Interview: Portfolio manager with Univest Trust Services
>> the federal reserve bank of new york invited 14 of the major participants in a credit derivatives market to a meeting next month. it is amid concern the $8 trillion industry is rife with unconfirmed trades which critics say could undermine investor confidence. the meeting at the fed’s new york office on september 15 will focus on market practices. that’s according to a letter sent to bank chief executives by the president of the new york federal reserve timothy githner. the credit derivatives market doubled in the last year giving companies, investors and government the ability to bet on or protect against changes in credit quality. and as we’ve been reporting this afternoon, oil prices reached a record price, $67.40 per barrel. that did help send stocks lower today. and our next guest says in this environment, investors need to be defensive. here to explain is gary wolfer, portfolio manager with univest trust services. he helps oversee about $1 billion in assets. and he’s joining us from allentown, pennsylvania. gary, good afternoon to you.
>> great to be here, ellen.
>> gf we talk about being --
>> before we talk about being defensive, let’s talk about ford. we had news after the close that moody’s was cutting ford senior debt rating to junk status. how significant is this?
>> it’s reflective of the bad news that’s already intrinsic in ford. we have been out of ford bonds for quite some time and quite frankly never held g.m. or ford. we stay away from the domestic auto producers. it’s a very tough area given the overhang of pension costs, etc. it’s an area that really needs to be restructured. this is reflective of the restructuring that ford will be undergoing in the next year or two.
>> that very much in the news today as we get these hints of how ford will restructure. in the short term, i here what you’re saying long term. you don’t want to be there. for some investors, there are these restructuring plays to be had perhaps with the bonds or with the stocks?
>> i would stay away clearly from the bonds as well as the stock. basically at this point, i don’t think there’s any reason to stick your chin out. and literally get clobbered. specifically on quality of that low. so basically what we’re recommending is to take more of a defensive posture. at least in the near term. we’re still very positive on the domestic economy but basically the dual hit of both record energy prices as well as the fed continuing its campaign to raise the fed funds target rate, we will be comfortable once one of those negatives is removed. and we believe that basically the fed is nearing the end of its raising interest rates.
>> what are good picks then for investors under this defensive scenario?
>> basically, we were looking at two more increases by the fed. and again, high energy prices would keep us away from the basic materials, the packaging companies, the papers, those type of companies we would definitely away―stay away from. what we are looking for are more of the consumer staple type companies and health care. we feel there is good value to be had in those areas.
>> noye one of the stocks you think ex--- i know one of the stocks you think exemplifies this is walgreen. tell us why you think it fits the scenario that you’re talking about.
>> they just―they’re just a well-run company. excellent management. 30% of their stores are basically three years or younger. just very well-run. we feel that they can grow earnings by 20% per year over the next several years. and in essence, the p.e., although high, ex-trap lathe forward as far as e. -- extrapolating forward as far as earnings are concerned, it is reasonable at a 28 p.e. given earnings.
>> given the stock is up 21%, about 25% over the past year, do you think other investors have caught on to what you’re talking about?
>> i think that’s possible. but we still feel that there’s more room in the stock. and specifically if―just by example, what happened today. even though the consumer staples area did not do that well, we still feel it’s a good haven at this point. until things are resolved. if not, as far as energy prices are concerned, as far as the fed is concerned.
>> gary, we had news after the bell as well that guidant is receiving f.d.a. approval to expand the u.s. drug-eluding stents, getting the ok to expand the stent trial. i know you like johnson&johnson so tie this together for us.
>> basically we feel that johnson&johnson is a tremendous play. very well diversified company. about the closest i would get to big pharma at this time. the guidant news just is the icing on the cake. we still love johnson&johnson even if there had been a little bit of a difficulty passing that aspect of the stent. we feel that’s just a very big plus for j&j going forward. we actually have a 12-month price target on j&j of about $70 a share. and it could even go higher. we feel that $62, it’s extreme had i undervalued. it’s extremely undervalued. not only a value play but growth play and can generate earnings in excess of 12% going forward coupled with a 2% dividend yield.
