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CNN IN THE MONEY
How Stability in Saudi Arabia Affects Our Lives Here; Is the Housing Boom and the Economy Headed South?
Aired August 6, 2005 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JACK CAFFERTY, CNN ANCHOR, IN THE MONEY: Coming up on IN THE MONEY. Closer than you think. For the new king on the throne in Saudi Arabia, see how stability there affects our lives here.
Plus, that money will cost you. Mortgage applications down, interest rates on the rise again. Find out if the housing boom and the economy are headed south.
And father knows best. Not in my house. We'll look at whether family businesses do better than the ones where you don't have to have Thanksgiving dinner with your boss. All that and more right after a quick check of the headlines.
GERRI WILLIS, CNNHN ANCHOR: "Now in the News".
A plane carrying 35 passengers and four crew members crashed into the Mediterranean Sea today. Italian media reports that at least 14 people have died. Twenty others have been rescued. And five are still missing. The flight tried to make an emergency landing in Palermo before it went down.
We'll have a live update next hour on CNN LIVE SATURDAY.
Russians are trying to pull a sunken mini sub closer to the surface of the Pacific Ocean. An American deep-sea drone along with other rescue vehicles and personnel are in Russia at this hour. Rescuers are attempting to pull the submarine off the ocean floor. Seven Russians are now inside the submarine. We'll bring you live updates. That's next hour on CNN LIVE SATURDAY.
More news at the bottom of the hour. IN THE MONEY begins right now.
CAFFERTY: Welcome to the program. I'm Jack Cafferty. Coming up on today's edition of IN THE MONEY, hanging tight. Saudi Arabia lost one king this week, gained another. See why stability there affects a lot of things here.
Also ahead giving dad the business. Laughon Murdoch's bailing on his dad's media empire. That would be FOX and those other things, the newspapers and stuff. We'll look at whether family-owned companies deliver better bottom-line results.
Plus, earning their stripes. As Adidas picks up Reebok, find out how sneakers went from a schoolyard necessity to a fashion accessory. Joining me today, a couple of IN THE MONEY veterans, CNN correspondent Susan Lisovicz, "Fortune" magazine Editor-at-large Andy Serwer.
You know there is no good news in the jobs report.
The jobs report came out Friday. Better than expected numbers. Previous two months revised upward. Unemployment rate holding at 5 percent. All signs of a good economy, which is good for profits.
But it is bad because now the Fed is going to have room to keep on raising interest rates because they're afraid of the economy overheating and inflation rearing its ugly head at some point. So how do you read those jobs reports?
ANDY SERWER, CNN ANCHOR, IN THE MONEY: Well I thought the number, the 207,000 jobs created the month of July was pretty good. I thought it was down the middle of the fairway, not too hot, not too cold. Twenty-six months in a row now we had job growth going back to June of '03, back when Jack was wearing short pants, it was so long ago. What can you say? I think the markets responded a little bit because of other things, took a little bit of a hit early on Friday. It is great. What can you complain about?
SUSAN LISCOVICZ, CNN ANCHOR, IN THE MONEY: And it really sort of dissuades all those people who were fearful that this soft patch that we saw earlier in the year that it was going to really translate into a very weak second half. And all of the economic statistics we have received in past few weeks have totally refuted that, whether it is corporate profits, which have been terrific in the second quarter. Whether it is personnel income, spending, inflation under control, despite record oil prices. That's great.
But as far as the labor market, yes there has been growth. But remember that it is coming off of, I mean a recession and the dot com bust.
SERWER: Yes. But if you're at beach, relax. Come on.
CAFFERTY: Even if you're not at the beach, relax. If you're doing IN THE MONEY, relax.
SERWER: We are, right.
LISCOVICZ: So it is just right. Not too hot. Not too cold.
CAFFERTY: Goldie Locks. The most interesting thing about Saudi Arabia's leadership change this week is the stuff that is going on behind the scenes -- interesting, and perhaps longer term, not good -- at least not for us. There are concerns that the country's new king, Abdullah, may be running a country that is primed for rebellion. What's more, there are questions about just how much oil the Saudi's have left. It all adds up at the pump, as you no doubt noticed of late.
For a look at the big picture we're joined now from Santa Faye, New Mexico by Michael Klare, who is the author of "Blood and Oil", professor of Peace and World Security Studies at Hampshire College in Massachusetts. Mike nice to see you. Thanks for being with us.
MICHAEL KLARE, AUTHOR, "BLOOD & OIL": My pleasure.
CAFFERTY: Short-term, everybody expects continuity to remain pretty much as it has been in terms of the U. S. relationship with Saudi Arabia. But the new guy is an old guy -- he's 81-- suggesting he may not be at the controls for a whole long time. And there is a group of younger Turks over there that are chomping at the bit to get their hands on power.
