Interview: Chief Investment Officer with Boston Advisers
>> welcome back, earnings are coming down fast and furious but stocks are stuck in an ugly october slump. where’s the market headed from here? well, what can we expect from the new round of earnings is another question. joining us now with his answer, mike vogelzang, chief investment officer with boston advisers from boston. october turning out traditionally ugly for the markets . what’s your biggest concern?
>> the tug of war between inflation worries the fed’s fighting and slowdown worries of the consumer because of higher energy prices and hurricanes. we’re right in the tug of war and neither direction looks interesting right now and that’s shaking out in the market .
>> you mentioned the hurricanes. what factor will that have on the markets ?
>> the hurricanes, of course, pushed up energy prices so you’re paying $50, $60, $70 and more for a tank of gas. the consumers are having a difficult time dealing with that and we’re seeing the consumer start to roll over with implications for the christmas holiday season, shopping, the economy, corporate earnings in the consumer area so you could have a situation with inflation in the economy with higher energy prices while at the same time you have weak and anemic consumer spending and consumer action and that’s not a particularly good dynamic and i think you’re seeing that in the market all of a sudden.
>> oil is selling off but the market is still struggling. why?
>> the market right now has been lead all―led all year by energy stocks, accounting for almost 100% of the gain in the s&p before the correction in october. all we’re seeing is a pullback here in energy, in our opinion, we don’t think energy is headed down to $40 any time soon and the sentiment around energy stocks specifically was significantly high at the end of september with window-dressing at the end of the quarter with fund managers and i think that’s unwinding right now but it’s not fun to go through this right now.
>> you’re not changing your position right now?
>> no, we’re more careful, selling into the strength in late september but still have an overweight condition and anticipate staying there. with a little more than this, we’d be net buyers.
>> what about the s&p 500? it’s been in a five-month slump, do you see a break soon?
>> let’s hope so. we’ve been talking about all year about basically this market taking two steps forward and two steps back and the same things still apply with relatively high valuations, upward pressure on interest rates, inflation looking to creep in and first year of a presidential cycle, all of those things work against us historically. the thing that makes us feel better about the market , the valuation is getting more interesting, down around 15 times forward earnings on the s&p 500. the long-term picture is beginning to get more interesting. i think we have headwind to get through. there’s nothing particularly bright on the horizon we can see.
>> what are you doing with your portfolio? are you repositioning your portfolio to be more defensive now?
>> not much. you saw a defensive rally today, all the big major industrial names and big healthcare names rallied strongly while energy sold off. we think that’s a bit of a temporary correction in energy, as i said. no, i don’t think we’re doing a lot differently. we are lightening up in the consumer area believing the holiday season will be tough for consumer stocks and consumers in general with a weaker-than-expected holiday seasonyso that’s one area we we are beginning to be defensive but we are buying selective technology and with a little more dip in energy, probably adding to the energy position. >> how confident are you that stocks will move higher by the end of the year, and if so, what do you see as at catalyst?
>> if they move higher, it will be fractionally, back to breakeven for the year. we’ve been saying it will be a flat year and nothing’s really in our forecast that has changed from that perspective. there’s no catalyst to drive us up 10% before the end of the year. one thing that might do that which won’t happen in our opinion is the fed all of a sudden reversing course but that won’t. happen. we don’t see a particular catalyst here unless earnings come through gangbusteners the third quarter but we don’t see that ahead of expectations.
>> what are you underweighting and what are you overweighting right now?
>> as i said, we’re overweight energy with a little bit of overweight in utilities n.terms of underweighting, we’re light in the consumer staples area, light in the consumer discretion and retail area and we’re also significantly underweight in financials and have been for quite some time because of the upward pressure on rates.
>> what are you advising clients at this point? what’s attractive at this phase in the market ?
>> look for a fun place for the holiday it’s beaches of the caribbean. there’s nothing particularly interesting right now in our opinion. sometimes there’s really no place to hide. so a little careful, a little defensive, a little cash probably not a bad idea for stock investors. but, again, we like the long-term story and think the long-term story is shaping up quite nicely but we’ll have turbulence for a bit in our opinion.
>> thank you very much. mike vogelzang, chief investment officer at boston advisers. thank you. it looks like there could be big changes ahead in the media world. who’s buying and who’s being bought. google, a.o.l., comcast, learn after the break.
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Listen Market briefing --- Derek (slow)
Refco --- Allan (slow)
Rush to the courthouse --- William (slow)
story. reeling from the disclosure its former c.e.o. hid unpaid debts, blocked clients from withdrawing funds. bloomberg’s allan dodds frank will have further details on refco and big names the broker added as special advisers. let’s get you caught up on the closing numbers. markets mixed with the dow jones industrial average down less than a point to 10,216. s&p 500 index down less than a point to 1176. the nasdaq composite index up nine points to 2047. to our top corporate story, trading of the shares of futures broker refco have been suspended as the company tries to remain in business. the company says it is suspending operations and hiring special advisers. today’s actions followed yesterday’s bombshell that the filing of criminal chrges against refco’s former c.e.o. for securities fraud. allan dodds frank has the latest. allan?
