Interview: Federated Investment --- Duessel, Linda---Portfolio Manager
>> shares of amazon.com are solidly higher, up 4 percent. they were up as high as 6%. revenue growth 20%, better than expected, $2.28 billion versus the expectation of $2.23 billion. we’ll speak with david garrity later in our hour to go through the numbers. but first, linda dissle is equity strategist with federated investment management and joins us from her offices in pittsburgh with what she sees ahead for the market . welcome.
>> thank you.
>> we have many issues investors are justing right now, inflation rates and reactionary measures in terms of metals. what are the key things for investors to consider?
>> i think the most important things for the markets is inflation. if there’s an inflation problem in our economy and markets and is it something that makes the fed continue to raise rates? that’s what it’s all about.
>> how does the fed look at today’s economic reports, better-than-expected consumer spending and existing home sales?
>> right, right. the fed’s got to look at that and say, wow, this economy really, really is strong. does anybody notice that we’re raising rates over here, does anybody know that we’ve raised 15 straight times and have we slowed down anything? have we slowed down the economy, the stock market , the bond market , the labor market ? it seems like nothing is slowing down and consumer confidence is another example of that. home sales, they’re worried about the profit in the home segment and what does it mean? maybe it means they’ll continue to raise rates.
>> how far? one or two more rate hikes? the bond market suggests two more.
>> it would suggest two more and federated’s bond department is suggesting probably that’s all it needs. it’s difficult to say. it’s all data dependent. it all depends on what the fed sees as the months progress. they don’t want to go too far and put us into a deep correction in our market or economy. but the problem is that their raising interest rates takes a while to feed through to the economy so with the economy looking strong, i think it’s very important that we watch the next numbers on the job situation the beginning of the next month, the unemployment rate and wage increases.
>> so, then, how are you positioning your strategy? are you looking at one more rate increase or two?
>> well, our bond group is suggesting that, yes, for sure one. probably two and then it all depends. we’re being a touch more defensive on the bond side as we wait and see more evidence of of this. we’re certain they’re near the end and everyone is certain they’re near the end of rising rates but we want to be defensive until we have clearer evidence that there’s enough slowing.
>> defensive on equities, too?
>> defensive on equities, yes, in so was we’ve been moving to the larger company stocks, dividend-oriented stocks, certainly not favoring the consumer. later in the economic advance, we’re in the camp that does go with business and that has paid offhandsomely.
>> are you optimistic about earnings growth coming in stronger-than-expected? does this offset the offensive tactics you discussed?
>> we’ve been bullish about earnings, more bullish than the consensus has but bullishness about earnings does not necessarily translate into stock gains. in this case, late in the economic cycle, it translate into the fed saying things are still really strong. and what we’re seeing is lower increases in earnings but look, 13% in the first quarter is extremely strong compared to a 7% long-term rate. it should come down as the fed continues to tighten but we wouldn’t want to see it go negative. we don’t want negative earnings growth. we don’t see it but we think earnings growth will slow and that’s just fine with us. it’s been too hot.
>> short term, did we see a sentiment shift with the declines we saw, worst declines in two weeks?
>> short term, yes you can say that. i think the bond market is very telling. we went up over 5% and that was an important level which i think many tried to explain away. now 5.08, we keep rising. that’s the inflationary concern that’s out there. that, i think, is worth looking at. as far as the stock market is concerned, we’ve been around that 1300 level on the s&p 500 for weeks and weeks. so i would say, no, you really haven’t seen anything dramatic there.
>> would it be safe to expect or do you think the dow, last week coming 100 points shy of its all-time high, do you think it will rebound and make a run?
>> if things play out the way we think they might, we could definitely see a little more of an inflation scare here. we could see concern about the fed going too far in some of their statements. that could bring on a correction in the stock market . a summertime correction would not be abnormal at all. a summertime correction in line with a slowing of our economy, which we do expect as the year progresses as the consumer slows down with energy and interest rates and then all these things coming together, there’s a weakness that the fed needs to see, gets them to stop and we could finish this year potentially at the 1,400 level on the s&p 500. we could make good mid to high single-digit gains when it’s all over but there are a lot of months ahead of us for this to play out.
>> thanks so much. judging by today’s report on home sales, some economists could be forgiven for thinking the worst, that the housing slum slump is over.
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Listen After the bell --- Lori (fast)
NYSE --- Julie (slow)
SG Cowen---Malone, Mike---Sr Managing Director
i’m lori rothman. this is “after the bell.” u.s. treasury prices tumbled today, yields rose to their highest in nearly four years. stronger-than-expected reports on consumer confidence and housing sales boosted expectations that the federal reserve will raise interest rates at its next two meetings. stocks followed bond prices lower. let’s look at the settling numbers. dow jones industrial average lost 50 points, we’re at 11,286. the s&p 500 fell six points, 1302. and the nasdaq composite dropped three points to close at 2330 today. those two economic reports challenged the view that rising commodities prices and borrowing costs are starting to take their toll on economic growth. the conference board’s conference index climbed to 109.6 in april, a four-year high. purchases of existing homes rose .3% in march to an annual rate of 6.9 million. checking the bond market on the heels of those reports, you can see bonds tanking today with the 10-year down 22/32, yielding 5.08%, the highest yield since 2002. looking at the shorter end of the curve, the five-year down, as well 11/32, yielding 4.98%. on the two-year today, also lower with the yield at 4.94%. a component of home construction, copper, today also recording its biggest gain since june 1999. copper in new york trading rose nearly 21 cents to $3.32 a pound, a gain of $6.7 -- 6.7%. a big jump in silver futures, almost 7%. julie hyman has a wrap-up of the action at the big board. what were the drivers leading us lower?
