Special Holiday Edition
>> colin, earnings season. we have had a couple. we expect double gidget growth. that would be the 11th straight. does that make you exciting as a fund manager
>> it is great because we have been recovering from the bottom and it will continue to slow gradually. it doesn’t make me excited but it makes me satisfied and happy because we needed the economy to come more into balance.
>> as charles was saying corporate balance sheets look pretty good. record cash on s&p 500 balance sheets and earnings expected to look pretty good but don’t you want to see more of that money returned to you in the way of dividends?
>> i think that a lot of it is being returned this the way of dividends. the payout ratios are not that low. companies have done a great job in the recovery of paying down debt and fixing balance sheets but i think we are in an ok place.
>> is there a level at earnings that you would be a little more nervous on a macro level if we go down in single digits?
>> i think what we need is the economy to slow a little bit and earnings to go a little bit slower. thank would be almost perfect.
>> charles how to you feel about that cash and dividends because companies would say we decide to buy back stock but you don’t have to do hawaii you can put out a press release and say you approved the plan. if you don’t buy back one share nobody can do anything.
>> that is usually the case it is a smoke screen of sorts at advertisements.
>> a delay tactic.
>> i would like to see more in the way of dividends. i think we will see something from microsoft again.
>> a big one-time?
>> a big one-time. there’s a number of companies that could potentially do the big one-time.
>> who else might be able to do that? microsoft still what $50 billion after doing that
>> why not somebody like an intel. they are spending a little money on the capital side but they are notting if to deploy all of that. but i think microsoft is a good example. companies generating a lot of cash but i think wall street will convince the companies that instead of dividending it back let’s spend that money doing an acquisition. if the economy lows, top line becomes harder to come by, why not do some acquisitions. i think we are going to go a little bit of mergermania. we used to have merger monday. now this are two or three deals a day.
>> it is good for bloomberg. plenty of news.
>> plenty for you to talk about at 6:00 in the morning. but i think we are spending a lot of that money. if the economy slows you can look out a year or two in the future where we look back on all the deals and say boy was that a dumb idea.
>> most of them don’t work, do they? tech deals have shown they rarely add shareholder value.
>> most deals don’t work. but some do. so they are not all bad . it is always fascinating all the deals get done when the market is weak. you would think they are racing to buy one another when it is cheap but.
>> so they are not any smarter than the average retail investor? we know bankers are always whispering in c.e.o.’s ears any way.
>> true.
>> say you wake up in the morning and you own abc company and they made a purchase do you automatically unload it?
>> no, you have to evaluate it because it could be a god deal. but sometimes i do. for example i formerly owned boston scientific and i didn’t like the guidant deal and i sold it.
>> do you think boston scientific will eventually win this
>> yes
>> and i think that would make you unhappy.
>> inchings. i think they said the stock is not what i thought it was.
>> do you own j&j?
>> no.
>> charles, big deals, we have had multibillion dollar energy deals. you were on bloomberg tv a couple of months ago and talked about burlington resources. they got taken out and you made a interesting comment. you sort of declare victory is what you said. do you go out and farm for companies you buy them only because you think they will be bought?
>> not necessarily. you buy stocks because you think there’s a good fundamental case because there’s an attractive valuation story and a lot of times the fundamental story post-deal starts to change and in the energy space in particular the companies are all moving pretty much together. yes, there’s a little bit of variability and volatility between stocks but once you get the deal there, the execution risk starts to come in. you get a lot of changes in the constituency. why not declare victory and move on?
>> we will move on and take a break and be back. we have a lot more to talk about. certain stocks that you may want to own. what part of the cycle we are in. and what that may benefit in terms of sector picks.
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Listen Special Holiday Edition
>> good day today, monday january 16, 2006, u.s. stock and bond markets closed in honor of the martin luther king jr. holiday. welcome to a special edition roundtable of bloomberg tv we are about halfway law the first month of 2006 and things looking pretty good so far. earnings season just starting and i know you know this but your winter heating bills are arriving and they are probably higher than they were. and alan greenspan retiring at the end of the month. which of these events if any, if all, if none, will move the markets and affect your investments the most? we will get analysis on that in the next month. charles and colin, thank you for joining us.
