Interview: Head of equities at Moubt Eden Investment
>> stocks rose for the fourth day in the last five on the back of some positive economic data. worker productivity rose more than expected in the third quarter. and the service economy rose more than forecast last month. so setting up for a strong fourth quarter rally, richard slinn is the head of equities at moubt eden investment and joins us―at mount eden investment and joins us from san francisco with his market outlook. he helps oversee $500 million for the firm. welcome.
>> thank you.
>> so what is the driving force behind these recent gains?
>> well, remember, we were very oversold for the first couple of weeks of october. i think that was in part due to the concern that q-3 earnings were going to disappoint. people were looking at the hurricanes, at higher energy prices and became somewhat apprehensive that earnings results were going to be below plan. in the second half of that month, and so far in november, we’ve actually seen that q-3 earnings have been by and large pretty good. and that q-4 guidance, although soft, has not been as bad as some people feared.
>> what is your outlook for a fourth quarter rally, are we setting up for one?
>> we think stocks will trade higher in the fourth quarter. it may not be a big rally like last year’s but think stocks will trade higher from here.
>> energy stocks led the market . do you see energy stocks continuing to be a market driver? energy stocks right now are driven by two things. one is certainly the price of crude. and stock prices for the major oil companies are discounting much cheaper crude than we’re seeing prevailing today. the other driver is more sentiment. and that doesn’t look like it will change. the very tight supply-demand equation in the u.s. and around the world for energy means that the risks will be toward higher prices. not toward oversupply. and that means we think energy stocks will continue to do well with some volatility. over the next year or so.
>> let’s look at the other side of that. rising energy has been a driver of inflation. what’s your outlook on inflation?
>> well, inflation had been ticking up. q-3, c.p.i., the largest in 23 years. and that worried a lot of people including i think the chairman of the federal reserve, alan greenspan. and in his testimony today, once again he highlighted that he doesn’t think growth is a problem. he thinks that any impact from higher energy and the hurricanes will be temporary. he thinks inflation is the big uncertainty in the economy right now.
>> do you see the federal reserve raising interest rates too far, thinking inflation is more of a problem than it perhaps is?
>> you know, overshooting is a big worry of the equity market right now. a lot of stock people are looking at that. and over the last 30 years, there has been eight tightening cycles. and in five of them, the yield curve has inverted. and we’ve seen a recession. the fed usually doesn’t stop raising rates until they’ve seen flat retail sales contracting, manufacturing activity. none of which we’ve seen. and the economic data we got today was all pretty positive for the economy. one thing the market will look closely for, the stock market i should say, is signs in the next one or two federal reserve open market committee meetings that they’ve moved from this sense that they are being accommodative to a more neutral or balanced view of where interest rates are today.
>> i would like to pick up on the retailers. we’re coming into the all-important holiday sales season. judging from today’s overall solid retail sales numbers, are you more optimistic or pessimistic coming into this time?
>> you know, today’s retail sales figures i think took at that lot of people by surprise. the stocks acted really well. we in fact are slightly underweight many of the consumer discretionary names. not because we think in the short term data will get terrible but over the longer run we do think the consumer is on a little shaky ground in the terms of higher interest rates and high energy prices.
>> so then are you changing your―will you continue to be underweight in consumer discretionary?
>> we are. we tend to take a longer-term view. our investment horizon is usually multiyear. and we’re looking at a consumer sector that has done great over the last several years. that has been very profitable for investors. and we’re believing that its best days may perhaps be behind it in this cycle.
>> and if could you tell me what you like and what you might be overweight in.
>> unlike consumer discretionary, we are overweight consumer staples, particularly the ones exposed to international markets . to the rise of consumer activity in the less developed world. we are a little bit overweight in health care. we like that for both valuation reasons. today we’ve been talking is a lot about merck, of course. but there’s a lot of big pharmaceutical companies out there that are trading at very attractive prices. in what is a relatively speaking rapid growth sector. we are a little overweight in information technology. and we are still slightly overweight in energy.
>> all right. let me get you to give me your s&p outlook by the end of the year.
>> our s&p outlook for the end of the year, we think that this year will be net-net a mid to high single digit total return. and that could be perhaps 5% up from here. so a decent end to the year. we don’t expect that 2006 will be much different than that.
