Interview: Barclay's Global Investors---Koesterich, Russ---Sr. Portfolio Manager
>> more testimony today in the fraud trail of former enron chairman kenneth lay and former c.e.o., jeff skilling. the company’s former treasurer testified in houston federal court today that lay knew the company had billions of dollars in losses and didn’t tell investors about them. benjamin gilsan said by the summer of 2001, enron’s assets were worth at least $3.5 billion less than their recorded value. glisan said lay attended many meetings where the losses were discussed. lay and skilling are charged with orchestrating a fraud that led to enron’s collapse. they face at least 25 years in prison in convicted. all three major averages finished the day higher. can today’s rebound from the previous two days be sustained? joining us with his answers and outlook on the market is russ koesterich, portfolio manager with barclay’s global investors. russ joins us from san francisco. welcome.
>> thank you.
>> after a clip of sluggish days, has the march rally resumed?
>> i think the march rally has resumed and the catalyst we’ve seen is the same catalyst we saw in january. that is that after a tough year, 2005, where we had a steady drip of tighter monetary policy, we’re seeing the light at the end of the tunnel and investors are beginning to discount the fact that the fed is almost done and that’s clearing the way for stocks to move higher.
>> so, we have a couple of weeks, here. march 28, not even, until the next fed meeting. not many potential catalysts we know of that could move the market . so how much room does the rally have to advance from here?
>> in the near term, the market may need to consolidate. you raise a good point, there are not a lot of good catalysts. you’re out of the earnings season and most of the major economic numbers for march have already come out. the next date is the march 28 fomc meeting, and in particular, not the decision. i think a quarter-point hike is fairly well telegraphed, but what is the language? do we see an indication that chairman bernanke and the fed is telling us they’re almost done with monetary tightening? that could be another catalyst for the market to move higher and the dow to take out its highs.
>> what specifics would you look for in that commentary?
>> you would want to see evidence that the fed believes core inflation is well contained. 2005 was an interesting year because the fed was unusual in how well telegraphed the monetary policy was. the difference going into 2006 is that really now it’s coming down to the economic data so as the fed looks at the economic tea leaves, as they read the numbers, what are they taking away? if their opinion is that core inflation is stable, not accelerating, i think that’s going to be a plus for bonds and a plus for equities.
>> so, russ, in this climate of rising interest rates, let’s bring in the earnings picture. a lot of sentiment today was that earnings growth can continue to climb and outweigh the climate of rising interest rates. is that the way you see it?
>> you have to look at what investors fully discounted. the market is looking for deceleration of earnings in 2006 so it’s all right if earnings start to slow. what the market isn’t expecting is a collapse. we’re looking for earnings growth of 10% to 12% in 2006. if the fed can engineer a soft landing, if they can keep the consumers spending without overheating, i think that’s realistic and probably enough to get the averages higher, my guess in the high single digits for the year.
>> regarding consumer spending, consumers have outspent industrial spending for the last six years. that trend seems to be reversing. characterize, if you will, the slowdown in consumer spending.
>> the consumers have carried the economy the past several years and what’s interesting is how atypical the recession was in 2001. normally you get a pullback in consumer spending, you get a pullback in durable goods,. you actually had the opposite, the best month for auto sales was october 2001. consumers never slowed down. what’s that meant is that going into 2006, indebted, real wages, which means wages after inflation, are slowing and they’re facing higher energy costs. on the other hand, corporations rebuilt their balance sheets during the recession. their cash flow is strong and they’ve got much better ammunition to spend over the next couple of years than i think the consumer is likely to have.
>> russ, let’s move on to your sector calls. industrial shares, best performers this month, jumping ahead of the broader market for this year after trailing last year. is this, though, the right time to get into industrial stocks given where we are in the economic cycle?
