Prudential Equity Group---Keon, Edward---Chief Investment Strategist
>> welcome back, we have after the bell earnings from walt disney company, coming in haevd expectations with first-quarter earnings per share excluding a gain of 35 cents, versus a 30-cent-a-share estimate n.terms of revenue, also above expectations. $8.85 billion versus the $8.79 billion expectation. also, a deal disney is announcing. they will merge the abc radio network with citadel broadcasting in a deal valued at $2.7 billion. we will have much more on disney’s after-the-bell earnings and go through the numbers with an analyst coming up momentarily. first, we want to introduce ed keon, analyst with―one of wall street’s most closely watched strategists. ed keon cut his equity recommendation to 55% from 100% and slashed his forecast for the s&p 500. he says some of the characteristics that made him more bullish going into this year have come under attack. ed now joins us from the american stock exchange for insight into the pullback. what was behind the drastic change?
>> my expectations were that you’d see an increase in equity valuations this year as inflation fell, as people regained confidence in equities and put money in the stock market , as earnings continued, it is slower, but still at a decent pace and as we maybe had a break on the international front and over the course of the last several days, we have data suggesting some of those things are questionable and some may not happen. the laboridate was a stronger than people expected and at the same time we saw a drop in first-quarter earnings numbers outside of energy. expectations fell to under 4%. it’s suggestive, not conclusively, but suggesting that higher wage costs are crimping corporate profits. at the same time, data suggests that people are pulling money out of large cap stocks rather than putting it back in and on top of that we had the news that iran would be referred to the security council for possible action, suggesting the crisis may last longer.
>> i want to ask you to stand by so we can bring you breaking news on general motors. g.m. holding a board meeting today and jerome york has been elected to g.m.’s board. jerome york, part of kirk kerkorian’s tracinda group, very involved with cost cutting at chrysler and he will be on general motors’ board. g.m. saying o’neill―stanley o’neal will step down, of merrill lynch. so g.m. is saying that stanley o’neal of merrill lynch is stepping down from the board, to be clear. but the top headline is isat jerome york will take a board seat at general motors. earlier, they could not come to an agreement. we can confirm that jerome york will take a board seat at g.m. ed, returning to our conversation. i don’t know if you have reaction to the g.m. story. i know this is a closely watched stock in particular. do you have exposure to auto industry stocks at all?
>> i cut my consumer discretionary sector weighting this morning, so that’s a part of the market we had been overweight and now have a neutral position.
>> appreciate that. never know when the breaking news will happen. you mentioned you did bring your stock allocation from 100 to 55%. so where should investors allocate?
>> basically i’m slightly less aggressive relative to my benchmark. 60% is the benchmark, we’re at 55. so i still think stocks will have positive returns this year and returns will be higher than you will get on bonds or cash but i think a little bit more conservative stance makes sense within the equity allocation so i added to energy today and we are now overweight that sector as we were most of 2005, back into 2004. we added weight to telecom today where it looks like you’ll get earnings growth in the first quarter and maybe the next couple of years out of that sector with valuations looking reasonable. at the same time, we added to utilities, more of a defensive move, looking for dividends and i think that sector might do well if the national struggles.
>> have you decreased your exposure to particular industries?
>> yes, we took financials down to neutral and consumer discretionaries to neutral and took weight out of industrials. within the financials we still like companies exposed to the capital market . we think private equity will continue to be hot so brokers we think might still do well even if the stock market doesn’t do that much for us this year.
>> you did say you’re cutting your s&p forecast although two analysts raised their s&p 500 forecasts for the end of the year. are you being overly cautious?
>> possibly but invest suggest about balancing risk and expected return and at the time when i thought we would have 20% plus returns i was willing to bear the risk of 100% stocks as we had been since last july. but if you think the return will be more high single digits, a more balanced approach makes sense and especially given you can get over 4% out of just cash, why not take a more conservative approach. so still like stocks but not as much as i once did and slight underweight relative to traditional benchmarks makes sense.
>> thank you very much for joining us and bearing with us through the g.m. news. our thanks to ed keon, chief investment strategist at prudential financial. our next guest says walt disney isn’t making movies that people want to see and it should focus on a stronger tv lineup. we’ll hear more on the fickle movie business, but, remember, disney did come out ahead of estimates so we’ll see if he’ll back off of his forecast. that’s coming up.
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Listen Market briefing--- Lori (slow)
GMAC --- Margaret (slow)
Walt Disney --- June (slow)
NYSE --- Deb (fast)
Nasdaq --- Robert (slow)
the bell.” news after the bell from general motors. the g.m. board has added jerome york to its directors of the next on the agenda, g.m.’s board meeting today and tomorrow could show the fate of gmac.
>> jerome york, an aide to general motors’ biggest shareholder, kirk kerkorian, will join the board of g.m. york is c.e.o. of a private investment company founded in 2000. he’s also a board member at apple computer, tyco international and other companies. he advised kerkorian on his unsuccessful bid for chrysler in 1995. york has called for g.m. to cut its dividend and speed up layoffs. on the gmac front, the board could be considering offers from wachovia and citigroup. but the banks may not be willing to pay enough to raise its credit rating and cut the costs of borrowing. the ratings agency says direct ownership by a official institution would improve the debt rating to investment grade.
>> our concern was a consortium of a private equity buyers purchasing gmac. we didn’t think that would be good for gmac bonds. gmac needs its rating to investment grade. it’s hurting their borrowing costs, being in junk status.
