG may reopen its West-side
mill.
April Baer - The sun came out on Wall Street this
week! If nothing drastic happens in today's trading, the Dow might just
close a fifth straight week in the "win" column. That would be a welcome
complement to some other good economic news that has been surfacing this
week. For one thing, the federal government announced nationwide claims
for unemployment are fewer than 400,000 for the tenth straight week. Some
analysts have suggested that it is merely a lack of bad news that is protecting
the market right now. Here to stroll with us along the sunny side, as
he does each Friday, is Scott Roulston of Fairport Asset Management. Scott,
how are you?
Scott Roulston - Good! How are you this morning?
April Baer - Not bad. Gosh, it's good to have something
different to talk about for a change. New car sales have been looking
awfully nice this week. Talk to me about that.
Scott Roulston - Well, the zero percent financing,
along with the rebates, have really helped sales. In July, sales were
at a rate of about 18 million new cars a year, which is huge. The early
returns for August are that they are even higher than July. So people
are snapping up new cars right and left right now. As a matter of fact,
they may be buying cars instead of other kinds of big-ticket items.
April Baer - Speaking of large purchases, are there
any actual homeowners left in the country who have not refinanced this
summer? There have been so many people refinancing right now. Are the
banks - it kind of has me wondering, are the banks taking a bath on this
one?
Scott Roulston - Not in the least. And I'll tell
you why, but just to go back, you know the rates right now are somewhere
around 5¾ for a 15-year and 6½ for a 30-year. So if you haven't, maybe
you want to call your bank and start the process going. I know I did a
couple of weeks ago. It's creating a lot of liquidity for consumers and
actually people are even beginning to save. There are some signs that
they are not spending that reduced house payment. But the banks are not
taking it on the chin at all, April. I mean, they can't place this paper
in the market quickly enough. As a matter of fact, one banker told me
"You know, when we're loaning it at 6¼ and we only have to pay 1.75 in
the Fed funds rate, we're really cleaning up on this."
April Baer - I saw in the paper this week that
the old West Side mill that used to belong to LTV might be reopened. ISG,
the company that bought most of LTV's assets, may begin producing steel
there again - something not a lot of people expected. Could this be a
needed shot in the arm, creating some more jobs for Cleveland?
Scott Roulston - I would love for that to happen,
but the operative word there is "may". Their costs are much lower and
they're helped right now by the fact that prices are temporarily high
because of the tariffs. But I'm not ready to call those folks the "Southwest
Airlines of the steel industry" just yet. I mean, steel prices are already
starting to come down. The Bush administration is doing all sorts of things
to weaken those steel tariffs to avoid a trade war. So I think we'll just
have to wait and see whether the West Side mill opens or not.
April Baer - My goodness. All this optimism! (laughter)
Tell me, though, could anything go wrong with such a rosy scenario as
we've just painted?
Scott Roulston - Well, I am optimistic. I'm in
the camp that says we're going to see some pretty strong growth in domestic
product, maybe even as high as 3-4% in the second half. But there are
two big risks right now. One is corporate credit. The bank may be loaning
money to these homeowners, but they are not to companies right now. I
was with a banker earlier this week who said that he can't even take a
cash flow deal to committee, only the much more conservative asset-based
loans are the ones being approved. So any kind of loosening by the OCC
(which is the regulatory agency for the banks) would really help. And
bond spreads are very high. That means that corporate borrowing cost is
very high. So any kind of corporate credit crunch is a risk. Second is
employment. You mentioned earlier that initial unemployment claims are
down and that is a good leading indicator that employment will be up.
But people are still worried about losing their jobs and that could affect
consumer confidence.
April Baer - Can we bounce back to the real estate
tax for a moment? We've talked about property as an investment in the
past, but only in terms of home ownership. Can you give us an idea of
what is one way an investor might get started in other kinds of real estate
development or investment?
Scott Roulston - Sure. I think besides either going
with a shorter-term loan or some of the things we talked about on your
own home, real estate investing is just like any other kind of investing.
One of the premises is diversification. And a good way of getting that
is to invest in REITs - Real Estate Investment Trusts. These are publicly
traded and they're companies that invest in a variety of properties. Good
examples locally would be: Developers Diversified DDR, which is a shopping
center REIT.; Boykin Lodging, which is a hotel REIT - they own hotel properties
all around the country; Associated Estates, which is an apartment REIT.
So a good basket of REIT stocks would be a way of investing in different
sectors in the real estate economy.
April Baer - Well, Scott, you have a nice weekend.
We'll talk to you next week.
Scott Roulston - See you next week!
April Baer - Scott Roulston of Fairport Asset
Management chats with us about the business news of the week at this time
each Friday.
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