Play Boy's 20Q

Ron Insana didn't set out to become a television business journalist. He took just one economics course, as a college sophomore. After graduation, the theater-and-film major got a job as a production assistant at the struggling Financial News Network in Los Angeles. He was soon laid off and joined the staff at a vitamin store. When FNN again beckoned, he quickly moved up the ranks. Two anchors of the understaffed operation called in sick the same day and Insana was tapped to read news updates on the air. A stint as an overnight replacement anchor helped him land his own morning stock market show. In 1991, CNBC acquired FNN and moved Insana to New York.

Over the years Insana has covered bull and bear markets, bankruptcies and bubbles, and recently a good deal of crime and scandal. In May 1999 he teamed up with Sue Herera (one of the FNN anchors whose sick call gave him his break) to anchor Business Center, the network's daily two-hour broadcast of news, features and opinion. The show originates from the floor of the New York Stock Exchange after the close of trading.

Insana has more than made up for his lack of formal economic training. He's a serious student of financial markets who peppers his conversation with references to the history and lore of Wall Street. He has just published his third book, Trend Watching, which covers investment manias and bubbles.

In addition to his Business Center duties, Insana frequently reports for NBC's Nightly News. And when the morning's business developments befuddle the irritable Don Imus, the radio host telephones Insana for enlightenment.

Contributing Editor Warren Kalbacker caught up with Insana at the Big Board. Says Kalbacker, "The janitors hadn't yet had a chance to sweep away the day's trading slips and order forms that littered the floor. When I queried Insana about the existence of such debris in the digital age, he remarked, 'This place generates more paper than was used before the arrival of computers."'

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[Q]Playboy: You anchor Business Center for two hours a night from the floor of the New York Stock Exchange. Was it a coup for the show to land that location, or was the Big Board determined to maximize the after-hours use of its physical assets?

[A]Insana: It was a coup. If you look at the history of how the Exchange has dealt with the press, it's been an extraordinarily clubby environment where only a select few have had access to the floor. The Exchange derives some benefit from having us there, but I'm not quite sure what the financial arrangement is. I think that it's more a partner than a landlord.

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[Q]Playboy: OK, once and for all, how do those you term the smart money crowd differ from the rest of us?

[A]Insana: They are different in meaningful ways. The smart money crowd will always have access to what one former hedge fund investor calls "fancy information." If you're a well-resourced hedge fund manager who is pulling in hundreds of millions of dollars in fees every year, you are able to buy--for hundreds of thousands of dollars--information that the public can't immediately get its hands on. There are all kinds of proprietary research, analytics, geopolitical intelligence gathering. What's changed in the past 10 or 20 years, depending on how you want to define the start of business news, is the emergence of a real-time environment, which shrank the information gap between individuals and professionals. An individual who can focus and avoid the noise can do well as an investor. What you can't do, and what professionals can't do even in this environment, is ride anything. In 1999 and 2000 day traders played the momentum game. They made the professionals look stupid because they were able to ride stocks that went up. But that was an anomaly. The 11,700 Dow was outsize. It should never have happened. The market is normal now in that it's more difficult. People are disconcerted. I know professionals who have been at this for 30 years who say this is the most difficult environment they've ever seen. People who want to become good traders are going to have to dedicate a lot of time, immerse themselves and learn through a series of mistakes. I don't know any professional who does this on a part-time basis. It is a 24-hour job. A hedge fund investor with billions of dollars on the line gets phone calls in the middle of the night.

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[Q]Playboy: Where have all the day traders of the Nineties gone? Did they change into business suits and set out on job searches?

[A]Insana: They're around. Some people managed to weather the storm. The hardest part of the peak was that the individual day traders were encouraged by some of the day trading operations, which in my view were the modern equivalent of the Twenties' bucket shops--brokerage houses that used to clip people. They would let them trade stocks on margin. They would manipulate a stock to make it a bit better and then they'd drop the stock and people would get wiped out. The day traders of the Nineties were encouraged by the principals in the operations to lend each other money, which allowed them to get around margin requirements. Whenever you use leverage, it can blow up because your losses are amplified. I know some of the best traders in the history of the game who lose billions of dollars--and they're still good. They make mistakes, but they're well capitalized. That's the difference between an individual who takes his 50 grand and tries to pyramid it into something bigger. If you lose the 50 grand, you're out of business.