>> pretty good year so far charles. the breadth of the market pretty good. you have over 400 of the s&p 500 stocks done well in the last couple weeks of the do you buy into it? is it for real?
>> i don’t want to jump on the bull bandwagon right now. i think the early part of the year the wind will be at the market ‘s back for a while.
>> why?
>> i just think the economy is stronger. earnings will be better. i think we get a little bit of retreat and calming down in the energy market heading that spring. there’s a perception that the fed is pretty much done. so i think those things argue in favor of stocks doing ok in the first three or four months of the year. after that my crystal ball gets cloudy.
>> what about you colin? the first week all up. they say first week first month.
>> i think it will. i think we are having a mid cycle adjustment. stocks are very cheap if we have another three careers of spappings. so i think it will be good.
>> what do you mean mid cycle adjustment
>> what what happens is you transition from the recovery where you drive the economy with low interest rates and recover what you lost in the recession. you have capital spending, no capacity and we have real growth another three or four years and multiples don’t reflect that.
>> you sound more concerned, charles. do you remain mildly optimistic or is had going to be a bad year?
>> i think it will be another lackluster year. i think the consumer will feel the pinch where higher interest rates will start. i think worldwide economic growth will be pretty good. i think the fed may be close to the end but long-term interest rates will have to rise as we see the spikes in commodity prices will work through either impacting profitability or impacting the overall economy. so, i think we have to be careful here not to get too far ahead of ourselves.
>> what has been interesting is that people talk about being positive on stocks because the fed may be close to being done but at the same time history shows stocks can also rise while the fed is increasing interest rates. which is better? are we prediscounting the fed stop and when they stop is it already too late.
>> the traditional models have not worked. you go back to 1999 where we saw the fed hiking interest rates, usually it is the old rule is three steps and a stumble but stocks continue to race forward. then 2001 they aggressively cut rates and the market takes a tumble so people who use the monetary models have been tearing their hair out and it not clear where we will get back to some correlation.
>> it not so much whether they are going up or not but why. so when they are tightening and it causes a recession like in 2000, like in 1989-1990 obviously the stocks will go down. but if they are tightening because of a mid cycle correction in 2004. it went up.
>> do we have to fear five, maybe five plus percent fed benchmark learneding rate?
>> i think we may get there but i don’t think we should fear it. i think that is perfectly normal.
>> history says that is about a normal level. high from a few years ago and if you are knew to the―new to the market that number might scare you.
>> it might but if not much above five i think it is fine.
>> charles how high do you think the fed has to go? will they go above 5% or is bernanke needing to send a message is
>> based on what we know now about the economy i don’t think they have to go much further. this is a heck of a time to take the job as new fed chairman. there’s a lot of uncertainty as to what they need to be doing with policy and the impact that the dollar is going to have this career on that policy. so i think they are as cop fused as we are with the reaction of the markets and economy based on what they have done on interest rates so far. an important point is in the last interest rate easing and tightening cycles we were not battling inflation and price stability. i think what greenspan and his brethren were concerned about was disinflation or deflation. that has been won if you look at the c.r.b. and changes in wages. so i think it will be interesting to see as we go back it more of an environment where they are worried about inflation and price stability in terms of increasing price.
>> colin does the fed influence your day-to-day stock picking?
>> no, it doesn’t, not day to day. the fed is important but where they are off a longer period would influence me. for instance if he thought they should not tighten more and they kept going that would change my thinking the.
>> how?
>> say they should be finished and they go another 100 or so basis points then i get nervous because that will create a recession.
>> for financials or consumer stocks?
>> across the board but especially consumer stocks and financials.
>> is the consumer already in trouble here, charles?
>> they are pretty stretched.
>> retail numbers are not great. we have the mid term election and if i were a strategist for the democratic party i may be pointing out that conforms balance sheets have never looked better but the consumer never more stretched and this is an environment where we are at full employment where job creation has been good so i shudder to think what might happen if we start to lose the momentum on the jobs front because consumers are very stretched right now. it is a sector that we are underweighting and it will be wise.
>> staples or discretionary?
>> both.
>> we will talk more about the consumers and we have talked about the housing market . it has remained fairly strong although will are some signs maybe it is turning over a bit. a lot of things to talk about. we have a long way to go on this special edition. right back after this short commercial break.