Put some perspective on this thing for us as we look beyond the short term.
KLARE: Well, bear in mind the founder of the modern Saudi state was King Abdullah Aziz, who met with President Roosevelt in 1945, I think it was. All of the kings since then have been his sons by various wives. He had many wives. So all of the kings of Saudi Arabia since 1945 are sons of the King Abdullah Aziz, the original king. All of them are now in their 70s and 80s. This generation will eventually pass on. And then there will be enormous fighting, I believe, between their children, their sons.
It has to be males. And there are many, many grandchildren of King Abdullah Aziz. They have different politics, different interests. There is no agreement on who will succeed. So I worry about a clash within the royal family when this generation, the sons of Abdullah Aziz, pass away.
LISCOVICZ: Michael, is there any one figure emerging? There's so many issues in Saudi Arabia, but let's just talk about that enormous family and the power struggle. Any certain faces or names that you can throw out there?
KLARE: No, because not much is known I believe, about the children of the current generation. Prince Sultan is now the crown prince. And he is expected to succeed Abdullah when Abdullah dies. But they're roughly the same age, so that wouldn't last very long. Who would take over after that is quite unclear.
Bear in mind that the original founder, Abdullaah Aziz had many wives and many children and they come from different tribes. The way he pacified the country was to marry into different Bedouin families and thereby gaining the loyalty of those tribes. So the children and grandchildren come from different tribes. They have different political and economic interests. And it is very unclear who will dominate if there is a power struggle a few years from now.
Bear in mind also that there are two armies in Saudi Arabia. There is the National Guard, which is loyal to some members of the royal family. And the Army, which is completely separate, has other connections. And they could fight with one another if it came to an internal power struggle.
SERWER: I mean Michael, let's put this into perspective. This is a really scary situation, I think. I mean this is a country that is basically run like it is in the middle ages. It would be like if England had the war between the Windsors and the Stewarts, and they still controlled the situation. They didn't have a Parliament. There is no democracy. And this is a country that is very, very powerful with these armies and, of course, with a great oil wealth. This is a situation in my mind -- I mean it is a tinderbox, isn't it?
What do you think could happen here?
KLARE: You have these two separate sources of instability. One of them we're talking about is possibility of internal struggle within the royal family. But then you have the rest of the population, 25 million people, who are not part of the royal family, who have many grievances. Many of them believe the royal family is deeply corrupt, too tempted by their ties with the United States and the West, spend their money too flagrantly in wealth, which is not something you want to do in a deeply religious country.
So there is a lot of grievances against the royal family. And there is no -- as you say, no legal public way of expressing that dissent. And that leads some angry young people, boys, and young men, to join various terrorist organizations as a way of expressing their hostility to the royal family.
So you have two possible sources of instability that could explode at any point down the road.
CAFFERTY: How much oil do they have under the ground over there? Now all of a sudden there seems to be some question about the size of the Saudi reserves.
KLARE: Yes, there is a lot of question about that. Now, they claim that they have about 260 billion barrels of oil reserves untapped. And bear in mind that's about one-fourth or one-fifth of the known world supply of petroleum. So that is a crucial supply of petroleum. But they have not allowed the -- the Saudis have not aloud Western oil experts to examine closely records of production from all of their major fields.
Most of their oil comes from half a dozen very large fields. And we haven't seen information on just how productive they are and how much reserves really are there. So some experts in this country are coming to the conclusion that Saudi Arabia does not have the capacity that is claimed to keep producing more and more oil in the future. And this is deeply worrisome for us in the United States.
LISCOVICZ: Right. But it is also, of course, worrisome for the Saudis. That is their cash crop. There's so many other issues in Saudi Arabia -- for instance, the demographics which is so young, high unemployment, high debt. So politics and oil aside, that's yet another problem.
KLARE: You're quite right about that. Indeed it is a very young population, a lot of unemployment. And one way that that unemployment is expressed is that the -- the educational system is dominated by Mullahs, by the religious part of the country, the religious elite, so many of these young men are trained in Islam, but not in very usable skills that, you know, to work in a factory or other conventional jobs. They're steeped in Islam so they're susceptible to appeals from radical leaders, from radical movements, but they don't have very good job prospects.
So you have this combination of youth, unemployment, and very extreme religious movements in the country. All of this is very deeply disturbing.
CAFFERTY: Makes you really not want to look forward to the future. Michael Klare, author of "Blood and Oil. " Thank you very much for joining us. Appreciate having you on the program.
KLARE: My pleasure.
CAFFERTY: An example of the degree to which people become disaffected with the leadership in Saudi Arabia is personified in the image of Osama Bin Laden. He is a Saudi.
When we come back to IN THE MONEY, Fed up. Interest rates could rise next week. Mortgage applications are slipping. See if a new Fed hike will put the kibosh on the housing boom.
