Is the market going to keep rising?
Interview: First American Funds---Lettenberger, David---Portfolio Manager (slow)
>> r.j.reynolds tobacco incorporated, maker of camel an winston cigarettes, must pay a fine for handing out free packages of cigarettes at an event where kids were present. they sought to overturn the fine for violating california’s law banning tobacco give aways on public grounds where kids may be in attendance. they argued the state law is preempted by a federal cigarette labeling law and that the fine is tuitionally excessive. former chief executive of enron’s north american unit agreed to plead guilty to a criminal charge from the department of justice. david delaney also settled securities and exchange commission fraud charges. he will also pay a civil fine of $3.7 million. the s.e.c. said delaney and others at enron engaged in a wide-ranging scheme to manipulate enron earnings and produce materially false and misleading financial results. there’s concern that the third quarter could be the high watermark for the u.s. economy and for earnings. for a look at that and where he is investing now, senior portfolio manager at first american funds joins us. one of the funds he manages is the first american large cap growth opportunities fund, up 19% so far this year, and the first american mid cap growth opportunities fund, up over 28% year to date. he is joining us from their offices in minneapolis. welcome, sir.
>> thaou, michael. good to be here.
>> you have pretty impressive results there. are you going to be able to keep that up, in other words, is the market going to keep rising?
>> i don’t think people should expect the kind of returns we have seen the last 12 months. as you mentioned just a minute ago, i think we have seen the peak if not this quarter, next quarter in the earnings growth rate of the market. therefore, going forward i think one should expect to see in the way of equity returns as roughly in line with the earnings growth we’ll see which we think is low double digits over the next 12 months. we’re positive on the equity markets. we think we’re looking at 10% to 12% returns over the next 12 months.
>> can you explain pwhapd today? we saw a jump in equities today after the blowout g.d.p. report and in the afternoon it seemed like everybody lost interest.
>> you know, i’m not that surprised. i think g.d.p., we have to remember, is a look back figure. it’s a summation of the positive economic data we have been seeing the last three months. the fact that we jumped out of the gate, i think people looked at it and said boy, you know what, this is great but let’s look at what is happening going forward. this probably was the highest level of the g.d.p. we’re positive going forward, think the economy will continue to grow but maybe not at the same time. maybe it’s time to lock in profit. i think that is what you saw, normal profit taking, which is healthy, based on the moves in the market not only in the last 12 months but in the last three days. we have had a powerful move.
>> the economy doesn’t have to grow 7% a quarter to impress the markets, does it?
>> not at all. in fact, we’re positive on the economy not only into the fourth quarter but next year. the fourth quarter we think you’ll continue to see corporate spending which was probably the biggest surprise in today’s g.d. report. in 12004, in addition to corporate spending based on higher levels of profit, you should have the consumer continuing to be strong, aided by the fact that tax refunds in 2004 will be greater than in the past. we think the consumer, as proven in the third quarter, few put a dollar in the consumer’s pocket, they’re going to spend it, at least a dollar. we’re positive on the economy. i don’t think we’ll see 7% type of growth rates. a 3%, 4% growth rate over the next 12 months is very doable.
>> what did that mean, do you suppose, for corporate profits? we had the third quarter growth come in in corporate profits very, very high. what do you make of that? are we starting to get the topline growth we need?
>> well, we are. but i think what i said before is that the growth rate expectations going forward shouldn’t be what they were in the third quarter. i think they’ll moderate a bit. there is nothing wrong with low double digit type of earnings growth for the s&p 500 and for corporations. i think with that as a backdrop plus the low level of interest rates, i think equities continue to work higher.
>> as this goes along, you have managed a small cap fund, you now help run a large cap and medium cap. who is going to do the best. what kind of companies will profit the most going forward?
>> you’re not going to like my answer. i think going forward it will be a level playing field. we have seen for the past four years small caps dramatically outperform large caps. that followed on a dramatic four or five-year outperformance of large caps. the valuation discrepancy had become too large. i think what has happened now is you are trading at roughly the same valuations whether a small cap or large cap. i think the equity returns going forward will be fairly comparable and more in line with the earnings growth rate.kind of a copout but i believe that small mid cap, large cap, we’re looking at 10%, 15% returns over the next 12 months.
>> thank you very much, dave.
>> you’re welcome.
>> senior portfolio manager at first american funds. the california fires have already destroyed more than 2,500 homes and threatened thousands more. the likely impact of it on the insurance industry coming up when we return.
