Interview: Fund manager with Independence Investments
>> major benchmark indicesgating the day higher. investors are gaining more confidence about a fourth-quarter rally on strong earnings reports and data showing economic strength. joining us to talk about whether the market is poised to rally is john forelli, fund manager with independence investments. welcome. earlier, you told us you expect to see stocks trading in a range through the end of the year but a big part of today’s rally is that investors are thinking, hey, maybe we’ll see a rally. what’s your take on the move?
>> today’s moves are positive. people focused on positive economic growth and earnings from companies. on the other hand, interest rates will continue to be ratcheted up by the fed and will be a pullback to keep us in a range.
>> where do you expect to see the s&p by year’s end?
>> we think plus or minus 5% around where we have been the last few weeks.
>> what about earnings season? we had goods reports today, especially from time warner. did anything from the overall last couple of weeks surprise you?
>> as much as anything it surprised me that, one, the hurricanes didn’t hurt people as badly in the third quarter as we might have expected. and there were not as many warnings about fourth-quarter earnings using the hurricanes as an excuse. so all in all, we think it was a pretty positive earnings season.
>> and as far as market headwinds, do you see anything besides inflation and rising rates?
>> it’s really the inflation outlook is really the key. the bond market will be the best indicators to investors’ expectations about future interest rates. if the bond market continues to sell off as it did today a little bit, it will be hard to see the multiple expansion we’ll need to propel the market forward in the coming months.
>> any analysts we haven’t seen yet?
>> i don’t think so. i think most of the news is good, the earnings news is good, the g.d.p. news is good, employment is positive. inflation would probably be the catalyst that we want to see as that investors really getting confidence that inflation isn’t picking up. >> how would you describe current inflationary pressures?
>> i think we’re in an inflation scare right now, people looking at the numbers closely, looking for excuses as to why they think inflation is going up rather than down. eventually, we think the bulls will win out in the sense that we do not think inflation will be an issue but we think it might take about two or three months for investors to realize that.
>> energy, commodity prices down by and large this last month? could this be indicative that perhaps inflation’s peaked?
>> i think so. i think that’s one of the first things that will get investors believing that inflation is not a big issue, seeing oil prices going down and realizing that consumers are going to have extra money to spend for christmas presents.
>> we have the october jobs report coming out tomorrow. what if it comes in weaker than expected?
>> i think in a sense that could be a good sign, that the economy is slowing. one of the things that’s going to need to get this market going is for us to see that the economy is slowing down a little bit so that people get confidence that inflation is slowing down, the bond market will start rallying and the fed will stop raising rates and we’ll be off to the races for the market .
>> you told us earlier you’re defensive. you like classic noncyclicals, beverages and healthcare stocks. anything more to add to that?
>> we’re in a typical defensive slowdown so we think large cap might do better. they have lagged so far this year. you might see people going into financial stocks less interest rate sensitive but in general, we think short term we’re in a defensive market . we think once we’re through the trading range period, you want exposure to industrials and cyclicals again.
>> what’s your time frame there?
>> three months plus.
>> ok. you say you’re cautious about consumer spending stocks. usual christmas shopping whoas, we have retail sales tomorrow?
>> we think they’ve been fierce in september about retail sales. we think october sales have come back nicely. the indications of the last two weeks of october were strong are for retailers. we expect once the stocks trade up, peopleville thanksgiving blues about the consumer and people will corp.y about consumer spending for the christmas season.
>> you’re cautious on homebuilders, some home building stocks have pulled back ahead of the housing market but maybe we’ve seen a softening in housing. are you still cautious on home building and what’s your time frame there?
>> sure. we think in short term we’re cautious on homebuilders because people expect interest rates to go up and investors are fearful that home prices are starting to level off as far as pricing goes. we actually think the stocks are very cheap. if you look out to a six- to 12-month time frame, we would own homebuilders today but now through the end of the year, we would be cautious on those stocks.
>> what about global opportunities? do you see anything there? infrastructure building in china?
>> the place where growth is right now if you look globally is in china and if you see companies with excellent growth prospects in china, we have g.d.p. growth rates there triple, quadruple from the rest of the world so we like chinese global infrastructure plays.
>> before i let you go, do you expect an extension of today’s rally?
>> not in the short term.
>> we’ll leave it there. john forelli, thank you very much for joining us this afternoon.