And out of sight, out of pocket. Self-storage lets you pay to hide all that stuff you just can't bring yourself to part with. We'll look at how one storage company is doing on Wall Street. Actually they're all doing pretty well.
Ladies first. Find out why there is so much testosterone in the video game world and so little estrogen. We explore a lot of issues on this program. Stick around.
CAFFERTY: Well the money you borrowed to buy that house is going to get more expensive soon. And it could turn even pricier as early as next week. The Fed's Open Market Committee expected to once again ratchet up interest rates by a quarter point when it meets on Tuesday. That comes as Freddie Mac reports average mortgage rates hitting their highest point since mid April. There is still relatively low, but they are creeping up. And what's more, an industry group says mortgage applications fell off last week.
All of which got us wondering if the AC is starting to kick in on the hot housing market. John Rutledge is going to help us figure this thing out. He is the chairman of Rutledge Capital, a private equity investment firm. John, nice to have you with us.
JOHN RUTLEDGE, RUTLEDGE CAPITAL: Thanks, Jack. Great to be with you.
CAFFERTY: Some have suggested that one of the things in the Fed's gunsights is the housing market. Do you buy that?
RUTLEDGE: Well I think so. The Fed likes to raise rates. You know they get headlines. They'll put the rates up on Tuesday a little bit. The housing market though is already topped out. This is really just the nail in the coffin.
SERWER: Hey John, let me ask you about inflation a little bit. I think that you're suggesting inflation is not a problem. I see higher prices. You're suggesting it is not so bad?
RUTLEDGE: Well, Andy, you need to shop in different stores.
SERWER: That's probably true, thanks.
RUTLEDGE: I think so. Go Costco, go Target. But the truth is, the U.S. is now connected with China and India with fiber-optic cable. Our prices and wages and their prices and wages are now being driven together. That's going to be the story for the rest of our lives. The U.S. is not going to have an inflation problem. As long as it doesn't, it won't have a bond rate problem either, which is why we have a bond yield now, a 10-year bond that's 431 yesterday.
LISCOVICZ: Let's talk about that. You are saying, John, if I'm not mistaken, that it is really not what the Fed does. And we all know the Fed is definitely going to raise rates for a tenth time. It is really what the market does. And mortgage rates are still really attractive which is why people are buying houses. You make your case that this market is cooling off.
What are your signs?
RUTLEDGE: I think the market is cooling off in housing. We saw it start to do so last year when the rates actually hit bottom and rose a year ago in June. Housing prices went flat until the end of the year. Now we had a further drop this year. We got a big boost in housing prices.
A rule of thumb is 100 basis points or 1 percent on the long-term mortgage rate is worth about 20, 25 percent on the price of a house. Well in the last 30 days, the 10-year bond increased by about half a percent since our fiasco with the Chinese currency. That half a percent, you can think of, as 12 percent off of housing prices.
Housing market is not going to deflate or explode. But it is a big mistake to think that they always go up. It is a big mistake to go in there now and buy the house.
CAFFERTY: Let me go back to something you said earlier, which I thought was interesting -- the tying of the fiber-optic cable of the American economy to China and India. A lot of people are expecting we are going to get stronger second half growth. I have heard estimates of maybe 5 percent in the second half GDP in this country.
CAFTA, this new free trade agreement that they are putting through with the Central American Countries, the critics say, will siphon additional jobs out of this country to go down there as opposed to the ones that have gone off to India and other places.
Is the economy in this country as strong as some of the experts think it is? And what impact do you see this tying of our economy to places like China and India having on economic growth in the United States?
RUTLEDGE: Jack, I have Alzheimer's. So if I don't remember both of those questions --
CAFFERTY: The question is longer than the program. John, I get paid by the word.
RUTLEDGE: OK. First of all the economy. The U.S. economy today is stronger than dirt. The reason it is so strong is because more than half of the U.S. economy is mom and pop businesses. It is not General Electric, or it is not big public companies. Mom and pop were shut down from business loans for four years until last May. That was because the government shut down the banks after their bubble in the late '90s.
The banks are back in business now. Business loans have been flooding the street for the last 12 months. Mom and pop are hiring. That's why today we had such a big jobs number. And the big surprises that Wall Street is having now is the economy is always stronger than they thought, and the profits are always stronger than they thought. That means you're going to have growth, rising job numbers, rising profit numbers, and rising stock prices. So I'm very bullish on the U.S. economy.
The second question, though, you asked was regarding China. China and India have been hooked to the U.S. like what I like to describe a washtub. When I was young, my mom had washtubs, those cast iron things. One side was for washing; the other side was for rinsing. You know if you filled one of them up with water, and left the other empty, but you drilled a hole in the wall, pretty soon the water would level out.
