Interview: Deutsche Bank
>> big losses last week in stocks turned to gains today. both the dow and s&p 500 with their biggest advance in more than a month while oil had its biggest loss in two months. joining us for a look at where stocks may be headed is benjamin pace, chief investment officer at deutsche bank u.s. private wealth management group, joining us in our studio. ben, i want to start off with oil. it’s hard to talk about stocks and not look at oil. was $60 the key mark or is there a different mark where investors will be concerned?
>> i think there’s no doubt that $60 was a key level psychologically, particularly given the fact that the market has rallied so much since april so every level has met this resistance in the stock market advance and the fact that oil went down today was the catalyst for today’s market move.
>> give us a flavor for what you hear in your offices, are more people calling up nervous? what is oil doing for your clients?
>> there is concern, but i think the thing they know is that adjusted for inflation from the 1980’s, oil is still relatively cheap. it’s also not a supply shock type of environment as it was in the 1970’s and 1990 when oil prices went up because of artificial supply constraints. this is more demand driven, a function of how strong the economy is. is there a point in time when it will slow the economy down? yes, but not necessarily $60.
>> so the consumer confidence number today that boosted stocks, did that surprise you in terms that it was a three-year high and that it lifted stocks?
>> the consumer has surprised us all year because we expected more of a capital-spending driven economy but given the fact that rates are so low, it shouldn’t be a surprise. mortgage rates have stayed low so the housing boom has continued. refinancing options are there for consumers but most importantly, job growth is picking up. it’s been a lagging indicator for us the last year or so. but the fact that the consumer seems to be running on all cylinders is not so much of a surprise that you’ve seen that confidence number today.
>> let me challenge you on something. basically, you and others called it wrong, thinking that the business demand would have been stronger at this point than it has. why hasn’t that hurt stocks more? you look at that durable goods order report recently, it was weak taking out transportation. why doesn’t that spook investors more?
>> obviously, 2/3 of the economy is driven by the consumer so that’s the first reason that’s the case and it’s not that capital spending has fallen out of bed. this isn’t the 2000, 2001 environment. i.s.m. numbers are positive, although down from 60. it’s just a disappointment in magnitude of capital spending. it’s not that it’s in a recession.
>> in terms of, then, what to avoid or what you like, let’s start with what to avoid. in terms of the fact that capital spending hasn’t picked up as anticipated, are there picks you’re rescinding, saying that you’re wrong?
>> weave backed off of our overweight in industrials and moved that back down to an even weight but not underweight. the areas we are avoiding, we think utilities. with interest rates still, our forecast is that they’ll move up from the 3.90 level on the 10-year or maybe 3.95 today. so we’re out of that area pretty much in total and also it’s overvalued, we think, now, because it’s done so well. telecom, the intense price competition there, it’s still keeping us out of that sector. and we are underweight consumer staples. we think for two reasons, one, no reason to be overly defensive in these markets and the second, more important reason, is we see margin squeeze in that sector more than anywhere else, the inability to pass along raw material price increases to the consumer is really seen prominently in consumer staples.
>> if you’re underweight utilities and telecom and you don’t like traditional fixed income, what’s an investor who wants yield to do?
>> as far as the stock sectors we like, energy, with these high oil prices and high oil prices will stay high here, tends to have good yield, as well, particularly your large international integrated oil companies so you have yield in the stock market there. the other area where we’re overweight is healthcare and a slight overweight towards technology. a little bit of yield in healthcare, not so much and not so much yield in technology. outside of u.s. large cap stocks, though --
>> where specifically in healthcare? people have been talking about overweight healthcare for six months. where specifically?
>> it’s a broad sector. we’re underweight the large cap pharma companies which still have product problems but we like biotech and we think that biotech, because they have the better drug pipeline and also that’s recognized by the large cap pharmaceutical companies who haven’t been successful.
>> as an acquisition play?
>> acquisition play, yes, very much so.
>> who do you think is likely to be bought?
>> i don’t make speculation on that now but i think that the names we’re interested in are names like celgene. they have a good product pipeline, not so much because they’re going to be acquired. that could happen but that’s a name we like.
>> ben, thanks so much for joining us. ben pace is with deutsche bank u.s. private wealth management group. when we return, shares of a.m.d. rose today. the company filed an antitrust suit against intel having to do with p.c. chips. su keenan takes a closer look.
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Interview: GMAC
>> scrushy was found not guilty of all 36 charges in the indictment. he is the first chief executive acquitted of fraud charges since the government began prosecuting corporate wrongdoing after the collapse of enron. u.s. prosecutors accuse scrushy of inflating profit from 1996 to 2002 and propping up healthsouth shares in order to enrich himself.
>> we have five c.f.o.’s that said they had direct conversations with this man and he saw all of this income but no expenses. no, i’m shocked by the verdict.
>> 15 executives who pleaded guilty to the fraud, including five finance chiefs, did help the prosecution. the verdict came on the 21th day, including the judge having to replace one of the jurors. our other big story of the day was the decline in oil from a record high. crude down 3.9%. the biggest one-day decline since may 12. certainly that decline playing out for stocks. it did help boost the major stock indexes. here are your settling numbers as the market did close -- for more on the rally, here’s a report from deborah kostroun at the big board.
