Interview: Chief Investment Officer with S&P Wealth Management
>> the major stock index posted gains this week even with katrina and the subsequent energy price rises. can the momentum continue as damage from the storm is assessed? let’s put this question to malcolm polley, chief investment officer with s&p wealth management overseeing more than a billion dollars in assets. he joins us from pittsburgh. malcolm, it’s nice to have you on with us this afternoon.
>> thanks for having me.
>> interesting to look at the indexes this week. it was not just the energy shares that were higher even the market that people are dealing with the aftermath of katrina. how is it that stocks were higher this week?
>> i think there were a lot of people making kneejerk reactions in all kinds of industries. we saw the engineering and construction industry up strongly across the board. i know people are kind of guessing which direction retail is going to go given that we’re back to school shopping and getting ready to head into the school season, so i think that there is a lot of guessing going on as to which direction the economy is going to go with the fallout of katrina.
>> even though you call that a kneejerk reaction, what are you anticipating we’ll see in coming weeks given that we have this katrina aftermath and historically as it is september is one of the worst months -- the worst month, really, for stocks?
>> our anticipation for the whole year is that the year would end up not too far from where it started with a lot of volatility along the way, and we’ve really seen kind of the same scenario play out all year, a strong move up, then a shock happen and the market move down. katrina was a shock. we didn’t get the big move down that some people expected but we’re really not seeing a lot of fireworks for the equity market throughout the rest of the year.
>> i believe you have changed your position having to do with energy stocks, correct? you were ready to do some selling and are holding off on that. tell us a little bit thought process.
>> right. we had been trimming some of our energy positions pretty much throughout the summer because almost all of our energy stocks have had very large gains not only this year but last year and the year before and we were having a hard time making a case for them to go a whole lot higher. we had begun the process of trimming, and with katrina happening, sending oil prices up higher, we really decided to delay that a little bit and hold onto what we’ve got.
>> and add to that at all?
>> i don’t know if we’re going to add a lot. we may have some opportunities in some selection issues. if you get some stocks like poageo, that have had some hair on them, this may give an opportunity for those stocks to move a little bit higher.
>> let’s talk about the insurance companies. that is a group that you like, that you think has some opportunities. let’s start with why and then we’ll move into some of the picks. why do you like the insurers?
>> i like the property casualty insurance industry in general. i like the way the industry works. typically, what happens after you get a big weather-related event like we have had with hurricane katrina is that the property casualty insurers move sharply downward as people look and say whether these companies are going to have huge checks to pay as they pay for the fallout from the hurricane. in reality what it does, particularly for the industry, is it helps firm up the pricing in the property casualty business. weaker companies pull out of markets . those companies that are left are able to go in and hold the line on the premiums that they charge people for their insurance.
>> one of the picks, let me jump in here because i want to make sure we talk about some names, commerce group is one of the property and casualty stocks you like. in fact the stock has been moving lower both for the year and in the wake of katrina. what’s interesting to me, though, is the company has slowing profit growth. why doesn’t that concern you more?
>> really, what you look for in a property casualty insurer is something called float, and the cost of float, and the best way to kind of gauge the cost of that float is to look at something called the combined ratio. the industry and the whole property casualty insurance industry, their combined ratio tends to be above 100 which means most of them lose money on their underwriting. commerce group is unique in that they make money in their underwriting and they make a pretty good amount of money in their underwriting and they’re headquartered in a fairly highly regulated state, that being massachusetts, and they’ve done very well in that market , so we’re really not concerned about the profitability slowing because we really see the making a lot of money on the underwriting side of the business.
>> what about mercury general? this is an auto insurer. it’s had slowing sales. not much profit growth. what do you like here? >> same type of story as we see in commerce group. they make money in underwriting. they do a good job underwriting. they’re car insurance. when they go into a market they tend to tie the car insurance with the homeowners because most people that open a home tend to have their car with it because it gives them a discount on their rates but the same type of story with commerce group. they are headquartered in a highly regulated state, this being california, and they do a good job on the underwriting side and we like the fact that they stick to their knitting.
>> malcolm, thank you for joining us.
>> certainly.
>> have a good weekend.
>> you too.
>> malcolm polley of s&t wealth management. sports teams and sports leagues coming to the aid of hurricane katrina victims. mike butil has the story in this edition of “money & sports” also ahead the latest on the recovery effort.
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Listen Market briefing --- Ellen (slow)
Hurricane --- Tom (slow)
joining us now to explain is editor-at-large tom keenan. a lot of the story overshadowed by the hurricane. let’s delve into it.
>> this is an indication of the positive news within this report. 169,000 is not that great a number but the three month average with the revisions 195,000, that’s a good, good number. what i saw in there without exception every economist saw in there that i spoke to today was great numbers beneath the headlines. here is one of them. this is the broadest we can get. the number of employed to the entire population of the nation. so it’s big and broad. it’s a big-picture number. here we see it over 30 years. 1970-2005. this is that revolution of women going back to work, more of the population working. up, up and r we go and then we have this boom in the 1990’s up to the green box and then down. what concerns economists is when you look at the chart you see in the past, sharp v’s down, we’ve seen a very slow recovery in the employment-to-population ratio. if we go back to the choort quickly, you can see finally -- to the chart quickly, you can see that’s a straight line up. that really pleases economists.
>> let’s tie it into the unemployment rate being at a four-year low. it only seems in certain months people focus on the unemployment rate. begin it was back down, given it was a four-year low, people focus on the unemployment rate when you have the report coming in much weaker than had been expected. how important is that level that we saw today in the unemployment rate?
>> breaking through five is a hallmark for economists because they’re arguing through the natural rate of unemployment and it’s a number no one knows. certainly going below five is like below 10,000 in the dow, but there are a lot of moving parts and coming out of katrina there will be great data uncertainty as we move forward. bill dudley at goldman sachs wrote today forget about the data for the next couple of months.
>> they’ll be so affected by the hurricane.
>> the hurricane, in and out, all sorts of gyrations, it was a time dudley suggested to focus on the refineries.
>> tom, thanks so much.
>> sure.
>> when we come back we’ll focus on the stock market . you saw those indexes higher this week.
