Interview: Chief equity strategist with AG Edwards
>> stocks suffered their steepest weekly declines in three months and with the outlook for oil and impact of hurricane katrina and rita still to be tallied, what kind of gains, if any, could we see in the stock market ? let’s take a closer look with stuart freeman, chief equity strategist with a.g. edwards and sons of the thanks so much for joining us. want to start off with the weekly declines we saw. we had that post-katrina rally, oil prices, however, turned around and started to go higher this week and stocks with a steep weekly decline. what do you make of that?
>> the market ‘s looking at rita and the possibility of oil prices moving higher and having the kind of impact katrina had on consumer confidence. which was negative on the level of jobless claims which have been rising. in a lot of ways, we’ve seen the economy slow down dramatically over the last four or five weeks from what we were looking at three quarters ago and i think that’s what the bond market was―bond market ‘s responding to, also, a tough bond market today had something to do with i think the oil prize continuing to show some ability to be strong.
>> do you think for stock investors oil becomes the dominant theme in coming weeks?
>> the stock market has done incredibly well given the moves of oil and gas prices in the last number of weeks and i think it will continue to keep a real close eye on this storm, rita, that’s coming in here. it will be the short-term answer. although, it’s interesting, earnings expectations on the street have been rising for the last three or four weeks so i think as analysts are looking at the economy itself, they think things are going to get a little better.
>> how is that realistic, though, given the higher prices that companies themselves have, higher costs they have because of energy, and given the fact that consumer confidence has taken a hit from the storms?
>> well, i think analysts estimates were a little bit too low to begin with. our estimate coming into the year, not taking portion storms was $75. the street was looking at $72 earlier in the year and it’s crept up to $74. even though it’s rising it’s not going to rise to the level it would have as a result of the storms so i think the analysts are playing a little bit of catch-up with the strength of the economy, underlying strength of the economy. we figure the storm probably took for the third quarter could tike .5% a―take .5% away from growth in g.d.p. and more than that in the fourth quarter.
>> we’ve had a number of companies lower profit forecasts, including alcoa, traditionally kicking off earnings season. how many announcements would you need to hear like that to change your positive view about corporate earnings?
>> i’m looking at these storms as a short-term phenomenon generally and i think as we move ahead what happens on the other side of them is rebuilding and that actually is a boost to the economy, again, and we’ll be seeing that in the first quarter and second quarter of next year, in my opinion. so, because it is short term, we would expect earnings to do a little better again on the other side of this and i think the markets are responding to that. the markets still very attractive if you compare it to the long bond right now, where interest rates are and that hasn’t changed a bit and i think that as we get through this pocket of worry about oil and gas prices that equities will move higher again.
>> i know a few months back you were positive on energy stocks, thought they would continue to move higher as they have continued to move higher. does that remain your position or are all those gains played out at this point?
>> there’s a lot of expectation in the stock prices at this point. we have been overweight energy for three years because the stocks were cheap and because the energy prices were low. about, it was early july, we went to an even weight in our ranking of the energy sector which means about a 10% position, maybe enough for most portfolios at this point. that’s about an even weight in the s&p. we think that as we move ahead as soon as we get to the other side of this storm, that’s a good chance we see drifting downwards in oil prices again and a chance for investors to buy them cheaper.
>> consumer stocks have been some of the worst performers since katrina. is it time to go defensive to get into names like healthcare?
>> i think it’s a little late. but i do think it’s time. we’ve earlier this year we had gone to an underweight in consumer cyclical stocks based upon the valuations and expectation for slowdown in growth anyway in the economy and we’ve been underweight consumer cyclicals all year. we’ve been underweight basic industries and overweight healthcare and consumer staples, some of the defensive areas. so i think we’re in that part of the cycle where you see a slowing growth rate in earnings year over year and some stocks that are actually have been beaten up pretty good in healthcare and in consumer staples, some of those areas where investors just don’t know when the economy is very, very strong.
>> stuart, thanks so much for joining us.
>> thank you.
>> thanks so much, stuart freeman of a.g. edwards. we’ll come back and take a closer ok at earnings.
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storm, sending oil prices lower. the dow ending the day percentage-wise unchanged, as did the s&p. the nasdaq gaining six points, a gain of .3%. on the week, indexes lower. higher oil prices and the threat of rita raised concern economic growth would slow. stocks erased earlier gains as rita weakened by near the close, you basically saw stocks losing steam. for more on the friday trading action, here’s deborah kostroun.
