Interview: James Investments --- James, Barry ---Chief Investment Strategist
>> welcome back. crude oil rose for a second day on investor concern about a decline in u.s. refinery operations. crude futures closed just pennies below the $62 mark, a gain of almost 1%. gasoline futures for the biggest gainer after the energy department said imports of refined products fell 12% last week. at a time when u.s. refineries are reducing operations for maintenance. the nation’s fuel supplies remain adequate for now. traders say to pension disruptions from major opec producers could change that.
>> you have to really, really watch what’s going on in both iran and nigeria, these are very, very important issues to the crude oil market and all the energy products. so if something happens there you’ll see crude pike and all the rest follow their way up.
>> crew prices are up 20% from a year ago. brace yourself. barry james, chief eck quit strategist says expect a rocky ride in the stock market along with a 20% drop in the s&p at some point this year. he joins us now from dayton, ohio, with his outlook that’s not very rosie. it’s good to have you here.
>> hi, glad to see you.
>> let me just clarify, when you talk about a 20% drop, do you see that in terms of part of the market year or the s&p 500 ending the year with a 20% loss?
>> well, i think of it more as a ditch in the road that we’ll see a dip. and i don’t know if it will be 20% or not, but history shows that in the mid term election year, the average decline is actually over 20% from the high the previous year. so that would just be a normal. if we look over the last six years we’ve been following this format pretty closely. the good news though is on the other side of it, it’s a great buying opportunity and tends to be a very strong rally into the preelection year, and the numbers there about 50%, we only have to go back to 2002 to see that that’s the scenario, very weak market for part of the time, and a great bottom and then a great rally in the stock market the next year.
>> 2002 was the last time the s&p 500 dropped more than 0%, and ended the year down 23%. what would be the catalyst, what makes this year potentially different than that year?
>> well, i think one of the things that we look at is what are the preconditions for bulls and bear markets . would we expect a 50% rally from here, i don’t really think so. because the conditions for bull markets are typically low p.e.’s, you’re don’t out of a recession, you’re coming out of a period of weak earnings and falling interest rates. we have just the opposite. what we find is about 66% of the time since the 1940’s you had a market make a peak when you’ve had excellent earnings, about where we see them today, about 15% year over year, where you see economic growth over 3.5%. and where you see p.e.’s above 18 and rising interest rates, all of those are preconditions. it doesn’t have to happen. but in concert with that, these things that we see very often associated with the start of a bear market , we look at our own indicators that we do every weekend and we measure the risk levels and sentiment is one of those. we’ve seen a start to change in sentiment has been exceptionally bullish and is starting to make that turn, and it’s those inflection points that are very significant.
>> let me just jump in quick, what you talk about sentiment. because we had the market strong today and of course the talk is that there’s optimism about earnings growth. so help me a little bit understand what you mean by that sentiment issue you raised.
>> sure. just a couple of examples. previously u.b.s. has their sentiment survey, they show 93% are bullish. you look at cash levels and mutual funds are very low levels, which means they’re bullish. but you look at something like investors intelligence, that had been up to about 60% bullish and has started to ease off of that, it’s started to fall away from those levels. and when i think about sentiment i think about, as we look forward in terms of earnings, we do see some good earnings reports. but we’re not going to keep it at 15 or 20% rate of increase in terms of earnings. everyone realizes that it’s going to continue to slow, and that’s going to narrow the list of stocks that really have great potential, narrower and narrower, so there won’t be as many to choose from, that could be one of the things that winds up driving the market in the end.
>> we’re going to make you choose something that looks like it might weather that downturn. what particular areas of the market do you like then?
>> well, there’s three areas. we like the utilities, both telecoms and electrics and some of the gas utilities. we like energy, but maybe after prices stablize maybe a little bit from these levels, they’re probably still a little high. today we like technology, maybe kind of a strange thing for some, it’s a little bearish on the market . earnings look very good for the technology area. we see a number of these guys that around trading very expensive that have been beaten down for five years. companies have a lot of cash, they’re investing in productivity enhancements, i know we are, and if we’re spending money at technology we’re generally at the far end of the chain. so a lot of folks putting their money to work in that arena, and we think there’s some good opportunity in the tech area.
>> quickly, barry, if you’re holding onto something that you think is something you should drop immediately, what would it be?
>> if i had something to drop immediately, probably be the satellite radio stations, you know, xm or sirius. i would move out of those fairly quickly.
>> barry james, chief equity strategist at james investment research, joining us from dayton, ohio, thanks very much. march, may and june, some economists say that today’s economic news likely means the fed will raise rates three more times. more on that report after this short break. stay with us.
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here’s a look at the big three u.s. auto makers. we’ll bring in june grasso for details and we’ll get analysis of where the auto makers are going from the director of research for global insight, that’s later in the hour. now let’s get you the closing numbers. gains for the dow s&p 500 and nasdaq, the dow up 60 points. s&p up 10.5. nasdaq . deborah kostroun was at the new york stock exchange, here’s more on what drove today’s action in stocks.