That's what is happening today with prices and wages between the U.S. and China and India. Fiber-optic has hooked our service sectors together. Our prices and wages are much higher than theirs. That's why everybody is so frightened about this outsourcing thing, because our prices are being driven together. That's good for inflation. It is good for investors. It is terrible for an uneducated unskilled worker with a wrench in his hand. That person is going have a bad day for a long time.
SERWER: John, I guess listening to you I shouldn't expect the value of my home to triple over the next two years. You also suggest the bond market is going to be quiescence. You said the stock market is looking good. Can you explore that a little bit more for us?
RUTLEDGE: Absolutely. I like the stock market a lot. I think of the stock market as a big weather map, like on your news show, where you have storm systems created by high and low pressures coming together. Well in the stock market that is high and low returns. So any time there is an event that moves returns relative to each other, there is money to make in the stock market. The biggest example we have had in the last couple of years, the dividend tax cut, raised the after-tax return on dividend-bearing assets relative to others.
Since then the stock market is up $3 trillion. It was 7,500 on the Dow then. Today, it is 10. 6. So we're seeing the same thing happen in terms of these small companies today. Mom and pop have access to business loans now. The return on small businesses have gone up, so small cap stocks which are mom and pop companies, have had a tremendous run relative to the market. It is good for the market, but it is especially good for small companies.
My big bets today are small cap U.S. stocks, dividend bearing stocks, things that sell things to China, and a recovery in Japan along with what is happening in the Persian Gulf. Those are great storm systems to have on your weather map.
LISCOVICZ: OK. We appreciate the stock picks. Now who is your pick to replace Alan Greenspan? That's a question that has really fascinated Wall Street. And Lawrence Lindsey's name resurfaced in the past few days.
RUTLEDGE: Of course. Well you know Susan I've known Alan for about 30 years when I was writing the Gipper's (ph) economic plan, Alan was the uncle on the phone I was talking with. The best replacement for Alan Greenspan in my opinion would be one of those blowup dolls that you can put in his chair that never does anything.
CAFFERTY: Just sit there.
RUTLEDGE: I've always thought the best Fed policy would be every time there is a number that goes up or down, they should go out on the lawn and bang on a gong and make a lot of noise rather than move the funds rate. You see, the mistake that Wall Street makes, monetary policy is not the Fed funds rate. The Fed funds rate only matters for the newspapers and the news shows and for the adjustable rate mortgage market.
What really matters is the availability of credit. It is whether the banks are open or closed. And the Fed doesn't directly control that. So I'm not too worried about who runs the Fed. I would like it to be someone who doesn't have too much hubris and think they talk directly to god, though.
SERWER: All right. Sadly, John, we're going to have to leave it at that, because I think we could talk to you for quite a bit longer. John Rutledge, chairman of Rutledge Capital. Thank you for you're very articulates comments.
RUTLEDGE: Great to be with you.
Coming up after the break, can't live with it. Can't dump it. Somebody is making money off your mom's old couch and all that other stuff you're too guilty to get rid of. See how shares in public storage are doing on Wall Street.
Plus, that's some allowance, kiddo. Family businesses turn the people you grew up with into your bosses and coworkers. See if that is a recipe for success.
Plus, players and winners. With Adidas doing a deal for Reebok find out how the simply art of selling sneakers turned into a major moneymaker.
LISCOVICZ: Now let's take a look at the week's top stories in our "Money Minute".
President Bush signed his essential American free trade agreement CAFTA. And is law after Congress passed the bill by just two votes. Supporters say the measure wills open markets like the Nicaragua and Honduras, to U.S.-made goods. But opponents say the agreement will lead to another reduction in American manufacturing jobs.
The man environmentalists love to hate is retiring. Lee Raymond, chairman and CEO of oil giant Exxon Mobil, stepping down at the end of the year. As CEO of Exxon, Raymond's engineering the merger of his company and Mobil in 1999 gets a lot of the credit for turning Exxon Mobil into the world's most valuable company. Raymond will be succeeded by Exxon Mobil President Rex Tillerson.
And this why the call them diet fads. Atkins Nutritionals filed for bankruptcy, blaming slumping demands and tougher competition. At one point Atkins' low-carb diet was so popular that is was blamed for bankruptcies at bakeries and pasta companies. Atkins is hoping to recover by focusing on its more successful nutrition bar business.
SERWER: One of the biggest winners in this hot real estate market is a company called Public Storage. The company owns more than a 1,000 of those storage locker facilities that so many Americans are using these days. Experts say all the buying and selling of homes is a big reason why people are opting to store their things in a locker rather than moving them around with them.
