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12/24/04:
CHRISTMAS EVE SPECIAL: The NBR Annual Investment Review and
Preview
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: 2004: it was
a year when the American economy seemed to be building momentum,
until a slowdown in hiring led to worries about a jobless
recovery, hurting consumer confidence, depressing prices on
Wall Street and even becoming an issue in the presidential
campaign.
PAUL KANGAS, NIGHTLY BUSINESS REPORT ANCHOR: It was also a year when
the price of oil soared to new heights, as the confluence of terrorism,
hurricanes and increased demand drove crude to a record $55 a barrel and
put some airlines into bankruptcy.
GHARIB: So what is 2005 likely to bring for investors? Stay tuned as
we try to find out.
KANGAS: Good evening everyone and Merry Christmas. The stock markets
took advantage of today`s legal holiday and took the day off. And because
Wall Street is not taking off any time next week for New Year`s, we`re
taking this opportunity to present our annual investment review and preview
program. Susie.
GHARIB: Paul, a year ago, the markets were wrapping up one of the best
years in recent memory, but 2004 wasn`t nearly as strong. Back in January,
the Dow opened at 10,453, while the NASDAQ stood at just over 2,000. Those
numbers soon headed upward on encouraging economic prospects and news of
JPMorgan Chase`s plan to buy Bank One.
After a slight pause, a new rally in the large caps seemed to be
building in mid-February, fueled by Comcast`s hostile offer for Walt
Disney. But instead, stock prices tumbled in March, amid news of weaker-
than-expected job creation. Adding to the rout, new terrorism fears
spurred by an al Qaeda attack in Spain. Although both the Dow and the
NASDAQ rebounded in early April on good economic news, a remark by Fed
Chairman Alan Greenspan cut the rally short. He raised fears about an
impending hike in interest rates.
As oil prices moved past $40 a barrel in May, stock prices went in the
other direction. The Dow fell below 10,000 and the NASDAQ broke 1,900 on
the downside. But a pause in oil prices and a stronger-than-expected jobs
report led to a burst of optimism in June, putting the Dow and the NASDAQ
back into positive territory.
In July, after the Fed decided to raise rates for the first time in
four years, both the Dow and the NASDAQ again dropped below their opening
levels for the year. Stocks fell further in early August on dismal jobs
news, rising oil prices and another interest rate hike, leading the NASDAQ
to post its low for the year.
As the presidential race began to heat up in September, a third rate
hike kept stock prices in a chill. And October saw the Dow set a new low
for the year on news of a weak jobs report and an insurance bid-rigging
scandal. But in November, falling oil prices and a Bush victory were just
what the doctor ordered for the markets. By Thanksgiving, the Dow was over
10,500 and the NASDAQ passed 2,100. That strength carried over into
December, and even after a fifth rate hike by the Fed, the markets held
onto their gains, with the Dow actually setting a multi-year high.
KANGAS: Thanks, Susie. And to fill us in on more details of the past
year`s market action, joining us is Paul Cherney, chief market analyst at
Standard & Poor`s and Paul, welcome back to NIGHTLY BUSINESS REPORT.
PAUL CHERNEY, CHIEF MKT. ANALYST, STANDARD & POOR`S: Hi, Paul.
KANGAS: Let`s begin by taking a look at the relative performance of
the major averages through Wednesday. And it is interesting to note that
while NASDAQ and Standard & Poor`s 500 are both beating the Dow this year
by a wide margin, the only double digit gains are in another index, the
Russell 2000. What do you make of that?
CHERNEY: Well, this is the broader measure of smaller-cap stocks. And
yes, the gains were very good. Smaller-cap stocks tend to do best in the
early years of a bull market. Last year the Russell 2000 returned 45
percent.
KANGAS: OK, that explains that. Now let`s look at individual winners
and losers in stocks starting with some of the big gainers among the Dow
Jones industrials, first McDonald`s.
CHERNEY: They had a domestic U.S. profit turnaround and reported 42
percent higher Q3 profits.
KANGAS: And then we had Boeing stock, another one of the high flyers.
