Interview: BB&T Asset Management---Schappe, Jeff---Chief Investment Officer
>> welcome back. four former and current executives at online brokerage a.b. watley group were indicted today, facing charges they paid thousands of dollars to brokers at merrill lynch, lehman brothers and goldman sachs to eavesdrop on conversations with clients over firm intercoms. the charges were added to a previous indictment back in august of 2005 that accused four former stockbrokers at merrill, citigroup and lehman with securities fraud for letting day traders listen in on discussions with institutional clients over the firms’ squawk boxes, using the inside information to generate more than $800,000 in unlawful profits. in today’s session, stocks fell for the second day. in this environment, where can investors reap the biggest rewards? joining us now is the chief investment officer with bb&t asset management, jeff schappe, joining us from raleigh, north carolina. welcome.
>> thank you, lori.
>> the talk today, the bern banky speech, producer prices and the inverted yield curve. how do you see these themes playing out in the market in the near term?
>> i think the market overreacted today. as far as what bernanke said last night, i don’t know if folks expected him to say, hey, they’re going to be done tightening. he clearly said it’s going to be data dependent so he’s not going to give that comfort yet. we don’t think they’ll stop tightening until the economy has slowed measurably and that has not happened yet although leading indicators point to that and as far as producer prices today, yes, it was higher than expected but it was lower than january and we think inflationary pressures have peaked.
>> you say today’s losses were overdone. could this be consolidation given the gains last week?
>> yes, i think that’s exactly what it is.
>> you are calling for 8% to 10% growth in the s&p 500 this year. so far, the s&p is up just shy of 4%. what fundamentals will carry on this growth pace in your view?
>> well, i think, lori, the key here is for the economy to slow but not go into recession, the fed to take its foot off the brake, companies in the u.s. are in the best financial health they’ve been in in years and we think that could at that time provide a terrific backdrop for equities in the back half of this year.
>> where do you want to see the fed take its foot off the brake?
>> it’s important that the economy start to slow. we think we’re starting to see some signs of that now. i’m guessing that they’ll tighten next week, probably in may and hopefully that will be it.
>> let me ask you about your bb&t large growth fund, up about 3% this year. you’re only, though, beating, according to bloomberg data, 27% of your peers. how will you improve that standing?
>> i would tell you that on a year-to-date basis, we’re in the top quartile and it’s largely because in the fourth quarter of last year, lori, we had to focus on quality and somewhat more defensive cast and that is benefiting us this year as interest rates go up so we’re in it for the long haul and the signs we’ve seen so far points to a good turnaround.
>> among your top holdings, microsoft, cisco. some are saying these companies fit more of a value profile rather than growth.
>> i don’t think that’s necessarily the case. any time we see earnings growth above 10% above their peers and i’ll use cisco for an example, as a great example of that. we think it could be a good growth stock pick and cisco, for example, lagged last year and this year it’s up very strongly so, again, we expect that to continue.
>> technology is one of your favorite sectors. given the mixed bag of tech earnings, especially with oracle last night, you also had intel, another one of your holdings, and apple, all disappointing. what’s your outlook for the tech industry as a whole.
>> for the tech industry as a whole, reasonably constructive, but i would differentiate between technology companies that are focused on business spending and those focused on consumer spending. cisco would be a good example, focused on business spending. we like names like that. we had reduced our apple position towards the end of last year to take gains in it. we think, though, it’s somewhat of an exception in the consumer space. they have a very bright outlook because of their product cycle. other areas we like -- communications equipment, software and we do not like, as much, semiconductors. again, because they’re more closely linked with consumers.
>> you also favor the industrial sector, you’ve told us. in particular, a copper mining company called joy global. today, copper and zinc rose to records in london extending a four-year rally. what is your outlook for copper?
>> copper, we think, is largely driven by industrial demand and that by china, india and in asia as well as strong demand here. joy global actually produces and manufacturers the mining equipment for copper mines. they are also involved in coal mining, so, again, we think it’s a great play on worldwide industrialization and growth.
