Interview: American Stock Exchange
>> the equity markets continue to rally as gas and crude prices retreat from record highs. the dow jones today posting its biggest gain in two months. the s&p posting its largest gain in 4 1/2 months. chip dixon, chief investment strategist with lehman brothers today told clients to cut their weighting in stocks because of hurricane katrina concerns. ed keon has a different approach. chief investment strategist with prudential equity group maintains his view that 100% of assets belong in stocks. made quite the headlines when he made that call two months ago. ed joins us now from the american stock exchange to tell us yes is remaining so optimistic in the wake of katrina. nice to have you back on the show.
>> great to be here.
>> why are stocks rallying in the face of tryan’s fallout?
>> katrina is a terrible human tragedy. economic impact is probably not going to be all that severe. the number being tossed around is about $100 billion. that is about 1% of u.s. g.d.p., a very small percentage of the country’s assets. i think people are looking beyond the terrible tragedy and thinking more about the economy and they like what they are seeing.
>> there seems to be a disconnect though. one percentage point is still a significant number. for example, if g.d.p. came out one percentage point different than what people were looking for, you would see the stock and bond market react. there does seem to be a disconnect. is that hard as a strategist to digest?
>> there’s a lot of moving parts. you might see lower short-term growth, but that might actually add to growth a little bit next year conceivably. at the same time as you rebuild and add to economic activity. also, i have a feeling that the spike in gasoline prices and other energy prices could actually set the stage for a sharp drop a couple of months down the road when all this new supply we’re talking about gets onstream. especially if that is combined with a bit of slump in demand as a result of those high prices.
>> what about the effect on consumer spending?
>> it’s tough to get americans to stop spending money. we did a study a couple of years ago that consumer spending is a function of confidence in incomes. when incomes are down, half the time we increase our spending.
>> let’s take a look at what you are targeting for the stock performance through your end. your target had been 1340, which i believe is at a 9% gain from where we stand right now. is that still what you are anticipating where stocks may end on the year?
>> it is that’s about seven s&p points a week to get to that number. at the end of the year that would give you the same stock valuation we had at the beginning of the year and returns would be about equal to the roughly 13% earnings growth we’re going to get to this year. it seems like a long way to go when you break it down and we’ll get there, i think.
>> let’s compare to it how attractive or nonattractive bonds look. a lot of speculation about whether the federal reserve, in fact, will change its course, perhaps raise rates on september 20 and stop for the rest of the year. are you changing your fed outlook? i ask speckly in the context of are bonds any more or less attractive to you right now?
>> our economist with the fed outlook hasn’t made any changes. he thinks we’ll end up about 4% at the end of the year. at the bond market we published a note comparing a simple idea. when valuations of something are high, it’s expected returns are low and vice versa. over the last years with bond yields over 5%, return over the next five years is averaged less than 2%. from here the expected return on bonds is yield. i think stocks offer a much better bet.
>> what about stock sectors. let’s talk about that in light of the new change investing environment given what’s happened over the past eight days or so because of katrina. what sectors? what industry groups are looking attractive right now?
>> i made no changes to my sector recommendations. my two biggest overweights remain energy and technology. overweight energy since july last year. that said, if i am right we are setting the stage for a drop in prices, there may be a possibility with a bit of a pullback there. i think from a portfolio construction perspective being overweight those two groups gives you both higher expected returns and diversifies away a big chunk of the risk you face here.
>> explain that energy call a little bit more. if you are anticipating prices will fall explain why you think the group is still one that would be a top pick?
>> i think basically investing is all about trying to find value. if you look the energy sector today, whether you look at price earnings ratios or book values or cash flows or just about any valuation metric you look, the sector looks extremely attractive compared to the alternative. at the same time, momentum of all the stocks and earnings is the most positive of any sector. from quant point of view, we love energy stocks and have for a long time. stocks do tend to trade on price a little bit. you have to be careful not to stay too long.
>> thank you for join us.
>> thank you.
>> ed keon of the prudential equity group joining us from the american stock exchange this afternoon. we started talking about the fed. we’ll take a closer look after this quick break what you expectation of a federal reserve rate pause are rising in the wake of katrina. our peter cook will have that story from washington.
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Listen Market briefing --- Ellen (slow)
NYSE --- Deb (fast)
Nasdaq --- Robert (slow)
Crude oil --- June (slow)
stocks rose today as oil and gas prices declined. that he’sed concerns record fuel cost in the wake of hurricane katrina will curb consumer spending. retailers such as wal-mart, home depot leading the advance. crude oil and gas futures fell on expectations the release of 30 million barrels of crude from the strategic petroleum reserve will ease shortages. here are the closing prices as well. gasoline futures down 5.9%. heating oil down 1.8%. natural gas futures slipping .3%. june grasso’s been following all the energy moves today. she’ll join us in just a few minutes. first up, let’s take a closer look at the stock market . you had a rally across the board. the dow gaining 141 points. the s&p gaining 15. the nasdaq gaining just shy of 26 points. as for the s&p, you had 24 of 24 industry groups making up the indexes gaining today. financials and health care helping to lead the advance. as for the s&p was the biggest rally in 4 1/2 months. let’s get more perspective right now on stocks. after an unsettled week last week for stocks, today’s gains, again, coming on strong add together gains we saw last week. here is deborah kostroun at the big board with those details.
