The earnings season
Interview: Westwood Holding --- Strategist --- David Spika
>> earnings at mutual fund companies may show increases of more than 40% this quarter. fund companies such as franklin resources, t. rowe price and legg mason are profiting from a 12-month stretch when the s&p 500 index climbed 17%. that gain in the market has seen their fees rise accordingly. the average gain for 10 of the biggest asset managers will be about 25%. the pace of profit growth may slow the second half of the year year. should investors scale back purchases of equity funds or the market decline. the earnings season underway in earnest next week. suzy assaad spoke with westwood holding strategist, david spika, about what he expects.
>> what we’ve seen is four consecutive quarters, assuming this quarter comes in over 20%, of over 20% earnings growth and the market is discounting the future. the market is looking ahead. historically, we have had very few periods of four consecutive quarters of strong earnings growth so this quarter is priced in and the market is projecting higher inflation rates and higher interest rates and does not see as robust growth in the coming quarters.
>> so if you have a market growing 20%, earnings growing 20% and you can’t get stocks to move up with that information, it doesn’t bode well for the future at least in your terms?
>> stocks did move up in anticipation of it. what we saw last year was 30% gains in the market predicated on the liquidity in the market and the strong earnings growth we were seeing. what happened was is the market started to correct in the second quarter of the year when we started to see interest rates go up. interest rates going higher leads to slower economic growth, which leads to slower earnings growth so we see the market as being very rational and it’s set the market up in a better position to make modest gains going forward.
>> what kind of modest gains do you expect?
>> we think that the market from here could do another 4% to 5% for this year. next year, we think it could be tough sledding. however, we think there are pockets in the market presenting better opportunities―the manufacturing segments of the market . we saw g.e.’s number today, up 22% on their industrial business. we think there’s a lot of opportunity to make money in the industrial part of the money, as well as energy. oil prices still up $20 a barrel although the saudis are pledging to pump more, we see high commodity prices, boding well for energy companies.
>> you mectioned―mentioned 4% to 5% for the year. given the fact that the dow is in deficit of 4%, you’re talking about a return of 3% overall for 2004. you would think there would be a better investment out there than stocks at this time.
>> not really, and the reason we don’t think so is because in a rising interest rate environment the asset classes that get hurt the most are those that are high-yielding type asset classes like fixed income, lie high yield bonds and reits. these are the asset classes that perform the worst in a rising or high interest rate environment. stocks, on the other hand, generally perform fairly well as interest rates rise until they get to the point where they start to choke off economic growth and that’s when stocks generally will trade down. so we have seen somewhat of a correction. that leads us to believe that the market ‘s healthier today than it was six months ago. however, we think that the rising interest rate environment and slowing economic growth will present somewhat of a headwind for the market . but we think equities are the best asset class to own today.
>> one technical trader, i was reading his note earlier today, suggested that the market has put in a major top for stocks and on a technical basis, a lot of stocks are failing to break through important resistance levels and the nasdaq has not been doing well technically on the charts. what do you think of that?
>> the market ‘s been in a trading range the entire year on the s&p, between 1100 and 1150. so we don’t do a lot of technical analysis but it is fair to say that the market ‘s been this a trading range and generally when you get into a range, you need some sort of positive or negative catalyst to push the market one way or the other. we don’t see anything significant on the horizon either positive or negative to push the market significantly out of that trading range, something in the way of much stronger earnings in the third quarter could be a positive catalyst. much weaker earnings or slower economic growth could be a negative catalyst but longer term we still do think stocks present a fairly good risk-reward tradeoff at this% -point and that modest gains of 5% to 10% a year for the next few years are realistic.
>> in other news today, james newson has resigned as chairman of the u.s. commodities futures trading commission, going to take over as president of the new york new york stock exchange―new york mercantile exchange, effective august second. during three years as chairman of csfb, newsome brought cases against .22 -- 22 energy companies, including enron and a unit of el paso, charging them with price manipulation and fraud. the new york giants could say goodbye to meadowlands and be moving to a brand new home. we’ll tell you why the team’s c.e.o. is considering a move instead of a renovation. up next in “money and sports.”
