Technology sector
>> welcome back to this special edition. i am brian sullivan in new york. welcome. let us continue with our market discussion. we’re speaking with jessica caie, portfolio manager of cohen cligin stein and marks and charles crane and gary shilling, column must for “forbes”.” i want to talk about interest rates because that is something that, whether you’re growth, value or a complete bear, you have to talk about interest rates. jessica, from a technology point of view, is the main concern of higher interest rates because higher rates will make that dollar of earnings, which is oh, so value to a high multiple company, simply worth less?
>> yes, certainly. we’re not that concerned about interest rates moving up significantly this year. there’s no inflation and i think that the --
>> let’s talk about how as a growth fund manager a higher interest rate may affect you and what changes you may make.
>> in 2000 we sold technology because of high interest rates and very high valuations.and we thought the economy was going too slow and there was too much excess capacity. that was one reason why we got out of technology at that time.
>> as a whole, how much would overall value―i know i’m being very general. but how much would valuations have to come down if we saw a 100 basis point increase in rates, over the next year or so?
>> i don’t know. i don’t think that much, actually. rates are so low right now that i don’t think 100 basis points.
>> so in other words don’t panic if we see a half a point, quarter point rise, you don’t need to drop tech holdings and run for the doors.
>> no.
>> what about value?
>> the market as a whole and value stocks in general are already discounting higher rates. thatthey’re very simplistic and probably oversimplistic fed model suggests that stocks are downing rates of 5% on the long end of the yield curve and we’re far from that rate now. that doesn’t mean, however, if we get there in the course of the next year that multiples won’t come down further. as far as the underlying earnings of companies, higher interest rates will have some negative impact, no question about it. it represents yet another tax.
>> you do a lot of other studies historically, gary, what have you seen about periods of high rates and what does well and does not do well?
>> interest rates follow inflation up and down and we had that period from the mid 1960’s until probably 1982 when stocks did miserable with a high inflation and high interest rate period.
>> i think it added one point.
>> the s&p 500 adjusted for deflation declined 63% during that period, a culmination of p.e.’s declining with higher interest rates and the devastating effects of inflation.and i think that’s what this rally since 1982 has been all about, celebration of unlining of inflation, lower interest rates and higher profits because you’re not transferring corporate profitability to government and labor.%
>> and the point jessica makes is that even if we do see a 2% gain, you’re still very low for interest rates.
>> it’s not that, it’s a trend. markets―they’re a discounting factor and it’s not the first quarter of a point but what people think beyond that. we think the next movement in interest rates is down, not up.
>> what about?
>> i know. 99 to 100% of the other people say they’re going the other way.
>> why do you think they’re going to go down and when and how much?
>> i think we’re headed for deflation and you have heard that from me. i think the economy will not be strong going forward. i don’t see big employment gains and you have no pricing power of american business. all the -- 212 of the 308,000 jobs that were added in march --
>> that’s a lot!
>> ok, but 112 of those were in healthcare, government, retail, hospitality and construction, those are not areas that compete with the rest of the world. everyone else that does compete can’t afford to hire more people because of the pressure.
>> deflation has been an issue on the horizon for the last few years and i’ve been more worried about that than inflation for the past couple of years. however, with all of the things that are going on in the global scene with china becoming the elephant in the corner that nobody can ignore anymore, there’s both deflation and inflationary pulls to that presence. on the deflation side, they’re exporting low labor costs. on the inflation side, they’re eating up an awful lot of resources. i don’t know where that tug of war plays out but it will play out one way or the other.
>> charlie, you look at what’s been happening, looking at the last year, the economy in this country has been boiling, china, as you say, has been growing rapidly and much is because they’re producing more capacity and they produce more. the point is that with all of this, inflation rates around the world are coming down. germany has deflation, canada, norway, sweden.
>> is it deflation or disinflation.
>> producer prices in those countries are declining year over year.
>> jessica, we know it’s deflationary for consumer% -electronics as digital cameras today cost more than they will next month. are you worried about that from a growth fund perspective?
>> that’s one of our concerns. but it hasn’t been that evident that it’s going to happen and i think the technology companies are starting to get some pricing power back.
>> we’ve seen it in d-ram a little bit.
>> a lot.%
>> to the benefit of micron fecnology―technology.
>> significantly. talking to the companies, they’re having pricing power.
>> is that because they’re smarter about their inventory and the capacity they produce. gary says everybody sees what’s good for the goose and starts producing a lot of it.
>> look at nokia in the last week. a classic case. their prices are too high and their lunch is eaten by their competitors.
>> some of the outsourcers like flextronics and selectron, they’re the end of the chain.
>> ultimately they don’t care who designs it as long as they build it.
>> right and i think that’s nokia’s problem, actually, the service providers don’t care who makes the phone and they want their name on it, not nokia’s. i think that will be a long-term problem for nokia.
>> how long, forever?
>> i don’t like forever.
>> is there anything on nokia’s horizon to indicate things -- and i don’t have time to get your answer but we can answer it when we come back, the beauty of television is there’s always another segment. please come back, we’ll talk more about technology and the industry groups in tech and value look attractive right now.
