Reducing some positions
Interview: Boston Advisors---Vogelzang, Michael---Chief Executive Officer
>> a victory for governor arnold schwarzenegger, the california assembly approved an overhaul of the state compensation system, saving as much as $7 billion for companies such as costco and wholesale corporation. this lowers the amount paid to workers with preexisting conditions. the definition of permanent disability is altered and creates incentives for employees to return to work. the measure needs to be voted on in the california senate but today’s victory adds to schwarzenegger’s clout as he begins final negotiations over ways to fix california’s chronic budget problems. our next guest has been buying more stable stocks. he’s been selling out of his technology and cyclical positions, gradually, i presume, michael vogelzang, president and chief investment officer of boston advisers, joining us from boston to bring us details. i assume i should gradually reducing those positions, i assume it’s not a wholesale clearance like filine’s basement.
>> not quite, although you can buy a good tie there. the fact of the matter is we’ve been overweight for the last almost 18 months in technology and have come to the conclusion over the last really six to eight weeks that the rally in tech and the nasdaq has really run its course. we’ve seen the rate of change of earnings growth in the companies, whether semis or software, the rate of change of growth quarter to quarter is slowing. still terrific quarters and great growth numbers but we’ve annualized the earnings recovery and it’s that rate of change that wall street pays attention to so often so we feel, given valuations and the rate of change slowing, that frankly there are things that are longer loved and opportunistic for us.
>> was there anything in particular six or eight weeks ago that made you say the party’s over?
>> if you look back at the history of, really earnings recoveries, the first year, cyclical stocks and technology is simply another cyclical proxy, really outperformed. whenever you get the bottoming out of the earnings cycle, that first year out of the box, those cyclical companies do very well and last year was an exceptional year with the nasdaq up 40%, and the cyclical indices up almost the same. the second year, particularly a presidential election year, you get rotation away from the leaders of the previous year and the second year of an earnings recovery, it’s typical you get more normal leadership of the bigger, more stable companies, whether healthcare or big consumer staples names or things that are less cyclical than those that performed so well the first year of the earnings recovery. so far this year it’s tracking right on line. six, eight weeks ago, we were in january, the cyclical names had a good january and we began to sell into some of that strength.
>> michael, you’ve told our producers that you see the broader markets probably rising 7% to 12% from current levels for the rest of the year. i put together a one-year chart on the bloomberg terminal for the enjoyment of our viewers. what i’ll do is zoom this in because i want to talk about the trading range. we’re stuck in the 5% trading range year to date because 11 -- between 1100 and 1150 in the s&p 500, going on all year. what’s going to push us out of there, 7% to 12% higher over the next 7 1/2 months?
>> here’s an answer you probably don’t expect. when interest rates rise. we think actually what’s holding the market back and keeping it in the trading range is not earnings growth or fundamentals in the economy because we think they’re terrific. what we think is holding the market back is this anticipation of rates going up and so often we see this where the anticipation of rates keeps the market down, sometimes pushes it down quite a bit, but actually on the first and second rate increases from the fed, stocks rally. so we actually think that the good economy, in a weird, strange way, is holding back the market from performing a little better. we think once we get through the log jam and often times interest rate increases are the catalyst there, we’ll have a better second half.
>> if you look at energy stocks and energy prices, oil services, basically anything commodity-related is very, very strong right now. but you have said you’re not worried about commodity prices falling. how can you not be worried after this run up?
>> because the economy is so strong. this is not a―this is a synchronized global recovery that hasn’t happened in some time and the demand for commodities, whether energy or silver or whether it’s paper or anything, is going to continue to be strong. and we certainly don’t see significant supply coming on over the next six to 12 month and we think that will be a great recipe for further gains in the basic material sector.
>> and you expect it to be choppy, though?
>> yeah, no, i mean, we’re clearly in a period where some expectations from investors, guys like us, are a little bit too high and the one concern i have about having a little bit of a bullish outlook for the year is that it’s not unusual. there’s a fair amount of bullishness out there and that worries us a little bit so i think we’ll have to fight through some of that and me i way have a decent-sized correction first.
>> michael, thank you very much. he’s the chief investment officer of boston advisers. we’ll preview earnings outside the u.s. next week coming up.
