Interview: RBC Dain Rauscher --- Dow, Philip ---Managing Director / Partner
>> welcome back. no economic reports today but tomorrow the commerce department releases february retail sales figures. that number likely fell for the first time in six months. a bloomberg survey shows sales probably dropped .8% last month, compared to a more than 2% gain in january. checking treasuries and the dollar, now, the 10-year currently at 4.77%, down 4/32. to the shorter end of the yield curve, unchanged, yielding 4.72%. a look at the dollar, we saw weakness against the yen, euro as well as the british currency. this week’s economic calendar is full, not just as retail sales and consumer price data is coming out, as well. joining us now to tell us if good economic news will be enough to lift the stock market is phil dow, managing director of equity at rbc dain rauscher. great to see you again.
>> good to see you, rhonda.
>> this is a fascinating day when you see all those deals, billions and billions of dollars worth of deals in all sorts of industries, the stock market essentially goes nowhere. if that’s not enough to give the markets a lift, what is?
>> the market rarely anticipates positives. at least the last couple of years, it anticipates negatives and i think there’s heightened concern about rising global interest rates. you had international markets decline, particularly emerging markets , last week. we’re in the confessional period, the prerelease period so i think there are things we have to slog through this week before we can go higher and my sense is basically the economy is in pretty good shape. the information this week may not verify that but my belief is we’re ok for investors going forward. f. the information doesn’t verify it this week, does that mean there might be a retreat in 6 the bond market that could help stocks?
>> my guess is we’re going to take a cue from the bond market but i think that with regard to the stock market , it will be the first quarter earnings as they come out, any corporate guidance with regard to their businesses. my guess is we’re in pretty good shape, rhonda. valuations aren’t completely out of whack and i think there are opportunities for investors but by and large i think it will be an indifferent period in the market for the next week or so.
>> when you have a market waiting for a catalyst, “indifferent” as you call it, what sectors are you watching or do you sit back and wait for more data?
>> you have to anticipate. the market goes up once the good news is out. it’s better if you can anticipate it. my belief is healthcare is an attractive area. we like the orthopedic stocks under a cloud for some time now and we think valuations are quite attractive. additionally, technology stocks. we think it’s time for people that didn’t participate in energy to look at the exploration and production companies, those that actually find oil and natural gas.
>> let’s talk about the mergers and what that tells us about the bigger picture. do you think we’ll kick off and round of mergers in various industries and are the mergers coming from weakness or strength?
>> it looks to me like many of them are accretive acquisitions, good uses of corporate cash. we’ve all heard about the tons of corporate cash out there. hoping that some of it will come back for business capital spending. right now, i wouldn’t be surprised at all to see a number of industries continue to consolidate. the traditional ones and today, the bright news was the assortment of industries included. my bet is that managers in general in america are more risk-tolerant, more willing to make bets on the future and we’ll see a continuation of mergers and acquisitions activity.
>> what’s the biggest risk to the stock market going forward―rising yields, energy prices?
>> i think oil, is absolutely one. but one that may not be on the radar is whether congress can get their act together on the dividend tax treatment. if the senate doesn’t come up with a proposal that extends the treatment, my guess is the stock market could be in for tough sledding later this year.
>> tough sledding later this year, but still a gain on the year, right? you’re expecting a good, solid gain?
>> i’m expecting that. i’m expecting that congress probably will extend the treatment on dividends but there’s always the chance they won’t and if they don’t, i think that’s the biggest major hurdle for the stock market . if and when the senate decides l proposal and if they do extend it, great, i think all systems are go. but the wild card is what congress does with dividends this year, that’s critical.
>> we don’t know the answer of that but we’d love to get your answer for the s&p 500 gain on the year.
>> i think up 8% to 9% this year on the index. it could be better. the history on it is going back to 1926. 70% of the time after three up years, the market goes up, on average, 14% is the fourth-year gain so history would say we’ll have a great year. we’ll see.
>> anything you would get rid of now in your stock portfolio?
>> the only thing i’d be concerned about is companies that have low-quality earnings right now. i think that will be a problem going forward. poor balance sheets, low-quality earnings, i’d get rid of them.
>> phil dow, managing director of equity strategy at rbc dain rauscher, thank you very much for joining us. coming up, we’ll have more on the deals of the day, including that $14 billion capital one north fork deal. craig maurer, analyst with soliel securities, will join us. we’ll be right back.
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industries all saw m&a action today. what’s in capital one’s wallet? $14.6 billion, using to buy north fork bank. north- capital one announced its second takeover of a bank in a year. capital one’s share price dropping at the close better than 7.5% and north fork gaining better than 15%. we’ll see what’s ahead for the two companies with craig maurer with soliel securities at 21 minutes past the hour. the dow industrials off .32 of a point, the s&p 500 still higher, but off its best levels, climbing 2.5 points and the nasdaq gained just under five. former enron financial executive andrew fastow faced cross examination from a grueling tag team by the defense today. june grasso joins us live from houston with the latest there.
>> rhonda, mike ramsey, ken lay’s attorney’s, cross examination of andrew fastow was short but brutal. he accused him of making up facts in order to improve his bargaining position with prosecutors and derided his lack of knowledge as the c.f.o. of enron. ramsey used everything from fastow’s handwritten notes and company memos to newspaper articles to impeach him. he showed him memos to demonstrate that the off-the-books’ transactions, the partnerships with enron, were approved by lawyers, were audited and done at arm’s length. still, fastow said that the transactions were illegal. yet, when ramsey asked him, can you give me the name of the deal when enron lost money dealing with the partnerships, fastow couldn’t come up with any name. it was a very personal attack on fastow at many times. fastow had testified that after skilling left the company, he had a meeting with ken lay in order to assure lay of his loyalty. ramsey said, you were looking him right straight in the face telling him you were loyal and he could count on you and you were stealing from the house?
