Interview: Chief Investment Officer with Amsouth Bancorp
>> july is drawing to a close. on this last trading day of the month, the s&p has slid back from a four-year high. still, the dow and s&p both up 3.6% for the month. reporting their best july since 1997. it is the best july for the nasdaq since 2003. all this today on the heels of a report that showed continued economic expansion, but that does raise the question of whether higher bond yields are going to attract investors away from the stock market . a lot to discuss. joining me from his firm in birmingham, alabama, to offer his perspective is joe keating, chief investment officer with amsouth bancorp where he helps oversee $25 billion in assets. joe, thank you for joining us on this friday.
>> glad to be here, ellen.
>> what do today’s economic reports tell you about the pace of growth in coming months and have they changed your outlook, at all?
>> the second quarter report was solid. 3.4% growth rate in the economy by itself is pretty much right in line, maybe just a touch above the economy’s long run growth rate. what was interesting is that the headline number was actually depressed by 2.6% because of the inventory drawdown. if you added that back in, that means the economy grew at a pace in excess of 5%. the number i look at is the sum of consumer spending, business capital spending and housing that. grew at a pace of 4.4%. good strong final demand in the economy during the second quarter. inventory draw down says good things about the third quarter because it means thaten vin tries need to be reglennished as well as demand in the third quarter will have to be met with new production, not by drawing down inventories.
>> we saw a lot of this reflected in the bond market today. you saw those yields move higher. that 10-year back above 4.25%. are you shifting your allocation recommendations at all given the rise in bond yields recently?
>> not at the moment. what we have done is we have made sure our duryaugses an bond portfolio are relatively close in duration of the market . we’re still a little shy, but we are darn close. when you take a look at it, right now a very conservative earnings estimate for the s&p 500 in 2005 would say that the market is currently trading something like 17 times below expected earnings, whereas if you took sort of an earnings multiple on a 10-year treasury, it’s about 23 times. on that speaker expective, we think common stocks are still cheap relative to the bond market .
>> what yields would you have to see in the treasury market to make treasuries more attractive to you?
>> well, we think the 10-year treasury right now is in a trading range of 4% to 4.5%. if we get closer to that 4.5%, we probably get closer to neutral on durations in our bond portfolios. if we went above 4.5%, we would probably start moving our durations out and become more interest-rate sensitive in our bond portfolios than the interest rate sensitivity of the overall bond market .
>> begin the rally we saw in stocks during july, retailers particularly strong, real estate particularly strong, what changes are you guys making based on the gains you had in your portfolios you manage?
>> we think the single best play in the equity market today is to invest in dividend-paying stocks. in particular, to invest in companies that have done the best job historically of growing their cash flow, earnings and dividends. we all know returns on common stocks will, both long-term capital gains as well as the dividend is tax advantage relative to, say, the interest income their earnings on a fixed-income security. we are trying to position our portfolio toward companies doing the best job historically growing their dividends and where we think the dividend growth rate will be best in the coming years.
>> let’s name some of these. honeywell and ablabs are two you like in part because of the dividend.
>> that’s right. we really are concentrating on big brand-name companies that have done great jobs of growing their dividends over time. both these companies that you just mentioned are very large brand name companies. both of them are about 10% dividend growers, historically. both have their own particular things going on. abbott labs relative to not having real risk on patent expiration. honeywell being well placed in the aerospace industry. good solid company wrs we think investors can benefit greatly from the growth of dividend over time.
>> i believe you personally own shares of both companies, is that correct?
>> yes, i do. we put our money where our mouth is at the organization in terms of owning the stocks in our portfolios, as well as myself owning them.
>> what you do like about johnson controls?
>> johnson controls is an interesting company. it has grown its dividend in over a 13% compound annual rate over the past few years. it operates in a tough business in the automotive business. what it’s done, it’s done a great job taking market share from other providers of parts into the auto industry. great company, very well managed. good balance sheet, paying down their debt. it’s a company we think has great prospects on a go-forward basis.
