Interview: Drug stocks
>> continuing our discussion of the economy and potential headwinds it may be facing, one of them could be the record deficits and reliance on foreigners to finance the debt. the current account deficit, broadest measure of trade, is running nearly $600 billion a year, about 6% of g.d.p. to put that number into perspective, it takes nearly 1.8 billion dollars in foreign capital to finance the deficit and maintain the value of the dollar. so far, that hasn’t been a problem based on the latest inflow data from the treasury. international investors bought more than $61 billion worth of u.s. corporate bonds, stocks and treasuries in december. but things could change in a hurry. we spoke with columbia university professor and nobel laureate joseph stiglit, here’s what he had to say.
>> it’s one of the biggest challenges, there are others, and they’re all interlinked. the deficit, the fact that we’re borrowing so much in the global market , in the long run, it’s hard for an economist not to conclude that real interest rates will rise. if real interest rates rise, then, the housing market , which has been very inflated by low interest rates, may come down.
>> some other red flags, he’s looking at, include the dearth of individual savings. during alan greenspan’s tenure as fed chairman, personal savings rates have gone from an average of 7% to 1% and much of that has to do with low interest rates which has encouraged consumers to take on more debt by investing in homes. and prices have risen sharply in many parts of the country. could the 30-year bond make a comeback? new pension fund rules proposed by labor secretary elaine chao may force the treasury to revive sales of 30-year bonds, bring back the 30-year. possibly. the labor department says the decline in stock prices and interest rates has cut the value of pension plan assets, leaving them underfunded by $450 billion. the new rules, if passed, would force fund managers to better match long-term liabilities with assets and one way do that may be to buy longer term securities. president bush can check one thing off his second-term agenda priority list, he’s signed a class-action bill into law.
>> the class-action fairness act ends marks a critical step to ending the burden of litigation on every american worker, business and family. by beginning the important work of legal reform, we’re meeting our duty to solve problems now, not to pass them to future generations.
>> companies including ford, pfizer and allstate lobbied congress for the overhaul in order to cut legal costs. under the new law, most claims seeking at least $5 million would be moved from state to federal court. judges will be required to assess the fairness of settlements and any deals that resulted in a loss for consumers because of legal fees would be banned. president bush says the class-action bill signed today is only the first step in cutting frivolous lawsuits. he wants congress to take a medical malpractice and asbestos-related claims. jeremy segal is a professor at the wharton school at the university of pennsylvania. his new book “the future for investors” says fast growing industries aren’t the best investment and historically shrinking sectors and slowing growth industries have always outperformed. professor joined us earlier to explain.
>> we found that over time only 1/3 of the return to a given sector could actually be attributed to whether that sector was growing or not. the energy sector, for instance, which has shrunk dramatically over the last 50 years, provided above-average returns, better than technology, better than finance, better than expanding sectors.
>> he strongly recommends investors start buying overseas companies, especially large ones.
>> i’d say 40% of your portfolio now should be global, should be outside the united states. that’s where the growth is going to be and if you’re looking long term, i think that’s going to be a winning combination.
>> see burst on to the scene 10 years ago when he published his book “stocks for the long run” in 1994. in this week’s edition of “money & sports,” we’ll talk about hockey. the national hockey league, the nhl, if they ever drop a puck again, you may not be watching it on espn. plus, a popular hip-hop artist is entering the world of sports. we’ll talk about that with mike buteau in “money & sports.”
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>> welcome back “world financial report,” i’m matt nesto. let’s talk about how wall street finished up on a friday. mixed market , no big changes for the indexes today. we saw big moves in drug stocks and energy, more specifics on that in a bit. you can see the s&pand dow both higher but the nasdaq down just over two points. for the week, a lot of red arrows. g.m.’s highly anticipated new car may not be selling so well. the company is delaying extra production runs of the new g6 and boosting incentives for customers. adrian cox has more.