>> caterpillar, another one of your top picks. could you quickly tell me why you see this company extending growth?
>> again, for a couple of reasons. one, because of global growth. two, we do expect the dollar to weaken when the fed takes its foot off the brake and the economy slow. that will benefit caterpillar as much of their sales are overseas. additionally, we think it’s a nice play on infrastructure spending we’re seeing taking place in europe, the far east, china, india.
>> jeff, i know you own these companies in your fund. thank you very much for joining us.
>> thank you, lori.
>> jeff schappe, chief investment officer with bb&t asset management. back with more, including nike’s earnings after the bell.
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Listen Market briefing --- Lori (slow)
NYSE --- Deb (fast)
Nasdaq --- Robert (slow)
profit rose 19% on sales gains here in the u.s. net income climbed to $325.8 million, or $1.24 a share, exceeding analysts’ estimates. revenue rose 9.2% to 3.61 billion dollars. revenue in europe, though, fell, on a decline in shoe and apparel sales. nike said today futures orders rose 2.9% less than some analysts’ estimates. bob sweet, analyst at horizon investment services, will join us with his analysis later in this half hour. now, the other big story today, general motors and delphi corp. very close to offering as many as 70,000 workers incentives to retire. this will be part of a deal to cut costs. that comes to us from a labor analyst monitoring the talks. delphi, an auto parts maker, is a former unit of g.m. an agreement may avoid a strike at delphi that would hamper g.m. c.e.o. rick wagoner’s plans to restore profitability at the automaker which last week revised its 2005 loss $2 billion higher. the agreement, part of a broader labor negotiation, might come as early as today. in finance news, j.p. morganchase set the stage for an $8 billion share buyback. and morgan stanley reports first-quarter earnings before the bell tomorrow morning. margaret popper covers the sector for us and has the latest. margaret?
>> j.p. morganchase expanded its share buyback plan by $2 billion. c.e.o. jamie dimon got approval from the board to repurchase up to $-- 193 million shares, worth about $8 billion, and 5.5% of total shares outstanding. shares of j.p. morgan rose in reaction to the news but finished .6% lower at $41.20. on the earnings front, analysts have not set the bar very high for morgan stanley this quarter. one of the more bullish is keefe bruyette & woods’s lauren smith. she expects profit to barely budge compared to a year ago. but analysts’ average estimate is for earnings of $1.3 billion, or $1.22 a share, a 4% drop from the first quarter of last year. it would be the worst performance of the four brokers reporting in march. last week, goldman sachs said first-quarter profit jumped 64%, bear stearns’ earnings climbed 36% and lehman’s rose 24%. one of the big drags on morgan stanley’s earnings is a $380 million charge arising from an accounting rule. f.a.s.-123 changes the way the company accounts for employee stock awards. another drag on growth, retail brokerage, where shareholder anton schutz isn’t expecting much progress.
>> gorman is now on board. it will take a long time to get things to change but they’re not going to sell this business at the bottom. they’ve brought him in to improve it, improve margins.
>> he is more bullish about the results for morgan stanley’s other businesses. together, he thinks they could beat analysts’ forecasts this quarter.
>> i think there certainly is the possibility to be a record. they’re out of the aircraft business. i’m glad that’s gone. credit cards should be good because clearly the charge-offs were last year for the bankruptcy reform so from a credit perspective, that’s going to be good. corporate finance should be very good.
