Interview: Fifth Third Asset Management---Withrow, David---Dir. Taxable Fixed Income
>> treasuries fell in response to the industrial production numbers out today being, but the decline wasn’t enough to put a dent in the market bonds posting their biggest weekly gain this year, joining us now to give us outlook where the market is headed next is david withrow, of fifth third asset management. david joins us from his camera in cincinnati. good to have you on the program.
>> hi, rhonda. how are you?
>> good. watching the bond market is like watching a basketball game. we weren’t clear how it would end as the week began. did we see a real trade change in trend if you factor outside today? what will we see when we come in monday?
>> well, fortunately or unfortunately, the bond market participant seem to be very short-term focused, the numbers that came up this week on inflation were that inflation may be tamer than some people expected it to be, or at least for this month, reporting for last month the numbers came in a little weaker than what was the expectation, people―now that fed is near the end of their tightening cycle, or at least the end is in sight, people are fork you had on day-to-day numbers as opposed it to a long-term prospect. we’ll see increased volatility, also keeping in mind we started on january 17 from a low of 433, we’ll see a retracement, there’s a lot more to go in terms what the more recent lows and yields have been.
>> what was your firm doing today in the market ?
>> it’s a pretty quiet day in the market for a lot of reasons. really, we’re still looking for opportunities. we think money will be made this year not necessarily on interest-rate anticipation, because it is going to be a volatile market it will be number to number, to get that right you can get burned as many times as you can help your performance. we think looking at the right sectors and digging into the sectors, such as the mortgage area, buying the right kind of structure, high quality. we think low quality is a bad play this year, really across from structure to corporate markets . it’s trying to delve into individual securities. that will be key to performance in year.
>> i want to point out something you said. we’re looking at information really number to number. what about some of the bigger picture stories? structural changes in the u.s. economy. the overhang of the deficit, is also something that a lot of people focused on? on this week. how does that play into the market . that too would explain the relationship or lack thereof of the dollar.
>> well, i think you hit on a lot of key components, those are things we are focusing on, intermediate to longer-term issues. people have lost focus on how the dollar plays. we’re seeing the german boom -- bohn hit new highs, and the japanese 10-year is hitting new highs. we’re seeing more competition for assets go from foreign central banks as u.s. goes outside its own territory to look for opportunities across the marketplace, as competing assets attract money into them it will raise u.s. interest rates, in effect, hurting u.s. bond prices, we think, again it won’t be catastrophic, but we think the 10-year is probably overvalued at this point, especially pretty much across the curve is overvalued. we think the 10-year could get into the 4 90’s to pl possibly 5%.
>> let’s talk about securities you mentioned. let’s focus on corporates if you want to be on bonds and you want to make money, where do you do?
>> unfortunately, a lot of the -- the, quote, big money in the bond market from investment grade standpoint is somewhat out of the market . it’s a matter of what you avoid to help your relative performance going forward. high yeelts are at several year types. even the lower end of the spread versus treasury marks. it’s a matter of avoiding leveraged buyouts, avoiding those risk securities. in some ways, it’s more of a boring market . there are so many more markets toin vestment. you have the swaps market , c.d.s. market , extremely efficient futures and option marketplace. it’s playing to nuances in those marketplaces. we like structured areas, and high quality such as subprime and focusing on high quality and structure, where we think the option piece of a mortgage is not being valued properly and digging into the structure of those securities to make money. so the people that can pick good securities, we’ll separate the wheat from the chaff this year, that will identify the market .
>> there are other options out there, in investors want to find it.
>> i don’t want to say that fixed income people are borg.
>> we’ll end there. you have a great weekend.
>> you too.
>> the ncaa has meant a lot of money from cbs, but the boss may lose big on? the tournament this year. a lot more sports, next. “money&sports,” next.
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Listen Market briefing --- Rhonda (slow)
NYSE --- Deb (fast)
Chart of the day --- Tom (slow)
points, the s&p 500 also tacked on a couple of points. up close to two, and the nasdaq closed in positive territory, gaining nearly seven points. stocks, in fact, had their best week since the beginning of this year, tranceports, home builders and industrials playing a big role.
