Interview: Where stocks may be headed
>> oil has been one of the big themes for investors this week and crude oil fell for a fifth day in new york trading on friday, the longest decline since august on signs u.s. inventories will meet increased demand by refiners making gasoline. if we look for the week, a decline of 6.9%, retreating from the record high of $58.28 a barrel reached on monday. half the traders and analysts we’ve surveyed expect prices to continue moving lower next week. in the meantime, a u.s. government report predicts gasoline prices in this country. peak at $2.35 a gallon this month and the energy information administration sees gas average ing $2.28 for the summer. the head of that agency says rising demand will be the main reason. among other movers this week -- gas was a theme for investors this week. our next guest says earnings news will dominate the market next week. phil dow, director of equity strategy at r.b.c. dain rauscher joins us from minneapolis for a look at where stocks may be headed. welcome to the show.
>> good to be with you.
>> we have ford out after the close cutting its 2005 profit forecast. how significant is that for investors given all the bad news that’s already out there in the auto sector?
>> i don’t think it was unexpected. i think there’s an interesting nuance. if you look at the release, they talk about rising costs, rising factors of costs amidst lower demand. if you look at other parts of the economy, you see rising costs but relatively productivity and pricing power, allow being them to pass that along. my sense is that will be a recurring theme we see in first-quarter releases, which means earnings could be better than expected.
>> how much better?
>> my guess―consensus is 7.5% year-over-year gain on top of a 20% gain last quarter so my sense is 10%, something in that neighborhood is in the cards.
>> isn’t that already priced in given that we’ve had 12 quarters now where earnings have beat the average consensus?
>> i’m not sure 10% year-over-year gain in the quarter is priced in. there have been 12 quarters where the reality has been better than expected and it was a surprise every time. here’s how i see it. if we look at the beginning of the year, analysts’ expectations were for about an 8% gain this quarter and they’ve come down to 7.5%. the fed has upgraded their description of economic recovery as solid and talked about pricing power. my belief is that the economy strengthened more than people expected and that will be reflected in the income statements and earnings beginning next week.
>> will earnings will be the focus for investors?
>> the main focus will be guidance. since the advent of sarbanes-oxley, u.s. companies have been good at releasing bad news but don’t know how to release good news. my hope is you’ll see good numbers along with guidance with regard to what companies will do with their cash hoard in terms of reinvestment.
>> what areas have the greatest strength and possibility in terms of giving guidance? i ask that because basic materials expected to account for the bulk of earnings gains.
>> right, and a number of industries pricing power will come to the fore. oil service companies, the companies that drill well for companies, that provide seismic services, are likely to show much better-than-expected numbers due to better pricing power and better demand. my guess, if you look at risk and reward, price for what you pay, real attractive areas right now are healthcare, energy and selected technology companies.
>> in energy, let’s drill down there for a little bit if we can, because you had oil, a big theme this week for investors. how significant will oil and energy stocks be, do you think, during the earnings season?
>> i think you have a huge following in the trading community of these stocks and i understand that a lot of them are beginning to sell after making great gains. i think what’s come out today and in the last month is that it’s highly likely demand will remain strong for some time to come. we saw the world bank estimate of 3% g.d.p. growth globally for the next couple of years. that means demand characteristics will be strong. secondarily, you saw a poll of a broad number of economists saying it would take a price of $80 a barrel to derail this economy so i think we’re in a relatively robust demand environment with relatively limited supply and that means good earnings and stock prices for the energy sector.
>> what weighting are you maintaining in the energy shares? how optimistic are that that they’ll go higher?
>> right now, energy, as a component of the s&p, is around 8%. in the early 1980’s, the high was 28%. our belief is that it could go as high as 14% to 15%. we’d recommend to most people that 10% would be a reasonable starting to place to weight energy at this point in time and also if you’re an individual investor, it’s a way to hedge against the vulnerability of higher prices.
>> phil, thank you very much for joining us, phil dow of r.b.c. dain rauscher. he mentioned healthcare stocks. they are one of the leaders in the s&p this week and some say gains are just beginning.
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Listen Market briefing --- Ellen (fast)
Ford --- Analyst (slow)
Cable stocks --- Su (fast)
Weekly look --- Deirdle
the company did not establish a new 2006 target. we will have more on ford in a moment. bloomberg news learned comcast and time warner will purchase adelphia communications for as much as $18 billion. the deal was presented thursday to the judge in adelphia’s bankruptcy case. the sale may be completed within several weeks. su keenan will have details. first, let’s bring you the closing numbers for friday, stocks falling across the board -- to get more on ford right now, the automaker cutting its forecast for this year and next. the announcement came after the end of the regular trading session. ford now says it expects to earn between $1.25 and $1.50 a share, below the company’s previous forecast, also lower than analysts’ estimates. they had been expecting $1.64. ford said it would not make its 2006 target of $7 billion in pretax profit. ford did say first-quarter profit will exceed previous estimates. standard & poor’s revising ford’s credit outlook to negative. this may put more pressure on ford’s stock, already down 25% year to date. looking at the story with the analyst at mcdonald’s investment, joining us on the phone.
>> how big of a surprise is this?
