Dobbs on Holland

Holland:After the incredible move upward, I think the market has been remarkably resilient. This is particularly true given some of the news coming from the Middle East and Europe, notably the terrorist news. I think the economic outlook continues to be positive. I think overall that multinational companies are going to continue to do well, particularly those that are exposed to deeply cyclical kinds of things in commodities. The geopolitical outlook remains a somewhat net positive, and I think that gives a backdrop for continued move flat to up towards the end of this year. I do think the direction going into the election will be up.

Dobbs: China stocks have been getting a lot of attention lately, and also a lot of hype. What is your opinion regarding what's going on there?

Holland: I think the China syndrome has done its usual overheating. I think we're in the process of reversing some of the excesses, and it will take a while. The underlying economy continues to move upward faster than the authorities in China want, and it looks to be in the early stages of a blowoff. But if they can somehow restrain the incredible growth that's going on over there, then the growth has the opportunity for lasting longer. But I think clearly they're building up excesses over there. I'm on the board of something called The China Fund (CHN NYSE). We launched in 1992, so we've been through a couple of these cycles. That fund actually traded a few months ago at a huge premium to the net asset value of the fund. Underlying The China Fund are simply investments in companies in China, so you can identify the net asset value every day. It traded at a huge premium--well over 50%--earlier in the year. Right now it's at a 10% premium, so that's a pretty good measure of the unwinding of the excesses.

Dobbs: You say that it's cooling off. Given your experience and understanding of the market, are there any China sectors that you expect to do particularly well going forward?

Holland: I think the under-priced market in China right now is the infrastructure market. This consists of companies that deal with the internal structure of China--for instance, the export companies, the technology companies, the Internet companies. Sina.com (SINA NASDAQ) and Sohu.com (SOHU NASDAQ) have done extremely well in the marketplace. The companies that cater to the infrastructure have lagged way behind. So, I think those have a major opportunity to make money for investors over the next few years. One of my current recommendations, American International Group (AIG NYSE), is one of the best ways to play China right now. It is the world's premier insurance company and has important prospects there.

Dobbs: Let's get back to what's happening on Wall Street. Are there any US market segments that you think will perform particularly well this year?

Holland: Yes. I still believe that the oil service companies like Schlumberger (SLB NYSE), another of my recommendations, will continue to exceed expectations. I think that the price of energy continues to bode well for these companies. Interestingly, China represents one out of three barrels in incremental demand for oil in the world today. So every time there's another dollar demand for oil in the world markets, 33 cents of that is coming from China. And that's just one country. Ten years ago they imported no oil. It's really an incredible turnaround. And that demand for energy appears to be insatiable. As the economic recovery around the world continues to play out and as China continues to grow its demand for energy, I think that energy companies are going to benefit from the rising price of energy--as you talked about earlier. I think the supply/demand picture for oil particularly remains positive for higher prices. I also think that other cyclical companies, like 3M (MMM NYSE), will be beneficiaries of worldwide demand growing overall.

Dobbs: Anything that you think will suffer this year?

Holland: I think Treasury bonds, particularly Treasury notes might. Treasury obligations used to be called 'risk-free return' Treasury bills. Instead of risk-free returns, I'm now viewing a good portion of the Treasury note market as 'return-free risk.' I really believe that. Yielding 2% or 3%, those are lows we haven't seen since 1958. If we get a little bit of inflation coming into this country in the next few years, these will make huge losses in your portfolio. If we have continued unsettling times in terms of terrorism, maybe you don't lose any money on them, but it's a bad deal for you in your IRA. So, I'd start there. I also think there are some problematic areas in the stock market itself. If you're looking for things to sell today, I think junk companies, which ran up so much last year, have only given back a little. Some new companies that don't make any money, particularly the marginal companies, haven't given up that much. I think there's a whole sector of small- to mid-size companies that make no money that shot up a lot last year and have only given back some of their gains. I'd unload them.

Dobbs: Let's turn to your recommendations. Can you give us an update on the stocks?

Holland: Sure. American Express (AXP NYSE) continues to be a winner. Another winner as the capital markets recover will be Citigroup (C NYSE). American International, as I mentioned earlier, is one of the best China plays. IBM (IBM  NYSE) and Microsoft are extremely attractively priced--Microsoft (MSFT NASDAQ) is as attractively priced as a near monopolist gets. Johnson & Johnson (JNJ NYSE) remains a world-class company at everyday prices. The current price of Merck (MRK NYSE) fully reflects the company's multiyear disappointments, and as I mentioned last time, I'm not willing to say it's unattractive. One of the brightest outlooks among world-class multinational companies is still Schlumberger. It'll be a huge beneficiary of global economic recovery. And Wal-Mart commands 12% of US retail sales and continues to execute superbly. In addition, I'd like to add Exxon (XOM NYSE) here. It's the largest holding in my mutual fund now. I'm adding this company to the portfolio because it is a smart way to participate in the continuing supply/demand energy imbalances globally.