>> the dow jones industrial average closing right near its best level of the day. in fact, the dow was gaining all day. that is crude oil and gas retreated. in fact, taking a look at the 24 industry groups in the s&p 500 gainers, real estate, retail and many commercial services. even the laggards in the s&p 500 were higher. energy stocks. that was the worst performer of the 24 industry groups, but it still managed to close higher along with autos and materials. crude oil and gas, that was lower on expectations on the release of emergency fuel reserves after katrina. halliburton closing at a record high on the day after saying they will increase prices for drilling and other energy services that capitalize on growing demand. that price increase will take effect in october. taking a look at retail stocks. also some good performers in today’s session with oil and gas prices taking a reprieve. you look the gainers in the dow jones industrial average. you see wal-mart, also home depot on the list. of course home depot may benefit from post katrina rebuilding efforts as well. now what we are looking at may be $100 billion trail of destruction. that’s according to risk management solutions, an insurance industry consultant. another dow member coca-cola got an upgrade from bank of america. taking a look at some of the drug stocks, a little bit of news coming out. analysts say novartis will probably raise its $4.5 billion cash bid for chiron by at least $500 million after the initial offer was rejected as inadequate. novartis owns 42% of chiron. they are expected to raise their bid to at least $45 a share or $5 billion. barr pharmaceuticals and teva pharmaceuticals saying they will begin shares of their generic form of sanofi-aventis allegra allergy tablet without waiting for approval from u.s. courts. i’m deborah kostroun at the new york stock exchange.
>> neiman marcus group out after the bell with earnings. the luxury retailer that is being acquired by two private equity firms said fourth quarter profit rose to $4 million. the number held by higher sales of designer apparel as well as hand bags. here is a look at the numbers. net income increasing to 69 cents a share from 42 cents a year earlier. chief executive increased sales by bringing new fashions onto stores more quickly than he had done before. it was biotech stocks helping lead a broader-based rally on the nasdaq today. robert gray has details from the site.
>> nasdaq posting its biggest rally in seven weeks helped by falling energy prices and the i.s.m. report showed service part of the economy growing faster than economists anticipated and coming in at $65. the average economist had been for a reading of $60 on that, as well. do want to look at some of the movers in today’s session. helping lead a broad-based rally. the biotech index, the biggest gainer here on the nasdaq. also the financials and the industrials. that’s where a lot of the retailers are. we saw those energy prices falling. crude and gasoline. computer related shares moving higher, as well. within biotech we saw teva pharmaceuticals said it will launch with barr pharmaceuticals a generic version of allegra. they are not waiting for a u.s. court to give them a green light. the trial could be held next year. we saw that taking down shares of albany molecular research. they own a patent in the agreement of allegra. do want to take a look at protein design labs. the biotech companies saying its experimental drug reduced symptoms of heart failure in 21 patients helping send the stock higher. apple closing at a record in today’s session. ahead of what many analysts and investors expect will be an announcement from partner motorola about a cell phone that will enable to you play itunes. rocker is the name that’s being bandied about by analysts at the moment. cisco rising on the day. sizz co-getting upgraded from overweight to equal weight at lee espn brothers. that helped the share rising. retails moving higher, including american eagle on a buyback announcement of its stock. at the nasdaq, i’m robert gray.
>> let’s get the details on today’s energy trading. crude oil and gas futures dropping from the record highs. they have continued to drop for several days from those record levels. today’s decline coming as countries such as germany and japan prepared to send emergency reserves to the u.s. june grasso joins with us more. several reasons at play today.
>> absolutely. you mentioned one of them. members of the international energy agency are releasing 30 million barrels of gas ryan and other refined products. october gasoline fell as much as 6.5%. the u.s. pledged to sell 30 million barrels of crude oil from its reserves starting today. crude oil for october delivery fell as much as 3% today.
>> i also think crude oil prices, as we look forward, have come back down to prekatrina levels. i think that’s mainly because incidents like this were really factored into the price earlier this year.
>> about 58% of u.s. oil production in the gulf of mexico remains shut today. that’s an improvement compared with the 89% shutdown last friday. offshore production was halted when workers were evacuated, slowly being restored. another one of the eight u.s. crude oil refineries that were shut down because of hurricane katrina resumed operations today, leaving a total of five refineries still closed. valero says it expects to start up its refinery in st. charles, louisiana, mid week. exxonmobil says its flooded refinery in louisiana may have sustained less damage than initially estimated. neil mcmann says repairs may not be as drawn out as those after hurricane ivan one year ago.
>> maybe more pulp site damage in terms of platforms out to see and the processing centers onshore, which would take a number of months to fix, but maybe not as protracted as the six to eight months seen with the aftermath of ivan from last september.
>> at the pump, americans are paying more for their gasoline. after adjusting for inflation, more than at any time since 1981 during the iran-iraq war. average price of gas jumped to $3.07 a gallon in the past week according to the energy department. some energy analysts such as charles maxwell are predicting refinery shutdowns will push prices at the pump to $4 a gallon. triple-a survey says the highest price for gas is in washington, d.c. and the lowest in louisiana. ellen, back to you.
>> june, thanks so much. let’s take a look at what happened in the economy today. you have the service side of the economy accelerate unexpectedly last month. the institute for supply management saying its nonmanufacturing index rose to 65 from 60.5 in july. the number does suggest the economy was strong even as energy prices rose before katrina struck. a reading above 50 showing expansion. demand in industries such as home construction bolstered services, even as auto sales slowed and gas prices pinched sales at retailers. let’s take a look at what happened in treasuries today. you see prices slump on that report because along with lower energy prices they bolstered the case for the federal reserve to raise rates at the september 20 meeting. we’ll have more on that in a few minutes time from peter cook in washington. let’s take a look at the five-year 3.9% is the yield. the treasury department saying it will sell $14 billion of five-year notes tomorrow, $8 bling of 10-year notes on -- $8 billion of 10-year notes on thursday. currency little changed. earlier the dollar rising the most in three weeks against the euro.