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[Q]Playboy: What does the Dow tell us?

[A]Insana: I characterize the Dow as a barometer of intelligent perceptions about the economy and the social, political and military environments. You can even use the Dow to gauge sentiment about where we are as a culture. When investors, particularly those who are making some long-term bets, plunk down their money, they're making assumptions about the future. So as the Dow or the S&P 500 moves higher, you can tell that people think the economic outlook is good because the political and social outlooks are stable. From the late Sixties until the early Eighties the Dow was a reflection of the volatility of the times. It slammed around violently--between 700 and 1000. Looking at the Dow could tell you that the entire fabric of America was being jostled about with oil price shocks, inflation, unemployment.

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[Q]Playboy: Financial journalists were criticized for cheerleading for stocks during the bull market. Care to give us your side of the story?

[A]Insana: I was not among those accused of being a cheerleader during the up years. People criticized me for being too dour in my outlook. I got my share of hate mail as the market went higher. Now, I was not universally negative. I agreed with people who suggested that the technology was transformational. But the real question was: Did stock prices overestimate the near-term benefits? I like market history. The canals and plank roads of the 1830s were similar to the Internet, making business more efficient, making communities smaller, allowing our wives and daughters to get to church faster. They were community developments, which are echoed in the Internet. But point out to people that this has happened before, and they say, "No. This is brandnew." That's the risk: not understanding that it's not new. The Internet is going to transform a lot of things. But you can't blindly assume the stuff is so filled with promise that you believe your investment in pets.com is going to go up for the rest of your life. The Internet is working great in a postbubble environment. The stocks are gone.

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[Q]Playboy: An investor we know acquired Enron stock when the outfit was a pipeline operator, but he claims that over the years he never figured out what Enron's business was. Can you explain what Enron was up to?

[A]Insana: I think a lot of people never figured that out. Enron got into market-making capacity for everything from copper to aluminum to natural gas to electricity to fiber-optic bandwidth. Trading those last two like industrial commodities is beyond a lot of people--although that will happen in the future. The problem was that Enron was using a complex trading system to facilitate transactions in a variety of markets. My understanding was they got into areas that were mind-numbingly complex. They would provide electricity to a company that smelts copper. And instead of getting paid for that, they would take physical copper in exchange, then go out in the futures market and hedge their exposure to copper and create layer upon layer of transactions, assuming they were somehow fully hedged when they weren't. When one market went against them, and then another and then another, they collapsed.

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[Q]Playboy: Can financial reporters hope to explain to the public the Enron-style wheeling and dealing that may challenge even the most dogged forensic accountants?

[A]Insana: It's not that the transactions defy explanation, it's just that they require a great number of words. And to simplify the situation in such a way that people understand what's going on might be a difficult, if not impossible, task. We can come up with these broad generalizations about what was done. Was there accounting fraud? Were there sham transactions to pump up revenues and profits? In most of these cases, we can safely say yes. The details are interesting for the forensic accounting people who want to understand how this stuff got through the system. For the layperson who enjoys this level of detail there will be some good books written about it.

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[Q]Playboy:Business Center has featured at least one stock market watcher who bases his predictions on alignments of heavenly bodies. Wouldn't stadium naming rights be a valid indicator of a company's prospects?

[A]Insana: Absolutely. It's the contrarian indicator of the Nineties. As soon as a company spends $100 million to name a stadium, sell the stock. Enron Field. PSINet Stadium. CMGI up in Foxboro, Massachusetts.

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[Q]Playboy: We love those talking heads, but isn't financial news a challenge in such a visual medium?

[A]Insana: I don't know that we are in a business that has ever produced the Emmy-winning visual. When I started, we would do 16 pages of commodity prices over three and a half minutes. But in the Eighties we consciously tried to understand the dynamics of sports broadcasting. When sports introduced a color commentator, the nature of sports broadcasting changed dramatically. It was no longer one guy telling football fans what down it was. The dynamic of an expert, who was previously involved with the game and had an intuitive understanding of it, added insights. That developed to what we have now. Investors benefit from practitioners--color commentators--who share their views or walk us through a problem.

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[Q]Playboy: Please analyze the problem with stock analysis.