>> we’ll have to leave it there. thank you for joining us. richard slinn of mount eden investments with us this afternoon. and action certainly speaks louder than words. high energy prices were supposed to take a toll on consumers. but they kept on spending. more details when we return.
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Listen Interview: Analyst with Raymond James in New York
>> merck’s victory helped send other drug stocks higher including pfizer. which had its own pain killer controversy with celebrex and bextra. we’ve got more on merck’s vioxx verdict. what impact will the company’s victory have for future trials and for the future of merck? joining us is michael krensavage, analyst with raymond james in new york. he joins us in studio this afternoon. welcome.
>> thanks for having me.
>> let me first ask you what your outlook is for merck’s liability.
>> my belief with merck all along has been that the street is vastly overstating merck’s liability. because it plans to fight every case. and if you look at some other litigation where the defendants just caved and did a settlement, it enticed a lot of plaintiffs. so merck is going to fight every case. and also it’s going to be very difficult for the plaintiffs to prove that merck actually caused or that vioxx actually caused a heart attack. because heart attacks are relatively common events.
>> ok. how much of merck’s legal liability do you believe is already priced into the stock?
>> well, i think there’s probably 30 to -- $30 billion to $35 billion priced into merck’s stock. but i would guess that the ultimate liability is much less than that.
>> so how much more are they facing?
>> well, they have more than 6,000 lawsuits. so there will be an awful lot there will be a lot more trials. and they’re going to have to fight one by one and we’ll see what ultimately happens. i will tell you if you look at other companies that have fought cases one by one like the tobacco companies, it typically takes years before they pay any money. and i think that will be the case with merck as well.
>> does today’s verdict set a precedent? some were saying earlier that perhaps merck might face fewer lawsuits now.
>> i think the verdict today probably will discourage plaintiffs from pursuing the company. so i think it is a very significant victory for merck.
>> now, let me ask you, are you sticking by your strong buy rating?
>> yes, i. i believe that merck is one of the best values in pharmaceuticals. and i believe that the street is really wrong about the vioxx liabilities. i don’t think they’re going to be to the significance of $30 billion. you look at this company, and its cash flow, it’s generating about $5 billion a year of cash flow. after capital spending. which is about 10% of its market value. so that’s an extremely rich cash flow. and it’s yielding about 5%. more than 5% for its dividends.
>> and it will hold on to that dividend level?
>> i think the dividend is very safe.
>> what about merck’s pipeline? that’s come under significant pressure. or criticism i guess.
>> that’s true. merck certainly has been among the drug companies that have had a drought in their pipelines. so it’s pretty much universal in the pharmaceutical industry, merck does have a few products, a few vaccines. the most important one is called gardacil, a vaccine or drug for cervical cancer that could be filed at the f.d.a. this month or next month and could come to the market in the middle of next year.
>> getting back to today’s news on merck with the verdict, would you agree or disagree that today’s verdict carries more weight with shareholders than the first case which merck lost?
>> i think so. if you look at the stock price, it didn’t rally as much as it declined in august when they lost the texas case. however, it really does validate what merck is saying. that merck did the right thing. and i think that’s very, very important for the company’s shareholders.
>> and what about the fact that merck’s next case, right after thanksgiving, is going to be held in federal court now? some analysts were looking at that and saying this might actually make it easier for them to state or explain their case.
>> that is correct. typically defendants prefer the federal court system. over the states. and in this case, coming up later this month, i think it’s also a weak case where the plaintiff took vioxx for only a month or so. and there really is no significant evidence indicating that vioxx causes heart attacks if you take it for less than 18 months. i think many of these cases are just going to be thrown out.
>> but if merck has―if the question in the particular case is does vioxx cause heart attack or is it linked to a heart attack versus did merck do a decent job informing the doctors of the risk, isn’t there a difference in the difficulties merck is facing?
>> yes, i think that in each case first the plaintiff would need to prove that vioxx caused the heart attack. and then you would look at merck’s responsibility, did it do the right thing? did it suppress negative data on vioxx? first you have to establish that vioxx caused a heart attack. and that will be difficult to do. because people face so many different risks. obesity. and hypertension. and these factors can all contribute to a heart attack.
>> we’ll have to leave it there. thank you so much for joining us.
>> thanks.
>> that’s michael krensavage, an analyst with raymond james. a lot more ahead on “bloomberg’s after the bell.” so stay with us.