>> you know, when the market is going up over the last few years, one the things we’ve been seeing of the technology stocks leading, but very different the kind of market environment we’re, that we have transports performing quite well. in fact, they hate record this week, you can see where we saw the record a little earlier this week. as we closed out, we had a lot of railroads, union pacific, also c.s.x. and norfolk southern in friday’s session hitting 52-week highs. union pacific raised fist-quarter earnings by more than 20% because of increased shipping volume and also one of the things that we saw, u.b.s. upgrading c.s.x. this week, saying the stock may double in the next five years, u.b.s. saying its clearly a desirable to own stocks that haul commodities, railroad stocks, they have actually over the past three years, they had been pretty good performers, mainly on increased demand for hauling of commodities like coal and chemicals, in fact, norfolk southern, their shares have gained 20% this year, and one of the things they also said just last friday, they said they will increase their shipments and raise their rates this year, main because of a strong economy. so if you are kind of looking at the economy, and seeing how well we do, sometimes you have to look at some of the shippers, those are performing well. one of the things we saw with the transports, had you other stocks like fedex performing well, even some of the airlines performing quite well this week in the face of those crude oil prices that yesterday we did hit 63 per barrel, but we came down a little bit in today’s session. other areas of the market , like the cyclicals, they were up 4% this week, a lot of the cyclicals and material stocks performing well, like phelps dodge, interest-rate sensitive stocks doing well, as bond yields were down nine basis points this week, the bloomberg home building index was actually up 7% this week, doing better even than the oil service stocks, home builders performing quite well. back to you.
>> thank you, deborah. deutsche bank strategists forecast gold at 660 an ounce in 2007. the recent weakness in the dollar could be the natural for the next leg higher for gold. time for “chart of the day” with bloomberg’s editor at large, tom cane.
>> the collar weekended, interest rates came back down. there’s a lot of noise in the market , some economists and strategists like to look at gold. research came out with a very forceful note today, they said, look, it’s simple. things have changed, the dollar is now weakened,, they are predicting gold, $660 an ounce into 2006 if we go to the chart, this is one of the great charts of the last half century. the last 20 years. here is the stability of gold in the 19 on’s. here we if the gold boom, rounda you don’t remember in 1980, we come back down and churn, here is the move up. this is not adjusted for inflation. we’re looking out to? 2007 in the center of the gold circle, is $660 an ounce. gold is advanced in the last number of quarters against the normtive trend of a dollar, the equity markets and interest rates. they say finally the dollar shifting where gold is starting to act with a normal trend, is weak dollar, higher gold, they think it’s a real―not tipping point, but certainly something to watch for as we go into mid year 2006.
>> will we talk about gold and higher inflation?
>> that’s the link, that’s an interesting link. gold has moved up in the opposite trend of interest rates. if you have interest rates move higher now and we move up to 4.77%, if we were to continue to move higher, would, again, signal higher interest rates, years of inflation, higher gold prices, that’s the normal trend, we have not seen that in the recent quarters, deutsche bank saying here is the shift back to nor normality.
>> they talk about trade imbalanceds, are there other factors we should bring up?
>> there are a number of factors. we looked at the futures market and hedges out gold and technical inside stuff them do center back to, you as you know, the current account deficit, a record level. 7% of g.d.p., what they are saying is we’re moving away from interest rate differentials of supporting the u.s. dollar back to where we worry about the trade balance, the current account deficit and with worry about trade flows what are called capital flows, michael louis at deutsche bank suggesting new worries about capital flows, another oomph, another leg up in the price of gold from where we are now, $5 on 50 to $660.
>> nobody is talking about’s 800 yet.
>> no.
>> thank you very much. have a great weekend. what we want to do is tell you coming up we’ll have another look at what’s happen negotiate bond market , because we know that treasuries are coming off their best week of the year. we’ll find out if the rally is for real, we’ll talk about the recent weak innocence corporate bonds as well. that is next. we are back in just two minutes.