[A]Insana: At the peak of the market, buy recommendations on Wall Street outnumbered sell recommendations by 100 to one. The old song on the Street is that the pendulum swings between fear and greed. We went so far past greed in March 2000. The investing public was saying, "Give me more." They wanted to hear from Henry Blodget at Merrill Lynch. You had analysts making all sorts of public pronouncements about stocks that they knew were garbage. A lot of companies were brought public that in normal times would have never been given seed capital by private investors. On Wall Street, somebody would go, "We're going to sell pet food!" "Great, fantastic! You get $100 million." They were rewarded for success before they even tried. In many cases they didn't even have a product.

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[Q]Playboy: In the Eighties it was the fictional Gordon Gekko with his "Greed is good" philosophy. What's Ron Insana's best estimate for the cliché investor character of this decade?

[A]Insana: I am beginning to think that the next play is going to be based on inflation. We might have Seventies-style characters with oil, gas and alternative-energy limited partnerships. Maybe we will see the rise of the commodity huckster. Real estate might also be one of those hot investment areas that will bring out the same type of animal spirit in people. There's going to be another bubble cropping up somewhere in the world that's going to get our attention and our dollars. The risk is that we're going to have an inflation problem (continued on page 187)Ron Insana (continued from page 152) and hard assets are going to be involved for a while.

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[Q]Playboy: For many of us, technical stock market analysis can make the eyes glaze over. Why should we pay attention?

[A]Insana: Technical tools can be helpful--standard chart patterns have a long history of being reliable indicators on everything from an individual stock to a stock market average, to commodities and bonds. In the Seventies Edson Gould coined the "three steps and a stumble rule": When the Fed raises interest rates three times, one year later the market will be lower. If people had paid attention as the Fed started raising interest rates in 2000, they would have saved all their money. That simple rule should guide most investors. Ninety-nine percent of the time, when the Fed is lowering interest rates, the stock market goes up. One hundred percent of the time when the Fed is raising rates, stocks go down. I am not recommending that people become market timers, but if investors see the climate changing adversely, get out once in a while. Later you can buy the stocks back cheaper. In this latest bull market, marketers who wanted people to buy stocks said, "Warren Buffett is a buy-and-hold investor." That's bullshit. Buffett is a buy-and-watch investor. He holds a stock for as long as it's working. Buying a stock and sticking it in a drawer is suicide.

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[Q]Playboy: We've read reports of Al Qaeda's financial machinations. Does Osama bin Laden occasionally call his broker?

[A]Insana: He's from a billion-dollar Saudi family. Al Qaeda has an investment arm. I believe that the markets can even discount events such as September 11 if someone like Osama bin Laden was actively shorting airline stocks and reinsurance companies in the week leading up to the attack. There were vague signals in the financial marketplace that somebody was doing something strange. There were allegations in several European countries that reinsurance stocks, which might have held paper on potential targets--maybe the Twin Towers--and domestic airlines stocks were being shorted. It would not be unheard of. There's plenty of evidence to prove that Saddam Hussein was long in oil futures before he invaded Kuwait. The oil market went up about 65 percent in the two months prior to the invasion of Kuwait--for almost no reason. Saddam Hussein, a mass murderer, probably would not be above insider trading.

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[Q]Playboy: How many times do you think you'll cover the "biggest bankruptcy of all time"?

[A]Insana: For the rest of my career. The first one for me was Continental Illinois Bank in 1984. It totally blew up and then was rescued. We'll see more and more.

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[Q]Playboy: As a keen observer of chief executives, and now that Jack Welch is no longer head of General Electric--and your boss--would you assess his management style?

[A]Insana: I still love him. Jack was as involved in CNBC as he was in any other business he ran. I've never seen anybody command the details of all his businesses as well as Jack did. He would give you details about businesses at the operating level that you wouldn't think a CEO would know. The first time I met him, Jack started boring down to a level of detail that my own supervisors weren't cognizant of. And at that point CNBC was a gnat on an elephant. We were not generating profits. Revenues were slim. Jack had a passion for broadcasting, which was fascinating. He liked the game.