>> under c.e.o. john mack, morgan stanley slid in the corporate finance rank, in 2005 to fourth from second in sales of merger advice and to fifth from first in stock underwriting. morgan stanley shares lag their peers. over the past year, shares of morgan stanley, the orange line in the chart, rose almost 5%. the amex broker/dealer index, the white line, rose more than 50%. back to you, lori. >> margaret. sticking with the financial sector, we know that sandy weill at citi will be retiring and now we have a date for you. it’s been set for april 18, his last day at the company. the bank’s board gave weill the honorary title of chairman emratus. charles prince was elected as citigroup chairman. checking shares of citi at the close, down 18 pents, $47.22 a share. news after the bell from fed chairman ben bernanke. bernanke says creating industrial banks have “ramifications.” his comments come in a letter to a congressman, brad sherman of california. this letter does not mention wal-mart’s banking application, though bernanke says combining banking and commerce together could be irreversible and use of a loophole removes the decision from congress. we’ll have much more reaction to the fed chairman’s speech last night in new york a little bit later in the hour. but first, we want to bring you up to speed where the markets closed today. a wild session today with the dow, s&p 500 and nasdaq giving up earlier gains. the dow closing near its low of the day. here’s deborah kostroun with more details on today’s trading action.
>> many traders i talked to today said the big story in the stock market was the fact that bonds were weak and that sent yields higher and the stock market was lower because of that. teddy weisberg at seaport securities saying disappointing to see the reversal in stocks. we had a 112-point trading range in the dow jones industrial average. he points to the reversal in oil which did not help the market , either. he also says, you have to remember we are near the top of the trading range, so right now he says you can’t throw the baby out with the bath water just yet. looking at stocks slumping for a second day. the market really grappling with bernanke’s speech. also, wholesale prices increasing for a fourth straight month, which gave us idea that the p.p.i. report suggested that rates will continue to rise. bond yields were higher. treasuries saw their biggest drop in the two-year note since october. the yield on the two-year note, 4.73%. you have to go back about three weeks, when we saw yields on the two-year near this level and over the past couple of weeks as the yields have been going down, the market has been going higher for stocks. but today, seeing a big reversal of that. interest-rate-sensitive stocks on the decline once again today as bond yields were heading higher. in fact, of the 10 economic groups in the s&p 500, utilities, those were the biggest drags. mainly because higher yields on bonds make dividend payments from companies like utilities less attractive. and the bloomberg homebuilding index, over the past week, it had a really great week but in the last two days, we’ve been losing 4% in the last two days. homebuilders again lower in today’s session. other intereste stocks on the decline. real estate stocks on the decline the past couple of days and real estate stocks lower once again. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> what was behind the reversal of fortune on the nasdaq today? here’s robert gray.
>> we saw the nasdaq composite rose to a five-year high midday. we saw selling coming in in the afternoon, not enough buyers to keep the market near there. the nasdaq with its biggest decline in about three weeks during the session. it was higher bond yields that that took the wind from the sails and we saw the market moving lower as bond yields, particularly on the 10-year note, rose and stayed higher. we, of course, saw the fed funds futures rise being, as well, so concerns that interest rates will continue to move higher, sending stocks lower for the day. a look at the industry groups today, you’ll see the most interest-rate-sensitive groups including the financials and banking stocks leading the way. telecom stocks also falling on the session. oracle also a story out. of course, their earnings out monday after the close. disappointing investors with their database software sales, and that sent the stock lower in tuesday’s trading. google shares opened a little higher after they said they would launch a new finance section of their website to go against yahoo and microsoft’s offerings. apple computer falling after the french parliament approving a bill aiming to force companies like apple and microsoft to open up their music downloading services to competing players so that apple’s would work not only with ipods but other companies’ music players, as well. we also saw some of the stocks rising, including rambus. rambus rising during the session as it boosted its first-quarter forecast and the semiconductors moving higher, as well, during the session. at the nasdaq, i’m robert gray.
>> crude oil futures rebounded from yesterday’s almost 4% drop as investors await the energy department’s latest inventory report tomorrow. the april nymex crude futures contract, which ended today, settled at $60.57. analysts surveyed by bloomberg say tomorrow’s inventory report will show crude supplies at their highest in seven years. the real focus, though, is gasoline, especially as we prepare to enter the paeng summer driving season. according to analysts surveyed by bloomberg, motor fuel supplies likely fell by a million barrels last week. after falling today, can the s&p recoup losses tomorrow? stay with us.