>> the problem now is the banks don’t want a majority stake in gmac because it would tie up too much regulatory capital. the ratings agencies are not satisfied with that. moody’s investors service wrote that the sale of good to a financial investor, private equity fund or hedge fund to a buyer group that includes a financial investor may limit the benefitss of gmac’s ratings resulting from the sale. that would probably kill gmac’s chance at a better credit rating but some investors wouldn’t mind if g.m. kept gmac.
>> it would be nice to have an extra $10 or $11 billion for general motors to work with and possibly assuage the ratings agencies. these have been poncht parts of g.m.’s profitability over the last few years.
>> one other note from g.m., stanley o’neal, chairman and chief executive officer of merrill lynch will step down from the g.m. board because of time demands. back to you.
>> thank you very much. walt disney’s first-quarter earnings beat analysts’ estimates. shares are rising in late trading. june grasso has more on the numbers. june?
>> lori, the second largest u.s. media company said profit rose 7% in the december quarter after its theme parks and television unit posted gains. fiscal first-quarter profit excluding one-time gains was 35 cents a share, five cents above analysts’ average estimates, while revenue rose 2%.
>> i think it came in for the most part as expected. i think most investors were expecting the broadcast division, the networks division to do pretty well. it did. most people were expecting the theme park division to show steady growth and it appears to have done that and most people were expecting the filmed entertainment division to lose money and clearly it did.
>> disney’s studio entertainment revenue dropped 13%, showing why chief executive bob iger decided to buy the pixar animated film studio last month for more than $7 billion, gaining control of the company that gave disney hits such as “the incredibles” and “finding nemo.”
>> they really need a studio division to do well. disney’s issue has been that they need a franchise hit like “the lion king” that they’ve had in the past to permeate throughout the disney franchise and if you watch the super bowl last night, it’s disney at work with advertisements for abc with “desperate housewives” and espn and the mobile phone launch.
>> profit at the theme park unit rose 51%. disney said a holiday season attendance rort at its―record at its resort in florida. results were helped by higher ratings at abc, with hits such as “desperate housewives” and “lost.” also today, disney agreed to merge its abc radio network and 22 stations with citadel broadcasting in a transaction valued at $2.7 billion. disney’s sale of the stake in abc radio peels off a slower-growing business as advertisers and listeners flock to satellite radio.
>> $2.7 billion is right in line with our number. it’s a good transaction for the company to get out of a low-growth business with a good multiple and redeploy that cash into a buyback program.
>> disney shares dropped 14% last year compared to a 10% decline at time warner, world’s biggest media company.
>> thank you very much. let’s go ahead and update you on tonight’s closing numbers. not a convincing rebound off of yesterday’s losses, yet the dow and s&p do gain today. 10,7 98, so the dow jones industrials dropping below 10,800. the nasdaq composite off 3.75 of a point. stocks closing with little fanfare after a busy news day. for more on today’s trading action, here’s a report from deborah kostroun at the big board.
>> many traders that i talked to on the trading floor here at the new york stock exchange all said that today seemed like a slow day. indeed, it definitely was the slowest trading day of the year at the new york stock exchange. our volume about 1.5 billion shares so slowest day of the year. however, we did see gainers in the s&p 500. the energy stocks performing well, material stocks doing well on olkey getting that―alcoa getting that upgrade. semiconductors and energy shares performing well, increasing on expectation over turmoil in iran. also, crude oil closed down 26 cents to $65.11. oil services like transocean was actually at a record after winning $520 million new orders friday and $805 million in new orders in today’s session so across the board, you saw many of the energy stocks performing well. arcelor is considering a takeover of u.s. steel to counter a $22 billion hostile bid by larger mittal steel. by taking over u.s. steel, that would increase arcelor’s debt and making it less attractive target for mittal so a lot of movement there. the h.m.o. index was lower in today’s session. a couple things going on. one was that president bush’s budget released today, saying it would shrink medicare and other entitlement spending by $65 billion over five years, but also, humana reported their fourth-quarter profit, although it rose on increased enrollment in its plans aimed at medicare recipients, they did forecast disappointing profit for this quarter so one of the reasons human was a lower. also, we saw j. jill, it agreed to be bought by talbot’s for $517 million. that trumped an $18-a-share offer by liz claiborne who had been pursuing j. jill for more than two years. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> semiconductor stocks, pocket of strength, although the nasdaq fell for the third consecutive session. robert gray has details from the nasdaq marketsite.
>> the nasdaq composite moved lower for a third session. but we did see semiconductors moving higher. tim heekan, director of trading at thomas weisel partners, telling me that semiconductors were rising as investors were buying the winners of what has been working so far this year, including semiconductors, basic materials stocks and energy stocks, as well. take a look at the semiconductor index on the session, rising some 2%. and also for a year-to-date, the s.o.x., now higher by more than 12.5% for the philadelphia semiconductor index. as far as some of the movers within that, broadcom, those shares up nearly 50% so far just in 2006. u.b.s. out with a note expecting positive catalyst for the stock from next week’s industry show in barcelona. we also saw intel shares moving lower. tim heekan from thomas weisel saying it’s its own entity in relation to how had trades as far as other chip stocks. joy global moving higher, to a record, in fact. caris and company out with a note saying that record results from rio tinto, world’s number three miner, bode well for the mining equipment company like joy global and joy global moving higher to that record level. weakness from apple computer. apple extending its slide since its disappointing forecast, down 21% from its record on january 13. below $70 a share for the first time since december 1 on concerns for slowing demand for macintosh computers as it transitions to intel processors. cisco systems shares moving lower a day ahead of its earnings report. at the nasdaq, i’m robert gray.
>> noted wall street bull looks at the u.s. economic picture and takes a bearish stance on stocks. ed keon, we’ll ask him about his change of heart next when “after the bell” returns.
