Interview: MS HOWELLS & CO---Reynolds, Brian---Equity Strategist
>> the market may have rebounded today but how big of a threat is general motors? the overall health of stocks and bonds? for more on today’s market moves and what’s ahead, we’re joined by brian reynolds, chief market strategist with m.s. howells. welcome. thank you for being with us, brian. we had this significant rebound in stocks today. can stocks continue this rise as the fed continues to raise interest rates?
>> in the long term, yes. in the short run, it will be a little choppy. if you look at the flow of funds data from the federal reserve, there’s a tremendous amount of companies buying back stock but there’s also a tremendous amount of selling coming from the hedge fund community. that’s like driving with one foot on the accelerator and one on the brake. that makes for a very choppy ride, but in the longer term, the corporate bond market is pricing in continued growth in profits and cash flows. that means companies can take more shareholder-friendly actions and over time the stock market can work a lot higher.
>> let me get you to narrow that down. what do you think will be the breaking point? for example, if the fed pauses, the economy rolls over and then you have a curbing of corporate profits? what will be the next big point?
>> if the corporate bond market is wrong and profits roll over, it will probably be disastrous for corporates and very bad for stocks but that may not happen for years to come. there’s a lot of selling pressure already on the stock market coming from the hedge fund community so it could easily go the other way and stocks could work higher as more companies go private. there’s a lot of private equity money out there financed by the junk bond market and that means that eventually, over time, more companies will disappear, take themselves private at a premium and that can be crushing to short sellers.
>> what’s your outlook for corporate credit?
>> i think they rise gradually over time but not to the point where we got to the last recession, unless there’s some big macro event that happens. and you really can’t forecast that. historically, there’s been signs in the corporate bond market when things start to go wrong, anecdotal things like volume slowing down, dealers not making markets . we’re seeing the opposite of that right now. we’re seeing corporate bond investors shovel money at companies hand over fist and in that type of environment, that’s generally good for stocks.
>> in this type of environment you’re detailing, you say by fair value the dow has the potential to reach 14,000 sooner rather than later. i asked our producers―we thought that might have been a typo.
>> that is correct but that’s how optimistic corporate bonds are right now. corporate bond spreads are near the tightest levels in history and add on to the fact that the flows in the corporate bond market are extraordinary and you look at the values on equities, and it’s much more modest and as long as that differential persists, that’s great for investment bankers and you’ve seen that in the investment banks’ earnings in the last quarter. that differential is what makes investment banks go and the private equity investors go and as long as they see opportunity there, there’s that potential to work much higher in the stock market over the next two years.
>> how much of a risk, though, is the g.m. story that we’ve been following for months and months? news today, delphi workers, the strike is looming perhaps closer. if that leads to a bankruptcy for g.m., g.m. being a dow member also with a huge number of borrowers, this could be disastrous?
>> i think the big risk for that is last year at that time. i was on bloomberg a number of times last spring while g.m.’s debt was in crisis. what happened was, when it got downgraded to junk, the then current investors had to sell and all that forced selling could have upset the financial markets . but what happened in the credit derivatives market is that so many people were betting on a financial market collapse that the spreads in the derivatives market got so wide that it actually ended up sucking more money into the corporate bond market and actually improving overall financial conditions. now, g.m., it’s still in some type of distress, but the owners of the debt, now, are more speculative in nature and their credit derivatives prices are priced as if bankruptcy is already a significant possibility so if bankruptcy were to happen, it wouldn’t be a major macro financial event and if they were able to sell off gmac, that’s where most of the debt lies. if they can sell that to an investment-grade type of borrower, there’s almost no impact on the financial markets from a g.m. bankruptcy.
>> so g.m. bonds and gmac bonds fell today on the latest news from delphi. that doesn’t concern you? >> they fell but only by a little bit and they fell within the range they’ve been bouncing around for the last few months so there will be a steady flow of moves on g.m. over the next couple of years. the thing to remember is that most of the heavy forced selling took place last year so it’s not that big of an event any more for the major financial markets . the thing that will most likely take us down when this credit cycle ends and it may not end for five or six years is something we’re not focused on.