CHERNEY: Up quarterly dividend by 25 percent. They have good orders
for commercial and military aircraft.
KANGAS: That will help. Now we have ExxonMobil.
CHERNEY: Well, this is expectations that the global demand for oil
products will continue through next year.
KANGAS: Uh-huh. On the other extreme, Paul, it looks like Merck and
Pfizer shareholders could both use a pain reliever after the drops in their
stock prices.
CHERNEY: Yes. Both these drops due to Cox 2 inhibitors. September
Vioxx was pulled by Merck and the stock suffered. And then most recently
Pfizer, concerns about its Celebrex which is also a Cox 2 inhibitor.
KANGAS: Then we have Intel whose price went inside out.
CHERNEY: Well, the stock had been trending lower all year as profits
from the first year of the bull run were being taken. But then in July it
took a one-day dive of 10 percent after the company lowered its gross
margin targets.
KANGAS: Now turning to the Standard & Poor`s 500 Index, Apple Computer
had a nice gain. Was that all because of its music machine iPod?
CHERNEY: It really is. The iPod sales are terrific and it has had a
halo effect where it`s actually brought people into be interested in buying
Macintosh computers too.
KANGAS: And Autodesk, the software maker, what is the story there?
CHERNEY: It`s a computer-aided design software, their reported Q3
earnings and sales rise. They set a two for one stock split and then they
just recently approved a $24 million share buyback. So lots of things for
the bulls to like.
KANGAS: Now, on the flip side, Ciena had a pretty rough year. What you
can tell us about that?
CHERNEY: They provide network solutions to telecom service providers
and optical switching systems. The stock bottomed actually in August and
has been trending higher since then, but February through July too many
concerns about earnings sent prices lower.
KANGAS: Then there was PMC Sierra.
CHERNEY: That is communications chip maker. In September they lowered
their Q3 sales forecast.
KANGAS: OK. Turning to the NASDAQ. There was no price cutting in the
stock of Kmart holdings thanks to the merger with Sears.
CHERNEY: This is a huge turnaround story after emerging from
bankruptcy about 19 months ago. And the company has cut costs to bring
profit to the bottom line and as you mentioned, plans to merge with Sears.
KANGAS: And then there`s Apple Computer again which we saw already on
the Standard & Poor`s 500, we don`t have to go over that. On the other
hand, can you give us the synopsis on what happened to Synopsis?
CHERNEY: This is a software company, August the 19th, it fell 29
percent in one day after delivering a negative outlook for the quarter and
the year.
KANGAS: It looks like Chiron got a case of the flu.
CHERNEY: Unfortunately Chiron`s flu vaccine manufacturing was halted
in Britain as we all know. That was October 5th and the sellers have been
in command since.
KANGAS: Some very good information there, Paul. Unfortunately our
time has run out. But I want to thank you very much.
CHERNEY: My pleasure.
KANGAS: My guest Paul Cherney, chief market analyst for Standard &
Poor`s
GHARIB: There were several stories that dominated business news over
the past year, but there`s little doubt that the explosion in oil prices to
a record $55 a barrel had the biggest impact. As Erika Miller reports, a
"perfect storm" of events was responsible for that unexpected surge.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: When 2004 began,
oil stood at $32 a barrel. But the price started going up almost
immediately, as the U.S. occupation of Iraq hit several snags. And there
was growing concern that terrorists would start targeting Middle East oil
fields.
JACK AYDIN, OIL ANALYST, KEYBANC CAPITAL MKTS.: The fear was that
some of the Saddam Hussein loyalists, they will destroy you (ph), put some
of those fields on fire and also destroy some of the pipeline facilities
and port facilities.