>> i think you can still be leveraged to the industrials. i would look for companies in machinery, capital spending, infrastructure. even some select areas in technology such as communication equipment. and the reason for that, as i mentioned before, is that companies are flush with cash. in addition, you’re seeing capacity utilization rates, which really are a measure of how tight capacity is, rise to the highest level in 5 ½ years. that means producers in the industrial area have pricing power. we’re seeing that in the numbers and in my opinion, that pricing power will translate into higher returns. in contrast, you look at the consumer space, you see that auto manufacturers, electronics, apparel―they’re really unable to raise pricing so i would definitely leverage to the industrials rather than the consumer.
>> i do want to point out you like oil services within energy, but not all oil services. could you tell me why?
>> within energy, you probably want to stay from the e&p names that had a great run but i would position myself in oil services, particularly the deep water rigs. there’s capacity constraint in this area. there’s no new capacity coming on until 2008 and you’re seeing very strong day rates which represent pricing power.
>> russ koesterich, portfolio manager with barclay’s global investors, thank you very much. much more with bloomberg “after the bell” continues after a short break.
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G.M. --- June (slow)
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this is “after the bell.” shares of k.b. home rising in the extended trading session. the homebuilder reported better-than-expected earnings after the close of regular trading. profit increased 42% to $2.02 a share or six cents above the average estimate of analysts surveyed by thomson financial. earnings grew at the slowest pace, though, in four quarters as rising mortgage rates cooled the housing market . orders fell 12%, compared with a 23% gain a year earlier. we’ll speak with alex barron, analyst with j.m.p. securities, later in this hour on k.b. homes and their latest earnings. we also have extended-hours earnings from adobe. giving their guidance, their target $640 to $670 million, reaffirming that number. thomson financial analysts looking for second-quarter revenues of $675.7 million. on the earnings per share range in the second quarter, adobe looking for 30 to 32 cents a share. thomson financial analysts are expecting 32 cents a share. for the quarter that just passed, in the first quarter, adobe beating street estimates by three cents a share. 32 cents, excluding items, versus the 29-cent-a-share estimate and on revenues, better than expected, $665.5 million. you’re looking at the extended session, shares more than 3.5% down on adobe systems, more than likely on the guidance, reaffirming to the low end of the thomson financial analysts range. also after the bell, we heard from jabil circuit, saying second-quarter profit rose 50% on growing demand for design and manufacturing services. jabil, which makes cell phones for nokia and philips brand consumer electronics, reported a rise in net income to $69 million from $46 million a year earlier. sales rose 35% to $2.31 billion, beating analysts’ estimates of $2.21 billion. shares of jabil circuit ended the regular session up four cents to close $38.24 a share. general motors has cut a deal with the united auto workers union. it will pay out tens―pay tens of thousands of g.m. and delphi workers to get them to retire early. june grasso has more on the implications.
>> the agreement brings g.m. a step closer to avoiding a threatened u.a.w. strike against delphi which could force g.m. into bankruptcy. to get rid of thousands of workers, g.m. will shell out billions of dollars. let’s take a look at the terms. as many as 13,000 delphi workers would qualify for early retirement that pays up to $35,000 to some eligible workers. but g.m. workers who accept the buyouts will give up g.m. healthcare and other post-retirement benefits. auto analyst rebecca lindland says the deal is significant because it helps avoid a strike, but it’s unclear how much of a fix it will really be.
>> if people looking and saying, can i get another job? you know, $140,000 sounds like a lot of money but these are people that typically make a very good salary, anywhere from $60,000 to $100,000, depending on overtime and their wages. so, you know, it’s not necessarily they’re going to jump at this opportunity.
>> getting workers to retire helps both g.m. and bankrupt delphi to reach their goals of cutting costs and becoming profitable again but lindland says there are still many difficult issues that have to be resolved, including how many u.s. factories delphi will keep and how much to pay the workers who can’t or won’t take a buyout. delphi reiterated it plans to ask a bankruptcy court judge for permission to cancel contracts on march 31 if the company and its unions can’t agree on wage cuts by then. g.m. shares rose as much as 3% on the news today after rising 5.5% yesterday on word a deal was imminent. back to you.
