Interview: National City's Allegiant Asset Management
>> welcome back. now let’s get an update on bonds and the dollar in the aftermath of the fed minutes. the rally in treasuries, the 10-year yield down to 4.03%. the benchmark stock indexes failed to get a boost after the release of the fed meeting minutes. what will drive stocks in coming weeks? is that is our question for michael chren, senior portfolio manager at national city’s allegiant asset management joining us from west palm beach where i understand it was 90 degrees today, for a closer look at the market . welcome to the program.
>> thank you very much for having me.
>> let’s begin with the issue of the fed minutes. what was your reaction to some, there was something of a contradiction or conundrum as data was discussed showing slowing economic growth and yet when it came to the fight against inflation, everyone seemed to be resolved to keep in the “measured pace” language. what was your reaction?
>> i think the message was pretty clear. it looks like the fed’s going to raise rates higher for longer and the bears can put their hat on that. however, there were issues the bulls can look at, as well, several pieces of daylighta that came out after the may 3 meeting certainly would lead some of the bulls to believe that maybe the fed will be closer to ending tightening cycle than perhaps the bears think at this point in time. if you look at the range of targeted fed funds rate out there right now, 3.5 to 4.5, a pretty wide range and a big difference, either two more quarter-point hikes versus perhaps six more quarter-point hikes and at this point given the fact that earnings growth looks like it’s slowing substantially and the fed won’t stop any time soon, to me, that’s a bearish picture for stocks over the next six to 12 months.
>> i want to hang on that last phrase you use, the fed won’t stop any time soon. that is apparently your conclusion based on what you read today. why?
>> we did get a data point in the c.p.i. the core c.p.i. was flat, post may 3 fed meeting. however, looking at inflation expectations, those expectations keep rising, so to me, the core number is more of a backward look number. expectations going up is more of a forward-looking number and the fed is probably focused on that which leads me to believe they’ll probably move in quarter-point increments longer than people think.
>> we have the s&p 500 up six of the last seven session, the nasdaq up eight consecutive sessions. that hasn’t happened since 1999. what’s the story?
>> well, it’s interesting. i think there’s a lot of repositioning in the marketplace right now. what worked last year in the first quarter certainly energy falling into that camp is not working lately, notwithstanding the last couple of days. i think what’s happening is that hedge funds and portfolio managers are trying to reposition their portfolios to take advantage of the end of the tightening cycle and we know that once we hit that point, certain sectors do extremely well, technology being one of those sectors and that’s partially why we’ve seen money flowing into that space recently.
>> are you repositioning your portfolio in anticipation of the end of the tightening cycle and if so, how? ilate we are not, although what i would call our current position is more of a barbell positioning. if you look at earnings growth expectations for the s&p for q-3 and q-4, currently q-3, somewhere in the 15% to 16% growth range, q-4 slightly below that, 12% to 13%. we think those numbers are high and will have to come down to the mid high single digits. that will make it tough for stocks to rally into that environment. however, there is a point at which the market will look over that and see the fact that rates aren’t going up anymore and maybe eventually will come down again and the market may look through that and try to position for higher beta sectors going forward. we’re trying to put a little money in those sectors we think will benefit when the market senses we’re near the end of the tightening cycle. on the other end of the barbell, we’re being defensive, what we think are pretty good stable growth names that are undervalued right now like coca-cola, for example.
>> that’s one name. we’re on tv where brevity is the name of the game. you said the sectors you think will benefit us. tell us the sector youings will benefit the most from the end of the cycle?
>> anticipation of the end of the cycle, technology is a clear winner. based on all the data that we’ve seen, certainly tech stocks have a tendency to do well before the actual numbers start hitting the tapes. in other words, right now the numbers don’t look particularly good for tech stocks. i’m talking about earnings growth. soon enough, we may see data that capital spending is kicking in there again and we would expect that sector to do relatively well. however, i do think you’ll get a chance to buy the stocks lower which is why we’re being patient, hoping we get a chance to put money to work at a later date.
>> you have just watched the comments of michael chren, senior portfolio manager allegiant asset management, thank you, michael, for being with us today. today’s existing home sales numbers showed no signs of slowing in the housing market . we’ll have details behind yet another all-time high in sales and all-time high in prices after the break.
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Listen Market briefing --- Mike (fast)
Fed's minutes --- Deirdre (slow)
NYSE --- Deb (fast)
Nasdaq --- Robert (slow)
Fed's minutes --- Peter (slow)
that meeting released today. stocks failed to rise on the fed news, at least if you consider the dow. down .2%. the s&p, no move at all and the nasdaq up about 125 -- .25%. markets closed mixed after digesting the fed’s minutes. deirdre bolton has more on the market story.
>> a lot changed in the last 30 minutes of trade. the energy stocks led the turn around that sent the s&p 500 to close unchanged. we saw chevrontexaco, valero, conocophillips, the stocks that pushed the s&p 500 energy index higher. crude finished up on the session but still under $50 a barrel. also pushing the market higher, technology stocks, including intel, kla-tencor and texas instruments. earlier, we spoke with art hogan from jefferies about technology stocks’ strength.
>> people are shifting attention to investing in technology stocks, one of the hotter areas in the last week or so.
>> earlier in the day, markets were trading lower as investors worried about continued interest rate hikes.
>> until the fed gets to a point where they stop raising rates, if it continues to be a headwind, if nothing more than psychologically.
>> banks and financials were the worst performing groups before the fed’s minutes were released and remained among the worst performing groups after the minutes, as well. stocks like merrill lynch, morgan stanley and goldman sachs closed lower as the fed’s minutes showed an unchanged policy of rate hikes at a measured pace. these companies’ profit margins are squeezed when rates move higher. one number that could push the group down for the week, the thursday’s revised g.d.p. figure. consensus figure for the g.d.p. figure is 3.6% and some say it could be enough to change the fed’s outlook.