>> which is?
>> historically it’s something that’s not on anybody’s radar screen. it comes out of the blue like the asian crisis when long-term capital management took on too much exposure to spread product. no one had heard of spread product before 1998 and that type of event. no one thought about it. worldcom melting down, downgraded in 2002, at the time no one thought a downgrade of a company could cause financial markets to collapse so it’s usually something most people aren’t thinking about. there are worries out there -- the housing market , the oil situation, global tensions. those worries are generally well known and that’s not the type of thing that causes markets to collapse. it’s usually something that nobody’s focused on. we can usually see the signs of that in the corporate bond market as it’s happening and that usually happens before the stock market goes down.
>> we’ll have to leave it there. brian reynolds with m.s. howells.
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whirlpool can in fact complete its $1.7 billion takeover of maytag. both stocks soared in the final minutes of trading today. we’ll go ahead and have a look. maytag shares down in the extended session, though, taking back some of the higher gains. let’s go ahead and check whirlpool in the extended hours, also lower by about 1%. the government rejected objections from its own lawyers that the combination might hurt competition. the acquisition will create the world’s largest appliance maker. it was the first merger decision that thomas barnett made since he won senate confirmation february 10 to head the justice department’s antitrust division. antitrust lawyers familiar with the matter say government lawyers who investigated the combination raised concerns it would lead to higher prices for washing machines. the reason, whirlpool and maytag together control more than 70% of the u.s. market . we will go to the new york stock exchange for more on the maytag-whirlpool story momentarily. first, today’s settling numbers -- that late-breaking news on whirlpool and maytag sent those stocks higher today. for more reaction, let’s head to deborah kostroun at the nyse.
>> we did get that late-breaking news that whirlpool can complete its takeover of maytag, helping both those stocks hit 52-week highs. that’s also one of the things on the trading floor of the new york stock exchange, where those stocks are traded and definitely some very big crowds at the post where those stocks are traded. also very big volume orders. maytag, the average daily volume over the past year, 1.6 million shareholder. today, trading 13 million shares and much of that volume coming after the news broke. we saw block trades over 100,000 shares at a clip. so definitely a lot of interest in those two stocks late in the day. aside from that news in the market , of course, the other thing people were talking about was the fact that we saw a rebound in the markets . the dow, however, did not recoup all of yesterday’s 95-point losses. however, the s&p recouping its losses from yesterday and the reason for that optimism. it was first-quarter earnings that many people are talking about. first-quarter earnings in s&p 500 companies expected to exceed 10% for the 11th straight quarter. what we’re looking at, profits may increase by 10.2%. this, of course, however, slowing down a little bit after the fourth quarter because what we did see, we saw earnings up 14.6%. crude oil, another big story on the day, rose to an eight-week high after the energy department reported that gasoline stockpiles fell more than forecast and that helping out not only crude oil. crude oil sitting at $66.45 a barrel. you saw many of the oil-related stocks also performing well. over the past few days, we’ve been talking about those metals. silver topping $11 an ounce for the first time since 1983. gold also rallying and copper rising to a record. freeport-mcmoran, it was one of the largest percentage gainers at the new york stock exchange so across the board, metal stocks, gold stocks all performing well in today’s session. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> the nasdaq shook off yesterday’s declines, rising to a five-year high today. robert gray has details on today’s nasdaq trading from the market site in times square.
