Interview: Wilmington Trust---Farr, Dorsey---Portfolio Manager
>> welcome back to “after the bell.” money manager mario gabelli says u.s. stocks will gain 5% or more next year, driven in part by mergers and acquisitions. he predicts m&a activity among utilities, industrial parts makers and financial companies.
>> i like some themes, simple themes, for the next 10 months, 12 months, dividends and deals. higher payout ratios and from the point of view of deals, corporate love making is alive and well and every day you come in, you’ll see another match made in heaven.
>> he recommended shares of nstar, the largest utility in massachusetts. and maker of jet engine parts in new york, sequa. gabelli is chairman, chief executive and chief investment officer of gameco investors. stocks closed mixed today as fresh economic reports painted a rosy picture of the u.s. economy. our next guest says he’s cautious about the market and sees major headwinds for stocks in the year ahead. dorsey farr, director of asset allocation and portfolio strategy is our guest, overseeing more than $26 billion, coming to us from our atlanta newsroom. welcome. we had three better-than-expected economic reports released today along with a decline in oil prices. why didn’t the stock market respond better?
>> we’re in one of those funny periods where the market seems to react negatively to good economic news because they’re more concerned about what that means about future interest rates and obviously the interpretation today is that the fed is likely to continue raising rates in response to the strong economic data. >> that would account for the bond market ‘s decline?
>> i think so.
>> you think this is the case where the stock market is perhaps priced in all of this strong economic news?
>> well, they may have but probably what is more the case is that recently we had the minutes from the most recent fed meeting released. and the market , both the stock and bond markets jumped on the notion that the interest rate hikes were coming to a close maybe sooner than expected. that was because of language in the minutes, indicating some members were concerned about taking the rate increase says too far. but that seems like the market may have set themselves up for a negative surprise here because now we’ve got strong economic data suggesting that the fed will likely raise rates at both the december meeting as well as the january meeting and take the fed funds rate to 4.5% and clearly that was not a welcome piece of news.
>> if those rates do come in, what do you expect―what could a catalyst be to get the rally back on track?
>> we’re actually―we’re fairly cautious, as you mentioned, right now. so things that could make the market rally, i suppose, are if, indeed, the fed did slow down their rate hike or stop sooner than expected, if we had some very strong fourth-quarter earnings data, but our expectation is that the market may have some trouble in 2006 and that’s going to be due to a number of things. you have earnings growth that we think will slow down substantially next year, we’re at very high profit margins today and we think margins will come down a little bit. we’re going to see, we believe, interest rates go higher. that typically is not good for price-to-earnings ratios and think about the fact that if the fed does go to 4.5% by the end of january, the federal funds rate will be more than 2.5 times the dividend yield on the s&p 500. that’s not a recipe for going more heavily into stocks so we’re trying to advise our clients to be more cautious with regard to their investments, particularly the equity markets .
>> were you at all encouraged by today’s consumer confidence for october report showing a huge rebound there? any chance this might offset concerns?
>> i think that’s encouraging to see. it was widely expected, according to our outlook, because we think the recent fall-off in confidence was largely due to hurricanes katrina and rita. and this was likely to be a temporary fall-off and confidence usually comes back quickly. we’ve had rising stock prices and falling gasoline prices. those two alone are enough to cause a rebound in consumer confidence. so i don’t think that’s much of a surprise. it is nice to see it and it probably suggests that the christmas holiday season may be good for retail sales and for consumer spending, but we don’t think that’s powerful enough to overcome the cyclical tendencies of earnings growth which we believe will slow down over the course of the next 12 to 18 months.
>> dorsey, we know it’s your company policy not to comment on specific stocks but you told us you’re overweight on international holdings versus the u.s. why?
>> that’s correct. we see two things about international we like. number one, the valuations. if you look at the developed international markets or the emerging markets relative to the united states, you see more attractive valuations from a relative point of view there. whether you’re looking at the price-to-earnings ratios or price-to-cash flow, all sorts of metrics suggest that international markets are more attractively valued than domestic markets . second, we see strong momentum in certain international markets rather than the domestic market so the wind is at your back if you’re an international investor right now.
>> we appreciate it, thanks for joining us today.
>> thank you.
>> again, our thanks to dorsey farr of wilmington trust. when “after the bell” continues, as gold approaches $500 an ounce, the demand for natural gas is damaged by climbing prices. we’ll investigate coming up.
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Listen Market briefing ---Lori (slow)
Economy preview -- Peter (slow)
NYSE --- Deb (fast)
economy and a butiant picture in the u.s. consumer confidence, new home sales, durable goods orders all surpassed forecasts. first, a check of the closing numbers -- investors concerned the fed might continue raising interest rates more than earlier expected. tomorrow could produce more evidence the u.s. economy is resilient. the government released the second reading on third-quarter gross domestic product. economists surveyed by bloomberg say it will likely show the economy grew at a faster pace than first reported. peter cook is in our washington bureau with a preview.
>> economists say tomorrow’s g.d.p. report should show the economy took the shocks from hurricanes katrina and rita largely in stride, likely growing at the fastest pace in a year, providing momentum for the current quarter and next year. the gulf coast hurricanes and high energy prices that followed slowed the u.s. economy from july soseptember but business at the cheesecake factory did not take the long-term hit first feared.
>> when katrina happened and gas prices peaked, things did slow down and i think for everyone and they’ve been slowly coming back so we see them improving right now. certainly, our numbers are showing that.