MILLER: And in February, OPEC unexpectedly pledged to cut its official
oil output by a million barrels a day. The cartel also said it would try
to eliminate cheating above quota limits. The announcement came at a time
when worldwide demand for oil was skyrocketing. In the U.S., demand was so
strong that stockpiles of gasoline were running 5 percent below their five-
year average. That raised the possibility of shortages in the upcoming
summer driving season. Demand was also soaring in China and India. By the
end of the first quarter, oil prices had soared to $37 a barrel, a 13-year
high. Oil prices continued their rapid rise in the second and third
quarters, surpassing the $40 a barrel mark in June, and $45 in August. The
swift rise in prices prompted OPEC to raise its production by a million and
a half barrels per day in August. But supply still couldn`t keep up with
demand, and by the beginning of October, crude passed the $50 a barrel
mark.
MICHAEL ROTHMAN, ENERGY ANALYST, MERRILL LYNCH: The real issue in the
current year had to do with demand. Oil demand growth rates or
disappearance levels were the highest, frankly, I`ve seen in 20 years. And
OPEC was in a situation where they kept producing more and more oil to try
to cool down the market. And those barrels seemed to just literally
disappear into the bounds (ph).
MILLER: There were also new fears of a disruption in oil exports from
Russia, the world`s second largest exporter. In July, the Russian
government demanded that Yukos, the country`s largest oil company, pay
billions of dollars in back taxes. As a result, Yukos threatened to
declare bankruptcy and cease production. Add to that political unrest in
Venezuela and Nigeria, which some feared could disrupt oil exports from
those nations.
And the knockout blow came in September from hurricane Ivan, which
damaged pipelines in the Gulf of Mexico. That reduced oil supplies by
hundreds of thousands of barrels a day. Crude hit its record intraday
price of $55 a barrel on October 22, although it never closed above that
level. Since then, prices have backed down significantly. The main
reason: signs that demand growth is moderating.
ROTHMAN: It had to do with the demand side pressures -- whatever was
going on -- finally abating as they should have at some point. And you
started to get a physical backing up of oil in the markets.
MILLER: The huge rise in oil prices this year had a devastating impact
on several sectors, including airlines. But one positive is that the U.S.
economy has remained fairly resilient.
RAYMOND CARBONE, OIL TRADER, PARAMOUNT OPTIONS: We did see that this
economy can certainly survive 35, then 40 then $45 then $50 oil. I think
that`s a big surprise around the world.
MILLER: Most experts say the days of $50 a barrel oil are over. They
predict prices will trade in the mid-$30s next year, barring any major
demand or supply shocks. Erika Miller, NIGHTLY BUSINESS REPORT, at the New
York Mercantile Exchange.
KANGAS: As we noted earlier, November`s decline in oil prices
certainly helped stock prices to make a nice comeback. So as the fourth
quarter draws to a close, how has that been reflected in the performance of
mutual funds? To help us find out, joining us now from Chicago is Christine
Benz, editor of "Morningstar Mutual Funds." Christine, Merry Christmas and
welcome back to NIGHTLY BUSINESS REPORT.
CHRISTINE BENZ, EDITOR, MORNINGSTAR MUTUAL FUNDS: Thank you, Paul.
It`s nice to be here.
KANGAS: First let`s take a look at which fund sectors have led the
pack during the year`s final three months. And it seems to be a pretty
diverse group with Latin America stock funds at the top. And I understand
this group is also number one for the year, correct?
BENZ: That`s right, Paul. And the big story here with Latin America
is the strength of the Brazilian market. This is a big part of Latin
America fund portfolios and investors have really liked what they`ve seen
in terms of economic reforms in Brazil.
KANGAS: Uh-huh. As far as the other top performing areas is
concerned, it is interesting to see real estate continuing to do well, up
almost 14 percent for the quarter and 30 percent for the year.
BENZ: Right. These were funds that were stellar performers during the
bear market, have continued to do really well. One thing I can`t help but
wonder, though, is whether we are looking at a little bit of a self-
fulfilling prophecy here. There has been such a stampede into these real
estate funds over the past few years. And fund managers have to put the
money to work somewhere. And I can`t help but wonder whether that is what
is going on right now.
KANGAS: OK. Interesting. Now let`s move on to the best performing
individual funds with more than $50 million in assets. And the surprise is
that Fidelity Select Medical Delivery fund led the pack with nearly a 28
percent return.