Shares of Public Storage have had a pretty good run over the past year. Public Storage is our "Stock of the Week". Actually it has had a very good run over the past five years, this is a stock chart that will make you weep. I mean the stock has gone from 20 to 62 over the past five years. And the guy who founded it, Wayne Hughes, is a billionaire.
And I think you know as I was suggesting it is getting in touch with your inner pack rat. I mean I have to confess I have one of these things. The company has my credit card number, every month caching, they get $150. My stuff is up there. My wife and I say oh eventually we will deal with it. We don't.
LISCOVICZ: See, that is the only good thing of moving as far as I'm concerned. You get rid of a lot of junk. But it also reminds you what an entrepreneur society economy we still have. And you say, why didn't I think of that? It is so simple.
CAFFERTY: Look at the cash flow. I mean there is no maintenance. You put these little sheds up, and rent them out. And Andy brings his queen size whatever, and puts it --
CAFFERTY: Gives his credit card number. And every month you ring the out. I mean it deceptively simple.
SERWER: You have to pave the asphalt. You have to paint every three years. And you have a security system. Those are your costs.
CAFFERTY: It is a fence.
LISCOVICZ: And you look at this stock. It is so contrarian to everything else. And in the last five years think about it 2000, 2001, and 2002 everything was down. This stock --
CAFFERTY: They have been trying to deal with another company and it is on again, off again. It is still off again. What is the attraction there?
SERWER: Well the company they are trying to buy is called Shurgard. And it is another one of these storage companies. But they have a lot of presence in Europe. So they kind of want to take this global.
LISCOVICZ: Take over the world.
SERWER: Yes. I mean Europeans are getting in the act, too. They tried to do a deal five years ago; they tried to do a deal recently. It doesn't look like it is going to happen. There is still a lot of moms and pops in this business.
So you can see another player coming in. These companies are REITs, real estate investment trusts, which means they hand 90 percent of their earnings to their shareholders, which is great stuff. You know this is one of these businesses the stock has gone up a lot, but I don't think the party is over. I mean I'm not suggesting mortgaging the farm and buying this thing, it is an expensive stock. But you know it is going to be around. It works. People like these things.
LISCOVICZ: And think about it. I mean living in New York City, in Tokyo, in a studio apartment, where do you put all your stuff? So even if you're not a pack rat, you still don't have enough room in your --
CAFFERTY: The alternative is you put it on the curb and let the garbage man take it.
SERWER: And one of these days I'm going to do that. Can you hear me, honey?
Coming up on IN THE MONEY, sorry, pops. Rupert Murdoch has a family business, but the family isn't playing ball. See if blood is thicker than cash when your dad is the boss.
Plus it is not just about sneakers anymore, as Adidas scores a slam-dunk against Reebok. We'll see how some athletic shoe companies started thinking beyond your feet.
And move whole states with just a click of the old mouse. Test your knowledge of U.S. geography with our "Fun Site of the Week."
(COMMERCIAL BREAK) WILLIS: I'm Gerri Willis in Atlanta with stories making headlines at this hour.
Rescuers have pulled at least 19 survivors from the sea after a Tunisian plane went down off Sicily. At least 10 people are reported dead. Ten others are missing. The Tunis Air flight reported an engine problem and tried to make an emergency landing at the Palermo Airport. A live update at the top of the hour on CNN LIVE SATURDAY.
The Russians say they placed cables under a trapped mini sub and hope to raise it shortly. Seven Russian sailors are trapped in the vessel, which can soon run out of air. The U.S. sent a pair of unmanned rescue vehicles to Russia to help with the rescue. The Russians say they've been in contact with the sub crew and the men remain in good condition. We'll bring you the very latest in a live update on CNN LIVE SATURDAY at 2:00 Eastern.
I'll have all the days' news at the top of the hour. Now back to IN THE MONEY at CNN.
LISCOVICZ: Sometimes the business headlines can look a like a lot like a gossip column. Just last week, 33-year-old Lachlan Murdoch, son of News Corp. Chairman Rupert Murdoch, abruptly resigned from his post as deputy COO at the media conglomerate, and rumors flew about a rift within the family.
Critics say the incident highlights one of the key risks in running a family business.
Our next guest says having family members on staff can be good for the company. David Reed has co-authored several studies on family- run and controlled corporations. He's also an associate professor of finance at the Fox School of Business at Temple University. Welcome.
DAVID REED, PROFESSOR, FOX SCHOOL OF BUSINESS, TEMPLE UNIVERSITY: Thank you.
LISCOVICZ: I guess it is appropriate that it is Fox, because that's one of the great assets for News Corp. Before we broaden the picture let's talk about this rift. Here is Lachlan quits, he was the heir apparent. One Murdoch daughter had already quit. Just one remains. And now there is not only the fact that accusations that Mr. Murdoch was interfering and even dissing his son while he was managing his part of the business, but now there is greater questions about the trust, the family trust because Mr. Murdoch's third wife has two small children who want a share of the family pot.
