Interview: Portfolio manager with Baring Asset Management
>> treasuries fell on speculation the federal reserve will keep raising interest rates into next year. the yield at 4.42% heading into tomorrow, which is the next federal open market committee meeting. the government began selling $44 billion in debt in the quarterly refunding, beginning with an auction of three-year notes today. we’ll take a closer look at interest rates in the next half hour. in currency trading today, the dollar currently little changed against the euro. the dollar lower against the yen, coming on speculation japan’s economy will continue its expansion even if prime minister koizumi does lose national elections scheduled for next month. stocks down today, in part, on the higher interest rates. also, you have concerns about oil prices as oil trades near $64 a barrel. our next guest says stocks are due for a correction so is this the beginning? here to tell us more is sam rahman, portfolio manager with baring asset management, overseeing $1.6 billion in assets, joining us from our boston bureau. sam, good afternoon to you.
>> thanks for having me on the show.
>> it’s our pleasure. let’s kick off by talking about the correction you’re expecting. why is it you’re thinking stocks will fall from current levels?
>> i think we’ve had a nice run since the market bottomed in april so, given the near-term concerns that investors have, obviously with record oil prices today and the rise in the 10-year bond yield, i think clearly there’s enough reason for investors to take some profits and sit on the sidelines for a better opportunity to buy stocks.
>> what would that better opportunity be? what declines would you see before you think it’s time to go back in?
>> you could easily see a 5% correction in the market and still be in a comfortable uptrend so i wouldn’t be nervous about a 3% to 5% correction. this is the time of year that the market gets weak as volumes decline and investors use the last couple of months of summer to take it easy. i wouldn’t be surprised to see a pullback here.
>> what’s interesting, if i look at your year-end price target for the s&p, it seems you anticipate the index will end the year higher from current levels so give us a sense as to where why you think the correction will be short term?
>> the earnings in the second quarter were very, very strong and at the same time, what had been concerns about the broader economy were misplaced. the recent data we’ve seen shows the economy quite robust actually so as we move into the second half of the year, i think a stronger economy and solid earnings growth rate coupled with an attractive valuation should set up the market for a nice run in the fourth quarter.
>> let’s talk about how your picks play into the scenario. one of your picks is covance. what do you like about it?
>> it’s a beneficiary of trends across the economy but primarily, they’re focused in research and development with their customers being large pharmaceutical companies and biotech companies and as the costs of research rise every year, there’s a greater need for efficiency by the customers to outsource those costs to more efficient companies that can provide the same service at a low cost and covance is perfectly placed for that trend.
>> its former sister company, quest, had been part of corning several years ago, in the news today on the deal quest is doing. covance, do you see it involved in the m&a space given the deals we’ve seen in the healthcare sector?
>> it’s possible. covance is such a great asset, i wouldn’t be surprised to see them in a situation where they’re looked at as an interesting acquisition target but i think right now business is so strong that the management team is very focused on generating the growth that they have line up for the next few years.
>> do you own shares of that?
>> yes, we do.
>> what about nasdaq, an interesting story and the performance very different than covance of the briefly. tell us what the company does, if you own it, what you like about it? >> it’s playing in a part of the automotive industry that has growth. they produce navigational mapping software for automobile manufacturers and right now penetration of mapping software and equipment is well under 10% so as you see, that penetration increasing over time, that’s an attractive growth opportunity for navteq. at the same time, they have a small but fast growing business in the wireless area with partnerships with companies like garman so you’ll see over time with the g.p.s. capability, this technology is getting greater acceptance on the consumer base and it’s an attractive area to invest in right now.
>> do you own those shares?
>> yes, we do.
>> sam rahman, we appreciate it.
>> thank you.
>> sam rahman of baring asset management. e-trade making an acquisition to keep pace with competitors in the online brokerage industry. june grasso will take a closer look at that and some other deals and potential deals straight ahead.
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regular floor trading session today. prices slipped from there, but still closing at a record high, $63.94, up 2.6%. a threat to the u.s. embassy in saudi arabia heightening concerns supplies from that country could be in jeopardy. su keenan is on the energy beat today and following the story. she’ll join us in a moment’s time. first up, the closing numbers as the stock market settled today -- news after the bell from the securities and exchange commission, two former citigroup executives accused by a u.s. regulator of siphoning off tens of millions of dollars in mutual fund shareholder fees. thomas jones, former chief executive of citigroup asset management and former senior vice president of smith barney management named in a complaint tiled today by the s.e.c. in u.s. district court in manhattan. news after the bell, as well, from priceline. second-quarter profit at priceline.com climbing 8.6%, helped by its european internet travel business. the company forecasts full-year profit of $1.20 to $1.30 a share. net income rising to 29 cents a share, and excluding costs, 41 cents a share. sales increasing 2.8% to $226 million, just shy of what wall street analysts expected. chief executive jeffrey boyd bought u.k.-based active hotel negligence september to increase the company’s business in europe in the online travel sector. returning to the top story, specifically, the forces driving crude futures to another record price, $64 a barrel. a threat to the u.s. embassy in saudi arabia raising concern about possible supply disruptions. this is a look at crude in the last 30 days, a jump of 7.2%. the gain in gas futures today, 1.4%, a never-before-seen price, refinery problems raising questions about adequate supplies. su keenan has been following the story.
