Interview: Wachovia Securities
>> Welcome back. stocks finished the day mixed with the dow up, s&p and nasdaq down. today’s retreat pared the benchmark index gains for the week if you look at the s&p 500. doug sandler is chief equity strategist with wachovia securities joining us from richmond, virginia, on this friday afternoon. welcome to the program.
>> thank you.
>> i wanted to begin by showing our viewers a six-month chart of the s&p 500 on the bloomberg terminal that i’ve drawn. and have you react to this. basically, we had stocks falling in march and the first half of april, turning around, then, the second half of april and in may, but really, the last three weeks here we’ve kind of been running sideways in the s&p 500 and i’m wondering what your sense is of what will drive markets higher or lower from here?
>> well, i think we’re in a very important shifting time for the market right now. the last 18 months we could say was a cyclical market . the economy was strong, the companies that were impacted by a strong economy did very well. the metal companies, machinery companies, steel companies, chemical companies. that gain, in my opinion, is over. going forward, we think the excitement of the market is the secular companies, those kind of companies that can grow regardless of what the economy’s doing. that’s because we’re seeing a slowing economy, and a slowing economy is almost never good for cyclical stocks so the exciting part from our perspective and although it seems like the market is going back and forth for investors and it’s hard to discern a real trend, the exciting part from my perspective is it’s very rare that the good secular companies are priced not that much more expensively than the cyclical companies. cyclicals should trade at a very big discount and they don’t right now so that’s a great opportunity.
>> what sectors do you like, meaning those that are non-cyclical? are you talking healthcare, h.m.o.’s and hospitals, pharmaceuticals?
>> right. well, i think it’s more of a stock-picker’s game. ultimately, a lot more secular games fall in the healthcare, technology, consumer discretionary area. but in the end, it really is a stock-picker’s game. i can look at industrial companies and say, clearly, caterpillar, for example, is a cyclical stock. they do well only when the economy is strong. on the other hand, in the same sector, a company like general electric, which i should note, we own, is a lot more secular. they have their arms in many different businesses, healthcare being one of them, water, et cetera and they can grow regardless of where the economy is going. they are impacted somewhat but they don’t have the same cyclical headwind that caterpillar might have.
>> to be devil’s advocate for a moment. i see names like u.s. steel down 26% year to date and steel dynamics, 28%, a.k. steel down 52% year to date. some of those stocks have gotten awful cheap, no?
>> well, no, no. the answer is no. the thing you have to be wary about on the cyclical names is the earnings number that you see is very cyclical, as well. so you may have a stock that earns $3 when times are good and they actually lose money when times are bad and what happens is people start to say, well, they’re earning $2.50 now so it’s cheap on a p.e. basis. you can’t do that with cyclical stocks. you have to normalize the p.e. and in many cases you’ll see these stocks are still not cheap here, still up 200% to 400% over the last couple of years.
>> i wanted to show the chart of oil over the last six months and get reaction to that impact on the market . you see oil around here at the $56, $57 level in march, coming down a bit and back again at end of may and now hovering at $54. if we stay at these levels, what does that mean for energy stocks and companies in general that are affected by the high prices?
>> for the energy stocks, it means the cash register will be ringing. for these kind of companies, $50 oil, i mean, that’s like pigs in slop. it’s as good as it gets. i don’t know how long it stays at these levels. we like energy stocks. it’s nice to see the bulls pick their head up out of the sand. we had a lot of people bullish on energy over the last couple of weeks. we are overweight in every one of the portfolios weeingage in energy. i can’t tell you a better theme than buying energy stocks right now. you may be buying them short term at a wrong time but long term, we like energy. we like energy drilling stocks, energy service stocks.
>> everything?
>> across the board.
>> anywhere you go. in our remaining seconds, i have a report from monday of this week you put out called “out of the block, the elephant in the room.” tell our viewers what is the elephant in the room.
>> the elephant in the room is the single stock position, one company that most investors own that accounts for 15% or 20% of their portfolio. we think that’s a big mistake, an issue that has to be addressed. it’s the elephant in the room because everybody ignores it. they want to pick a great company but ignore the huge position they hold. too many tombstones have been written in investment portfolios about people who ignore the big positions.
>> we are out of time but our thanks to doug sandler, chief investment strategist at wachovia securities. the u.s. trade deficit widened less than expected in april and americans paid record prices at the pump. a lot more goods from china. no surprise there. june grasso joins me with the story after the break.
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services almost 16% wider. at the same time the commerce department said the gaps for the previous four months were smaller than previously reported. one major factor in the april report was increased buying from china. america’s gap with china grew 14% and its textile shipments to the u.s. jumped 11%. u.s. imports rose 4% to a record in april. exports were up almost 3%. also, to a record. 10-year treasuries fell for a third day, the longest slide since march, on speculation yields, near their lowest in 13 months, did not odquattle reflect prospects for a healthy economic growth and further federal reserve interest rate increase. the five-year with 3.83%, the yield there, down 13/32 in price -- citigroup agreed to pay $2 billion to settle a class-action suit related to enron’s collapse. the largest settlement to result from lawsuits accusing wall street firms of helping the energy trader commit fraud. su keenan has more on the citigroup settlement.
>> the agreement sets the stage for other banks, including j.p. morganchase, to reach settlements in the $30 billion class-action suit resulting from enron’s bankruptcy four years ago. citigroup says it will pay the $2 billion settlement from its legal reserves set aside last year. the bank was accused of letting enron hide billions of dollars in debt and off-the-book partnerships. attorney stephen ryan says the charges would have been difficult to fight.