>> i think you could see a number close to 4%. that’s going to give the fed some concern and that’s another thing that may make the fed more hesitant to stop its interest rate rising campaign.
>> diversified financials down close to 6%. year to date declining more than the s&p 500’s 1.5% drop in that time. bob, back to you.
>> the g.d.p. number on thursday, thank you, deirdre bolton. the markets struggled most of the session on the day today, tuesday, with the late-day push, pushing stocks upward. still, the dow finished lower. looking at what was trying to move the market higher, a report from deborah kostroun at the big board.
>> many traders waiting on the fed to release minutes from the may 3 meeting and for many traders, it seems like the fed is remains committed to raising interest rates at that measured pace to keep interest rates in check and we have other economic reports that could impact the market over the next few days. thursday, we have that revision of first-quarter g.d.p. and tomorrow, durable goods orders expected to come out, expecting those to rise 1.3%. of course, those were april durable goods orders. gainers in the s&p 500, semiconductors, energy and also media stocks. semiconductors gaining for the 17th day in 18. energy stocks on the rise with exxon holding their annual meeting starting tomorrow. laggards in the s&p 500, autos, real estate and household products. in fact, that auto and auto parts makers sliding, 1.6%, the biggest drop among the 24 industry groups in the s&p 500, on the decline after general motors had its debt cut to junk status for the second time in three weeks. this time, it was fitch ratings downgrading the debt to junk status after s&p decided to lower their debt rating on may 5. asbestos-related companies really turning upward sharply today, owens corning, after the senate moved closer to considering a $140 billion fund for asbestos exposure victims. that legislation would eliminate lawsuits that have forced 74 companies into bankruptcy and owens corning, the largest u.s. installation maker―insulation maker, jumping on that news. genentech, number two biotech company, on the rise today after they said their lucentis drug helped almost 95% of patients with a condition that causes blindness to maintain or improve vision in a study compared to a 62% of people in a control study so genentech may seek approval for the medicine next year. i’m deborah kostroun at the new york stock exchange.
>> moving on, semiconductor stocks led the nasdaq to its longest rally in 4 1/2 years. that’s eight sessions in a row. robert gray with details from the nasdaq marketsite in times square.
>> the nasdaq composite bounced between gains and losses throughout the session, finishing several points higher, the eighth straight day of gains for the nasdaq, the longest streak for the composite since december of 1999. the composite is up 8.25% from its lows on april 28 and leading the gains so far this year have been semiconductors, the philadelphia semiconductor index has risen more than 12%, about 12.5% from its lows on april 15 and intel shares have really been leading the way for the semiconductors, as well. intel is higher for 10 consecutive days, 17 of the past 18. it was the biggest point gainer on several of the indexes today. the dow and s&p and number two point performer on the nasdaq 100, up more than 20% off its lows on april 15. the philadelphia semiconductor index, one of the best performing groups. we saw shares of google rising to a new record for the sixth consecutive session, speculation it will soon join the s&p 500 index. s&p estimates about $1.1 trillion is invested in funds that tried to match the index. they would all need to own google shares and many did not buy it from its i.p.o. up more than 200% i.p.o. to date. looking at shares of cisco. cisco systems shares rising for 15 of the past 16 sessions, the best performer on the nasdaq 100 in today’s session. also, j.d.s. uniphase, best percentage performer, world’s largest maker of fiber optic network parts, buying closely held acterna for $760 million in cash and stock, upgraded to hold by smith barney. video game pub publishers downgraded, bank of america reducing their rankings.
>> the federal reserve decided to raise interest rates at its last meeting despite signs of a slowing economy because of concerns over inflation. that’s according to newly released minutes of the may 3 meeting. peter cook joins me from our washington bureau with more on the minutes. peter?
>> bob, the fed minutes paint a picture of a fed concerned with signs of a slowing economy and signs of inflation but optimistic about the future. at that meeting three weeks ago, the fed raised its overnight benchmark lending rate a quarter point to 3% and the minutes indicate that no one at the meeting questioned the move. the minutes say “all members regarded the stance of policy as accommodative and judged that the current level of short-term rates remained too low to be consistent with stable growth and stable prices in the long run.” the minutes indicate concern over inflation. the minutes indicate “most members regarded the recent slower growth of economic activity as likely to be transitory.”
>> no surprises there. basically, the fed did issue some concern about growth but downprayed it a lota downplayed it a lot but the market has moved on from that meeting with data and various events in the financial markets , as well.
>> data released since the meeting shows employers have added 274,000 nonfarm jobs in april. retails rose 1.4% -- retail sales rose 1.4%. john herrmann with cantor fitzgerald says the minutes show the fed is committed to the measured pace of interest rate increases but paul mcculley with pimco says the fed will do more than just pause.
>> a pause is simply saying that the principal will stop beating you down at office but hasn’t finished the whipping yet and i think the fed will finish the whipping at 3.25, perhaps 3.5 and that will be it.
>> and the minutes said that some members pushed for the fed to consider dropping the measured language from the policy statement at that may 3 meeting fearing it might limit the fed’s flexibility in the future. in the end, committee members agreed to retain “measured” in the policy statement.
>> shares of network appliance are falling sharply in extended trading after saying sales and profit may miss forecasts in this quarter. the company is phasing―facing increased competition from e.m.c. and dell. network said sales will come in between $465 and $479 million, within the range of analysts’ estimates. in the previous quarter, network appliance earned 16 cents a share or 17 cents in terms of operating earnings, matching the average analyst forecast. we’ll look at today’s market action with michael chren, senior portfolio manager with national city, joining me with his outlook for stocks and reaction to the fed minutes, after this.