>> it was our broadest rally for u.s. stocks in a little more than two weeks, since february 14th. we also saw a lot of records in today’s session. we’ve been seeing these recently, records once again in the transports, also the russell 2000, small caps and mid caps, these indexes all outperforming the s&p 500, because the s&p this year up 3.4%, but even the transports of 7 thrs this year and russell 2000 is up more than 10% for the year. one of the things that was driving today’s action was the idea that earnings may not be so bad because we did get a few companies lifting their annual profit forecast. but sandy lincoln, c.e.o. of wayne hummer asset management says he thinks that investors are going to be surprised by the level of corporate earnings strength that we see coming out of the first quarter. in the long run that’s where we will focus. also, shares of, on that same theme actually where first quarter earnings may be doing better, shares of texas instruments rising today after a analyst said the company may raise its forecast next week. next week they have that mid quarter business update on monday march 6. texas instruments helping out that stocks index had its biggest gain in more than a year. brownforman raised their annual profit forecast, also a record price today. medco also raised their forecast for profit excluding some items. medco health also saying fourth quarter net income rose 33%, and also selling more high priced prescription medicines. for retail, sax fifth avenue, they had a big miss with their earnings, however and they posted a fourth quarter loss on expenses to close some stores, however the company did say they plan to pay a $4 a share special dividend on the sale of some of their stores. i’m deborah kostroun at the new york stock exchange.
>> u.s. auto makers rolled out their february sales number today and it’s a discurrenting picture for the two largest u.s. makers. bloomberg’s june grasso has the numbers.
>> asian auto makers continue to gain ground as sales at both general motors and ford fell last month and both december decided to cut production. daimler chrysler reported a sales increase. g.m. said its february u.s. sales fell 2.5% to nearly 200,000 cars and trucks, ford the second largest u.s. automaker said sales fell 4% to about 244,000. a different story at daimler chrysler. the world’s fifth largest auto maker said february sales rose 4.3% to nearly 208,000. analyst sean egan says the real issue for g.m. and ford is not the monthly sales numbers, it’s the monthly operating income.
>> the more important number than the actual monthly sales is how much money they’re making, and with the reduced prices in the case of g.m., with a still high incentives, they’re not making enough to cover their costs. unless that changes, both companies, ford and g.m., will continue to slip.
>> egan says that both ford and g.m. are in terrible trouble and will be in bankruptcy between two years. ford said today it will reduce second quarter north american production by 1.8%, and g.m. will cut north american production by 3.7% in the second quarter. quite a different picture for asian auto makers, yet another month of increases. toyota, the number two automaker reported a 2.4% rise in sales and nissan says its sales gained 2.2%. in january the asian companies pushed their u.s. market share to 37.5%. g.m. was expected by analysts to report a sales increase of 1.3% last month. its debt rating already below investment grade was cut one level by fitch readings, which sighted concern about whether g.m. has done enough to cut operating costs.
>> thanks very much. news after the bell from hewlett-packard and gateway, the two companies are working together to settle some legal disputes, they’ve agreed to cross license some of their patents. gateway will also pay hulet pack pardon $47 million. hewlett-packard filed a suit against gateway. gateway, the third largest u.s. personal computer maker, is taking a 16.7 million expense in 2005 as part of that settlement. telecom and computer related shares led the nasdaq’s biggest rally in six weeks. robert gray has details on today’s nasdaq trading from the nasdaq market site in times square.
>> a broad based rally sending the nasdaq to its biggest one-session gain since january 3. and it was a broad based rally, a lot of economically sensitive groups leading the way, pacing those gains, including telecom stocks, the transport index at a record in the session. also software as well. traders and investors saying that the economic data on manufacturing and personal spending showing that the economy, the economic and profit expansion will continue, and also that inflation looks tame according to those reports out, plus earnings giving optimism that those profits will continue to grow as we continue on in this bull market . the co-head of equity trading at citigroup global market saying that google is helping sentiment, also some positive comments coming out of the goldman sachs conference on the semiconductors. and some analyst comments on texas instruments which trades on the big board saying it may boost its forecast next week. altera being upgraded, they may raise their revenue forecast next week. also communications chips, pacing the gains for the semiconductors. iena rising a head of its earnings report due out thursday. a fund manager says that chris sew and ciena are part of an infrastructure play, they think consumer spending will begin to slow down so you should be leveraged to corporate capital expenditures. we’ve seen an increase in telecom spending to upgrade their infrastructure. i’m robert gray.
>> google shares gained today after falling more than 7% yesterday on comments from the chief financial officer that growth is slowing. bloomberg’s bob bowden joins me now with the latest on google.
>> yes, indeed google shares recovered today after that 7% drop yesterday, as investor as waited the news from tomorrow’s meeting. although the company has made public its intention not to offer earnings or revenue forecasts. investors and analysts will be waiting to hear statistical data about the main search engine as well as information about new products, like google mobile and google local. while some investors were spooked by that slower growth statement by the c.f.o. yesterday, analysts were less troubled by the comment. some firms reiterated their positive stances on google.
>> when we initiated coverage of the stock in august 2004, we had modeled that annual revenues would sequentially decline in terms of the growth rate, and that’s obviously what’s been happening and that’s what we expect to happen. in terms of new businesses, sure, that’s a company’s charge over time is to of course increase revenues and profit ability. so really the surprise from our perspective was the market reaction.
>> so if the prospect of slowing growth wasn’t anything new, why would the c.f.o. have made that remark in the first place? one investor told us the company may just be managing expectations lower ahead of tomorrow’s analyst meeting, that meeting begins tomorrow at 10:00 a.m. california time. we’ll have all the coverage here on bloomberg television. the shares gained 2.18 today, up .6%.
>> thanks very much. some earnings for you after the bell from chico’s, fourth quarter earnings of 24 cents a share that’s a penny below analyst estimates. chico’s also says it’s cease 2006 earnings share to be hurt by eight to nine cents a share, saying same store sales were up 5.7%. a rocky road, a 20% drop in the market , doesn’t paint a pretty picture. is that what equity investors should be gearing up for during the rest of 2006? our next guest will tell us. stay tuned.