How disruptive is this to the company?
REED: Well, typically we look at these family firms; one of the key issues in understanding the success is how they deal with the succession issue. You generally see two kinds of approaches if they stay in the firm. The first approach is to try to hire an outsider to run the firm after the founder leaves the firm. So it doesn't necessarily have to be a family CEO member. The family could be on the board or something like that. The other approach more of this notion of a family member must be the CEO and that is where it really depends on what is going on in the firm in terms of who is stepping up to the plate.
SERWER: David, let me ask you a question. Why do you think it is that these family firms do better on average than non-family firms, though?
REED: Well, I think it has to do with this notion that the family -- if they stay in the firm, they have a large stake invested in the firm. They'll typically have 70 percent of the wealth invested in the firm or more. They'll typically own a large undiversified stake. So they have incentive to pay attention to what is going on. They're monitoring the managers.
CAFFERTY: Isn't it true that in certain cases -- and I'm thinking, for example like the Ford Motor Company -- that family businesses continue to be profitable and successful in spite of the heirs?
There is a patriarch that usually has some sort of vision or idea to get these things going -- Henry Ford, Rupert Murdoch, yadda, yadda, yadda -- and then two or three generations down the line, you have these country club dwelling offspring that don't appear to have enough sense to get in out of the rain.
But the company by that time is so big and doing so well that it kind of drags the offspring along whether they want to come or not.
REED: Well that may be the case. But there is another counterargument to that, and that is that in these particular cases, it is true that the founder usually had some vision and was the one that really pushed the firm forward. But descendants, whether they take an active role in management or more passive role by sitting on the board, are really kind of -- think of them as a committed investor in the firm. So it is not so much that they had to have great management skills. It may just be that they are a committed investor in the firm that will really make the manager perform.
LISCOVICZ: But, David, one of the things -- one of the barriers is the amount of control that the family has. And you say it is 30 percent. If the family controls more than 30 percent of the company, of a big company, that's where problems can start.
REED: Well, what our results indicate is that, first to back up, like on average, families do better. That's not saying that all family firms do better. And kind of what we find is that if you separate the families into one where there is something to counterbalance the family -- say, like, independence on the board of directors, maybe four independent directors and two family members on the board, something to counterbalance their power -- then you see the family firm performing well.
And the flip side, if you see a family firm where the family has all of the board seats, or say five of the nine board seats with Adelphia Communications, and there are only a few independent directors, there is nothing that counterbalances the family, that's when you really start to see the problems.
SERWER: Hey, David, I think there is a difference here between getting rich and staying wealthy. I want to talk about this in context of Jack's lucky gene pool club of guys here. And what I mean by that is when a company is growing, the family is trying to get rich. But once they are rich, they want to stay wealthy. And that is a different vision because you take risks when you're trying to get wealthy and you don't take risks when you're trying to stay wealthy. Doesn't that affect the management of the companies?
REED: Well, in the short answer, yes. Two things that -- we think the same thing implicitly, I guess. But we have looked at that two different ways. The first way is to look at do family firms actually take different levels of risk? Do they invest differently? Do they diversify more? Do they take different amounts of debt on? And we find that this is not really the case. They actually tend to stay a bit more focused, which could be riskier.
The second thing -- and it kind of supports this notion, though -- is that debt holders really seem to like family firms. Family firms enjoy about a 30 basis point lower cost of debt financing than the non-family firms, which is pretty substantial savings.
CAFFERTY: Were you surprised at all by the results of the research when you set out to do it? I would almost think that the contrarian view might have been the thing you had in mind going into this.
REED: To be honest, that is kind of the popular view in both the academic literature and the popular press. I guess for us in starting this kind of research, it was more of maybe they're not as bad as we think they are. It was a surprise to find out that they're pretty good, actually.
But it is interesting to note, it is not all of these family firms that are good. It is only on average. And when you break it out by looking at whether there is a board, independent board to counterbalance the family, you find it is about the three-fourths of the family firms where they put mechanisms like independent directors to counterbalance their influence that are really driving the results.
LISCOVICZ: It is also surprising how many family run big businesses there are. Something like a third of the S&P 500 companies have some sort of family representation, right?
REED: That's correct. About a third of them do. They have about 18 percent ownership in these firms, which is fairly substantial. That's what can detect giving U.S. reporting requirements. If we move to the Russell 3,000, it is a little over 50 percent of these publicly traded firms are family firms.
LISCOVICZ: OK. David Reed, associate professor of finance at the Fox School of Business, Temple University. Very interesting findings. Thanks so much for joining us.
REED: Thank you. LISCOVICZ: There is lots more to come here on IN THE MONEY. Up next, teaming up to slam the swoosh. We'll look at whether Adidas' new alliance with Reebok has the power to take down Nike.
