Interview: Independence Investment---Forelli, John---Sr.Vice President
>> merrill lynch appealing a decision to pay $14 million to three brokers. they fired the men in 2003 in relation to abusive market trade funds. and the brokers said that meryl defamed them and claimed they were unjust lie given payments because the firing was for cause. they directed meryl to challenge the paperwork to show that their firing was not for cause. merrill lynch is a passive minority investor. january defect. we are one trading session away from securing a january effect which says that if stocks rise in the first five trading sessions of the year it could predict gains for the duration of the year. our guest is john forelli, joining us now with his outlook for stocks in the week ahead and beyond. hi, john.
>> how are you doing, lauer sne
>> fine, thank you. do you see the january effect taking effect here?
>> we god good odds right now -- we got good odds right now. we should have a positive first five days of the year.
>> and we’re back on dow 11,000 watch. do you expect to see that milestone crossed?
>> i would think that this is the tight. year when investors are looking out for the next 12 months and thinking that the fed will stop raising rates and that inflation is under control and that the market . e. has contracted over the last couple of years. and so there’s a lot of reasons for optimism in what i would call an optimistic season and so the chances are good.
>> can you give me more of a time scenario in that time frame?
>> sometime during the month of january. i don’t want to say january 15, i can’t give you an exact date there. but we have good momentum in the market and january typically surprises you to the upside if you get started off like this.
>> so we have the december jobs report in today. big reason we had the rally today in equities. how close do you think that the fed is pausing?
>> yeah, i think that the expectations are two more raises for the fed and that’s pretty spot on. they start to signal that they’re thinking of slowing down and i think that we’ll see that they’re telling us that they’re about to slow down.
>> what is the biggest clue that the fed is approaching neutrality?
>> you can look at a couple of things but the minutes from the december meeting start hinting in that direction. they have changed the wording. in addition to that, if you look at the fed funds rate we’re up at that 2% level and that 2% level tells you you’re at a neutral stance. i don’t think that the fed wants to get restrictive in its monetary policy so a neutral stance around here to ½ point up is about the right place for them.
>> do you foredast a rally and or how big could a potential rally be once the fed ultimately pauses?
>> you know, i think that you can get a decent rebound. what we see right now is earnings growth in the 6% to 8% range this year and we could see some mument pel expansion. if you put one point of multiple expansion on the market on top of that, you’re talking about a 10% to 15% on the year and it feels like it has a good chance right now.
>> what do you make of the energy picture? we see oil spiked to a three-month high today. any problem with that in terms of an economic market headwind energy priceing?
>> that is probably public enemy right now with the price of oil keeps going up and people start worrying again about inflation being reignited that would be the major impediment to a good market in twix. so we hope that it will stay under control and that oil stabilizes. if that happens and it’s good for the market and if goes down it’s an extra boost. but if we start seeing $70, $80 price of oil, we’ll have a new round of worryies.
>> what is your outlook on energy-related stocks? do you see them as leaders this year? i believe that it was a leading area today.
>> we like the energy area. we are changing from the commodity focused names to the service oriented names. we are positive that it will pick up because more exploration has to occur at the high prices of oil. we’re not as optimistic about the price of oil continuing to go off. if it leveled off we think that the service companies would do better than the integrated oil companies.
>> you can tell us about more industries that you see value in for 2006?
>> the technology area has been in a soft spot. has not been in the headlines. and we have thought of technology as leading the market and it has not done. that we see a bit of reacceleration, led by semiconductor companies. we are seeing products like the ipods and the m.. • 3 products reigniting the demand for technology products. semiconductors lead the way in the tech area.
>> john, thank you very much for joining us. once again john forelli of independence investment. monday night football ratings this year reached an all-time low. but it seems that there’s still hope for the college bowl games. the texas win over u.s.c., kills me to say that, being a trojan alumni that i am. the highest rated game in 19 years. abc reaping the benefits but what about the reasonue? much more after “after the bell” returns.
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Listen Market briefing --- Lori (slow)
Job reports --- Allan (slow)
Chart of the day --- Tom (slow)
to tout good news about the economic policies while democrats argue that things are not as good as the republicans contend. here’s allen frank with more on the story.