>> the new york stock exchange has halted trading in refco stock indefinitely. the exchange says it is evaluating the need for further disclosures from refco and whether a continued listing of the company’s stock is appropriate. the big board move followed a refco announcement today that liquidity issues require a 15-day moratorium on all activity by its capital markets unit. that unit is not regulated and the company says it accounts for a material portion of its business. the refco moratorium prevents customers if withdrawing money or closing accounts for 15 days as the company struggles to regain liquidity. the company says its regulated businesses, including segregated accounts for customers at the chicago mercantile exchange are safe and doing business. that claims was bolstered by reassuring statements about refco’s regulated businesses from the chicago mercantile exchange and chairman of the commodities futures trading commission. refco calls itself the world’s largest independent futures broker with more than 4.9 billion in customer accounts and offices in 14 crazy. earlier, refco announced hiring former s.e.c. chairman and bloomberg board member and contributor, arthur levitt, as special adviser. also hired, eugene ludwig in the financial firm goldman sachs. before the refco announcements, s&p analyst thomas foley characterized the company’s problems this way.
>> the liquid is the big issue here. even though they said they had $400 million received from phil bentet on cash and they had cash on hand, that may go out the door quickly. >> customers and investors fled since the company announced it failed to disclosed hundreds of millions of debt since going public last august at $22 a share. since friday’s close, the stock is down 72%. phillip ben het was charged on securities fraud, released on $5 million bail and allowed to spend the night in his apartment in new york. although bennett repaid nearly $430 million to the company monday, the disclosure of that act caused the company’s stock to drop sharply. and it caused prosecutors, after just two days of investigation, to charge bennett. back to you.
>> thank you very much for that, allan. refco’s failure to disclose - we will continue with general electric, general electric caps off first week of the earnings season tomorrow. c.e.o. jeffrey immelt will probably report that third-quarter profit rose nearly 16% to 44 cents a share. g.e. stock is heading the other direction. we return to brett gehrig with the story.
>> jeffrey immelt has reshaped g.e. with $60 billion in acquisitions in faster growth businesses while navigating through recession. the result, analysts say immelt is track to post profit growth of 13% this year and 13% next year, the first time g.e. has posted earnings growth over 10% since jack welch stepped down. yet, the share price is little changed in the past year compared to a nearly 6% increase for the s&p 500. investors say one force driving down g.e.’s stock is uncertainty about the economy.
>> there’s a total fear in this market that the geis going into recession and that the economy is slowing down. so what’s the first trigger people pull, the most liquid industrial name in the s&p 500, g.e. so it’s been used as that trigger point.
>> that skepticism is also illustrated by analysts forecasting revenue growth will slow from 14% to 7%. fund manager job jacobs points to another factor, this is the first year of g.e. financial’s turnaround and jacobs says some investors are waiting to see more strong results before buying g.e. shares, now trading at around $33.
>> my feeling is if he gets three or four really strong quarters and i think the stock easily can probably move way above the levels that are into the early 40’s.
>> g.e. has fallen about 16% during immelt’s first four years as c.e.o. during jack welch’s first four years, g.e. rose more than 70%. derek, back to you.
>> thank you very much for that, brett. we have more, now, on refco. let’s go to bloomberg’s allan dodds frank. allan?
>> refco’s failure to disclose that his former c.e.o. owed the company more than $400 million has prompted the filing of a number of class-action lawsuits on behalf of shareholders. joining us by phone today is another class-action attorney, william federman request federman and sherwood in oklahoma city, oklahoma. tell us about the rush to the courthouse.
>> the rush to the courthouse is an attempt to try to protect what’s left of any shareholder value here. under the circumstances, i think the investors are not getting all the information as soon as they should be getting from the regulators.
>> bill, what do you think all these events today mean? if the stock is not trading, is there going to be a company left to sue?
>> that’s an interesting point you are making. you may wind up with almost an enron-typ situation where it’s the underwriters, advisers and insurance companies left holding the bag. one item that has been circulated would be whether they should rescind the i.p.o. and put the burden on the underwriters themselves to have to refund the money.
>> that i.p.o. was in august and raised more than half a billion dollars. how important is the u.s. attorney’s criminal charge against the former c.e.o.?
>> i think it sends a clear message that the problem here is pronounced and very, very clear. to do such a preemptive strike, there had to be very little doubt in the u.s. attorney’s mind that there was some true wrongdoing that was very obvious. why the underwriters never knew about it or why the auditors never knew about it is going to be the issue for the lawyers to tackle.
>> what do you think the significance is of the company’s decision today to freeze its accounts, especially in its nonregulated business?
>> there’s good and bad to it, obviously. the good part is, there may be something left to the company. the bad part is, if you’re one of the unfortunate few who still have money the company. what it really shows is i think the market does not have confidence in this company’s ability going forward. the biggest fear the investors have is, are they going to be the last one with money still invested?
>> your suit seeks to represent investors. do you expect class actions frawls customers of this―also from customers of the company?
>> i think that’s a possibility. the mercantile exchange i believe issued a release today, as i recall, that they are monitoring the situation on a realtime basis so perhaps maybe belatedly someone is watching what’s going on and there may not be as much risk. we were looking to represent the current shareholders of the company.
>> what do you think their potential loss? is?
>> the i.p.o., $500 million, there’s been a large amount of trading even after the initial disclosure so it would be well in excess of that amount. keep in mind, of the money raised, not all of it went to the company. phillip bennett, the c.e.o. you mentioned, pocketed about $118 million himself.
>> does it make a difference to you that he repaid the company $430 million on monday?
>> no, it doesn’t. i think that’s too little, too late, because what we’re probably going to see are additional disclosures, something that that that doesn’t happen in isolation. there’s a lack of confidence in the audit and financial condition of this company.
>> ok.
>> and it’s early to tell but we don’t know the full story.
>> thank you very much, william federman in oklahoma city.
>> thank you very much. more financial news coming up.