>> nymex crude oil futures up 45% from this time last year. the u.s. closed its embassy in saudi arabia for today and tomorrow after a threat was made against a building. that got the attention of the market , analysts say, raising fears of war terrorism in an area that is the world’s largest exporter of oil. the latest concern about the stability of the region’s oil supply coming a week after the death of king fahd. in the words of a.g. edwards bill o’grady, this is the kind of news that spooks the market .
>> the fairly detailed warnings coming out of saudi arabia were enough to where the u.s. closed its embassy for a couple of days and the british have told nonessential personnel that they could leave the country if they so desired, suggests that intelligence officials are very worried that something’s going to happen in saudi arabia.
>> while o’grady predicts it will not be a disruption in saudi oil exports, he does see two other factors driving oil futures as high as $65 a barrel before labor day. the first, a surge in late summer gas consumption. at the retail level, the national average price for gasoline prices here in the u.s. rose to a record $2.34 a gallon according to a.a.a. the second factor, refinery outages, oil companies such as chevron, b.p. and valero energy have shut refineries in the past few weeks, cutting down on production of fuels. meanwhile, exxon-mobil’s refinery in illinois resumed operation over the weekend after repairing its water cooling system. natural gas futures also rallied today, reaching a nine-month high. hot weather helping fuel that surge as natural gas is used to generate electricity and help run air conditioners. times like this, record price, analysts like to note the forward oil futures contracts, oil for delivery in january through march of next year. those contracts closed the day above $66 a barrel. back to you.
>> so potential gains from here. thank you very much. news after the bell from the international monetary fund concerning japan. what the i.m.f. is doing is raising its forecast for japanese economic growth for 2005 to 1.8%. so, again, you have the i.m.f. projecting that the japanese economy will expand 1.8% in 2005. also making projections for 2006, saying it does anticipate the japanese economy will grow to 1.7% rate. also, you have headlines on the i.m.f. saying japan’s economy can handle a stronger currency, also that japan’s monetary priority should be deflation. keep in mind, this comes on a day when you saw the yen rebound from the lowest seen in a week against the dollar on speculation the japanese economy is going to extend its expansion even if the prime minister, koizumi, loses national elections scheduled for next month. it was last week you had j.p. morganchase as well as bank of america raising their forecasts for japanese growth this year so, again, you have forecasts coming out and the i.m.f. anticipating the japanese economy will expand 1.8% in 2005 and 1.7% in 2006. and back in the u.s. today, it was a surge in oil prices pushing energy stocks higher but ultimately concern about interest rates sending the indexes lower at the close. deirdre bolton was following the full day of trading and joins us with a closer look.
>> if it weren’t for energy stocks, today’s losses would have been deeper. investors didn’t like the lookav $64 oil and also the prospect of higher interest rates tomorrow. a day ahead of the fed’s rate decision, interest-rate-sensitive groups fell. since the employment report on friday, there has been a sea change in investor sentiment.
>> a lot of people thought the fed interest rate raises were coming to an end and now the consensus has changed and people feel the fed will continue to raise rates for a longer period of time.
>> reits, or real estate investment trusts, and utilities, were among two of the interest-rate-sensitive groups that weighed most on wall street. simon property group and equity residential lost out as smith barney predicts reit stocks may fall 10% this year as rates go up.
>> the companies and industries impacted the most are those companies and industries where investors feel higher interest rates will have the greatest negative impact. in talking about reits, homebuilders, financial stocks, even utilities.
>> homebuilders d.r. horton, pulte and toll brothers all traded down as mortgage rates are poised to move higher. utilities, including duke, american electric and a.e.s. also slipped but there were bright spots. mergers and acquisitions news pushed numerous stocks higher, including e-trade. that stock reached a 10-year five-year―five-year high on its purchase of harrisdirect, increasing daily avenue revenue trades by 13%, putting the company in the number three spot behind charles schwab and ameritrade. maytag’s stock soared as competitor whirlpool sweetened its bid for the third time. if the deal goes through, whirlpool gets brand names amana. and quest diagnostics rose as the nation’s biggest operator of medical testing labs agreed to buy labone. labone conducts drug testings for employees and other screenings, as well.
>> news after the bell from flour, the company that is the biggest traded construction and engineering company in the u.s. out with second-quarter earnings, excluding a charge, earning 58 cents a share for the second quarter. analysts were expecting 50 cents. flor saying revenue in the company coming ahead of analysts’ estimates. shares down 3.62% in extended trade. keep in mind, they had gained 53% in the past 12 months of trading. fluor also says full-year earnings per share will come in at $1.55 to $1.75 with the effect of a 70-cent charge. the company saying full-year earnings per share coming in at $1.55 to $1.75 with the effect of a charge that is 77 cents per share. moving on to tell you, the dow and s&p down for three straight days. is the time right for investors to continue selling or should they put money to work? we’ll put that question to sam rahman with baring asset management, joining us straight ahead.
