Reduce the exposure to technology stocks (medium)
Interview: Henry Hermmann---Waddell & Reed
>> energy, industrials and defense are the industries our next guest likes and the firm has been reducing its exposure to technology stocks . henry hermmann is joining us from overland park, kansas from henry, waddell & reed.
>> let’s look at your look at the market as a whole as we find ourselves bringing summer to a close. we are going to get through, a lot of people coming back to work as far as the stock market is concerned, in a week, week and a half from now. what do you expect to see out of the summer months and head into fall.
>> i guess the shorthand is i expect it will break out on the upside. you know, i think people have been looking for a correction, the idea that september and october are always a problem sort of thing. this time around i don’t think that’s going to work. i’m not looking for a huge run like we had april through may, but i do think it will break out to the upside and we’ll go through the 1,000 level on the s&p.
>> now, at the same time you don’t like what you see with the technology names which have gone up quite a bit since the beginning of the year. the nasdaq has had a strong run, many tech names finding themselves back into favor. you don’t like what you see there?
>> i think they are way ahead of themselves. i think it will turn out over the next six months there will be plenty of disappointments, especially in the hardware area relative to expectations. the other side of it is there are other cyclical areas working right now, and i think a lot of the move in tech has been played and people will rotate elsewhere which we are seeing.
>> you are not seeing the momentum like we were seeing two months ago in technology.
>> correct.
>> as far as energy is concerned it’s a wide category. anything specific as far as individual portions of the energy business you like better than another?
>> well, the number one focus for us has been natural gas. mostly because it’s the sort of thing that’s isolated inside the united states and the geopolitical events and whether or not opec is going to produce more and so forth doesn’t have the same effect as it might have on the oil patch. but we like the whole area. it’s the last cyclical play that hasn’t run, as far as i’m concerned.
>> you and i were supposed to speak on the day of the massive blackout of the northeast and we didn’t have that opportunity because there was no electricity. did that event―has that led you in one direction or another as far as energy? has that encouraged you about the energy industry or is it just another part of the equation?
>> we are thinking more about ways to get involved with infrastructure, that part of the equation we’ve given a lot more thought to. stocks that could help build out an infrastructure and improve the situation, deliverability is an issue here. some of the european companies and in the united states a few companies that are on the smaller side, not big cap that play into that.
>> we continue to have hostilities abroad, defense names are another area you continue to watch. we’ve seen ebb and flow in these defense names since the runup they had post september 11th. what is your sense of where they are going?
>> my sense is there are a number of contracts that are going to be let from the military area over the next year or so that are going to keep the majors with a firm bid. i think people are realizing that the geopolitical issues have not gone away. in fact, we are all disappointed that they seem to have heated up some over the last few weeks, which says there is no end in sight for any material slowdown in defense spending, at least in my opinion. then finally because they did ebb for a while, people walked away from, valuations started to look better. especially for a group? that has clear earnings momentum defense stocks are going up. i don’t think anybody would debate that.
>> industrials you like because they are trying to keep costs down, they’ve been trying to keep costs down for quite some time. do you really see any kind of true movement that’s going to lead to bottom line strength in industrials because of cost cutting.
>> there is not a great deal of evidence but caterpillar and deere have shown you can keep costs under control, get a little better volume gains and the numbers pop. i think we’ll see that out of the components suppliers as well the harness fagers and that sort of thing going forward.
>> how is your asset allocation now?
>> we pretty much manage all kinds of stuff so we are in bonds and stocks . on the bond side we are short duration, in other words, we are expecting rates will continue to rise, not like they did in the last month. and, you know, in equities most portfolios they are about as fully invested as they could be, because of the correction idea. but we are not making a big bet there.
>> end of the year do you have an expectation, a target that you expect to see the major market indexes at.
>> i’ve had my fingers, eyes and ears crossed with the idea maybe the dow gets to 10,000. i might have to back off a little on that just because the bond market has been so poor. >> that’s going to have an effect on these companies, the bottom line, as these interest rates continue to head up.
>> i think it’s going to make people worried about stuff, and that’s going to contain price earnings ratios. there is not a lot of room for p.e. expansion, if any. i think there is some risk of a contraction that might be a little bit of a lid as we get closer to 10,000 on the dow. if we had a really significant move in the long bond in terms of deterioration, i’d change my tune pretty quick.
>> henry hermmann, thank you very much, chief investment officer of waddell & reed financial.
