Bearish
Interview: National City Corp.---Dekaser, Richard---Economist
>> the decade-long debate over intel, yahoo and other companies, whether they’ll finally have to start making stock options as an expense, begins next year. the financial accounting standards board will issue a ruling as early as this week. expensing will reduce the average per-share profit among s&p 500 companies next year by 3% according to a bear stearns estimate. almost 500 companies including 113 out of the s&p 500 have started expensing options or at least have plans to. computer companies say valuation methods are imprecise and counting options as costs would understate corporate profits. our next guest’s firm manages $16 billion in equities and is a contrarian investor who says he expects stocks to go down this year. franklin morton, senior vice president, portfolio manager at ariel capital management joins us from chicago. thank you for joininging us, franklin. why so bearish? the stocks are going down, dow down 6% in the last three weeks. how much further are they going down and why?
>> you have to return to last year. a phenomenal year in the market no matter what index you look at and i think that incorporated most of the gains and good news out there and this year we’ll have to execute on an economic recovery and have no major problems on the terrorism front and i think if that happens, the market probably is flat to down a little bit but if the economy slips or we have some problems in iraq or with interest rates or inflation, i don’t think that’s built into the market so there is a downside here.
>> if you look at the groups and i know you don’t like group invest, but i’m going to to talk about it as a point of discussion. if you look at the groups year to date, telephone company stocks are the worst performers―that’s today’s -- apologize, i’m i.t.―i.t. the worst performer, materials the second worst performer and industrials index the third worst performer and on the top of the heap, energies and financials, up 2.5% year to date. that said, isn’t that telling us something about the belief of the economy and isn’t it wise to follow those trends in the market in terms of investments?
>> i think if you follow what everybody else is doing you’ll perform like everybody else. so the challenge is to be out there when the market starts to go too far in one direction, you should look the other direction. that’s what we try do, when everyone is uniformerly negative as they were in the end of 2002, that’s when we step up and buy stocks and after a year like last year when the indices were up from 25% to 50%, we look the other way thinking that maybe there’s too much good news out there.
>> one of the stocks you’re buying is black and democrater, 12 times this year’s estimated earnings and no change in the stock today but nonetheless, 12 times estimated earnings. is that the sole reason why you’re buying this tool and appliance maker?
>> that’s clearly part of it. a 12 multiple in today’s market is compelling but what you’re getting for it is a global leader in the power tool industry both consumer and professional. you’re getting great brand names in black & decker and dewalt and lastly, you’re getting a major restructuring program that’s neither an end and consistently% -the company has generated more savings than they expected and i think there’s a chance that will continue. i look at the 450 estimate i have for this year and i think they could do better than that.
>> what’s better than that?
>> another 10 to 15 cents.
>> why would that be? because they’re managing the company better or better margins, currencies?
>> it’s coming―it’s coming out of the margin line as the company has closed facilities and moved production to more efficient plants.
>> overseas?
>> yeah, in many cases it is overseas. they built a plant in czechoslovakia and moved production to the far east, as well.%
>> this is a perfect segue into our next topic. it is an election year and that will be a hot topic, outsourcing jobs or exporting jobs overseas, whether it’s black & decker or microsoft. people are moving jobs overseas. is that going to have an effect, do you think, outside of the political arena as far as investors are concerned?
>> i think investors are looking more for efficiency and right now the cost of doing some things overseas is cheaper than it is here. on the other hand, there’s some skills here that one can’t do overseas so those jobs are very safe.
>> you said you expect stocks to be down 5% from last year and the market could have a reaction to the election. what would they react to to make stocks go down?
>> i think if you look at what both candidates are saying right now, mr. kerry certainly is talking about raising taxes. and historically that has been negative for the stock market .
>> i apologize but we’re running tight on time and need to leave it there. franklin morton, our thanks to you. we’ll be right back and we’ll talk about slumping demand for commercial aircraft.