>> the biggest risk with johnson controls?
>> we tend to get more and more decline in domestic auto share, in market share by domestic manufacturers. johnson controls is doing a very good job making sure they are also supplying the foreign manufacturer. better twy say that would be just an overall decline in spending on autos would be their biggest risk.
>> thanks. have a wonderful weekend. we’ll take a quick break and come back with our weekly edition of “money and sports.”
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Listen Market briefing --- Ellen (slow)
P.& G. --- Suez (slow)
>> welcome back to “ after the bell.” u.s. stocks dropped on concerns the federal reserve continued to raise interest rates comes after the latest report on gross domestic product. as we look ahead, we have procter and gamble set to report quarterly earnings on monday. suez an o’halloran has the story―the story. suzanne o’halloran has the story.
>> p&g is to say profits grew by 8%. net income is expected to be 55 cents a share according to thomson financial. revenue probably rose 8%. that is the smallest gain in two years. chief executive rolled out products such as downey softener in developing countries such as mexico. this helped p&g tap markets that are growing twice as fast as here in the u.s. investor nick colas says it will be helped by the company’s ability to manage higher commodity prices.
>> this quarter is going to be a combination, i think, of some modest top-line growth and cost-savings growth. it is an important part of p&g’s earnings growth over the past months as energy price is have risen.
>> the $57 billion acquisition of gillette will boost p&g’s overseas sales. gillette got 65% of revenue from outside the u.s. last year. p&g raised its long-term annual sales forecast when it announced the purchase of gillette in january. sales are expected to rise between 5% and 7%. william schmidt says p&g is benefitting from new products. the company launched 106 new items in april including tide to go, a portable stain remover. p&g has topped analyst profit estimates in the past eight quarters, yet the stock’s 5% rise during the past year is trailing the s&p 500’s gain of 13%. the majority of analysts recommend buying the stock. 33% rate it a hold. as we mentioned, p&g continues to face higher commodity costs and morgan stanley says oil and coffee are the toughest one force the company. analysts expect p&g to discuss how it will address that and other issues on monday’s conference call. back to you.
>> thank you so much. moody’s saying new york attorney general elliot spitzer’s office subpoenaed information how the company rigged reinsurance companies and mortgage-backed securities. spitzer’s subpoena details how moody’s pursued and performed the businesses of rating reinsurance companies since january 1, 1997. it included how moody’s put together unsolicited ratings as well as ratings on companies that did not participate in the process. moody’s saying it is cooperating and responding for the demands from spitzer’s office. biotech stocks gained on the back of better than expected second quarter earnings. many investors expect the rally to continue. in fact, some investors choosing biotech as less risky substitutes for bigger drug companies. here to explain why is bloomberg reporter june lawrence with today’s edition of taking stock. i want to start off. you spoke to some investors who it sounds like are choosing biotech for the first time. never considered them before. why is that?
>> the investor whose i talk to who have that perspective, they are large-cap growth investors who like health care because it’s got the demographics they like. it’s got the growth. they like biotech because now they see it as less volatile. it’s got these big biotech companies like amgen or genzyme have kind of diversified revenue streams. they are not dependent on just one product. they are not soar and plunge the next day when some bad headline comes out of that one product.
>> we’ve seen a lot of volatility in some of the stocks including bad selloffs.
>> yes. february biogen idec suspended sales of brees brees. it was connected―breeze breeze. there is an argument where you can see some are volatile.
>> given the rally we’ve seen in biotech, what kind of gains are people projecting or hoping for?
>> gains in biotech? i don’t know. they didn’t say they were expecting sort of―they were expecting the best growth in the market . one analysts i talked to at s.g. cowen said biotech will grow 18% for the next five years. earnings are growing to grow 18% earn persian share. big-cap pharma will grow 2%. that is a big differential. if you can get stocks that are similar in terms of riskyness, it’s a good bet.
