Focus on treasuries
Interview: MDL Capital Management---Lay, Mark---Portfolio Manager
>>Welcome back. boeing is cutting its sales and profit forecast are the coming year. the company says it may take that long for the airline industry to come out of its slump and buy new planes. boeing says next year’s earnings could fall as low as $1.75 a share. that’s lower than the forecast the company put out three-months ago. we spoke with boeing’s c.f.o. michael sears and he says the company is adjusting its space program.
>> we all looked at the outlook in space a decade ago and believed there would be a lot of demand on the commercial marketplace side for launching satellites, and we prepared to meet that demand, as it turned out it hasn’t materialized so we are lagsalizing our businesses and beginning to focus launch and satellites on our government customers who do have real needs to insure national security for this country.
>> boeing shares opened lower but rows during the company’s conference call. during that call boeing said its pension contribution may be several hundred million below expectations. meantime boeing lost 24 cents a share in the second quarter, and its narrower than expected. the number includes an 87 cent charge for boeing’s rocket and satellite business. we have breaking news from quest software, not qwest communications, the phone company. this is quest software, qsft is the dicker on the nasdaq. you see it right there. after being up 4 1/4 percent during the day, there is news on second quarter earnings per share, six cents. on a net basis that’s three cents a share. quest expects to restate its previous results saying that there was a computational error. on that news shares are down more than 7% in extended trading. it sees the third quarter profit excluding items of three to five cents a share, break even to e.p.s. two cents on a gaap basis. third quarter revenue between $67 million and $71 million. quest is going to restate results for calendar year 2002, and as well for first quarter 2003. so that is affecting the stock in extended trading. u.s. treasury notes rose today after federal reserve governor ben bernacki said a u.s. economic recovery may not keep inflation from slowing. investors took this as a cue that the fed plans to keep rates low for as long as possible. the next guest says that targeting inflation may not be achievable and says that in a year we may be saying that the fed kept its foot on the gas pedal for too long. mark lay is chief investment strategist overseeing $4.6 billion in fixed income assets at m.d.l. capital management, joining us from pittsburgh with his thoughts. thanks for joining us.
>> thanks for having me.
>> what do you make of this market move in treasuries this week?
>> well, looking at the comments now from the federal reserve, it’s become evident to me that they are trying to jaw bone interest rates down. although they have the ability to keep short-term interest rates low, i think their impact on the long part of the yield curve very minimal. therefore, we have an initial pop on his comments, but after that the treasury market continued to sell off, especially the long, 30-year bond with no change on the day.
>> you said back in march that the situation we see in bonds is similar to the stock market technology bubble we saw in 99-2,000. you think that’s come to an end and weem begin to see a very big move in the opposite direction?
>> i think if you look at what’s occurring in the u.s. economy, and more importantly the global economies, central banks around the world are providing liquidity by cutting interest rates. you know, the government is cutting taxes, providing stimulus. deficits are ballooning in the u.s. and japan. when you look at all those factors, it would lead one to believe that higher interest rates are right around the korn. with that said, we’ve had a tremendous rally in bonds, in the face of all of this stimulus from the government as well as the central banks around the world. once i believe the economic fundamentals come back into play people will say, wow, rates are way too low. you know, interest rates should be 100, 150 basis points higher than they currently are, and then as a bond investor, i am being, you know, compensated for the risk of inflation or whatever the case may be in the global economy.
>> what do you expect from treasuries in the near-term with that said? what do you expect to see as far as movement in the coming weeks?
>> i would expect us to continue with rates going higher, not in the straight line. i mean obviously we saw the 10-year get as low intraday as 3.03%, and we closed today at 4.11%. i don’t expect interest rates to go straight up, but i would expect them to grind their way higher. as an investor, i would tell your viewers to start to shorten up their mature theies, start to buy shorter term bonds where they can prokt their principal if rates were to continue to rise in a violent manner. but all in all, i’m not looking for some sort of blood bath in the bond market. but i do think rates will rise, and as rates rise, the price of those bonds that your viewers and us bondholders have, will go down in value.
>> let’s talk about quickly, do you think inflakes is a -- inflation is a concern for you in the next year, and if so, why?
>> i don’t think deflation is a concern as the fed government spoke about. i do think inflation will start to arise. he spoke about inflation being in the 1 1/2 to 2% range. you know, for most of us that shows price stability. but once again, you start adding all of the monetary stimulus that’s in the marketplace, i think one will believe that, you know, six to 12 months from now c.p.i. could be at 2.5% to 3%, and in light of that, you know, rates could go higher.
>> mark lay, chief investment strategist overseeing $4 the 6 billion in fixed income at m.d.l. capital management. marriott, largest real estate investment trust posting results.
