Interview: Bank of New York
>> paychex reporting 27 cents a share, three cents better than the average analyst estimates. sales coming in at $379 million, analysts looking for closer to $370 million. the company saying fiscal year 2006 revenue growth will be 11% to 12%. it sees 2006 revenue approximately 1.6 to 1.62 billion dollars, the average analyst estimates at 1.62 billion dollars. paychex out after the close, fourth-quarter earnings topping analysts’ estimates for profit and sales. turning our attention back to the market . you have oil near the $60 level, both a―breaking a five-week winning streak for stocks. kevin bannon is chief investment officer with bank of new york and joins us with his outlook for the market . kevin, why haven’t stocks reacted more to the current prices of oil?
>> the main reason is that oil hasn’t seemed to have a particular dampening effect yet on people’s behavior in terms of changing driving habits, vacation plans, and hasn’t had too big an impact on corporate profits so basically i’d say the market has reacted positively to the fact that oil doesn’t seem to be derailing the economy.
>> is that what you’re seeing? from the clients you speak with, are they saying the oil prices aren’t affecting what i’m doing?
>> everyone’s complaining about it but i don’t think it’s having a major impact on people’s actions quite yet. i think basically what we see among the companies that you talk to is there’s not a lot of conviction out there and there’s even less willingness to act on that conviction which is why the markets seem to be meandering here despite what i’d say is a combination of fundamentals.
>> in terms of no lack of conviction, you still thinks stocks will rise 10% this year. why so optimistic still?
>> there are a couple of reasons. one, the stock market , to us, just looks very, very inexpensive. with the markets trading at 16.5 times this year’s earnings, that’s 6% earnings growth, compared to a 4% bond yield, that really looks pretty interesting unless you really are concerned that the u.s. is going to slip into the japanese deflationary slump where you don’t count on profits rising every year, but we don’t see that happening. we think the economy has made a nice transition into an expansion that is hopefully sustainable but we recognize risks are on the downside.
>> is there anything that would change that scenario in terms of stocks versus bonds as an attractive --
>> i don’t think there will be anything major market moving in the announcement. we expect the fed to raise rates. we kidnap them to raise rates perhaps one or two more times past this and pause. and see what impact that level of rates has on the real economy. i don’t know why people are getting as exorcised as they are about what the fed is doing because the fed has no intent on pushing the economy backwards, but it’s trying to remove the excess stimulus and unless you think the fed is erring and should be pulling back already, i am encouraged by the fact that they are stepping. up to head off inflation before it’s a problem.
>> what’s interesting to me, when i look at your asset allocation, you recommend investors put a big chunk in alternative investment. what percentage of a portfolio are you recommending?
>> for investors who are able to invest in hedge funds and private equity, we’d say 20% is the right number. the old modeled portfolio was probably 65% stocks, 35% bonds. i think stocks are falling toward 50 and bonds are falling toward 25% and alternatives are picking up the balance.
>> why is that? it’s interesting hearing you recommend hedge funds when the chatter in the last month and a half has been about concern that hedge funds are on shaky ground.
>> we’ve been recommending hedge funds and will continue. i think they have a real place in portfolios on a long-term basis. they’ve gone through a tough spell right now, but i think the array of outcomes investors have to consider going forward is wider than they have been in the past. deflation is something we’ve not thought about forever but it’s something out there. people are, after the experience of the 2000-2002 period, much more concerned about protecting on the downside and i think the pendulum might have swung too far that way. people who forget about risk management in 1998 are entirely focused on risk right now and at some point they’ll come back and ask for a return in their portfolios and they’ll be on to the next new big thing.
>> kevin bannon, chief investment officer at the bank of new york. we’ll take a quick break. when we return, the supreme court handed out a host of decisions today. we’ll learn more about them, specifically, time warner and comcast among companies affected. peter cook will join us from washington with more.
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Listen Oil price --- Bob (fast)
Market today --- Deirdre (slow)
Nasdaq --- June (slow)
NYSE --- Deb (fast)
>> people were feeling pretty good about themselves when it came towards $50 and this made a dynamic move back up to $60, which has people nervous.
>> despite the all-time closing high for oil prices today, there was another story about volume. tim jennings, president of vantage trading, said there was remarkably light volume, which affects his view of where prices might go later this week.
>> the market is poised to move to $62 or $63 but i think we didn’t see followthrough, it wasn’t an aggressive rally today so i think a lot of people are thinking whether we’ll sustain the move or pull back from these levels.
