Interview: Westwood Holdings---Spika, David---VP/Investment Strategist
>> stocks finished the week on a high note. the s&p, in fact, headed for its best weekly winning streak since july, fueling hopes about a year-end market rally. the s&p closed at a 4 1/2 year high today. joining us to wrap up the week and look ahead to 2006, david spika, investment strategist with westwood holdings group, helping to manage $4 billion for his firm, joining us from dallas, texas. welcome, david. we are coming off a four-week rally here for stocks. how do you see the remaining weeks of the year playing out?
>> i think a lot of it depends on the market ‘s perception of what the fed will do. what we’ve seen over the past 30 days is a feel-goodrally, the market bouncing off oversold levels mid october with good economic data and good earnings out of the third quarter, lower oil prices and tame inflation. but at this point, the market wants to see an end to the fed rate hike cycle and that will be the next catalyst.
>> how does that set us up for next year?
>> i think it sets us up pretty well because our expectations is that the fed will end the rate hike cycle around midyear at about 5%. we also think that corporate earnings growth will remain solid at around 10% so when the market looks at the current valuation of the market , when investors look at valuation of 15, 16 ford earnings―forward earnings and they see the fed will end the rate hike cycle without killing economic growth, i think you’ll see the market advance.
>> we had four deals in the news today. what is behind all of this m&a activity?
>> i think the key here is that earnings growth has slowed. now, i said earnings growth will still be 10% next year but that’s coming down from about 14% this year and 20% last year so corporations are a little bit under the gun to continue to drive earnings growth. and the way they’re going do that is by acquiring earnings growth as opposed to generating it organically and there’s a lot of cash on balance sheets and companies have strong currency in terms of their stock prices so they’re looking for deals to go ahead and grate additional earnings growth going into 2006.
>> do you expect any other headline deals before the year’s out?
>> i’m not going to predict any deals before the end of the year but it wouldn’t surprise me to see hear energy transactions. energy firms are particularly hard pressed to find good growth, particularly in production, because there’s very little in the way of big finds left in terms of oil and gas fields so they have a lot of cash, good currency. they’re going to look for acquisitions to drive earnings higher.
>> i want to bring you back to the earnings outlook. you mentioned the fed as a catalyst there. are there any other drivers for profit growth in the fourth quarter and beyond?
>> there are going to be things that will sway the market ‘s opinion back and forth. today, the market is very much focused on good news. they’re ignoring bad news and centering in on bad news as opposed to october where they focused on the bad news. clearly, there can be economic data, there can be employment data or other economic data that can sway the market ‘s opinion but until the market gets some comfort that the fed is done, you’re not going to see us move significantly out of this trading range.
>> how much of a risk is a softening housing market ?
>> i think it is a risk although i think it’s been priced in. we’ve seen housing stocks, building stocks sell off significantly this year. you’ve seen lenders that have significant mortgage exposure perform poorly so i think the market ‘s already pricing that in. the real key is what’s the impact on the consumer. we’ve started to see that as mortgage payments have gone up, a lot of mortgages are financed using short-term rates and the effect on the consumer could have a greater impact on the economy next year than we expect.
>> i’d like to switch gears a little bit here and get you to tell me which industries you like in this climate.
>> we continue to like the industries that we’ve done well with so far this year and last year and that would be energy, commodities, industrial-type industries. these are ones that are very much leveraged to the growth and foreign markets like china and india, they are producing very strong cash flow, trading at good valuations. and we really think the economic environment will favor the industrial part of the economy over the service part of the economy going forward. so that’s still where we’re focused.
>> how do you factor in volatile energy prices?
>> we factor it in to the extent that we’re going to own companies that benefit from higher energy prices, whether that be integrated oil companies, coal companies, exploration and production companies. and we’re also looking for companies that have pricing power that can pass through higher energy and raw material costs and maintain profit margins.
>> can you tell me what industries you’re not impressed with these days? you told us you were concerned about the consumer here?
>> absolutely. we’re anticipating an inverted yield curve next year which means short-term rates are higher than longer term rates and that’s negative for the consumer and also negative for the lenders. so regional banks, mortgage lenders, housing stocks. they’re the ones we think will be hurt significantly by the inverted yield curve so consumer and lending-type entities we would be negative on.
>> thank you very much, we’ll leave it there, david.
>> thanks for having me.
>> our thanks to david spika, president and investment strategist with westwood holdings group. still a lot ahead today when “after the bell” returns. the tour de france attracted record audiences and attention to the sport of cycling. can a bike race do the same for california and will lance armstrong be along for the ride? that’s coming up on “money & sports.”