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[Q]Playboy: Jack Welch relinquished a host of embarrassing retirement perks such as groceries and sports tickets when they became public through his divorce proceedings. Other chief executives have received outrageous pay and benefits packages, some while they were heading underperforming companies. What were corporate directors thinking when they originally granted such perks?

[A]Insana: In that environment, one could make money so easily that anyone with oversight responsibility simply looked the other way or never questioned right and wrong. There was a gravy train of historic size pulling everybody toward prosperity, and no one--no one--wanted to rock the boat. The imperial CEO took the notion of greed to a new height. It was brought to us by the biggest stock market bubble in U.S. history. It was no more complex than that.

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[Q]Playboy: What obscure financial statistic would you advise us to become aware of?

[A]Insana: The yield curve. It's the relationship between short-and long-term interest rates. The New York Federal Reserve did an exhaustive study about which single indicator is the best predictor of recovery and of recession. It's the yield curve. And during normal periods when bond market investors expect growth, short-term interest rates will be substantially below long-term rates, and there's a simple reason for that. If you're going to lend money to somebody for three months, you're not worried that inflation will erode the purchasing power of that loan. But if you're going to lend money to the government for 30 years, there is inflation sensitivity. If you think the economy over a 30-year period is going to grow enough to generate an increase in inflation over 30 years, you will demand a higher interest rate to compensate you for that risk. When taken in concert with the stock market and the commodity markets, the yield curve can almost provide a definitive sense of where the economy is going to be nine to 12 months down the road. With a steep yield curve, gently rising commodity prices and a rising stock market, you are in a recovery mode. If the yield curve inverts and short rates go above long-term interest rates, within nine to 12 months you'll be in a recession. We show it every once in a while. You can find it on a lot of Internet sites.

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[Q]Playboy: Don Imus often comes across as less than gracious when you're offering business analysis on his show. But lately we've detected a certain feistiness on your part. Would you ever dare mutter "moron" and slam the phone down on the I-Man?

[A]Insana: I have become more cantankerous with him, owing to the state of the economy. I am infinitely less patient amid all the constant wealth destruction taking place, not just in my personal portfolio but with everyone else's. Not much has changed between me and the I-Man. My goal is not to defeat Don. The challenge of my morning is to come up with something equally offensive. While I would never slam the phone down on him, I am looking for the opportunity to engage him in a celebrity boxing event on Fox. And if Imus is not up to the challenge, I'd be happy to fight Lou Dobbs or Neil Cavuto. It's just the greatest satire on radio. The first time I did Imus was quite by accident in 1997. There was a piece in the New York Post discussing a Westinghouse board meeting and some of the corporate governance changes they were making. And Imus said on the air, if I recall the quote correctly, "I need to figure this out. Get that fat little Lou Dobbs on the phone." The producer at MSNBC, which runs a simulcast of the Imus show, called me and said, "Get on the telephone with Imus and talk about this." And I did.

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[Q]Playboy: We understand you once performed a set in a comedy club. Did the audience's reaction confirm your career choice of financial journalism?

[A]Insana: I'm sure the audience felt that. Actually, it was right in the middle of my career. I was a film major and almost every project I did was comedy, from The Vampire Strikes Back, which had Dracula coming out of retirement, to Edifice Rex, the story of a landlord with an apartment complex. Poorly done and unfunny. There was a show on FNN called The American Entrepreneur, and one night they were profiling the gentleman who owns the Laugh Factory in Los Angeles. I'd been taking an improv class and I said, "Give me six minutes. I'm dying to try it." So I got in the middle of all these veteran comics. I did a piece on ethnically correct cars--the Matzoh RX7, which had yarmulke hubcaps and a menorah hood ornament and a speedometer that read right to left. And I had a bunch of Catholic school material I'd developed over time, including Sister Kevin. We really had a Sister Kevin.

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[Q]Playboy: Do you have a strategy for the day when the network deems Ron Insana's personal demographics less desirable to advertisers?

[A]Insana: I am going to happily manage money. When the younger crop is pushing me out the door, I'll go gracefully. Johnny Carson is the TV model. I hope I have 20 or so years between now and then. I've got plenty of ideas on the money management score. It's three-dimensional chess every time they sit down to play. Are you smart enough to anticipate all these variables and correctly position your clients' money in such a way that they're going to do fine no matter what? That's a pure game, and your performance is benchmarked immediately.