>> economists say the government’s latest reading on third-quarter gross domestic product should show the overall u.s. economy weathered the gulf coast storms better than first reported. the median forecast in our latest bloomberg survey indicates the economy probably grew at a 4% pace, up from the original 3.8% and 3.3% rate in the second quarter. while the storm was very damaging to new orleans and the southern gulf coast, the bottom line is, it did not knock the economy off course and in fact we will continue to see strong growth for many quarters into the future.
>> adding to growth in the quarter, stronger spending on construction, retail goods and business inventories, outweighing a wider trade gap in the period. some economists doubt the economy can maintain a 4% growth rate into next year.
>> i think the economy is moving into a more advanced stage of the business cycle with growth in the 3% to 3.5% range than the 3.5% to 4% range. not a substantial range but enough to move us into the lower end of the economy’s underlying potential range.
>> based on the initial g.d.p. report, the third quarter marked the 10th straight quarter growth has exceeded 3%. you have to go back to 1986 to find a longer string. tomorrow’s report will be released at 8:30 washington time.
>> more, now, on the consumer confidence report released earlier today. confidence rose in november by the most in more than two years due, in part, to falling gas prices. bloomberg’s june grasso is here with details.
>> those lower gas prices increased confidence and consumer spending and came after the record prices seen following hurricanes katrina and rita. the conference board’s consumer confidence index rose to 98.9, from a revised 85.2 in october. that’s far above economists’ average estimate of 90.2 in a bloomberg survey.
>> consumers are more optimistic than they were when the hurricane news was all over the place but right now i think people are getting more comfortable with the notion that the economy is not going to be thrown seriously off track by the effects of high energy prices and the aftermath of the hurricane.
>> consumers splurged over the thanksgiving weekend at discount retailers such as wal-mart. leading the national retail federation to say this will be the second biggest holiday selling season since 1999 and the component of the index that tracks consumer expectations for the next six months increased to 88.8 in november from 70.1 in october, the biggest gain since april 2003. still, the latest average retail price for a gallon of gas is 11% higher than a year ago. and the gauge of consumer confidence is well below the 105.5 mark in august. before the effects of the recent hurricanes were measured.
>> we have rising interest rates, you still have those winter bills that have yet to meet the christmas bills. income growth is not expected to be that great. so while we should be able to sustain levels of spending, there’s not much pointing towards a pickup.
>> auto sales fell last month after soaring during the summer months due to discounts. and lynn franco of the conference board says much depends on what happens with the auto industry, a major piece of consumer spending. november car and truck sales come our way on thursday so we should learn more. back to you.
>> thank you. in addition to the confidence report, we also had better-than-expected readings on new home sales as well as durable goods orders. new home sales unexpectedly rose in a record in october, suggesting people bought homes in anticipation of even higher mortgage rates in coming months. purchases increased 13%, the biggest rise since april 1993 to a 1.424 million annual rate. september’s number was revised to a 1.26 million pace. checking the bond market , treasuries fell the most in almost three weeks today. the 10-year down 19/32, with the yield pushing up to 4.48%. shorter end of the curve, the two-year yield pushing up to 4.39%, the price down 4/32. talking about durable goods orders, nice rebound in october, rising more than double what economists estimated. excluding the volatile segment of transportation equipment, orders also climbed. in the currency market today, the dollar was stronger versus all three major currencies. the dow got off to a good start but slowly the gains withered away throughout the session. deborah kostroun filed this report from the new york stock exchange.
>> we did have a lot of really good economic reports, the consumer confidence rising by the most in two years. those new home sales were up. but the idea for many traders is that we probably can’t sustain, say, a 13% increase in new home sales that we saw last month. and even though confidence was up, it really didn’t translate into better retail sales over the thanksgiving shopping weekend and so that was one of the big concerns, even though we did have good economic report, the market couldn’t sustain the big gains earlier in the session. is there more trouble ahead for general motors? b.n.p. paribas saying that the probability of g.m. filing for bankruptcy protection in the next two years rose to 50%, citing low vehicle sales and poor mixture of products. standard & poor’s, saying ford’s debt, already rebow investment grade, has be further lowered by one level because of their north american operations. worst performer in the s&p 500 on the day, calpine, lower after the c.e.o. and c.f.o. stepped down. the board of directors seeking a new direction. the company struggling to repay $17 billion in debt. calpine stocks and bonds dropped to all-time lows. merck saying that the company may win its first federal trial over vioxx. merck fended off a state court challenge earlier this month as the man that took vioxx twice as long as the man in this case. u.s. steel, one of the biggest gainers on the s&p 500 today, added to j.p. morgan’s focus list by analysts there, predicting the stock may reach $77 within 18 months as pension costs drop and investors recognize higher value for the flat-roll business. i’m deborah kostroun at the new york stock exchange.
>> a little more on merck. the third trial over damages for vioxx opened in a houston federal courtroom today with plaintiff’s lawyers claiming merck hid risks known before the drug hit the market . the plaintiff is a 53-year-old florida seafood salesman who died of a heart attack in 2001 after taking vioxx for only 23 days for lower back pain. merck’s attorneys said irvin suffered from clogged artery, overweight and a sedentary lifestyle that triggered the heart attack. the family says that merck failed to disclose the side effects that could lead to heart attack. merck has one victory, one loss under its belt with some 6,500 vioxx cases filed so far. fresh reports showed stronger growth for the u.s. economy but our next guest says investors should be cautious. stay with us.