>> we saw a rebound in stocks after rita was downgraded to a category three storm but the markets couldn’t hold on to the gains going into the close and going into a weekend when rita would make landfall on the texas gulf coast. that downgrade of the storm did have an impact on some stocks and reversal, especially in insurance stocks. take a look at the gainers in the s&p 500. healthcare, insurance, also commercial services. many of those insurers were higher, seeing that turnaround. especially allstate. allstate has the most to lose with rita because they cover an estimated $740 billion of property in hurricane rita’s path, twice as much as the $330 billion from insured losses they had in louisiana, mississippi and alabama from katrina, according to storm modeler a.i.r. worldwide. reinsurers lifted, as well, even montpelier, down 30% since the end of july. this week, of course, they said they would have losses anywhere from $460 to $675 million from katrina. medicare today approving wellpoint, united healthcare and eight other companies contracts to offer new drug benefits in the biggest expansion of medicare in its 40-year history. laggards in the s&p 500, probably not too surprising we saw this turnaround in oil as well as rita was downgraded, you saw energy stocks going lower. natural gas, oil service and integrated oil stocks. if you look at the commodities this week, it’s been a pretty tumultuous weak, mainly because at one point rita was a category five storm but crude oil up 2% for the week, gasoline up 17% and natural gas up 11%. alcoa, biggest laggard in the dow jones industrial average after saying third-quarter profit will be less than expected because of lower prices and higher energy costs. i’m deborah kostroun.
>> and one of the big questions for investors in that they have been asking is how will hurricane rita affect the gulf coast in terms of the oil and gas industry. let’s bring in bob bowden for a closer look.
>> thank you. perhaps the single most important way we can explain friday’s dropping in oil prices is as follows. yesterday, or thursday, the hurricane rita was clocked at 170 mile-per-hour winds, fearsome category five storm. by friday, close of trading on friday, rita was category three with maximum sustained winds of 125 miles an hour, 45 miles an hour slower so we saw reaction in crude oil prices, down on the day, crude oil finishing down 3.5%. the threat to refineries had driven up gasoline on thursday to over $210 per 100 gallon but on friday, a 2.5% drop for gasoline. natural gas prices on thursday reached $13.42 per million b.t.u. on friday, down to $12.32. it was a hurricane sentiment change - friday that rita may not be as catastrophic as may have been thought. first, we have reaction with the energy analyst with rbc dain rauscher.
>> by market reaction, a lot of the experts think the energy infrastructure will escape the storm relatively unscathed. if we have supply disruptions, it appears they will be relatively short term. the storm is yet to hit and we’ll have the full weekend to assess the situation.
>> more reaction from the analyst with man financial who says it’s very possible the storm could cause less damage than the market has priced in?
>> i think if we get a glancing blow from the hurricane, a nuisance in area where refineries have totally up their damages and start operations again, i think oil markets will definitely sell off. i think there’s a good amount of the fear factor built into these prices.
>> with oil prices down and natural gas prices down, stocks fell, as well, beginning with integrated oil stocks, exxon-mobil down almost 2%. conocophillips and marathon down more than 2%. drillers fell today like devon energy, 2.68%. apache down 2.5%. anadarko down more than 2.5%. wanted to show you the s&p 500 supercomposite energy index with 79 members of the index, 74 of the 79 were down on friday. this is the one-week chart. you see what happened, the biggest rise here is the beginning of trade on wednesday and the begin of trade on thursday as the storm approached but as the day progressed thursday we saw the storm weaken, the energy stocks fell. on friday, a similar action, the energy stocks fell even more. follow me as i show you how the oil service stocks did, falling, as well, on friday with schlumberger down 1.5%. names like baker hughes, smith international, down over 2%, as well as enterprise group holdings down over 2% on the day. so there’s no question about it, while the most of the market wasn’t changed in terms of the s&p 500, little changed on the day, oil stocks were down. ellen, back to you.
>> in fact, bob, that was the only group among the 10 broad economic groups that make up the s&p that had declined today. thanks so much. u.s. food and drug administration commissioner lester crawford who was permanent head of the agency last july announced he is resigning. peter cook is in the washington bureau and joins us with the update. peter?
>> the news was confirmed by the food and drug administration late friday afternoon. the agency saying crawford’s resignation has been accepted and a memo crawford sent to employees was released. in the memo, crawford says “after 3 1/2 years as deputy commissioner, acting commissioner and as commissioner, it is time to step aside. i am doing so with deep gratitude to the president and both secretaries of health and human services for whom i have been privileged to serve. crawford won confirmation as permanent chief in july. the senate vote was delayed by two members of the chamber for the f.d.a. to make a decision regarding the sale of barr pharmaceutical’s birth control. an analyst with washington analysis wrote in a note today that von eshen bach of the national cancer institutes would be the likely candidate to replace crawford. crawford’s confirmation was delayed for an investigation into allegations that crawford had had an affair with an employee and promoted her on that basis. health and human services departments office of the inspector general released a letter saying the probe found no evidence into the affair or alleged favorism. we have no reaction from the white house to crawford’s announcement, to his resignation and no word specifically or specifically as to who might replace him as head of the food and drug administration.
>> thanks for that update. in meantime, today, china’s widened the yuan’s trading band against the euro and yen and said it is resticking how much the currency is allowed to nukuate against the dollar. in friday trading, the dollar stronger against the euro. here’s what we saw in the treasury market . prices fell as hurricane rita shifted course and weakened, triggering the slump in fuel prices, easing concern about economic growth. prices fell as the move by china bolstered bets the dollar range would be next. china has bought u.s. treasuries to keep its currency from rising against the dollar. stocks, as we saw, erased earlier losses and still the indexes ending lower. coming up, we’ll have more on the markets .
