Interview: Oppenheimer & Co. --- Metz, Michael ---Chief Investment Strategist
>> it was and up and down day but investors final shrined off on fed chairman’s ben bernanke’s first testimony, pushing the dow to a 4 ½ year high . what will it take to push the market even higher? joining us with michael metz, chief investment stratsquift at oppenheimer. welcome, michael.
>> thank you.
>> given bernanke’s comments that interest rates may indeed have to rise further, how significant is it that market extended past yesterday’s gains ?
>> well, there’s no surprise in his remarks. everybody expected him to say this. what i found very interesting, he was addressing the current in balance of trade. he said what is necessary to correct that is higher savings, more demand for overseas and also more flexibility in the exchange rate. what he is really saying is the economy has to slow down in order to accommodate some rebounds of the trade imbalance and also longer term has to be downward reevaluation of the dollar. which i think will later on sink into the market ‘s sensibility.
>> how does that translate into your view on how ber than case is looking at rates and how high they will be going?
>> i think he’s set to have a rate increase in march unless the housing slowdown turns into a rout and there’s some deterioration in consumer confidence. those are still quards. frankly, he said woe have 3 ½% growth this year, 3% next year. i think estimates are much too high.
>> let’s pick up on the housing slowdown. a lot of analysts are focusing on the housing situation. what is the reality that could cap stocks gains?
>> i think it’s very, very skigget. after all the consumption boom we experienced was a function of consumer leveraging rather than rising real incomes f he does not have a rising home value to leverage on, i think consumption will slow down dramatically. the savings rates will turn up. you have seen what’s happened with tension funds reich ibm and a few others―like ibm and a few others in the auto industry. i think they will see an increase in savings, which will temper final demand.
>> wur more optimistic or encouraged by the stronger-than-expected january retail number?
>> i think that has yesterday to be seen, the significance. i think it was a fluke and i don’t think it’s sustainable.
>> what is the biggest risk to stocks? it seems like a lot of market movement is still tethered to the fed. i know we had the sub theme with oil today. give me the outlook as you see it for the market .
>> i think two things. the consumer is one big question mark and the other is you have seen enormous increase in leverage in the commodity training, currency trading and so forth. the carry trade is borrowing in japan at 1% and buying other instruments, yielding 4%. i think there are financial stresses in the system that, frankly, make me uneasy.
>> can you give me a little more details on those?
>> if you look at extreme volatility in commodities like gold and the other ones, they are not reflecting changes in the fundamental. they are reflecting forced liquidation and you have a is ½%, 2% move on the yen day to day. this is to me indication of a high degree of leverage within the system. i think it’s something to be concerned about.
>> then in this climate, what’s your investing strategy? what industries do you see value in?
>> frankly the drop in the oil systems created enormous tufpblet secular trends are favorable and to me the inventory buildup, which turned into a decline in prices, i think it’s a great buying opportunity.
>> what would you stay away from?
>> i would stay away from retail and banking. i think the investment forms are tractive. they have a high data play but banks are not tractive.
>> can i narrow it down and ask you what you bought today or sold?
>> pirmly bought p.x.d., pioneer, gas company. i think the energy sector generally is attractive here.
>> you keep saying that. we have to make a note of that.
>> i can be wrong.
>> this is not an exact science, right? i have had many people come on andsy give me a crystal ball, lori. i want to pick back up, the last time the dow hit 11,000, a lot of discussion whether or not we are retracing our steps here.
>> don’t think dow 11,000 means anything. s&p is not there. nasdaq isn’t there. i have a feeling this is, again, a move in the trading range and we are at the high end.
>> are we going to bust out?
>> don’t think so. finance we do, don’t think it means anything. i don’t think everyone is looking at dow saying 11,000 is the time to buy but some say it’s a time to sell.
>> we love round numbers.
>> they are great to talk about and good for news. but what do they mean? nothing at all.
>> where do you see the s&p ending this year?
>> my guess is lower than here. i think the up-side is nominal. i don’t think it’s a catastrophe but i don’t think we are going nowhere next year.
>> you might be in narrow company saying the s&p may be lower than here, at least from the people i spoke with.
>> look, what the market has gone for it, is we are in a very leveraged system but the leverage is in commodities, not the stom. and moreover, an enormous amount of capital in real estate is going to the stock market , active investors. they are not buying ge but other middle and small-cap areas. that still plays. that will keep the market if play.
>> michael, pleasure to meet you.
>> pleasure.
>> our thanks to michael metz, chief investment strategist at oppenheimer. network appliance is out with its quarterly earnings. and tomorrow we hear from bro c5eud. is the market for data stores building?
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Listen Market briefing--- Lori (slow)
Interview: pimco --- gross, bill ---Fund Manager
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Nasdaq --- Robert (slow)
bernanke, who told congress interest rates mate have to go up even more to hold inflation back.
>> in these circumstances, the effluencey judge that some affirming the policy may be necessary, an assessment which i concur.
>> we will have much more on bernanke’s testimony later in our hour, including an interview with pimco’s bill gross. first the closing numbers -- dow jones hitting a 4 ½ year high -- after the earnings, hewlett-packard rose 38% as holiday demands drove sales. investors were beating up the stock in extended trading.
>> hewlett-packard beat its own profit forecast for the third straight quarter. i vesters are seeing results from mark heard’s july plan to cut costs by $2 billion and eliminate 15,000 jobs. those changes push operating profits to 48 cents from 37 cents last year and well above analyst estimates of 44 cents. sales are up 5.6% to $it 2.7 billion.
>> they are strong and that’s what we would expect. they have been performing. can you see that in the stock prices, fell stamly over the past year.