>> besides volume, another indication where oil prices might go comes to us from phil roth, analyst with miller tabak. he says we’ll know when the run in oil prices has played out by watching oil stocks.
>> at some point crude will rise and energy stocks will fall, a message that equity investors believe crude has gone too high. that’s the signal i’m looking for.
>> over the last two weeks, ellen, oil up almost 9% in just 14 sessions. back to you.
>> certainly that’s a major focus for investors in the stock market . let’s find out what happened today, what the fallout was of the oil prices. deirdre bolton has the market story.
>> we did see those higher energy prices really keep a lid on stock prices. some say the market is reflecting concern about rising energy costs because they are so far-reaching.
>> the bad thing about high energy costs is it costs everybody, not just you and i in terms of filling up our gas tank and cutting down on the money we might be spending at wal-mart, certainly corporate america, puts pressure on their profit margins, whether to heat or cool a building or transport goods and services, energy touches everybody.
>> for stocks in the energy group, higher prices were a catalyst. valero, exxon-mobil, schlumberger, awful those advanced. energy indexes, by the way, the best performing group year to date. but elizabeth bramwell, she’s one who says that energy stocks can move higher. one reason for that, she cites the outlook for drilling. oil field contractors like baker hughes and weatherford international, also benefited from a bet on future earnings. r.b.c. capital markets upgraded those stocks, saying earnings could be higher than forecast. other groups, though, a little more uncertainty about the outlook for earnings. international paper traded down on the dow after saying quarterly profits would be below estimates.
>> the market is trying to say, we’re not sure how much growth we’ll have in the second half in terms of corporate earnings and also in economic growth and i clearly think the market is a bit confused.
>> on the s&p 500, we recalling grafts. saying the grafts could fray or tear during suregating, so the boston scientific headlines coming out after the close of trading. another focus stock today has been google where shares rose above $300 after less than a year as a public company. june grasso has details.
>> the nasdaq closed lower for the third session, but one stock that bucked the downtrend was google. its shares rose above that $300 level, closing at $304.10. more than tripling since its i.p.o. price of $85, and after less than a year as a public company. cementing the most used search engine status as world’s largest media company by market value. google has a market value of $83.4 billion, surpassing time warner. the telecommunications group was the worst performing economic group at the nasdaq today. the leading mover in that group, comcast, traded higher. on news that the supreme court reinstated federal rules shielding comcast and other cable companies from having to open lines to rival internet service providers. the decision resets the rules governing the nearly $16 billion market for high-speed web connections. earthlink declined. it and other service providers do not have their own direct connection to consumers and purchase wholesale access from phone and cable companies. transportation shares falling again today as oil trades above $60 a barrel. concern that higher energy costs may crimp profit growth, we see airline stocks leading the group down where the cost of fuel is the second biggest expense after labor. northwest airlines downgraded to strong sale from sell at matrix u.s.a. jetblue, ryanair and europe’s biggest low-cost air carrier, all lower. apple, maker of ipod music players, may face competition as cell phone companies and the music industry team up to transform mobile phones into portable music devices. that’s according to “barron’s.” i’m june grasso, bloomberg news, at the nasdaq marketsite in times square.
>> let’s get more on today’s trading from deborah kostroun, filing this report from the big board.
>> oil prices climbed to a record a third straight day, raising concern about higher energy costs and if that could crimp economic and profit growth. one of the things we saw by the close of trading, energy stocks, the best performers, not only today in the s&p 500, if you look at the 24 industry groups, but also, these are the best performers this year. also, oil services putting in a very strong performance. baker hughes and weatherford, third and fifth largest oil field contractors, actually upgraded by r.b.c. capital markets . then, of course, looking at the pipelines like dynegy, the supreme court refused to revive a lawsuit accusing dynegy and duke and other power companies of fixing electricity prices in california during that state’s energy crisis in 2000 to 2001. speaking of the supreme court, take a look at media stocks. media stocks lower even though the supreme court ruled that grokster and internet file-sharing networks may bear responsibility when users illegally download. that was a unanimous ruling by the supreme court. it also revived efforts by a lot of media companies to block unauthorized downloads. remember, that music and film companies lose as much as several billion dollars a year to piracy. although these media stocks were lower, dreamworks higher on the day. cardinal health, biggest drop in the s&p 500. this is the second largest drug wholesaler, saying profit growth in 2006 will fall short of its target for the second straight year as the company fails to increase distribution fees as fast as projected. cardinal stock had their biggest drop in a year. the company, the board of that company, cardinal health, also doubled the dividend to 24 cents a share annually and approved a billion dollar stock buyback.