BENZ: Right. This is a fund that invests in HMOs and hospitals and
other health care service sorts of companies. And there has been a lot of
mergers and acquisitions in this -- in this area. And that, in turn, has
translated into improving stock performance on a number of these holdings.
KANGAS: Now, these are still preliminary results, but it appears that
the top fund in terms of performance in 2004 will be State Street Research
Global Resources with a 50 percent gain. Is that an energy play?
BENZ: It is. This is a fund that we`ve seen top the charts before and
it is a fund that focuses on small company energy service providers. And
these companies tend to be very leveraged to the price of oil. So when we
are all feeling the pain at the pump, this is historically a fund that has
done really, really well.
KANGAS: Indeed, it has. And for those who are more concerned about
long-term performance, the top fund of the past three years was U.S. Global
World Precious Metals. I suppose that reflects the big rebound in the
price of gold?
BENZ: It does. You know, most precious metals funds are pretty much
flat for this year-to-date in 2004. But these funds were such strong,
strong performers in the prior years that their three-year numbers are
absolutely stellar.
KANGAS: Now turning to the largest funds in terms of assets, these
funds generally seem to have had a good quarter with returns in the five to
seven percent range with the exception of Pimco Total Return.
BENZ: Right. Pimco Total Return is the only bond fund on this list
and bonds generally had kind of a lackluster to flat quarter. The stock
funds are all way up for the quarter. And American Funds Euro-Pacific
Growth is actually the big winner on this list. That is an international
fund and I think that`s the best performer here.
KANGAS: And for the full year, the returns of most of these funds
aren`t much higher with only Growth Fund of America reaching double digits.
BENZ: Right. The big gains did come in the fourth quarter. I think
when most investors open their statements, though, they will have a pretty
happy news for the year.
KANGAS: Well, generally that is absolutely true. And it`s a delight
to have you bring us that good news. Thanks so much for being with us,
Christine.
BENZ: Thank you, Paul.
KANGAS: My guest Christine Benz of Morningstar Mutual Funds.
GHARIB: So what`s ahead for the stock market and the economy in 2005?
I got some answers from Joe Battipaglia, chief investment strategist at
Ryan Beck and Company, Vince Farrell, chairman of Victory Capital
Management, the New York money management firm and Josh Feinman, chief
economist at Deutsche Asset Management-- the same panel I talked to last
year at this time. Their forecasts were right on target about the stock
market, economic growth and the dollar and interest rates. This time, I
began my discussion by asking Josh Feinman for his economic forecast for
the New Year.
JOSH FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MGMT.: The U.S. economy
is likely to continue to grow at a trend, a little bit above trend pace,
maybe three and a half to four percent in terms of real GDP. I think the
economy has a good amount of momentum and monitoring financial conditions
are still accommodative and I think the impetus to growth is going to shift
gradually from policy stimulus to self-generating growth with labor market
and income.
GHARIB: Joe, what is your forecast?
JOSEPH BATTIPAGLIA, CHIEF INVESTMENT STRATEGIST, RYAN BECK & CO.:
Similar in terms of the number but the composition of growth will be
different. I think the consumer is going to spend less on the durable
side, more on the nondurable side. I think business investment is going to
take on a major role in the 2005 economy, which is encouraging to me
because it suggests that we have continuity going into `06.
GHARIB: Vince, where do you stand?
VINCE FARRELL, CHAIRMAN, VICTORY CAPITAL MGMT.: I generally agree, but
I think it might be a little slower the first half of the year because the
economy lags moves in oil price by about a year. So we had a significant
up tick in the price of oil in the middle of the year. I think that is
going to feed through in the first half of the year and then the economy
picks up. I agree with the three and a half, four percent. I think is
going to be back-end loaded though.
GHARIB: Josh, the Fed raised interest rates five times this year to 2
1/4 percent. How much higher do you think they go for 2005?
FEINMAN: The Fed is likely going to continue on this gradual path of
unwinding the very easy policy stance. And I think if the economy
continues to grow above trend as I suspect it will, the Fed will keep up
but maybe take the funds rate to three and a half to four percent by the
end of the year.