>> the nasdaq composite rallying to a five-year high in wednesday’s trading, a very broad-based rally. we saw volume exceeding the average daily volume, advancers outpacing decliners by nearly 3-1 volume. we saw the telecom group, the industrials at a 5 ½ year high. traders saying it wasn’t that the fed indicated anything differently in their statement on tuesday or anything was interpreted differently, but that people think the economy is strong and will continue growing. there was pent-up demand for stocks into the quarter. also portfolio shuffling as investors and portfolio managers buying what’s been working and defending some of the stocks that had worked well as they get those portfolios adjusted and ready for investors to review after the quarter ends. and ken tower at cybertrader, technical analyst, saying it was a tremendous sight that the nasdaq had been a big laggard, had not moved to new multiyear highs after the s&p and dow both had. he shows there’s still signs of life for the bulls in this market . as far as individual stock movers. t.d. ameritrade helping to move financials higher in wednesday’s session. the discount broker exceeding its earlier estimate of 28 cents per share and that earnings will top that in the fiscal second quarter, also upgraded to outperform at fox-pitt kelton. its rivals rising, as well. google at the highest level since early february, above the 50-day moving average, signed agreements to invest $1 billion in time warner’s a.o.l. and enter into an advertising agreement with them. also saw sun rising on an upgrade at morgan stanley. starbucks rising to a record and qualcomm higher, as well. at the nasdaq, i’m robert gray.
>> the federal government’s raising fuel economy standards for s.u.v.’s, pickups and mini-vans over the next four years. lizzy o’leary has the story.
>> the new rules will raise fuel economy targets for light trucks to just over 24 miles to the gallon by 2011, an 11% increase from the current fleetwide standard.
>> the new standards represent the most ambitious fuel economy goals for light trucks ever developed in the program’s 27-year history. >> for the first time, the heaviest s.u.v.’s, like g.m.’s hummer h2 and chevy suburban, will have to meet efficiency standards. heavy pickup trucks remain exempt. the new standards will apply to all light trucks but vary based on vehicle size.
>> what we’re seeing is a requirement that people get better gas mileage. one of the things that’s going to result in consumers buying more economical cars is the current increase in gasoline prices.
>> the administration says the move will save more than 10 billion gallons of fuel. president bush made cutting dependence on mideast oil a priority in his state of the union address but environmentalists say the change is minor.
>> the president is only doing about this much. his new plan will only save about two weeks’ of oil over the next four years. we can do much better.
>> the changes will be phased in beginning with the 2008 model year. by 2011, the plan requires that some light trucks meet efficiency standards of over 28 miles to the gallon, higher than the current requirement for cars. lizzy o’leary, bloomberg news.
>> the government says complying with the new rule will cost about $6.7 billion. airline bonds rallying the most in nine years. there are a number of reasons. demand for travel is increasing. carriers are emerging from bankruptcy with less debt and fuel costs are down more than 20 portfolios over the last -- 20% over the last six months. the spread between junk-rated airline bonds and u.s. treasuries is at its smallest since april 2001. speaking of treasuries, treasuries fell today, pushing the 10-year yield to a 21-month high as expectations for more interest rate increases by the federal reserve curbed demand for an auction of new notes today. the 10-year was down, yielding 4.8%. when will rates stop rising? pimco chief investment officer bill gross tells bloomberg news the fed will stop at 5%.
>> i admit that there are concerns on the part of the fed in terms of inflation, in terms of capacity utilization, which means labor participation, but we still believe the fed’s going to stop at 5%. we still believe that being data dependent, that the data on housing will come through sufficiently weak in the next month or two to stop the fed at 5%.
>> the fed funds rate, of course, raised to 4.75% yesterday. the 15th consecutive increase. more, now, on the greater-than-expected plunge in gasoline supplies that drove crude oil and gas futures to their highest price in months. nymex crude oil futures ended the session at $66.45 a barrel. that’s the highest price in eight weeks. the gains were across the across the board. the energy department saying last week gasoline stockpiles fell more than three times the forecast of analysts polled by bloomberg. check out the chart, the reaction from investors was immediate. a straight upward move to within four cents of the $2 mark. nymex gasoline futures have been on a wild ride in recent sessions on investor concern about possible shortages this summer. new pollution control requirements are causing a change in the chemical additives from mtbe to ethanol. and last week’s more than five-million-barrel drop in supply heightens concern. the dow 12,000, what about 13,000? our next guest says, on fair value, the dow could rise to 14,000 in the next couple of years. brian reynolds is chief market strategist with m.s. howells.
