Interview: Morgan Keegan
>> the opec president says the organization is pumping almost as much as it can causing a surplus of 1.2 million barrels a day. among the other energy movers today, unleaded gasoline, heating oil and natural gas are all trading higher. one other energy note, chevrontexaco changed its name to chevron. that’s the name it had before the company’s $46 billion acquisition of texaco in 2001. the change effective immediately. even after last week’s rally, the benchmark stock indexs are down for the year. s&p 500 has fallen almost 3%. the dow dropped almost 4% while the nasdaq is losing about.2%. our next guest says that we have seen the lows of the year. mike gibbs, senior equity strategist of morgan keegan, joining us from his firm in memphis with an outlook for stocks. mike, let’s talk about what you are seeing in terms of the markets . investors seem to still be a little nervous although you say that we have seen the lows of the year. tell me a little about your outlook for the rest of the year.
>> yeah, i think we have seen the lows for the year. i think what you have seen is that the markets in general do not like it when the fed is tightening. the fed has been tightening for the last 10 months. they’re worried that the fed will go too far and create a recession or too much of a slowdown. i think given the length of the cycle, of the tightening and the place we are in the cycle, i think we’re about done. if you think about it, since last june when they started, the markets are almost flat. the s&p is up better than 2%. nasdaq is down more than 4%. so i think there’s some factors going on in the market that will cause the fed to quit tightening. when they do, the market will focus more on earnings and let it move higher.
>> also when you look at it, it seems that investors are still sensitive to the swings in crude prices. as we have seen on many days, crude prices would move higher and stocks move lower. so how do we get past the nervousness on that end?
>> it’s kind of interesting. today we saw really somewhat of a different move there. early this morning we rallied off the better than expected inventory numbers and then crude spiked up better than a dollar and the stocks sold off. we gave back most all the gains. the rally at the end of the day even with crude still up was healthy. now i really think it will shift gears and focus on the fed and i think what will happen for the balance of the year is when the fed stops tightening, we’ll focus more on earnings and if we look at history, right now we’re 10 months into this tightening cycle. the last five cycles, the phafrpblg tightening schedule has been 12 months. it’s been 135 to 150 basis points. now we have done 175. i think a second factor why they may stop is what you touched on earlier with crude oil prices. not how it affects investors but more so how it affects the economy. crude oil prices typically have a one-year lag before they get into economic data. we ht first spike in crude last june. we spiked to $47. we then spiked to $48 in august. our final top, $55 in october. that’s a little over a year from now. the numbers will start coming in and they’ll give the fed a little more confidence to back off. then finally we have had a really flat yield curve and it’s worried the fed. since the fed started tightening the 10-year went from 4.58% to 4.25%. when we get inverted yield curve that almost always signal a recession or slowdown. the news we had on friday about the treasury potentially issuing 30-year bonds again will be the catalyst to move the long end up and keep the short end down and give the fed confidence they can back off. when we do that, we’ll focus on earnings which will move stock prices higher.
>> let’s talk about that in anticipation of what a you see as stocks moving higher. what kind of groups or stocks are you looking at now maybe in aeplgs for that? some people look at market and say that we’re undervalued here.
>> i think we are shifting gears in the economy. we’re in a mid cycle slowdown. cyclicals have done well up to this point. it’s time to shift gears and look more at health care. the dow jones and s&p health care exchange traded fund both broke to new highs today. soy think the market will shift and rotate and be a little more defensive in those names. i think you avoid consumer discretionary stocks and maybe look at staples. if we get a steepening of the yield curve, financials will do very well. i think that’s really important because no bull market moves higher without financials involved. so all in all, a very positive. s&p earnings are $77 12 months out. that’s low inflation, low interest rate environment. put a 17 multiple on that and you have a 1,300 s&p which is 11% higher than it is today. it won’t be a straight line. it will be tough because the market will trade off news. the balances are going higher.