And why can't a video game think more like a woman? Why not? Allen Wastler will join us for a look at the industry's big untapped market.
SERWER: Remember when your sneakers were just a pair of worn out shoes you put on to go work out in the yard or jog around the block? Those days are gone. Sneakers have become the status symbol for those who define cool, and a serious moneymaker for a handful of big businesses.
This week, Adidas, the number two athletic gear maker, announced it is buying Reebok International, number three in the business, for $3. 8 billion. The combined company will take on industry giant Nike. Will it succeed is the question, of course.
Peter Roby has some thoughts on this. He's the director of the Center for the Study of Sport in Society. He also spent 10 years working for Reebok. He also coached at some of the nation's elite athletic institutions, as well we should mention.
Peter, welcome to the program. Can you talk about what you think this merger means to the business and to the rest of us?
PETER ROBY, DIRECTOR, THE STUDY OF SPORT IN SOCIETY: Well, it has a lot of potential ramifications, especially with regard to retail and how the relationship that these two brands, Reebok and Adidas, will have with their retail partners now that they have the additional leverage and clout of the combined resources abilities that they both bring to the table with regard to working out better pricing, working out better shelf space at retail and maybe being able to leverage their two entities to the extent that Nike has been able to leverage it over all these years.
LISCOVICZ: Obviously, Peter, Adidas and Reebok still have a ways to go. I think Nike still controls more than a third of the U.S. market, even with this merger. But Reebok brings some interesting names to the table. It represents for instance Allen Iverson, rappers like Jay-Z and Yao Ming, which is important because Beijing is going to host the Olympics in a few years.
ROBY: Yeah. I think one of the interesting things about this whole merger is the implications in terms of the rest of the international markets as opposed to what is going to happen just in the U.S. I know I have read that Adidas feels like this move will help them with regard to their ability to drive the business in the U.S. where they haven't been able to crack that tough 12 to 24-year-old male mark net particular, whereas they do have quite a reputation internationally and had an involvement in China for over 20 years.
The issue is that the fact that the companies are going to remain independent with regard to their branding, it is still -- begs into question what does it mean in terms of the consumer, seeing anything different about the two brands.
CAFFERTY: What is it that Nike knows about selling shoes -- not about making shoes, because a shoe is a shoe is a shoe, I suppose to a point -- but about selling shoes that nobody else in the industry seems to have been able to figure out yet in?
ROBY: Well they've put so much of their emphasis and resources behind building a brand. And when you talk about trying to get people to buy products based on fashion, as opposed to just performance, it really is about branding. And Nike invested so much money over the last 20 years in associating their brand with the things that were cool, that were hip, that were irreverent, and that spoke to being the best with the people that they have had onboard as spokespeople, with the events they've done, how they've marketed their products in terms of advertising been very consistent over 20 years.
And it pays dividends because the consumer knows what the brand stands for. And the consumer, when they buy products, wants to make a statement. They want to tell people what it is about them that makes them special and unique. And Nike has done a really good job of being able to do that. Whereas Reebok and Adidas had fits and starts with that, it hasn't been consistent over time.
SERWER: We all know -- speaking of standing for something -- that Adidas stands for "All Day I Dream About Sports" or something like that.
Let me ask you, know, hasn't this thing topped out a little bit, Peter? I mean it is stale. It was a big phenomenon of Michael Jordan. And now with it sort of declining, if you will, of the NBA is the trend a little bit down turning?
ROBY: I would agree with you if you were talking just about the U.S. market. I think the U.S. market obviously is the most mature market and has been that way for a long time. So you haven't really seen that marketplace grow very much over the last five or six years.
But where you see a lot of the growth still happening is internationally, especially as countries that have been unavailable to a lot of brands over the last 10 or 15 years are now starting to open themselves up. The whole issue around China is so obvious that everybody -- that's the next big opportunity and everybody is trying to get a toehold in there. And, you know, the fact Reebok has the most popular athlete in China now in Yao Ming certainly positions them well as the Beijing Olympics are going there in 2008.
LISCOVICZ: Yeah. So Yao Ming could be sort of the next Air Jordan for Nike -- for excuse me Reebok, Adidas. Should be interesting. Certainly they've got plenty of opportunities with the summer games in Beijing.
Peter Roby is director of the Center for the Study of Sport in Society at Northeastern University. Thanks for joining us.
ROBY: My pleasure. Thanks for having me.
LISCOVICZ: There is more to come on IN THE MONEY. Just ahead, find out how a big square state can drive you crazy. Check out the geography quiz on our "Fun Site of the Week."
And brag about your score or just tell us what is on your mind. You can drop us a line at this address INTHEMONEY@CNN.com.