>> thank you, matt. g.m. launched its g6 sedan with great fanfare last year when oprah winfrey gave away dozens of the cars to the studio audience in september. now the company says it’s delaying production of the g6 coupe and convertible in michigan by two months in july and will extend a planned shutdown at a factory in texas that makes the suburban and tahoe. g.m. says sales are holding up quite well and the company is building up inventory of the g6 ahead of the spring selling season, as inventory of the car is 110 days and the g6 is more profitable than the older cars it replaced. the company says it is ready to go on a product offensive in the next couple of years. the “wall street journal” says the carmaker has started offering incentives worth as% -much as $4,000 as well as 0% financing for 36 months to attempt customers into buying the cars. g.m. is relying on the new models to lift sales after losing market share in america for the second straight year last year. its share price has fallen more than 30% since the beginning of last year. at the same time, asian carmakers such as toyota captured a record 35% share. incentives may not be enough, says the president of genta capital management in los angeles. sooner or later, he says g.m. will have to take a hard look at combining brands to combeat with japanese rivals.
>> thanks so very much. also worth noteing, semiconductor stocks rallying this month and gains may continue for the group as orders rise and inventories fall. that’s the subject of our “taking stock” today and here is danielle sessa. what’s going on? the semis are turning?
>> great move in february, second only to energy stocks in terms of gains for the month and there are signs, some investors say, that the worst is behind for the semiconductor stocks. last year, they were the biggest decliners in the s&p, an index of chip stocks down 22%. the big problem was inventory. companies, chipmakers, chip equipment makers, they were having more and more product build up in factories because earlier in the year they flooded the market with product and the end demand wasn’t there, so that was the reason for the drop we saw last year in the second half. intel, as it’s reducing inventory levels, they said in january it’s down to 2.2 billion from a record 3.2 billion they had in the second quarter. altera and xilinx forecasting a sequential increase in sales this quarter.% those are the things investors are looking at saying, hey, we may be at the bottom and investors want to step in and buy the stocks before there’s an upswing in fundamentals.
>> so analysts stepping forward, saying now is the time. the group is still down 20% over 12 months, certainly off of the lows but still down.
>> yes, it is and starting this month we had credit suisse first boston recommend investors buy global chip stocks, citing valuations, the companies cheap on a price-to-book basis. analysts at s.g. cowen also saying when this group moves, it will move quickly, evidence of the big gain we had this month, saying investors should buy these stocks ahead of the turn in fundamentals.
>> i’ve talked in the past about how technology isn’t necessarily the biggest weighted group in terms of the market moving but it leads the market up and down and we’re seeing technology again, at least as defined by chip stocks, in a rising market . is this rally expected to continue or what is needed, do you hear, from people, to keep the rally in chip stocks rolling.
>> bottom line, you need demand coming back from the end demand. the consumers buying more things using chips and more orders from the companies and you need a better environment. growing economy around the world. if the fed stopped raising interest rates, that would also help things out, if oil came down, as well, these are macro things investors are looking at. on the charts, technically, traders and investors who watch these things, say there is more room to run in these stocks because the prices have come down and analysts keep cutting down their earnings estimates so, really, any surprises we have will be on the plus side because all the bad news is priced in.
>> let me pull up some fundamentals, looking at the philadelphia semiconductor index. too much data to put on the screen, but on the forward p.e. basis, this group trading at 27 times, you’re still paying the premium for the growth rates of some of these companies but that doesn’t appear to be scaring away buyers here?
>> no. many investors i talked to said, the group is more expensive compared to the s&p 500 but if you look out further and the earning potentials of these companies on the long-term basis, they’re a little bit cheaper.
>> do you get a feel for cap-ex, we focus a lot on who’s spending and the different technology sectors. what do you hear along those lines?
>> intel said they would spend more money this year compared to last year on equipment and intel being the biggest chipmaker, that has to be a good sign for the industry.
>> danielle, good to have you on, danielle sessa on our stocks team with bloomberg news. we’ll be back. we’ll take a break and get in line to come back with more news.