>> substantially shares of hewlett-packard are up more than 60% since chief executive mark heard took the reins on march 29. h.p. used a less expensive processor made by a.m.d. allowed heard to cut prices. sales of desktop and notebooks were up 8% to 7.4 billion. it hosted quarterly revenue of $6.5 billion, up 8% over last year.
>> on the one hand, you have got some favorable trends, i.e. more color coming into the market , which trends to drive higher per page and more revenues towards h.p. and towards their market . on the other hand you have dell coming into the market . obviously dell has a big impact on the competitive landscape and meargens have come under pressure in that part of the business.
>> there was a disappointment in the services revenue, which declined 2% compared to last year, to $3.8 billion.
>> i think the area where they really need to focus is in services. services today is 20% of the overall revenue picture, contrast that with the company like ibm, it’s bulked up over 50% and that’s where the growth in the i.t. industry has been.
>> the earnings news is driving shares of h.p. higher in after-hours trading. there you can see up 3.6%. nine analysts have a hold waiting on h.p., 18 buys threen sells. h.p. is the third best performer in the dow this year, soaring 11% compared to dell’s gain of 6%. back to you, lori.
>> june, we also heard from applied materials today saying sales in the first quarter rose for the first time in a year. but profits, the world’s biggest makers of semiconductor equipment, fell 51% on cost to close facilities. applied materials sales growth indicates chip makers are adding capacity to meet growing demands for digital cameras and music players. shares are higher in the extended session, trading up 250 cents at $20.46 a share. shares of expedia have been down as much as 12% in after-hours trading after the company’s profits fell more than expected. expedia revenue climbed to more than $495 million in the fourth quarter and that was also less than analyst forecasted. the company had lower incomes and higher tam rate. expedia and other agencies are facing increased competition in the u.s. from the hotel airlines. we will have earnings a ll later in this half-hour. first many traders were telling deborah kostroun while bernanke’s testimony was born, oil prices played an even bigger role in the action. here’s deborah with what traders were talking about and what drove the action today on wall street.
>> two major stories today. that of bernanke testimony and crude oil. the market was little changed during bernanke’s testimony but what we did see, stocks really moving higher at crude oil moving lower in the last few minutes of trading and crude oil was really the big story today. the dow at a four-year high, still closing above 11,000 and really the big story, of course, crude oil closing below $58 a barrel for the first time this year. that, of course, at the energy department, reporting inventory is done so it’s really a story about stockpiles we do have. bernanke’s testimony, pretty much told us we are not done with the interest rate hike. edgar peters at asset management say there may be one or two interest rate hikes left. leaders today retailed transports and telecom and telecom is really emerging here as a leader in this market . telephone stocks rallied 10% so far in 2006. that is more than three times the advance of the other nine s&p industry groups. represent telecom stocks, those were the worst performers last year. in fact you did see verizon, biggest gainer in the dow as verizon’s c.e.o. is urging lawmakers to adopt a rule that would make it easier for telephone companies to sell television service and compete with cable providers. worse performers, energy down five days in a row with that drop in oil, oil services, integrate oil, all across the board. lower and while oil was lower, the slumping energy prices leading other commodities were lower. gold dropping to a six-week low. gold stock as among some of the worst performers in today’s session. with bernanke talking about further interest rate hikes, to keep inflation in check, that led other metal stocks lower like aluminum and copper. that impacting metal and steel stocks. some winners―amex broker index coming in as a record high along with transports at a record high. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> transport gained on the nasdaq. for tee tails, we have a report from robert gray, who is watching transports as well as other groups.
>> stocks were little changed here on the nasdaq for much of the session as the much-anticipated testimony of new fed chairman ben bernanke unfolded with a few surprises, saying more interest rates may be needed to combat inflation. the economy and expansion is still on track. not many surprises in that, according to traders i spoke with, including pete macquarie. what did send the market breaking out higher in the afternoon was crude oil prices, falling to a new low for 2006, below $58 a barrel. we saw transport stock rising to a record, nasdaq transport at a record for a second session. and we saw some of the transport names including j.b. hunt, largest u.s. trucking company, rose to a new record. we saw some of the airlines rising. retailers moving higher as we saw pullback. seeshes, urban outfitters, cosco since may 2000, the highest. apple computer raising for the second day. analysts at j.p. morgan saying apple fixed a video glitch in its new computers. they have begun shipping those mac book pro notebook computers. there’s concern about a delay in that. we did see biogen netic and its partner’s shares rising. the food and drug administration lifting a hold on clinical of their multiple sclerosis drug. they plan to assume safety exceptions in the coming weeks. that drawing was withdrawn last year when it was linked with two deaths from a rare fatal nerve disorder and we also saw blue coat systems plunging after a disappointing earnings end forecast for its revenue. at the nasdaq, i’m robert gray.
>> crude oil fell below $58 a barrel today for the first time this year, following word of an increase in u.s. inventory. it fell more than $3 lower than we began the year. among other energy movers, unleaded gas down a fraction, same story with heating oil. but gas futures―natural gas futures down by more than half a%. the c.b.r. index is at a 2 ½ month low. the latest energy department report on inventories showing the nation’s crude stockpiles surged at five times the rate analysts forecast. that brings supply 12s% above seasonal averages. heating oil supplies, which fell today, are 20% above average. gasoline stockpiles deprue for saveth straight week for the hiling highest in morning five years. gas inventories near record 38% average this time of year. tomorrow the energy department reports the latest data on natural gas inventory. stocks extend their gains with the dow moving further past 11,000 today. but can the trend continue, and how did ben bernanke’s testimony play into the equation?