>> well, really, it was what you were talking about, the fact that the economic reports today, although usually not huge on investors’ radar screens, really driving bond yields higher and raising concerns about interest rates. despite what the fed said in its last reported minutes about perhaps being close to the end of interest rate increases, still, they are paying attention and investors are paying attention to the economic data. couple that, then, with president bush’s comments that affected the energy market and we saw energy stocks also take their toll in today’s session. we saw interest-rate-sensitive groups do poorly today. utilities, for example, sometimes seen as an alternative to investing in the treasury market because they have relatively high dividend yields. we saw them fall today. duke energy, t.x.u., consulated edison or coned and southern company all lower today. homebuilders also lower today. when we see higher bond yields and interest rates, there is concern it will further slow the housing market . in addition, we had earnings from m/i homes disappointing. and with energy prices going lower and energy stocks taking a hit in the session, even valero energy that came out and matched analysts’ estimates with their earnings report, that stock also falling today. although earlier in the session, before president bush’s comments, that stock touched a record. want to mention the other piece of the pie is earnings. burlington northern santa fe, the railroad, came out with its numbers today and did not beat earnings estimates by as wide a margin as some of its competitors. many of those railroads, which closed at records yesterday, fell in today’s session.
>> we have after-the-bell earnings from amazon.com, the internet retailer coming in, matching forecasts on the e.p.s., 12 cents a share, right in line with forecasts, and beating on the revenue, coming in with revenue $2.28 billion. thomson financial analysts were expecting $2.23 billion. also giving numbers on their second-quarter outlook and investors liking the news. shares bid higher in the extended-hour session, up nearly 6%, $37.66. later in our hour, we’ll speak with david garrity to parse through the numbers from amazon. we want to look at what further drove the stock market and how today’s surprisingly strong economic data may impact stocks. we want to welcome in mike malone, trading analyst with cohen and company and joins us from their offices in new york. mike, hi.
>> hi.
>> it looks like inflation and thereby rising interest rate concerns are back on the front burner?
>> absolutely. this has been the trend taking place in the market recently. that is, you have a tug of war taking place between current economic growth trends, which are robust, and concerns over inflation. that’s really been playings itself out lately and played itself out today, as well. particularly this morning the housing numbers were concerning on the inflationary front in the sense that we have seen cooling lately and i think investors were hoping they would see further cooling there, which they did not. i think that raised inflationary concerns.
>> last week, stronger-than-expected earnings bouyed the market . it seems that’s been pushed back but we just heard a strong report from amazon.com. do you think earnings will become foremost on investors’ minds going forward?
>> i don’t really think so, actually. i think the earnings reports are confirming what most investors already know, which is that current economic growth is robust and profitability is high. i think that sort of is built into expectations. i think what’s concerning people is where the economy will be in three to six months and if you were to see inflation pick up from here and leading to an increase in interest rates, that would be a concern.
>> mike, got to leave it there. thanks a lot.
>> you’re welcome.
>> facing voter concern over soaring fuel prices, president bush today announced a series of steps he hopes will ease the situation. bloomberg’s peter cook is standing by with more on the president’s proposals and the reaction in washington. peter?
>> even president bush concedes the steps he announced today will not solve the nation’s long-term energy problems but he and republicans hope they will bring some relief to people at the pump. speaking to an ethanol industry trade group this morning in washington, the president said he wants the justice department and federal trade commission to step up efforts to investigate possible price gouging at the pump. while he did not announce a decision to top the s.p.r. today, he announced the government will stop filling it.
>> our strategic reserve is sufficiently large enough to guard against any major supply disruption for the next few months so by deferring deposits until the fall, we’ll leave a little more oil on the market . every little bit helps.
>> the president said the environmental protection agency will consider temporarily waiving fuel specification requirements for some states. refiners are making the transition to summer grade fuels and trying to meet new federal requirements for ethanol use. the president’s proposals could have a modest effect at the pump, says one analyst.
>> there’s basically little the government can do at this point but constituents are angry and politicians respond with the things they say they can do.
>> democrats unveiled their own ideas including a temporary suspension of the federal gas tack, wynd off gas tax on the industry and tougher measures.
>> i will offer an amendment to the supplemental to require a complete examination as to whether or not we should break up the the big oil companies. enough is enough. we have no competition.
>> there’s already a bipartisan bill in the senate sponsored by arlen specter to tighten the oil and gas antitrust rules. that industry would get new attention with prices at these levels.
>> the president’s energy proposal helped drive gasoline and crude oil futures lower for a second straight day. crude oil futures closing down more than .5%, 45 cents a barrel, $72.88. among the other energy movers, gasoline down 2%, heating oil up over 1% and natural gas futures dropped 4%. for more on how the president’s move to fight soaring gas prices played out in the nymex pits, let’s check with su keenan.
>> the proposals delivered a one-two punch. crude oil futures initially fell more than $2 in a flurry of selling. many of the moves, though, are seen as more psychological than actual. boone pickens who accurately predicted last year’s rally announced crude will reach $80 and doesn’t see bush’s plan as changing that.
>> there’s not anything you can do quickly. i mean, it’s like turning a battleship around. it takes several miles.
>> the big drive today, bush’s temporary waivers to gas additives initially what could the gas―whacked the gas complex.
>> what should investors do in light of today’s economic data? we’ll put that question to equity strategist linda dissil at federated investors, next.
