Dobbs: Visiting Holland
10/01/2004 12:00 am EST
Given my personal opinion that Lou Dobbs represents the highest integrity in journalism and Michael Holland represents the same in fund management, I’m thrilled to be able to share some highlights from Lou’s recent interview of Mike.
Lou Dobbs: "Michael, we’ve now had two interest rate increases from the Fed this year. What do you expect from the Fed going forward, and what kind of impact do you think its decisions will have?
Michael Holland:I think it’s possible that Alan Greenspan may be able to ride out on a triumphant horse. We have the potential for continuing a steady recovery in the US, followed closely by China and Japan, and eventually Europe. If we get what looks to be some emerging global economic growth over the next year, it will require the Fed to continue to move up short-term rates. When you have the federal funds rate as it is now, below the rate of inflation, it’s enormously stimulative. It’s the best of all worlds when the Federal Reserve has to move rates up to a more neutral level because of continued economic growth.
What’s your overall economic outlook?
"I think it’s a reasonable bet that we’re going to get continuation of economic growth. What’s been going on in late summer has been a renewal of some pessimism in the markets, and I think the fundamentals are at odds with the pessimism. I think the fundamentals are positive, and it’s likely as we move into the end of the year that we’re going to get good economic news, corporate news, and stock market news.
I always look closely at what’s happening with consumer spending, especially now given higher interest rates and increasing prices. What is your outlook for your consumer and financial stocks as interest rates and prices move higher—albeit at a measured pace?
"It’s a wonderful question because as the Fed has been signaling higher short-term interest rates, we’ve actually had the bond market react positively in terms of price and lower yield. So today, we now have a 10-year Treasury that is yielding less than it did one year ago. That means mortgage rates, which are priced off the 10-year Treasury, are actually down. The next year for the consumer continues to look reasonably good, and the best indication continues to be the housing activity and weekly sales numbers at Wal-Mart (WMT NYSE). The firmcomprises 12% of retail spending, so one out of every eight dollars spent in the US goes through a Wal-Mart store. That’s a pretty incredible indicator of what the consumer’s doing. Overall, management continues to do things that other retailing managements just can’t even begin to emulate. They are hitting markets and continuing to bring in cash flow in ways that are creative beyond the imagination of most other management. I think the fundamentals of the business have never been stronger.
"Among financial stocks, I think the outlook for American Express (AXP NYSE)remains positive. They have favorable management, and results continue to provide reasons for investors to have confidence in the current management team. They’ll take advantage of worldwide continued resumption of growth in travel and leisure, and this is the best way I know to play that. The recent results from Citigroup (C NYSE) underscore the importance of the successful diversification in the financial services areas that they’ve done, led most recently by the credit-card business, which has offset the negative results in other parts of the business — very specifically the negative results from litigation. I believe that the relatively low valuation of the stock continues to reflect not only the cyclical and commodity nature of some of the businesses and companies, but also the continuing contingent of liabilities in the legal area. I think that’s fully reflected in the stock.
Do you think oil prices above $40 per barrel are here to stay?
"I think longer term that the supply/demand equation for oil is tilted towards higher prices. Supply isn’t as great as was predicted. On the demand side, one factor alone — China — has already been a major force upward in terms of demand and price, and I don’t think that is going to abate. I believe continued demand from India and from the US, followed by Japan and Europe, will continue the upward pressure. We’ve had such a huge spike up, particularly because of terrorist concerns, but I think that the price may abate somewhat after this commodity spike blow-up. However, we should be prepared for higher energy prices in our lifetimes.
How sensitive will oil companies be to this?
"I think that longer term, the energy area is one I want to be invested in, which is why I’m recommending Schlumberger (SLB NYSE)and ExxonMobil (XOM NYSE) . The future for Schlumberger is, if anything, even better than in the recent past. The continuing imbalance between supply and demand in oil that we talked about will dictate that companies like Schlumberger will benefit. There’s no reason not to expect a pause in the relative performance of ExxonMobil given its good run. And I should hasten to disclose that it’s the largest holding by a good measure in my mutual fund, of which I’m the largest investor. So having said that, I am not inclined to be too cute by trying to sell some and buy it back at a lower price. I think that, longer term, it has management that can take advantage of what I described earlier as a continuing and even growing imbalance in the supply-demand picture for energy.
As one of the leading experts on investments in China, what kind of growth are you expecting there?
"I am a director and investor in the China Fund (CHN NYSE). I’ve been a director since 1992 and have been going over to China since that time. I would have to say that the economic growth there is one that will continue to be breathtaking, with fits and starts. I think overall that the economic giant has been unleashed. Having said that, I think it’scaveat emptor in the markets over there because of the nature of the very rudimentary and early stages of their securities markets, so I would have little compunction about saying it’s the wild, wild West in terms of its regulatory and securities industry. However, there are some American companies that should benefit, like American International Group (AIG NYSE). CV Starr was the China insurance entity for AIG many years ago and was the pre-eminent way to get a non-China insurance entry into the country. From the early 1990s on, they’ve been very innovative and impressive in terms of pressing that lead on the competition. I think it’s a pre-eminent way to invest in China. Having said that, the overall business is one of the best-managed businesses—not just financial services, not just insurance, but in my opinion one of the best-managed businesses of my lifetime. I think the backdrop for insurance companies is that the rate-setting environment will continue to be decent, if not good, over the next few years. AIG has an opportunity here to continue to make money in a very risky world. These guys do risk management as well as anyone has ever done it.
Thank you, Michael."
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