Bonds vs equities
Interview: GAM---Abate, James---Fund Manager
>> welcome back to television. keeping an eye out for worldcom. here is the word. worldcom $750 million the has been approved by a judge. this involves a packet with the s.e.c. which resolves the agency’s fraud allegations. the bankruptcy judge has approved the worldcom record payment to investors and it apparently is going to move forward from there. this is separate from the other issue with bob bowden last hour with at&t saying worldcom has a fee of asian scheme involving army and navy calls, which alleged worldcom routed government traffic through canada. this is a separate issue, a $750 million settlement approved by a judge to settle the s.e.c. issue of fraud allegations. in the meantime the federal communications commission has approved univision’s purchase of hispanic broadcasting according to agency officials, who say the three republicans on the five-person panel voted last week to approve this merger. univision is the largest u.s. spanish language broadcaster and hispanic is the largest hispanic radio broadcaster. they propose today merger in 2002. both were down headof this word. shares i should say climbed on the news.
>> tenet health he care rising in extended trading action t hospital company agreeing to pay $54 million to settle allegations of unnecessary heart procedures at one of its hospitals. it got a lot of publicity. shares are up 8.5% on this news. tenet is under investigation by three u.s. agencies but didn’t admit guilt and will not face criminal charges. what our next guest was last on this past may he said it was time to get out of treasuries. now he says while bonds may be at more reasonable levels current economic and market conditions should make investors wary of small-cap stocks . the investment director and fund manager helping oversee about $22 billion at g.a.m.u.s.a. nice to speak to you again. a lot of movement in the bonds. you said the bonds weren’t attractive. what do you make of them now, those when you look at what’s happening since then? there has been a lot of activity. do you get a sense that the tide is turning from a trading point of view?
>> i think when we made the discussion about bonds versus equities. the equity risk premium which was priced into equities, vis-a-vis bonds at that point, had become overwhelmingly biased towards the decision to get out of treasuries or actually sell treasuries against a basket of stocks . now that that’s largely happened i think you have to look and see is the bond market bad for equities. per se, it’s not bad, but i do believe it will change leadership in the market away from small-cap stocks towards larger cap stocks .
>> now, long term, is that a positive thing overall for large caps are is this just a short term thing related to what’s happening with bonds?
>> i think time will tell. but clearly when you look at the macroinfluencing factors that drive small-cap outperformance versus large caps, it’s two things. it’s interest rate policy and also it’s the pace of economic recovery. stepping back let’s look at interest rate policy. the fed has clearly been in an easing mode or conditions have been quite easy from the standpoint of a reduction in the fed funds rate since january 5th of 2001, up until you could argue june of last month when the fed basically went to a decision. now that you’ve had the backup in bond yields, that the fed is largely done in terms of reducing short-term interest rates. in fact, fed fund futures now are pricing in a rise for the first time in the fed funds rate.
>> this is more helpful to large caps than it would be for small caps or is it a question of outperformance because of their relative conditions here?
>> it’s really a question of outperformance. what it signifies is small-cap companies typically are more cyclical, more leveraged, more dependent upon the financing mechanisms to do well t second component is actually the pace of economic activity. that has something to do with the structure of interest rate policy. the reason why we think that small caps will seed outperformance to large caps going forward is the pace of the economic recovery we see. two things are tempering what would normally be associated with a post recession rebound. one, we had a very atypical recession. the consumer largely did not participate in it. the second is this is the first post of ta recovery. and a lot of the manufacturing jobs and so forth which are part of the recovery process are happening in china and indonesia rather than in the rust belt indiana and 0 forth one of the large caps you like here is exxon mobile. why pick that one out at this point?
>> it typifies all the things we think are important in terms of driving the not only nominal performance but relative performance going forward. size, leadership, and dividend yield. dividend yield now on the stock is $2.8%. you can easily see that going up and increasing dramatically, given the strong cash flows.
>> what about nfts here? pricing power concerns at all?
>> clearly one of the things that happened in japan over the course of the last couple days. there was some fraud, an issue that came out which puts exxon which generates about 12% of ipts incremental profits from japan in a much stronger position.
>> still to come, a wrapup and forward glance at the economic events around the world.