>> fastow said, “i lied to mr. lay.” so the defense has repeatedly poked holes and shown inconsistencies and lack of corroboration for fastow’s testimony. the problem is, that on direct examination, andy fastow admitted he was a liar, cheat and fraud and that he let his own wife go to prison rather than tell the truth about enron. on cross examination, when the defense confronts him with inconsistencies or misdeeds, he simply admits them and says, i was lying them, but i am not lying now. it’s up to the jury to judge his credibility ultimately. right now, the prosecution is doing a redirect examination of him in order to, as they say, bring back his credibility. back to you in the studio.
>> bloomberg’s june grasso reporting live from houston. thanks very much, june. we started the day with positive merger news but by the end of the day, the market turned its attention back to energy and the economy. for more, here’s a report from deborah kostroun at the big board.
>> the market ‘s little changed on the day. one of the things, as we started out, we heard about deals, deals and more deals. that shed positive light on the market but by the end of the day, other things were really coming in to play. one was the fact that the yield on the 10-year treasury note coming in at a 20-month high, gives us a lot of ideas that the fed will keep increasing those interest rates, maybe three times by july. of course, we have a lot of economic reports this week and if those are strong, that will reinforce those ideas that interest rates may keep rising. right now bonds looking more attractive than stocks with the yields at those high levels. morgan stanley increasing their estimate for interest rates, now to 5.25%. another thing holding back stocks, the fact that crude oil jumping $1.81 a barrel, now coming in at $61.77 a barrel, not helping stocks. today we had $21 billion worth of deals. north fork bank, biggest gainer on the day, after capital one saying it would buy that company for $14.6 billion. and mcclatchy agreeing to buy knight-ridder. and pinnacle entertainment agreed to buy tropicana owner aztar for $1.45 billion and watson pharmaceuticals saying it would buy andrx for 1.45 billion. energy stocks, biggest gainers on the s&p 500 as oil prices climbed on expectations of colder weather. ford motor, their debt cut another level below investment grade by fitch ratings, because of increasing pressure at the auto parts suppliers. delphi’s c.e.o. saying negotiations with g.m. still going on and very committed to a consensual resolution, looking at a march 31 self-imposed deadline. i’m deborah kostroun at the new york stock exchange.
>> to washington, now, where, for the second time in five months, top executives from the world’s biggest oil companies, will appear before a congressional committee tomorrow, defending the industry against cctions of anti-competitive behavior and fighting efforts in congress to change the nation’s antitrust laws. peter cook is in our d.c. bureau with a preview.
>>> back in november, some of the biggest names in the oil business faced criticism and tough questions from becomes of the senate commerce and energy committees. on tuesday, it’s the senate judiciary committee’s turn and senate arlen specter who already has his eye on legislation. big oil, big guns back again on capitol hill to defend their record and ease concerns about industry cltion.
>> it is my concern that there ought to be hard analysis of the existing antitrust laws with what is happening in the marketplace.
>> like the hearing last november, this trip to the hill includes c.e.o.’s from chevron, conocophillips, top u.s. executives for royal dutch-shell and b.p., plus exxon-mobil’s rex tillerson who took over for lee raymond on january 1. he says his goal is to explain the size and complexity of the modern oil and gas industry.
>> if we can just advance the understanding of policymakers of this industry another step, then i think it’s worthwhile.
>> specter may need a lot of convincing. he’s circulating draft legislation that would lower the legal test for rejecting mergers, require the government accountability office to review past mergers with the possibility they could be unwound if necessary, crack down on companies restricting supplies, even if they aren’t colluding, and even open opec members to antitrust lawsuits.
>> these are all very good first steps in making sure the industry is held accountable.
>> given the industry’s support within congress and the administration, one analyst says specter’s legislation is unlikely to move beyond committee. but another spike in prices could change the dynamic quickly.
>> we’re looking ahead at 2006 election season that’s bitterly contested and suddenly the question is, are you the member of congress who didn’t pass that bill to protect your constituents? is that could be a tough force to stop.
>> another difference between tuesday’s hearing and the one last november, all of the c.e.o.’s will be sworn in before beginning their testimony.
>> thank you very much. more details on our top story and the consolidation in the banking industry. capital one financial is buying north fork bancorp for $14.6 billion, almost doubling its deposits. analysts say it will give capital one access to cheaper capital. this could be called a credit card company going deeper into traditional banking to diversify tgs business. by acquiring north fork, capital one’s deposits will grow to $84 billion, an prime minister particularly beneficial after a string of 14 fed rate increases. banks who borrow with short-term instruments and lend at longer terms have seen profits squeezed in the face of a flat yield curve. this is a five-year chart comparing the 10-year yield in white to the two-year yield in orange. the spread, or difference between these lines, of over 250 basis points in 2003 is around five today. analysts say north fork is attractive because of its focus on profitability during a challenging time, even at the price of slower growth for north fork.
>> they’ve been reducing some of their other longer-term borrowings and they’ve not been growing the balance sheet as a consequence. they’ve been reducing the size of the securities portfolio, as well. it’s hard to grow your earnings if you are reducing the size of your earning asset base.
>> the new capital one may be more like four banks than two because in september 2004, north fork bought greenpoint bank and last november, capital one purchased hibernia. now that capital one has bought north fork, all four of those names are now part of capital one. coming up, a lot more on the markets today. will the economic news be enough to boost the stock market this week? we’ll ask phil dow, managing director of equity strategy at rbc dain rauscher.