点击播报
Listen Market briefing --- Lori (medium)
Equity market's performance --- Margaret (slow)
Taking stock --- Ari (slow)
that the economy would keep growing. margaret popper is here with a wrap-up of the equity market ‘s performance.
>>hi, lori. a late rally in oil stocks made them the top group. the next three leading groups were closely tied to the idea of an expanding economy -- transportation, capital goods and material stocks were those groups. georgia-pacific soared on news it’s going private. copper company freeport-mcmoran reached another record this week and shares of industrial gas company, air products and chemicals, went up for the fourth time in the last five weeks. some investors say the commodity play is far from over.
>> these commodity runs tend to go on long, long cycles. i know investors think they may have missed something. we’re only in the fourth or fifth year and these things tend to go for 15, 20 years and i think the build-up of the infrastructure in europe and the rest of the world is one of the biggest investment theels out there.
>> gold rallied to an 18-year high while copper set a record. industrial companies such as caterpillar, g.e. and tyco, which turn metal and energy into farm equipment, turbines and other products, rallied. g.e. raised its forecast and tyco talked about a breakup to boost shareholder value. transportation companies reached another record this week. they’re at the center of the economy with railroads hauling coal and metal, u.p.s. managing the supply chain and truckers delivering finished products to customers. the technology side of wall street is where the biggest gains were found. the philadelphia semiconductor index powered ahead for a third week, rising nearly 4%. the nasdaq composite is the best performer among the three major indexes, adding over 1% to reach a four-year high. the nasdaq has soared over 9% in less than a month and some investors say the biggest gains are in the past, especially with so many questions hanging over the economy.
>> there’s a lot of skepticism out there that the fundamentals are good enough, the economy’s ok, but the consumer seems to be slowing. earnings growth is ok, but it’s decelerating, also. so you have a lot of these, on the one hand this, and on the one hand, that.
>> on the losing side of the ledger this week, stocks that typically underperform when the economy is strong―food, beverage and tobacco stocks sank. tyson foods dropped after cutting its forecast. it failed to show a profit in its beef unit. and a goldman sachs analyst said altria’s breakup may be delayed two years due to another cigarette lawsuit. altria was the dow jones industrial average’s worst stock this week. g.m. staged a recovery. three days of declines left it down 13% by wednesday, near an 18-year low on fears it might be getting closer to filing for bankruptcy but comments from c.e.o. rick wagoner blunted those fears, limiting this week’s losses to about 2%.
>> thanks. a rally in technology shares pushed the nasdaq 100 to its highest level since 2002. it might be ending. the glimpse into next year shows the slowest profit growth for computer-related companies in more than three years. that’s the subject of today’s “taking stock.” bloomberg news reporter ari levy joins us in school to tell us more. ari, welcome. what fundamentals will lead to a tech slowdown?
>> analysts don’t see a lot of products they consider innovative and innovation is the driving factor for technology. you have from microsoft the xbox 360 coming out next week and the vista operating system coming out next year, so there are some things in the pipeline but broadly speaking in finding what the new thing is, investors are struggling to find it so you’re basically buying companies you think are sound companies with decent growth but that’s not what’s been the catalyst for techmology in the past.
>> is it a problem with tech spending or research and development spending?
>> part of it this year has been with higher energy prices and higher interest rates, there’s concern there will be less pending on technology so you have spend inventory buildup throughout the year and part of it is also where do we go from here and it seems companies are struggling with that. you look outside of apple on the consumer side, obviously, they’ve had success with the ipod, but, again, that’s a consumer item.
>> what kind of products really would catch the eyes of analysts in your opinion?
>> it’s tough to say. they’re looking for anything on the telecom space as we see a lot of the mergers and acquisitions on that side. new, inventive products from companies like cisco and such. cisco has been struggling.
>> any tech industries that may outperform next year that go counter to the trend you’re talking about?
>> people who have been following google and internet stocks still really like them. google continues to have the momentum. there’s really no sign of a slowdown in advertising spending. the question, is can those stocks continue to outperform? as far as apple goes, again, a lot of it is how strong will the consumer be. microsoft is one that i’ve actually talked to a number of people that do like, now. they’ve started to buy it for the first time in a number of years because they do have products coming out and if you look at the valuation, several of these tech stocks are trading at the lowest valuations in a number of years.
>> how would the ripple impact some of the semiconductor companies? >> a number of the semis, particularly intel, if companies are upgrading because of new products from microsoft, you know, if they’re updating their entire systems, they’ll need new semiconductors so intel is largely dependent upon products from other companies in order for that upgrade cycle to work.
>> thank you for coming in, ari levy, bloomberg news. still ahead, this hour, markets finished the week higher across the board, but, is the recent upswing just a feel-good rally and what’s the next real catalyst for stocks? we’ll get some answers from david spika as “after the bell” continues.
