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Interview: Bank of New York---Bannon, Kevin---Chief Investment Officer
>> argentina’s president has reached an agreement with the international monetary fund. argentina will make a payment to the i.m.f. according to a person familiar with the accord. missing that payment might have isolated argentina from the international financial community. argentina’s stock index had its biggest one-day gain in 11 months following news of that agreement. the country’s benchmark bond was also up and the u.s. dollar weakened against the argentina peso. details of the agreement with the i.m.f. will be announced tomorrow. a person familiar with the situation said argentine president ordered a $3.1 billion payment to the fund after the i.m.f. said it will release more financing to argentina. that person also said the fund agreed to back argentina’s stance on restructuring $99 billion worth of defaulted bonds. the weakness in stocks continued, today, as concerns about profit growth and job creation is not stocks lower. the s&p had its first consecutive decline in two weeks. kevin bannon is chief investment officer at banc of new york and he will look at where stocks may be headed next which is the question on people’s minds, and by way of interview introducing you in the subject i wanted to show the bloomberg terminal and the chart of the s&p 500 over the last six months. we had the beginning of the year right around here. this mark. really, i guess you could say since maybe the middle of january s&p has looked more or less flat. what does this tell you?
>> i think people are still looking for that final piece of evidence which is job creation, that the recovery in the economy to this point is becoming an expansion, and that will let them become a little bit more confident about the profit outlook going forward, let them pay up a little bit. i think we’ll see all that, but it’s just playing out in slow motion.
>> if it’s the lack of a job recovery which is holding back stocks, i would think that would holdback more consumer stocks, retail stocks. meanwhile, industrial stocks could prosper in an area of growing productivity.
>> while things are a little bit slow here, they are booming in other parts of the world, notably asia. a lot of prices for commodities are up which is bullish for the producers and a little bit bearish for the consumer stocks because they have no ability to pass through those higher costs. there is just no room to raise prices these days.
>> what is your forecast for the economy in 2004?
>> i think it’s going to be a good year for the economy. it will be a 4% kind of year for growth, a 2% or less year for inflation. we’ll look back at the end and say that wasn’t a bad year but will never have enjoyed it along the way because the outcome will never have been that clear.
>> based on that, where are you putting your money?
>> i think stocks are still really the place you have to be, and we would favor some of the more economically sensitive names, industrials materials, -- industrials, materials. while i can’t get enthusiastic about bonds at these levels i think you need them in your portfolio.
>> you have bonds recommended at 35%?
>> at about 35.
>> higher than most?
>> higher than most. i think we’re a little bit more concerned than many that the economy never really quite gets the job-creation engine started -- we run out of tax stimulus, we run out of mortgage refinanceings benefits and we’re in the early summer and companies haven’t started hireings yet, consumers entrench, layoffs start to come again and that’s a worrying scenario. it’s under 10% but this this kind of environment you need to be hedged.
>> with the asset allocation in equities which sectors are poised to grow?
>> the materials sector. it’s one of the few groups where there is pricing power. i think some of the industrial companies --
>> can you be more specific?
you say materials.
>> dupont. chemicals, papers, companies like that. in the industrial sector, whether it’s a company like minnesota mining or anything on that order, emerson electric, those kinds of names. it’s going to be business spending that’s stronger than consumer spending. we have seen capital spending start to kick in. i think technology earnings will be up but the expectations are still high there so we would be neutral there, not ore weighted―not overweighted.
>> tell me about valuations. checking the forward p/e of the s&p 500 at 18.5 right now, not particularly cheap, not particularly expensive. maybe that’s your point that we’re in for some sideways action.
>> i think most of the gains in the stock market will be earnings driven, but i would say that multiples are a little on the high side historically but in the context of where interest rates are and where inflation is, as well, i would say multiples should be well forth of 20, so i think we can see a back-up in bond yields without damaging the valuation case. i think we’re not going to get north of 20 because there is that terrorism discount in there that, ever since 9/11, people are just not going to pay up quite as much as they used to.
>> what might you short if you were going to short a sector, or a stock?
>> if i were going to short a sector, i would have to say maybe some parts of technology. because people really have got their expectations up pretty high as some of these recent earnings reports have suggested. i don’t think there is any room for surprise there.
>> all right. i want to thank kevin bannon for joining us here, chief investment officer back in new york.
>> good to be here.
>> moving on, we have breaking news on procter & gamble, the company declaring a two for one stock split and dividend boost, dividend increases―let me get to the numbers here―p&g increases third quarter and fiscal year earnings guidance also. the company once again declared two-for-one stock split and i’m looking for the dividend boost and i don’t see yet that number. we’ll have that, as soon as we have that for you. p&g sees third quarter earnings per share over estimates by 1-2 cents. that’s what we have so far. we’ll bring you the dividend information.