>> let me ask you a quick question. with the health care, i hear a lot of people talking about health care these days. if everybody is sort of moving toward health care, is it getting too crowded at that end?
>> i don’t think so. i mean a lot of things we do from our group are technically oriented. we watch what is going on in the groups. we’re seeing a lot of accumulation in the groups, a lot of money flowing into that. you have to pay attention to where the money is going. they’re going in that direction now. health care stocks, if you take out pharmaceuticals, health care stocks are producing nice earnings growth with a very relative valuations.
>> we have to leave it there. mike gibbs of morgan keegan. general motors is reviewing the cash tender offer made by kirk kerkorian. su keenan will be along with the latest in the battle for g.m. and more on the dividend, next.
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Listen Market briefing --- Monica (fast)
Market aciton --- Deirdre (slow_
NYSE --- Deb (fast)
Nasdaq --- June (slow)
Merger in electricity industry --- Bob (fast)
markets rose as duke agreed to buy cinergy and e-trade plans to purchase ameritrade. philip dow says when you see mergers and acquisitions it’s a sign of confidence and companies looking to the future. cinergy shares up 4.5%. ameritrade’s stock gained more than 18.5%. monday’s merger talk boosted a market worried about interest rates and energy prices. in addition to duke and ameritrade, investors focused on dynegy whose stock gained more than 11%. the power producer hired credit suisse first boston to review a possible sale of its gas business. yet some market watchers say market gains will be short lived if oil and gasoline prices remain high.
>> investors may continue to stay on the sidelines. they’re not likely to break out of the range they have been in this year until we see prices begin to recede.
>> oil rose above 51.50 pushing shares of energy stocks including chevrontexaco and concophilips higher. earnings news set the tone for other stocks with king gaining after the maker of blood pressure pills beat analyst forecasts for the first quarter. a strategist at prudential expects corporate profit growth to support higher stock prices for the rest of the year. he says investors are underestimating the strength of the economy and revenue growth.
>> the economy is doing a little better than the g.d.p. report would indicate.
>> sales of the major companies grow at same rate as the economy. but this time we’re seeing that sales look like they’re significantly faster than nominal g.d.p. growth. >> one stock that moved lower on concerns about earnings results, hewlett-packard. the stock fell more than 1%. that after bank of america securities put out a note saying the personal computer maker will not meet full-year earnings estimates. monica, back to you.
>> ok, deed rafplt the market was up but volume was disappointing. for more on today’s trading action, here’s a report from deborah kostroun at the big board.
>> the dow jones industrials closing near its best level of the day, however, wachovia securities c.i.o. rod smyth talking about the stock market is hard to please because welcome signs of economic strength such as friday’s employment numbers quickly turn into worries about inflation and higher interest rates. so that’s one reason he says we may not see this market going up too much. stocks, however, rising on that m&a activity with duke energy agreeing to buy cinergy while e- trade agreeing to buy rival ameritrade. look at dow gainers. unite oed technologies were higher in friday’s session as they may be interested in a takeover of honeywell. mcdonald’s up after the restaurant chain saying april sales rose 2.8% spurred by higher priced u.s. menu items. general motors was also a big gainer in the session. after the close of trading, general motors lost $1.1 billion in the first quarter and last week had $291 billion in debt cut to junk status saying it will still pay its 50-cent a share quarterly dividend as scheduled. that decision to make the quarterly dividend countered speculation that they may cut or slash the dividend. they announced that after the close of trading. take a look at some of the laggards in the dow jones industrial average. boeing on friday rose to a four- year high. i.b.m. has been seeing trouble recently. during the month of april it fell 16%. so far in the months of may down 2.2%. hewlett-packard another big story in monday’s session because bank of america had a bearish note on the stock. e-trade offering to buy rival ameritrade. both the stocks ending the day on the plus side and general electric talking about plans that they’ll more than double their spending on research and development to about $1.5 billion a year by 2010 for cleaner products ranging from power generation to locomotives to everything to water processing as well. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> well, financial shares led a rally at the nasdaq. june grasso has more from the nasdaq market site at times square.