GHARIB: So Vince, what impact will higher interest rates have on the
markets and how bullish and bearish are you on stocks and bonds?
FARRELL: Reasonably bullish because most of us have baked into the
cake a Fed move up to 3 1/2 or 4 percent. The 10-year bond versus last
year has not moved much at all. So I think the 10-year which is in the low
4s right now, is probably going to drift up to around 5 which would make
sense with a three and a half percent Fed funds rate. I think the economy
-- the markets have accommodated that because that is indicative of a
pretty good economy. So I think relatively bullish on the economy, same as
last year, roughly a 10 percent gain forecast for 2005, a bigger component
of it though coming from dividends.
GHARIB: Joe do you agree with that and how bullish and bearish are
you?
BATTIPAGLIA: Well, when you look at it from an asset allocation point
of view, real estate has been played out. The bond market had its greatest
run ever. I think it is time for the stock market to deliver. Now a 10
percent improvement in the S&P 500 gets you to roughly 1300, but that is
just the top line story. I think in the market itself, there will be a lot
of opportunities and the bond market, all the spreads have narrowed. There
is not much opportunity left for the income-oriented investor. So
therefore, stocks look like the right answer.
GHARIB: Josh, what about oil prices? What is your forecast for 2005?
FEINMAN: I think oil prices sort of drift a little bit lower,
continuing a trend we`ve seen in recent weeks but probably stay in the
maybe 35 to $40 a barrel range.
GHARIB: How about the dollar?
FEINMAN: The dollar long-term, we are still thinking it has further to
go to help correct the U.S. current account imbalance. But I think that
more of the movement is ultimately going to come against the Asian
currencies rather than Europe.
GHARIB: Are housing prices still going to stay strong?
FEINMAN: I think housing is a little bit worrisome in some regions of
the country. Home prices have risen faster than rents and I would look for
over the next couple of years some catch-up there with housing prices maybe
coming down a little bit.
GHARIB: So Joe, what impact will these factors - oil, the dollar and
housing have on the stock market?
BATTIPAGLIA: Well, let`s start with housing. I think you start to
sell your housing related companies because the earnings are plateauing.
On the oil side I take money out of the drillers frankly because I think
supply and demand will be even better balanced. And lastly on the dollar,
I think large-cap multinational companies in the U.S. will do well with the
dollar coming lower in earnings, in terms of translation.
GHARIB: Do you agree with that, Vince?
FARRELL: Generally, I wouldn`t take money out of the oil drillers. I
think the supply/demand situation is going to be very favorable for a long
time. The only forecast risk I see for us right now is if the dollar were
to plummet from its current level. Down 20 percent in a roughly three-
month period of time is a definition of a plummet to me. That is not a
forecast, that`s a worry. But things look OK. And I agree with the
multinationals, because you are going to have more ways to make money on a
multinational side.
GHARIB: Vince, the last time you recommended BP and Exxon as your two
favorite stocks. What are you recommending for 2005?
FARRELL: Stay with BP because there`s going to be massive share
repurchases as per the company`s own statements with oil where it is at.
So I think a rapidly rising dividend yield and big share repurchases make
it attractive. And Citigroup to it because Citigroup is only trading at 10
1/2 earnings and the market is at 17 times, has a 3 1/2 percent dividend
yield. The market yield is about 1 1/2 percent and I think the Citigroup
(INAUDIBLE) is going to be increased rapidly over the next few years.
GHARIB: And do you or your firm own any of these?
FARRELL: The firm owns them and I own them for the mutual funds that
we manage.
GHARIB: Joe, your big winner last year was Dell. What are you
recommending for the New Year?
BATTIPAGLIA: First, thanks for leaving out my laggards and losers.
But for the New Year, I would try Hewlett-Packard one more time. I think
they`re going to get it right this time. The quarters may look better and
on the other side of the ledger I`d do Johnson & Johnson. I think if they
make that acquisition of Guidant, the combined entity will be very
powerful. I like the medical device business, so those are the two I would
add to the portfolio. We own all three.