>> you’re welcome.
>> stay with us. interest rates rising, commodities falling. what is the link between the fed and commodities prices? we’ll ask managing principal at patronus capital in new york.
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Listen Market briefing --- Lori (medium)
Strong economic data --- Bob (fast)
October sales figure --- Suzanne (slow)
“after the bell.” i’m lori rothman. recapping the day on wall street. all three benchmark averages closed higher, steady climb, in fact, most of the day’s session with the dow closing at 10,472, a gain of almost 66 points. the s&p 500 gained 12 points at 1214 and the nasdaq rises 30 points to close at 2144. u.s. treasuries were lower for a third day in four on anticipation that economic data later this week will show enough strength in the economy to support future rate increases. now, bob bowden has more. bob?
>> thank you. the bond market weakness continues, pushing the yields ever higher. we begin with showing a six-month chart of the 10-year treasury yield showing how the right side of the chart, the last- two months, pushing up on the right side with yields going from 4.04% to over 4.6%. turn to the two-year, a similar trend although not as much because the yield curve has become less steep but the last two months you see what’s happened there. the yields going from 3.78% around the beginning of september to what the close is today, 4.41%. the main reason cited by investors, fed aggressiveness. we have this comment from the bond manager with prudential investment manager in newark who said, “the fed is tightening and will continue on a path of measured increases.” a similar sentiment from the other side of the world in tokyo said, “as long as the fed keeps on raising interest rates, that will put pressure on yields to move higher.” also spooking investors, the uncertainty of what economic data out later this week might say about economic strength. tomorrow, the i.s.m. services index number. economists expect it will rise for the month of october reading and friday, the labor department’s payroll number will be out. economists expecting 115,000 workers were added to the economy in october. another factor hurting bonds, more supply. the treasury department said today it will auction $44 billion of new notes next week to finance the budget deficit, dumping supply on to the market . specifically, next week’s sale will offer $18 billion of threerns and―three-year notss. the white line, there, that’s today’s yield curve. the difference in yield between the two-year and 10-year, the white line’s steepness, that difference fell to only 13 basis points today, the narrowest or least steep since august 30. by comparison, the yellow line shares a yield curve of a year ago when the three-month t-bill yielded less than 2%. the bond market will be watching tomorrow when alan greenspan will speak before the joint economic committee on capitol hill at 10:00 a.m. eastern time, perhaps his last public appearance. back to you.
>> thank you, bob. american eagle just reported same-store sales for october. those rose more than 22% which is much stronger than the 10% analysts were forecasting. most u.s. retailers will report october sales figures tomorrow and suzanne o’halloran has the story on what analysts are expecting and what it may mean for the crucial holiday shopping season. suzanne?
>> forecasts for october have been rising as the temperatures got colder for much of the country. a drop in gasoline prices and late demand for halloween items helped. sales may rise 4%, the prediction of the international council of shopping centers. we’ve heard from wal-mart about october. on saturday, the world’s largest retailer said sales would probably rise 4.3%. food sales outpacing general merchandise. gas sales also helping. stands outs may include specialty retailers according to analysts surveyed. sales at abercrombie & fitch may rise 15% and american eagle sales jumped and is 6% higher in after hours. analysts say discount chains should do well. sales at costco may rise 8%, b.j.’s 5% and target more than 4%. analysts at merrill lynch expect more modest gains from stores who serve more moderate to low-income customers. sales may rise 2% at dollar general and family dollar and nearly 4% at kohl’s. despite higher energy prices, investor ed peters at panagora asset management says the holiday season should be a good one.
>> we like j.c. penney because we think consumers will not be tapped out because energy prices will fall back and gas prices have already fallen back. consumers will feel they have enough money for a good holiday season and we’ll see a good holiday season, as well.
>> although october numbers are important, the next three months, november through january, are the most critical. the holiday shopping season, the international council of shopping centers predicts total sales could rise as much as 3.5% and the group expects heavy discounting and, lori, an example of how nervous retailers are about the holiday season comes from wal-mart. they started their holiday ad campaign yesterday, the earliest ever and for the first time, they are calling on celebs such as garth brooks and queen latifah to entice shoppers into stores.
>> we’ve seen this pattern before, stocks go down most of october only to rally into the christmas holidays. john forelli of independence investments will tell us if that will happen this year and why he likes healthcare and beverage stocks.