CAFFERTY: Video games your kids play all the time, $10 billion a year business. Right now about 3 percent of that comes from women. But even though females are the great-untapped resource for the video game makers, Allen Wastler says the companies shouldn't bother. That's the topic of this week's "Inside Out. " You're skating on some thin whatcha-ma-call-it.
ALLEN WASTLER, CNN ANCHOR, IN THE MONEY: I'm right here next to Susan.
LISCOVICZ: I'm ready to take you on.
WASTLER: And I'm not saying -- don't get me wrong, I'm not saying shouldn't -- there's all the valid reasons there. But the fact of the matter is, video games are always going to be the domain of 18 to 34- year-old young males who are too chicken to ask a girl out and will stay up all Saturday night playing a game instead of what they're going to do. It is an easy audience. It has been locked in by the video game.
CAFFERTY: You sound like somebody who knows.
LISCOVICZ: He just turned 35.
WASTLER: But it is just -- it is one of these things, you always have the press coming out saying, oh, you know, this should be made more open to women. We should have women involved and developing this. And the case in point here is the Sims. You were going to bring that up, right?
WASTLER: Of course the Sims. It has made $1 billion since its introduction in the year 2000. All right. And 55 percent of the people who play it are women. As a matter of fact, I have a neighbor who is obsessed with it. But that's the exception that proves the rule, I believe.
If you look at what the video game makers did with the Sims, they just came out with a new game called Singles. Like the Sims, you're controlling people, except you're trying to get them into romance relationships.
CAFFERTY: I started to ask why don't girls play these games. You answered the question before I withdrew the question. Because obviously the ones that appeal to this kind of behavioral approach have some appeal.
WASTLER: That is right. And it is going to be at a mental level well above where the existing big $10 billion market is right now. And if you throw more shoot them ups at them, more bikini clad heroines jumping around from building to building, it is always --
CAFFERTY: So what you are suggesting is at the end of the day, women are a skosh brighter than the mutant male species?
WASTLER: I am arguing that it takes a certain kind of game to appeal to them, and a more expensive game.
LISCOVICZ: I think it is slam-dunk.
CAFFERTY: I've been married twice, I have four daughters. You get no argument from me. They are much brighter.
What is the "Fun Site of the Week?"
WASTLER: A little geography test the production staff found. This is one of the hardest ones I've seen. We had these here. But now check this out. United States, but they don't give you the borders or anything. You have to figure it out by rivers and coastline. The red ones there those are mistakes. Every time it is red, you put it in the wrong place. Oh we are going to try to find Utah, go by the lake. Go by Salt Lake. No, no. Not there. You see. But they put it -- this is very -- it forces you to examine rivers and examine the borders. It is educational and fun.
CAFFERTY: All right.
WASTLER: It will appeal to women.
CAFFERTY: Thanks Allen.
WASTLER: Sure thing.
CAFFERTY: Coming up next on IN THE MONEY, time to hear from you as we read some of your e-mails from the past week. You can send us an e-mail right now if you would like to we are at INTHEMONEY@CNN.com. Probably the only show on television where all coherent e-mails are read and answered by someone who is marginally coherent and reads at about a third grade level. Stay with us.
CAFFERTY: All right. It is time now to read your answers to our "Question of the Week" about whether huge CEO salaries are an incentive to succeed or simply a safety net for failure. One hundred percent of the respondents voted for the latter.
Tom in Waco, Texas, wrote this, "Just look at Ken Lay for your answer. He demanded the huge salary but when the charges came, he said he didn't know what was going on. If the top CEOs keep pleading ignorance, what are we paying them for?" Terrance wrote, "The huge CEOs salaries have nothing to do with performance. Most CEOs really don't care about the long term health of their companies, so the big salaries are just a transfer of shareholder wealth to the new corporate aristocracy."
And Robert in Ontario, Canada, wrote this, "These huge salaries encourage reckless and even criminal behavior. These guys can even get sent to jail and they'll still be set for life."
Time for next week's e-mail "Question of the Week", which is this, "Are you addicted to foreign made goods?" Send your answers to in INTHEMONEY@CNN.com. And you should also visit our show page at MONEY.COM/inthemoney, which is where you'll find the address of the "Fun Site of the Week," that geography game which in fact does look like fun.
On that note, I thank you for joining us for this edition of IN THE MONEY. My thanks to CNN correspondent Susan Liscovicz, "Fortune" magazine Editor-at-large Andy Serwer, MONEY. com Managing Editor Allen Wastler.
Have a great weekend. We will see you again next week. You can also catch us Monday through Friday. Andy is on AMERICAN MORNING and I'm on THE SITUATION ROOM with Wolf Blitzer. That would make me Wolf's man Jack. That show begins Monday at 3:00. Hope you can join us for that.
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