>> the dow jones industrial average closing right near its best level of the day, up 114 points, near its best level of 118 points. stocks gaining all day and not relenting as oil dropped a whopping $2.34 a barrel to $58.20, the first drop in four days. consumer confidence climbed to’s three-year high and questions among traders about how long oil can trade below $60 a barrel. looking at the laggards in the s&p 500, only one decliner of the 24 industry groups in the s&p 500 and that was energy as crude oil was lower. you saw real estate and insurance posting fractional gains. looking at oil-related stocks, exxon and pfizer, the only two laggards in the dow jones industrial average. you saw many oil-related stocks lower, also oil services. this index trading close to a record yesterday. it was lower in today’s session. many oil service stocks sharply lower. gainers in the s&p 500, transports, very surprising, since transport is the second worst performer this year behind autos. transport, that index down 14% this year. but as we saw that retreat in oil prices, helping out not only transports but consumer durables and also you did see many of the auto stocks performing well. the transports, as i mentioned, good performers. also the consumer doubles and retail stocks not only performing well in today’s action in oil as many retail names have been seeing prices going lower. that on concern over the pressures of higher energy costs on consumers. consumer confidence was at a three-year high, helping many of those stocks. gold stocks on the day were sharply lower. i’m deborah kostroun at new york stock exchange for bloomberg news.
>> residential capital corporation is a real estate finance company primarily focused on the residential real estate market with businesses including gmac mortgage, gmac bank and ditech.com. co-chief executive david applegate and bruce paradis join me for a look at the real estate market . we’ve had alan greenspan speak of froth in the housing market . any signs you see that things are slowing at this point?
>> it’s a pleasure to be here. in terms of the overall housing markets , we still see strength. overall interest rates, particularly on the long end, have driven good refinance activity and kept affordability at reasonable levels. we see demographic trends with immigration being strong. you have seen baby boomers buying second homes. fundamentally, we see reasons for the strength in the housing market to continue. there are areas where you want to pause and be more careful about the rapid rises but in general, we don’t see any broad-based bubbles. we see good, fundamental underpinnings in the housing markets overall.
>> if you are seeing pockets of concern, bruce, this question is for you, a lot of talk about speculators in the market , what are you doing to make sure the loans you make are safe loans, they’re not to speculators who might have a higher probability of defaulting?
>> rescap is a leading real estate finance company in the country and we’re looking every day at the local markets in terms of which are strong and soft as well as in underwriting loans. we’re constantly looking at the performance of our assets relative to underwriting standards, in terms of who qualifies.
>> anything you’ve done to tighten the standards?
>> as we’ve seen markets soften, frankly, we’ve cut back on the more aggressive types of underwriting practices in the industry and taken a more conservative --
>> give us an example.
>> higher loan devalues is a good example. there’s press on interest-only loans so we’ve been typically more conservative in entering these types of products.
>> i want to talk about your connection to gmac and g.m. about a week ago, you did a $4 billion offering of notes that you had to do at junk rates even though your company has investment-grade status. is that something you anticipate you’ll continue to have to do as you have bond offerings?
>> rescap is a significant player in terms of its overall size. we’re the sixth largest originator, seventh largest servicer and have operated under gmac independently. what we saw is a growth rate that required us to go to the external marketplace to enhance our capital alternatives and we wanted to reduce our cost of funding versus gmac so we did that successfully. we view the transaction as a very strong inaugural offering. $4 billion was a great transaction. we think over time as we continue to perform well, as rescap, continue to grow our market share and our presence in the real estate finance space, we’ll gain more separation from gmac and continue to reduce our borrowing costs and gain access to cheaper costs of capital through that performance.
>> were you surprised you had to pay these rates? you said you did it to have to pay lower rates but although you had the investment grade status, you had to pay the junk rates?
>> in proportion to where gmac borrows and versus a solid b.b.b. company, we were in the middle of that range so we would view it as an initial transaction as successful and as we gain traction in the marketplace as an independent company, we think the borrowing costs will come down.
>> bruce, one of the concerns investors had and one of the reasons you had to pay the rates is because some investors don’t believe there is that independence. how separate are your assets from gmac?
>> we’ve been working on this transaction the last year and a half, have had extensive conversations with all of the ratings agencies and have put together a separate, independent company, both from a capital and financial standpoint as well as from an operating agreement. we have restrictions with regard to dividends and have put two independent board members on the board so it’s with that independence that we put in place that we were able to achieve higher credit ratings than our parent and also gain access to this bond market at considerably cheaper rates.
>> in terms of the independence, the big million dollar question or bigger than million dollar question for investors is, are you going to be spun off?
>> gmac has been very clear on that. they’ve been a good steward of our business. we’ve been with them for 20 years and they’ve been very valuable as a parent and have no intention of selling us.
>> david, however, it does seem to be some kind of top or near the top of the housing market so if you were spun off, or if it were considered a good time to do that?
>> as bruce reverend, gmac is a great parent and this rescap structure and independent ratings allow us to access capital markets more independently so we think we have an optimal relationship. we think it’s a win-win for the shareholder, bondholder andres cap.
>> thanks to both of you.
>> thank you.
>> david applegate and bruce paradis. we are going to have a special focus on g.m. in prime time tonight, 10:00 p.m. new york time, called “g.m., retooling an american icon.” the drop in oil was good news for stocks. but how can the upward momentum in equities continue? we’ll put that question to benjamin pace, chief investment officer with deutsche bank u.s. private wealth management.