>> i wouldn’t say it’s much of a surprise because you’ve seen many of the automotive suppliers and automakers, particularly general motors, reducing their earnings guidance of the it’s a little surprising because when general motors reduced their earnings guidance a few weeks back, ford reaffirmed its earnings guidance, lowering it to the lower end of the range but here we are a couple of weeks later, reducing it again. it’s a little bit of a surprise, but not dramatic.
>> what could have changed in that period of time?
>> i think what we’re seeing is a lot more incentive activity, particularly on general motors’ side. general motors has a glut of inventory, particularly with trucks, sport utility vehicles and large pick-up trucks. i think general motors is more aggressive on the incentive front and ford is recognizing it will have to match incentives. >> in the press relisa, ngating the news from the company, they’re citing high steel, high oil, healthcare costs, weak dollar. iv. give us your take on what is the biggest challenge for the company?
>> i think the challenge, clearly, ford has high production issues―high inventory issues particularly on their truck lineup. i think they’ll have to take inventories down by reducing production. i think the main impact here is a production impact driven in part by lower sales, in large part, on the sport utility side of the picture.
>> are you surprised we’re not getting revision as part of the announcement having do with production?
>> yes, i am somewhat. although, in talking with the company, the company has said they’re not going to provide updated production information until their earnings call on april 20.
>> we have s&p saying the credit outlook is negative and it could cut the company to junk status at any time. what’s your reaction?
>> not necessarily surprising. general motors is in a similar position right now. the automakers are both struggling with higher intent of levels, lower profitability, so not surprising.
>> given all the bad news out there from the automakers, specifically with g.m. lowering its forecast several weeks ago, what happens to ford shares from here given the 20-plus decline we’ve already seen this year?
>> i’d be surprised if ford performs well in the next quarter or two. i believe they’ll largely trade flat. we could see a small downside but i believe largely flat for the next quarter or two. we’ll see how the back half of the year shakes out. they could perform well due to easier production comps and commodities comps in the back half of the year.
>> what do you think will happen with the bonds?%
>> i’m not a bond analyst.
>> thank you very much for joining us. in another story, cable stocks boosted as investors anticipate the industry’s two biggest operators will complete a deal to buy adelphia. according to those familiar with the situation, time warner and comcast have agreed to pay as much as $18 billion in cash and stock for the bankrupt cable company. adelphia, which trades as a penny stock, has been at the center of the bidding war. su keenan follows the story and joins us now.
>> we have three other bids for this, this is the highest yet. the sale would mark the final chapter of an almost three-year long bankruptcy story and would give adelphia money to pay part of the $20 billion owed to creditors. the deal, which those familiar with the situation say was presented yesterday to the bankruptcy judge, valued at about $18 billion. the “new york times” breaking it down, saying time warner and comcast will pay about $13.5 billion in cash and $4.5 billion in stock. the transaction would give time warner and comcast roughly five million subscribers in cities including los angeles and miami. those close to the agreement say it could be completed within a couple of weeks. just two days ago, cablevision systems offered $16.5 billion for adelphia. there were two other offers from kohlberg kravis roberts co. and province equity partners. thomas eagan says the rest of the industry’s stocks were rallying because the price was just right.
>> there was concern on the cable stocks that they would pay more than $18 billion and there were a lot of folks that didn’t want to buy into the stocks on that possibility. the fact that it will probably be done roughly in the $17.8 billion range is a positive for the stock without a risk of a massively diluted deal. we like comcast.
>> in his view, comcast is the big winner here. the agreement reached with adelphia’s creditors gives comcast the ability to swap its stake in time warner for a part of the operational asset. eagan says comcast likely picks up two million subscribers in big customers, with tax benefits. adelphia declards bankruptcy after founder john rigas and his sons looted the company of more than $3 billion. a federal judge gave adelphia until the end of the year to decide whether to use an almost $9 billion loan to pay creditors in the event it doesn’t find a buyer.
>> thank you very much for the story. let’s turn our attention to the markets . we had stocks decline today, but from a weekly perspective, stocks had the biggest gains in two months. deirdre bolton has the weekly look.
>> oil prices were the magic ingredient, falling 7% for the week and stocks gained. out of the 24 industry groups on the s&p 500, 19 advanced. household products and healthcare equipment services groups were the two best performing groups. oil and stocks continued their tug of war this week with stocks gaining strength as oil gave ground. household product stocks like gillette, avon and clorox moved higher. pharmacy benefit manager medco and drug-coated stent maker, boston scientific, rallied. h.m.o.’s such as humana and pacific healthcare systems jumped as medicare pays more for services. the start of earnings season lifted markets . aluminum company alcoa and retailer bed bath and beyond reported better-than-expected earnings.
>> the first-quarter earnings season, there was too much pessimism in terms of what the market is expecting to come out of the u.s. corporate landscape for the first quarter. we think that, if anything, the earnings numbers are likely to surprise positively.
>> lower oil prices helped most groups but hurt energy stocks. the year-to-date breakaway leader was this week’s weakest link with the s&p 500 energy index the worst performer. stocks including chevrontexaco, e.o.g. resources and apache lost at least 2% this week. this group is up more than 17% this year, more than three times the gain of utilities. the s&p 500’s next-best performers. back to you.
>> thanks so much. first quarter earnings season gets into full swing next week. hear more from phil dow.