>> the president and his top officials hit 19 states today to promote the economic accomplishments. president toured the chicago board of trade, shaking hands with the traders and signing autographs. and at a nearby hotel he spoke about the economy.
>> the american economy heads into 2006 with a full head of steam. in 2005, the american economy turned into performance that is the envy of the industrialized world. and we did this in spite of higher oil prices and natural disasters. we’re strong. and i’m optimistic about the future of this economy.
>> the president’s team got going after the opening bell with secretary of treasury john no at the new york stock exchange, giving tv television appearances to dispel pessmim about the president’s record.
>> there’s things on peoples’ minds and we’re trying to address them. protecting pensions and we’re committed to doing that. those energy prices. but the fundmental news here is a good story.
>> michigan democratic congress man sandra levin challenged the assertions.
>> don’t give us these aggregate figures. for example, next going up -- income going up 7%. that includes the wealth whoa have done well under in administration but for most families this has not been a banner year or a banner period.
>> secretary of labor elaine chow disputed the notion that incomes are not keeping pace.
>> what we’re seeing on an after tax basis is a 7.1% increase. and so on a real income after tax basis, people are actually getting more money back in their pockets.
>> some political observers such as economist christian weller from the center for american progress, credited the administration’s efforts with drawing teaks away from other topins that have hurt the president’s popularity.
>> things have not gone well for the administration. support for the war in iraq is declining. and there’s scooter libby and the administration is―the administration is trying to take credit for what they perceive as good news though employment growth is below expectations.
>> the bush administration could face a tough year with slower economic growth. laurie?
>> thank you, alan. the jobs report gave mixed signals, in fact. beneath the headlinidate alabor participation declined. it’s time for our look at “chart of the day” with tom keen.
>> hi, laurie. my head is spinning, it’s friday and it was a wild jobs report. when it came out the market went this way and that way and a big revision. economists have gone this way and that what too. and they said this is a positive report, it speaks well of a positive labor economy. others disagree. i spoke with jim glassman today and he was heated about a -- not one month, but a one year, two year, three year challenge to the american labor economy. if we go to the chart this is a great, great simple chart. like a zen moment or something of labor economics. the blue line is trend of a good 25 years of the good news of participation in the economy. this is labor participation from 1975 up to the peak. and then it stops. and then it rolls over. and this is a great challenge. you heard the debate between secretary snow and senator levin and it’s about that tension between―some things look good but for so many americans it doesn’t look good and labor participation is one of those statistics that indicates that there’s a lot of people not participating in the labor economy. and that was signaled today, it declined today even as we ended with a pretty strong economy for 2005.
>> does that have anything to do with the skill versus non skilled laborers?
>> it does. it’s at the heart and soul of this. labor equality is afraid. and markets in toronto have a proprietary labor quality index. they are adamant that the quality has deteriorated and you hear others say, no, we’re seeing an improving quality of employment in self-employed and among the wealthy and among the skilled, but, yeah there’s a dichotomy of skilled people moving forward and unskilled just falling behind. and that’s been a long-term issue.
>> so why has this labor participation declined?
>> jim glassman is repeatedly forceful and i have a great respect for him. he came out of the northwestern university columbine with robert gordon and a lot of labor economics. glassman says that people have just left, and part of it is kids going back to school, and extending school. and people 27 going, geez, this is not good, i’ll go to graduate school and it’s been a perpatiating thing. he’s optimistic they’ll come back to the labor economy and boost up that participation rate, but it hasn’t happened this late into this recovery.
>> want to ask you about the revisions for november and october. have you heard anyone surprised by --
>> no, not at all. coming out of the hurricanes and it’s been wild. to a person, every economist and the bureau of labor statistics has done a fabulous job given the struggles and the dislocation of the chris niss the gulf―crisis in the gulf coast.
>> you have done a fabulous job.
>> well, thank you.
>> have a nice weekend. tom keen, editor-at-large. and stocks rallied today, sending the market to a 4 ½ year high. on the back of the december jobs report. we will talk to john forelli. that is next on bloomberg “after the bell.”
