Is the rally over?
Ariel Mutual Funds---Morton, Franklin---Equity Strategist
>> price of crude oil in new york fell for the first fifth nim sixth sessions on speculation that u.s. inventories will rise in coming weeks because of surging imports. they closed at $30 a barrel. gold prices in the meantime rose in new york trading after the dollar fell against the euro, making the dollar price metal cheaper for buyers in europe. gold closed 1% higher at $361 an ounce. solectron has a ninth straight quarterly net loss as the company wrote down the value of some acquisitions. the company’s third quarter loss widened to $3.1 billion to $3 rchlths 7 a share. sales fell to $3.82 billion. solectron, $2.8 billion in pretax costs from job cuts and revaluing goodwill. excluding those costs, solectron would have had a loss of 10 cents a share much on that basis wall street expects a loss of three cents a share. for the fourth quarter solectron sees a loss of two to six cents. in the regular session we see -- that is not solectron. that is another stock . that is not the one we are looking at there. we’ll just tell you that it is on the move. it is lower in extended hours trading, we are told. now, the value investing with a recent rally in stocks , is there any value left to find if you are looking at it from a value point of view. our next guest says yes. it’s his fund manages $1 billion in equities, his company is ariel mutual fund he joins us from our chicago studio. speaking with you once again, good to see you lane.
>> let’s get a sense right off the bat the market picture. we are hearing gliken haas and others saying this rally is over. you shouldn’t see much more over the next several months. what’s your sense of the market?
>> i’m more optimistic than that. we’ve come a long way, the majority of the rally is behind it. we have five or 10% to go over the next six or 12 months.
>> would that 5% or 10% stay put on top of the gains already seen or liable to be lost in what could be another bear market rally?
>> i think we are going to keep them this time just because there are not a lot of alternatives out there. you get less than 1% in the money market fund and that number could go even lower. so i think the money that goes into the stock market is going to be stickier this time than it was in the last couple of rallies.
>> how hard is it to find value at a proper price in this market right now?
>> well, it’s getting harder because, as you know, most of the indices are up anywhere are 15 to 30% over the last three months or so. but there are some still good opportunities out there.
>> you are always fully invested so you really have to keep that money working. where are you putting it now? are there neags that are popping up “on the radar” now or are you adding the previous positions here?
>> i would say it’s primarily adding the previous positions. we are looking for great companies that still have a cloud over them, and therefore the valuation is attractive. what we find is the market still tends to be very short-term focused, and we are looking more at a 3 year to five-year horizon rather than the current quarter or next quarter.
>> what’s your expectation for three to five years? we hear about the possibility of this being a secular bear market sitting in this range of 7,000 to 10,000 for the next 10 years. is that the sense that you get or is that overdone?
>> no, i think that’s overdone. i think it will be better than that. it’s certainly not going to be a return to the 1990’s, but i think you can see, you know, 5% to 8% a year over the next five or 10 years. which in the low inflation environment is a pretty good return.
>> that would be likely -- easily outpacing fixed income as well.
>> certainly would, given where rates are today.
>> let’s talk about some of these picks here. mbia is one.
>> it’s a leading insurer of municipal bonds. if bond defaults, mbi will step in and pay the principal and interest in a timely fashion so it gives the bondholder a second source of repayment, making their investment even safer than it already is.
>> now, why is this attractive right now? don’t they fay―face greater risk at this point with so many municipalities out there having a cash flow problem right now with tax issues and such? why turn to this one?
>> well, that’s certainly the current wisdom, is that a difficult “is bad for municipalities. but the reality is the overwhelming majority of states have a balanced budget requirement so the pain they are going through is to keep the budget balanced. the pain mean it’s bad place to be a taxpayer because your taxes are going up much it’s a bad place to be a citizen because the quality of your services is going down. but it’s great place to be a creditor because these laws force fiscal discipline upon the states and cities. so that is going to lead, i think, to minimal if any defaults going forward, certainly less than the market is looking for.
>> i t ac sentures, tell us why you think this is a reasonable price here, around 17 3/4.
>> it’s about 17 times forward earnings, so it’s trading around a market multiple, possibly a little less. what you are looking at here is a market leader in a very attractive industry. this company has got such good relationships with its clients, such a global reach, that in fact 60% of the contract that it wins are not competitively bid.
>> ok.
>> they they are the only player so they’ve got pricing flexibility there that a lot of companies don’t have.
>> franklyn morton. senior vice president, portfolio management at ariel mutual funds. the boy wizard may help amazon.com with overseas expansion plans. over a million people have ordered harry potter with a click.
