Interview: Oscar Gruss & Son --- Aronstein, Michael ---Chief Investment Strategist
>> the dollar today rose the most against the euro in more than a month. expectations increased that the federal reserve will raise rates faster than the european central bank. the dollar gained for a second day as the yield advantage of u.s. treasuries over european government debt widened to the most in four months. the bank of japan begins a two-day meeting in a few hours and may reduce the cash it makes available to the banking system, according to a bloomberg news survey. japanese prime minister junichiro koizumi is urging the bank of japan to be careful when ending its five-year deflation-fighting policy. meanwhile, u.s. productivity fell last quarter for the first time in about five years. the labored says―labor department says it declined at an annual rate of .5%. at the same time, labor costs rose 3.3%, the most in a year and almost triple the pace of july through september. checking bonds on the heels of those reports, by the close, the 10-year was up 6/32. the yield still a little lower but clearly above 4.7%, at 4.73%. the two-year unchanged yielding 4.75%. stocks fell for a fourth day today after texas instruments said first-quarter sales won’t meet its highest forecast. according to our next guest, this is a developing theme, market leaders will take a turn for the worse and become labor market laggards. so you’re talking about a shift in opinion about the direction and market leaders. if you could tell me more about that.
>> i think the big reflation trade or liquidity-driven trade that gan in 2001 and 2002 and really lasted until the end of january, is, in general, beginning to abate. some of the leadership sectors that took most advantage of the fed’s policies are starting to show signs of exhaustion and we look to january as a buying panic in many of the asset classes that had led the bull market from 2002, emerging marketemerging market stocks, emerging market bonds, commodities, a lot of pro cyclical categories where the enthusiasm developed three years into the mission and people really have gone overboard in terms of commitment to these areas which, when the process began in 2002, were very low risk, selling very cheaply. now, some of these emerging markets are up five to 10 times and the commodities are no longer cheap relative to production costs. you’ve had a seismic shift in attitude and we think that a topping process in that whole theme is actually being completed now and these stocks are apt to embark upon something of a bear market .
>> interesting moves in both of those sectors today―oil, continuing its move lower as opec says we want to keep barrel prices below $60. and emerging markets , really, today, a significant gap down in many countries. is this indicative of what you’re talking about and why did we see the gap lower today in particular?
>> i think in the last two or three days, people have sort of capitulated to the idea that the fed is going to be raising rates ad infinitum, which i don’t believe will be the case but i think the thinking has changed and sectors sensitive to interest rates really took it hard and that, in connection with the major central banks beginning to tighten, has contracted global liquidity to a point where it’s affecting liquidity-driven assets and pretty seriously.
>> earlier, we were talking about housing and how you see the breakdown here happening.
>> that’s where the liquidity had its most profound, immediate effect in credit creation in the mortgage market and from there, the price and activity of property, particularly in single-family homes in the united states and any withdrawal of what i would call the liquidity bubble, any contraction of that will be felt most profoundly in u.s. property sectors and we’ve compared that to technology in 2000, really, a sector where you have way, way overcommitment, too much individual money, people buying things on the expectation, not that they’re going to get a return from the operating characteristics, but they can turn around and sell them to someone else for a higher price for no particular reason other than that’s been the trend. and all of my years in doing this, i have never seen a speculative episode like we’ve seen in housing and with a soft landing so we are very much in the hard landing, accelerating decline state when it comes to the―our appraisal of the property markets .
>> you might be in the minority. your company might be slim in terms of calling for a hard landing. i think most people are calling for a gradual soft landing. the fed, of course, at least under greenspan, was talking about urging mortgage lenders to tighten loan standards. the market is pricing in at least a couple of more interest rate hikes. in our remaining time, if you could quickly address that.
>> i think for all the jaw boning the fed did, the mortgage market really got out of hand. and the creativity in financing a boom knows no bounds. we saw that with venture capital in 1998 through 2000.
>> i have to interrupt you. this is my mistake, i misjudged my time. michael aronstein, we thank you very much for joining us.
>> certainly.
>> stay with us.
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Listen Market briefing --- Lori (slow)
Enron --- June (slow)
NYSE --- Julie (slow)
world headquarters in new york. i’m lori rothman. this is “after the bell.” former chief financial officer andrew fastow testified at the enron trial in houston today. fastow, seen arriving at the courthouse, told the jury enron’s former c.e.o., jeffrey skilling, said he wanted to use an off-the-books partnership to “give me all the juice you can on earnings.” june grasso is standing by at the houston courthouse and will bring us a live update in moments. first, let’s show you the closing numbers. split decision on the major averages with the dow closing up 22 points, 10,980. and the nasdaq losing 17 points, 2268. a choppy session for the major indices but small caps and midcaps were crushed today. stronger industries today included banks. on the weak side there was energy, telecom and semiconductors. shares of pixar climbing in extended hours’ trading after the computer animated film studio said fourth-quarter earnings fell but less than analysts’ estimates. pixar, which is being bought by walt disney, says profit in the quarter fell 44% to $30.9 million, or 29 cents a share. earnings in the year-earlier period were boosted by the “the incredibles,” pixar’s last film released. steve jobs has been relying on video sales until pixar’s next feature, “cars” reaches theaters in june. in january, disney agreed to buy pixar for $7.4 billion. in the regular trading session, pixar gained 22 cents, closing at $64.03. we have news on video game maker take-two interactive reporting a wider-than-expected loss. take-two coming in with a net loss of 41 cents a share. forecasters were expecting a loss of 11 cents a share. the company reporting $265 million in software sales and they’re blaming the overall industry shift to different video game consoles for the loss but take-two interactive plans to return to profitability in the fourth quarter. shares higher in the extended session, up more than 4%. back to our top story. the highest ranking former exec at enron says his old bosses told him to use accounting schemes to inflate the company’s earnings. former chief financial officer, andrew fastow, took the stand for the first time in the six-week-old trial. june grasso is live outside the courthouse with the very latest.