>> garyer thanks for joining us.
>> -- gary, thanks for joining us.
>> thank you for having me.
>> that was gary wolfer of univest. we will be looking at bonds and updates on world and national news. a lot of news after the bell. keep it here, developments straight ahead.
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Listen Market briefing --- Ellen (slow)
Storm watch --- Su (fast)
Zigzagging action --- Deirdre (slow)
i’m ellen braitman. and this is “ after the bell.” let’s take you through the settling numbers. let me bring them up on the bloomberg. the dow down .8%. the s&p losing .7%. the nasdaq down .4%. as for the s&p, nine of 10 broad economic groups making up the index traded lower. only energy stocks on the rise with those record oil prices. and we’ll have more on the oil story in a moment. but first up, our top story. general motors and ford, the two biggest u.s. automakers, lowered to junk status by moody’s investor service. moody’s lowered g.m.’s rating two levels and the rating on its finance unit lowered as well. in the meantime, ford lowered one level to junk status. which is one step below investment grade. that current rating now, ba-1. that is an assignment from the company. moody’s also lowering its rating on ford motor credit company to the lowest investment grade. the cuts affect $150 billion in debt limit. let me also point this is the second jumping rating for ford. it comes after s&p lowered the company to noninvestment grade back on may 5. what that does mean is it’s going to push the automaker out of the most widely followed investment grade bond index. by lehman brothers. and may spark selling of those bonds. so a story that will continue to develop. in the meantime, energy futures were up for a fifth day. nymex oil futures surging to the never before seen price of $67.40 a barrel. the gains coming on concern about potential storm damage to oil platforms in the gulf of mexico. forecasters saying that tropical storm katrina could become a hurricane by monday. so let’s get the latest from su keenan.
>> storm watch. that’s the story here for oil. even though the latest government report on energy supplies shows gains in crude oil stockpiles. in fact, the fourth straight weekly gain which would be bearish for price. investors say they are focused on the storm and its direction. the direction of oil prices is higher. 2.5% higher on the day. as you see the close back above $67 a barrel. and take a look at natural gas futures. rallied more than 3% to their highest price in 2 1/2 years. prices have surged 87% in the past 12 months. now, platforms in the gulf account for roughly a quarter of u.s. gas production. 30% of oil production. katrina is the 11th named storm after storm-packed year and it’s forecast across florida this week to move into the gulf. while it’s currently a tropical depression, the national hurricane center says it could strengthen the hurricane force by monday. refco’s jim seal says without fear, it abounds right now, prices would be lower.
>> there’s just simply a lot of worry in the market . there is i think also, although inventory is very high, we do keem more on a daily basis -- we do consume more on a daily basis than a year ago so perhaps the amount is not quite as high as it used to be. but there’s no inadequacy of supply anywhere.
>> let’s look at supply. the latest government report shows the boost in the nation’s supplies of crude oil last week, diesel and home heating oil also rose. the nation’s gasoline supplies, however, plunged twice as much as analyst expectations for last week. it is the eighth straight weekly decline and analysts say this inventory report created only a brief pause in today’s rally.
>> a larenl-than-expected crude stock build―a larger-than-expected crude stock build and a distillate stock build. but a larger-than-expected gasoline stock draw so they sort of cancel each other out. the most bullish component being the eighth consecutive gasoline stock draw. and an indication that demand gasoline demand recovered a bit last week.
>> meanwhile, the latest word from opec, the oil cartel, spokesperson says oil prices probably will not fall in the fourth quarter and that’s because of instability in the mideast and difficulties among nonopec countries in raising production. ellen, another record-setting day.
>> another record. su, thank you very much. let’s tie it into the stock market where those record prices wiped out early gains for stocks. deirdre bolton is following the action and joins us. i should call it the zigzagging action.