>> june, thank you very much. stocks today break out of a two-day slump and sent the dow to an almost five-year high as investors grew confident earnings will climb fast enough to outweigh increasing interest rates. the dow jones industrials today closing at 11,317. important to note, 11,338, that is the last milestone before the dow’s all-time high hit back in january of 2000. the s&p gained nearly eight points to close at 1305 -- pharmaceuticals, biotech, financials and energy, all strong industries today and the nasdaq composite index gained nine points with leaders including oracle, yahoo, and genzyme, closing at 2303, closing close to the session highs today. for more on what was behind the trading action at the new york stock exchange, let’s check in with this report filed by deborah kostroun.
>> off to the races for the dow and s&p 500 surging higher. the next level we’re looking at in the dow, that 11,338, five-year high, only 21 points away from that. the market is drifting higher and a lot of traders say that’s the path of least resistance and when the market is going higher in that path of least resistance, it gives us positive undertones to the market . leaders today, drugs, financials and transports. we also saw more records today. the small cap, midcap and russell 2000 all closing at those record levels. general motors leading a rally in some automobile-related stocks. that on optimism that their buyout packages and early retirement plan with auto parts supplier delphi will cut labor costs. other g.m. auto parts suppliers also gaining on that news today. amex broker/dealer index with a very good session today, up 1%. morgan stanley gaining on their better-than-expected profit. the s&p pharmaceutical index at a 52-week high, big gains in bristol-myers. that was the biggest gainer in the s&p. also sanofi-aventis, after they agreed to settle that patent suit with apotex. that is going to keep a generic version of plavix, which is a blood thinner, off the market until 2007. analysts at merrill, u.b.s. and morgan all upgrading bristol-myers. we also have in the background, dr. reddy’s and teva. they also have generics of plavix and ideas that maybe bristol-myers would be able to settle with those companies, as well. transports in today’s session with a really good day. transports once again neither record levels. fedex higher, but having a tough time getting there. it was lower most of the day. they said third-quarter profit rose 35% as the company wasn’t able to raise a lot of their prices more than in recent years. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> and transports led a broad-based rally on the nasdaq today. here’s robert gray with details.
>> the nasdaq composite rising for the seventh day in nine, a broad-based rally taking it above the 2200 -- 2300 level. we saw the transports leading that broad-based rally and the fact that the transport index on the nasdaq rising to a record in the session. we also did see strength from the banking stocks, also the industrials and internet stocks, as well. within the transports, c.h. robinson, freight forwarding company, at a record high. also strength from e.g.l. group, at a six-year high and airlines moving higher as the international air transport association cutting its forecast for 2006 losses in half. some of the other movers included applied materials today, holding a shareholders’ meeting, boosting their quarterly dividend up to five cents from three cents and buying back shares. b.e.a. systems, also one of the best gainers in the nasdaq 100, rising a day after its analysts day meeting, management talking about topping the 10% license growth. and oracle shares rising as the are releasing a new product. we did see microsoft shares moving lower. one of the dominant stories of the day, microsoft delaying the release of the vista windows operating system until january, and it will miss the entire holiday shopping season. that put pressure on p.c. makers early in the session. then we did see dell bouncing back. chip stocks under pressure, intel was lower earlier though closed higher. advanced micro devices was lower, h.p. was lower. as far as rivals performed, apple had gains early in the session and gave back those gains. >> from equities to energy trading, crude oil and gas fell after the energy department reported a decline in fuel imports and supplies. nymex crude oil futures closed the session at $61.77 a barrel. a drop of almost 1%. checking your other energy movers -- there were a few surprises in today’s inventory report, including a drop of imports causing the nation’s crude supplies to fall by more than a million barrels last week. can today’s bounceback in the stock market be sustained? we will ask our next guest, russ koesterich, portfolio manager at barclays global investors, for his market outlook. that’s next.