>> lori, andrew fastow has been silent for the 4 ½ years since he was kicked out as c.f.o. at enron. but today, he took the stand and made up for that in his testimony against ken lay and jeff skilling. he let the jury in on private conversations with skilling that only he could tell about. he―the prosecution is attempting to show that both skilling and lay were intimately involved in the manipulation of earnings in the fraud that led to enron’s collapse. he also said that the off-the-book partnerships that were approved by the board were really a conflict of interest for him but fully approved by the board and when he spoke about one of them, in particular, to jeff skilling, that jeff skilling told him, go me as much of that juice as you can, meaning, using the equity from the off-the-book partnerships to inflate enron’s earnings and make the books look good and fastow said that was the role of these off-the-books partnerships, to inflate the earnings of enron to reach earnings records. if there was any so-called smoking gun in the case, it was the global galactic list because fastow testified that skilling guaranteed to him that he would not lose any money on any of these partnership deals, that enron would pay him back if money was lost and this was called side deals by the prosecution. the prosecution came out with handwritten notes by fastow that were also initialled by fastow and richard causey, former accountant at enron, and the notes were of all the different side deals that he said he made with skilling. the defense objected to this because they said they didn’t have a copy of this and fastow said he found it hidden in these safe deposit box when he was looking for other papers on enron and so the judge did end up letting it in. there was one emotional moment in the trial when he spoke about his wife, lea fastow, having to spend a year in prison on a deal she made in connection with the off-the-books partnerships, where she and her sons got money. he is still on the stand at this moment so we don’t know if cross examination will begin tomorrow morning but when it does begin, you can bet it will be vigorous.
>> june grasso live in houston. weakness today in energy stocks. once again holding back the market . but we did see pockets of strength. julie hyman is at the big board with more on sectors that stood out today.
>> for the second day in a row, energy stocks were the culprits behind the s&p 500’s drop, accounting for more than half of its decrease. take a look, first, at the volume we saw on the new york stock exchange today, more than the average seen for the year thus far, almost 1.7 shares trading hands. but the advancing versus declining volume, about 3-1 margin, decliners over advancers. some of the declines we saw were in energy stocks. the philadelphia semiconductor index down almost 3%, due, in large part, to texas instruments coming out with a revenue forecast that was short of what some analysts were expecting. those shares down 3%, exerting pressure on the group. energy stocks also taking a hit today, down for the second day in a row, as a group, down 10% from the record reached january 30. williams company is leading declines there. this is a natural gas provider. it declined yesterday after a downgrade from wachovia. continuing that slide today after it said one of its units was restating profit. also, if you look at the small cap side today, we saw big declines there, the largest in a month, with the russell 2000 down 1.4%, the s&p 600 small cap down 1.25% and the s&p 400 midcaps down more than 1%, as well. we did have areas of strength here today, however. that’s one of the reasons we had sort of an upsurge at day’s end. if you look at the philadelphia k.b.w. banks index, it was higher by .6%, gaining steam throughout the day as we saw relief in the bond market in terms of yield. in addition to that, in terms of helping the dow today, general motors’ shares doing well after the company said it would freeze its defined benefit pension plans for 36,000 salaried workers. those shares higher by almost 2.5%.
>> more on the two-day tumble in energy futures. as investors anticipate opec will continue to pump oil at a near record rate. nymex crude futures closed at $61.58 a barrel, a drop of more than 1%. let’s go ahead and check some other movers. natural gas, the only exception to the trend, rising 2% today. natural gas futures, though, have tumbled roughly 60% from their december record high. the perception among oil investors is that opec will not change output levels at its meeting tomorrow in vienna. this afternoon, speaking to bloomberg’s correspondent, opec president edmund daukoru signaled he will recommend the cartel continue to pump at its highest rate in 20 years because, he says, there are too many variables right now.
>> the size of the volume out in nigeria, the iraqi situation is not letting up, the iranian standoff is there, venezuela and the rhetoric. so, with all of these factors, we don’t believe that it would be a correct signal to decrease.
>> it is now expected the cartel will outvote venezuela’s oil minister who suggested the cartel cut half a million barrels a day, saying world markets were oversupplied. chevron plans to increase capital spending 8% next year to $16 billion and keep it at that level through 2008. at a meeting with analysts today in new york, chief executive david o’reilly said the increase will pay for more exploration and rising costs for drilling.
>> we know what our drill rate rates are going to be through 2010, all of our major rigs are, for the major development work and major exploration work, are already locked in.
>> oil companies are boosting exploration and production spending because of signs energy prices will stay high for years. chevron, which is the second largest u.s. oil company, today said production will grow at an annual pace of at least 3% through 2010. it’s also planning to increase refining capacity by making its mississippi plant the second biggest in the u.s. we’ll have more on the trading day with michael arenstein. he’ll tell us why he thinks the market is turning. that’s after this break.