>> the sixth gain in seven trading sessions for the nasdaq. ameritrade is one of the most actively traded stocks on the nasdaq today. its shares surging after rival e trade offered to buy the company. career education was one of the best performing members by percentage on the nasdaq 100. it said a special committee formed last year to investigate allegations of securities law violations found wrongful conduct by some employees but cleared senior management of any wrongdoing. the securities and exchange commission and the justice department are still conducting their own investigations into the company. but if you look at rest of the education stocks which tend to rise and fall together, you will see the corinthian colleges, apollo and strayer education higher. m.c.i., second largest u.s. long distance telephone company, has agreed to pay more than $118 million to settle a tax dispute with the state of mississippi. the state accused 6 m.c.i. known as worldcom of underpaying taxes before its reorganization in bankruptcy. telecommunications shares rallied early in the day. research in motion said its blackberry email pager has more than three million subscribers with one million added in less than six months. it was one of the best performers by percentage on the nasdaq 100. now wynn resorts, one of the worst performers by percentage on the nasdaq 100. the casino company headed by steve wynn was cut to in-line from outperform at goldman% -psachs. the report said that casinos are “our least favorite industry and wynn represents one of the more speculative companies in the group.” june grasso at the nasdaq market site in times square.
>> more on the merger in the electric utility industry. duke has agreed to buy cincinnati-based cinergy. bob bowdon has been following this story. he joins me now with more. bob?
>> thank you, monica. something of a merger monday you might say. the energy consolidation marches on. two weeks ago the refinery merger announcement between valero and premcor. duke energy, largest u.s. utility, agreeing to buy cinergy for $9 billion in stock. each share exchanged for 1.56 duke shares. based on friday’s closing price, it values cinergy at $45.80 a share or 13.4% premium. chairman and c.e.o. of duke, paul anderson, will be chairman of the combined company. cinergy’s chairman and c.e.o. will be president and c.e.o. of the combined company. this reflects a need for anderson to cut costs amid rising fuel prices. duke and inner skwreu expect $400 million in annual savings as a result of the merger including as much as 125 million from putting their wholesale electricity operations in the midwest under common management. also, duke plans to cut about 1,500 jobs of the 29,000 at the combined company or 5% of the work force. an analyst with jefferies & company says the deal will improve duke’s balance sheet.
>> we believe it’s a very fair price. duke is estimating initial accretion of 10 to 15 cents. we believe they’ll have an extremely powerful balance sheet with a debt to total capitalization of only 45% initially leaving them in a great position to do additional share repurchase or add value after the deal closes.
>> james halloran who helps manage $33 billion at national city in cleveland says the deal provides needed management debt.
>> paul anderson came into duke a couple of years ago to sort of resalvage the company. he has done an excellent job in doing so. he says at the time this was a finite stay with him. he will not stay around forever. it brings jim rogers who has done a good job at cinergy to be c.e.o. from a management standpoint, it works out well for both companies.
>> but some question the deal like robert rubin of deutsche bank who wrote in a note titled “we don’t really get it.” he said “we do not believe the most meaningful strategic rationalal outlined here, the ability for duke and cinergy to combine is a reasonable foundation for a deal.” duke fell almost 2% on the day. cinergy shares up. not near the $45.50 valuation price that duke is paying for cinergy. closing at $42.32. monica?
>> thanks. dynegy may sell their natural gas processing plants. credit suisse was hired to review a possible sale and other strategic alternatives for the gas business. the transaction would raise cash for the expansion of dynegy’s electricity business. dynegy is a power producer brought close to bankruptcy after enron’s collapse three years ago. stocks rallied on m&a news. but still the benchmark stock indexs are lower for the year. we’ll speak with one equity strategist who is calling for resistance ahead. we’ll hear more from mr. gibbs of morgan keegan after the break. .