GHARIB: Josh, let`s get a prediction from you. It`s expected that a
replacement for Fed Chairman Alan Greenspan will be named this year. Who do
you think it will be?
FEINMAN: I think Marty Feldstein probably has the inside track. But
there are others. John Taylor is a possibility. Glen Hubbard and possibly
even some people within the Fed, Governor Ben Bernacke or maybe a bit of a
dark horse, Governor Don Cohen (ph) who has been Greenspan`s right-hand man
for many, many years.
GHARIB: Real quick question. We only have 30 seconds left. What
impact will President Bush`s Social Security reform and tax reform have on
the markets if they do go through? Vince?
FARRELL: No impact in 2005. That`s has already been impacted. This
is going to be a very long struggle to get this stuff through. People say
oh, Social Security change will bring a flood of money to the market. That
is over the next 10 to 20 years.
GHARIB: Joe?
BATTIPAGLIA: Well, that`s true. The direction is what really makes
the difference here. If we go towards a liberalization of these programs,
perhaps the free markets will take full effect here. But if we move in a
different direction which is more government regulation and more
involvement, more convoluted tax form -- tax situation, we could end up
with more trouble in the economy by way of inflation as the years go by.
GHARIB: Gentlemen, thank you very much, Joe Battipaglia, Josh Feinman,
Vince Farrell, hope you have a very happy holiday.
BATTIPAGLIA: Thanks Susie.
FARRELL: Thank you, Susie.
KANGAS: Looking back a year ago, who correctly foresaw that 2004 would
be another up year for the stock market? Well, our annual panel of market
monitors, of course. But for 2005, this group is split 3-2, with the bulls
barely tipping the scales.
For the fourth year in a row, the leading bull is Abby Joseph Cohen of
Goldman Sachs. She expects the Dow to end the year at a lofty 11,800.
Cohen sees a comeback in the information technology sector leading the way,
followed by gains for the industrial and consumer service stocks. Cohen is
calling for stocks to outperform bonds, but warns that the Federal budget
deficit and interest rates are likely to move higher.
Our second-most-bullish panelist is again Alfred Goldman of AG
Edwards, whose prediction for the year-end Dow is just 300 points lower
than Abby Cohen`s. Goldman favors the consumer non-durable goods sector,
and expects the pharmaceuticals to rebound. He says the best way to play
those trends is through large cap growth funds. Goldman sees economic
growth slowing and the stock market doing the best in the year`s first
half.
Eugene Peroni of Claymore Advisors takes a somewhat different view.
Although his Dow numbers are slightly lower than Goldman`s, he sees strong
economic activity helping such diverse sectors as defense, hotels and
building products. And for that reason, he likes multi-cap mutual funds.
Gene says this is the most powerful technical landscape he`s seen in the
market in 30 years.
It appears that Jim Stack of Investech Research will come in with the
closest calls on the 2004 market averages. So it`s worth noting that he`s
now turned bearish, expecting the Dow to end 2005 at just 10,000. Jim, who
also scored a home run last year with his pick of the energy sector, sees
the momentum shifting to healthcare supplies. And Stack warns that the
coming year will bring unpleasant surprises with higher than expected
interest rates and a topping bull market.
Even more bearish is Mark Leibovit of VRTrader, who sees the Dow
sliding to 8,900. He still likes telecom, gold and energy stocks. But
Leibovit expects the overall market to fall quickly, and to resume its drop
after a mid-year rally attempt.
GHARIB: And we`ll take a closer look at the selections of our
panelists in our "where best to invest" series beginning on January 11. To
learn more about tonight`s analysis and predictions, please go to our web
site at nbr.com. We`ll be back with our regular program on Monday. And as
we wrap up tonight`s program, we`ll show you a montage of the top business
and economic events of 2004. I`m Susie Gharib. Good night, everyone.
Hope you have a happy holiday and a very Merry Christmas to you Paul.
KANGAS: And the same to you, Susie. I`m Paul Kangas wishing you all the best
of good holidays!
Nightly
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