>> it certainly was. a very zigzag and rocky ride for stocks today. the markets opened lower and investors became bullish on the july new home sales record but concerns on oil won out and markets sold off. a mixed bag of economic data pulled investors in opposite directions. the july durable goods number saw its biggest decline in 18 months. bringing out the bears. but new home sales in july hit a record, giving the bulls the upper hand.
>> equity investors are really torn. on the one hand, they want to believe that the economy can continue to grow despite fed tightening. despite high oil prices. because let’s face it, that’s what the economy has done all year. on the other hand they know that eventually we’re going to get some kind of response. some kind of slowing in growth.
>> fears of slowing growth sent cyclical stocks down, a slower economy means leaner profits for companies including caterpillar and united technology. basic material stocks, newmont mining, phelps dodge and monsanto also moved lower. not surprisingly, home builder stocks rallied on the housing figure. d.r. horton and lennar and pulte were some of the stocks that helped a key housing index break a six-day losing streak. g.m. also rallied. the world’ largest automaker led gains on the dow jones industrial average. “the wall street journal” reported the united auto workers union is considering helping the car maker by―cut costs. one strategy says corporate cost cutting is here to stay thanks to higher energy costs and the increasing costs of borrowing money.
>> the economy may not yet be slowing. but costs are rising. and you can see the evidence of that in companies taking all sorts of steps to try to cut costs. part of it is the little bit of a merger wave that we’ve been having which to me is all about cost cutting. another part of it is we’ve had a rise in layoff announcements.
>> one company extending contracts for a few of its key employees, coach. the luxury goods retailer renewed its agreements with its chief executive, executive creative director, and chief operating officer, after boosting first quarter earnings forecasts and saying sales will come in at the high end of its range. that stock closed up more than 4% today. ellen, back to you.
>> deirdre, thank you so much. deirdre talking about the automakers and after-the-bell announcement on automakers, johnson controls, the world’s largest maker of automotive parts, also out with news saying it will buy york international for $2.4 billion to double its heating and cooling system system business. and with york under its umbrella, they are less reliant on auto interiors. johnson controls will pay $56.50 a cash. johnson controls says that includes the $800 million of york’s debt. it will assume the purchase valued at $3.2 billion. treasuries, little changed today as the report on new home sales provided investors with little reason to buy government debt. given the fact yields are at the lowest levels we’ve seen in a month. as for that two-year note, take a look at that yield. 3.97%. the government today sold $20 billion of those notes at a yield of $4.01%. as for currencies today, the dollar was up against the yen. there is concern oil prices will limit growth in japan. you see little change right now. that’s the current trade but durk the day, that had been the -- but during the day, that had been the trading action. and brokerage firms credit suisse, city group and lehman brothers will join fidelity’s brokerage unit in creating b.s.x. group. this group will together operate the new market called beck. the deal may help buoy the money-losing boston exchange at a time when larger rivals, including the new york stock exchange, are expanding into electronic trading. for fidelity and its partners, the investments may help lower trading costs and that would be by increasing competition among stock exchanges. beverly enterprises says it has accepted an increased takeover bid of $13 a share. the buyer is investor group north american senior care. and the transaction is valued at more than $1.9 billion. it is subject to the approval of beverly shareholders. north american senior care beat out a group of hedge funds that last week offered $1.64 billion for beverly. and some analysts say this may not sh the end of the bidding war―may not be the end of the bidding war. america online settled an investigation by new york attorney general eliot spitzer. the biggest u.s. internet service agreed to stop giving bonuses to employees who persuaded customers not to cancel subscriptions. a.o.l. was fined $1.2 million and it agreed to pay $50,000 for costs of an investigation. about 300 customers had complained that their requests to cancel the internet service were ignored and that the company continued to bill them. a lot more on those record oil prices. one factor at that, putting pressure on stocks, has the summer course run its rally? we will ask gary wolfer, portfolio manager with univest trust services. we will also ask him about that junk status from moody’s for g.m. as well as ford.