>> the bank was essentially a satellite of the enron criminal conspiracy. and the bank to have to pay this very large amount of money directly to the shareholders, obviously puts some money back in the shareholders’ hands because their shares are worth nothing and keeps it out of the hands of the enron bankruptcy, which would benefit, frankly, a number of the banks themselves.
>> enron shareholders are still pressing claims against other banks which lent to the former energy trader. those banks include j.p. morganchase and merrill lynch. citigroup’s chief executive, charles prince, said the agreement brings the company closer to resolving a scandal-ridden era in the bank’s history. altennes investment’s nicholas jones views the settlement as a positive for the stock.
>> it came in at a good price. $2 billion is obviously a lot of money but when you look at the total case as it is, it’s essentially pennies on the dollar. >> the settlement is 2% of citigroup’s last year’s revenue. the bank has faced three years of regulatory and legal hurdles. last year, the bank paid more than $2.5 billion to settle claims related to the worldcom bankruptcy.
>> thank you very much. shares of general motors were strong all day. for more, here’s a report from deborah kostroun from the new york stock exchange.
>> the dow ended friday’s session higher, but it was higher sales from intel that failed to jumpstart the market . intel was the worst performer in the dow jones industrial average on on the day. the best performer, however, in the s&p 500, was the auto straempt general motors, biggest gainer in the dow jones industrial average.% and shares of g.m. rose on expectations that the united auto workers union may agree to negotiate on healthcare cost cuts. united auto workers gave authority to the union’s vice president to negotiate with g.m. on cost cuts linked to the contract that expires in 2007. in fact,, a morgan stanley analyst said that the union’s willingness to negotiate is an incremental positive. nortel networks down on the day, number one north american telephone equipment maker. president gary daichendt resigned after only three months on the job because his business views differ with the chief executive, bill owens and chief technology officer also left the company. it was a record price for wendy’s. wendy’s up in thursday’s session, about 3% higher in friday’s session. volume for the past past couple of days about four times the average daily volume that we typically see in this stock. the news is that gating square capital management, a hedge fund, actually wendy’s biggest shareholder, hired blackstone group for advice on spinning off or selling assets of the hamburger chain. wendy’s shares have risen 22% so far this year on talk of that spinoff. krispy kreme donuts rising on the day. this company has had concerns regarding cash flow. it hooks like the donut chain maker’s canadian franchise is selling the operator’s donut making equipment, store leases and assets, according to the “wall street journal,” citing papers filed by ernst and young. and chevron evacuating workers in the gulf of mexico ahead of tropical storm arlene.
>> intel shares led the nasdaq lower after their mid quarter update thursday. robert gray has details from the nasdaq marketsite in times square.
>> the nasdaq composite closing lower in friday’s session and lower for the week, as well. semiconductor stocks had helped lead the rally over the past six to eight weeks and in fact, it was the semiconductor stocks that led stocks lower in friday’s session. intel leading the way there, disappointing investors after its mid quarter update thursday after the close. investors had bid up intel stock by 25%. coming into friday’s session, off of its april 15 recent lows and of course, the nasdaq having a recent low on april 28 so chip stocks had been rising in advance of the broader nasdaq composite and intel one of the biggest drags on the nasdaq 100, the s&p 500, broader market as well as the dow industrials. intel stocks with its biggest drop in three months on friday’s session. we want to look at the semiconductor index because sentiment was negative throughout the index and most of the members fell after intel’s disappointment. also, one-two combination, microsoft weighing on the nasdaq, as well. you call it the net microsoft effect. microsoft shares didn’t rise but a lot of news surrounding the software company. their cnet reporting that microsoft moving into the music subscription business later this year to compete directly with apple’s itunes music store. msn trying to get copyright holders a free copy of any tune purchased on apple so they would have a copy. microsoft also started public testing of a new graphics program to compete directly with adobe’s photoshop and illustrator product, sending adobe shares lower. so the microsoft effect sending other technology stocks lower in friday’s session. at the nasdaq, i’m robert gray.
>> checking oil prices on friday, oil fell for the first time in three has higher-than-normal u.s. supplies reduced concerns that refineries will not be able to meet peak u.s. demand later this year. here’s friday’s close, you see on the one-day, down 1.36%, $53.54 is where we are. red arrows also with gasoline down almost 2% on the day, natural gas down 1.6% and heating oil down a little over 1% on the day. the international energy agency raised its forecast for worldwide demand in the second half of the year. global oil use will reach 86.4 million barrels a day in the fourth quarter, the group said, up 200,000 barrels a day from the prediction given a month ago. that means opec will need to pump more than 29 million barrels a day in the final quarter, an increase of 300,000. traders and analysts surveyed by bloomberg are fluid on where prices will go next week. 19 predicting a rise in oil prices, 17 predicting a decrease and eight seeing little change. a second executive of warren buffett’s general re pleaded guilty today to criminal charges over accounting practices at a.i.g. senior vice president richard napier appeared at a plea agreement hearing in general court. former general re executive john houldsworth entered a guilty plea yesterday, admitting he helped a.i.g. distort finances with a reinsurance transaction. in court papers, the government says his co-conspirators included several senior level executives from both companies. bernard ebbers facing life in prison for directing the largest securities fraud in u.s. history cited his charitable work and ill health in a bid for leniency. ebbers’ lawyer asked the judge to use her discretion to impose a prison term substantially below the life sentence recommended in a court-ordered recent investigation. ebbers was convicted of directing $11 billion accounting fraud at worldcom, once the second largest long-distance phone company, between 2000 and 2002. when we return after the break, stocks bounce between gains and losses in friday’s session. we’ll look at where stocks may be headed with doug sandler of wachovia securities.
