A View from "Holland"

10/21/2005 12:00 am EST


Lou Dobbs

Anchor and Managing Editor, CNN News

"Quality" is the mantra of The Lou Dobbs Money Letter, in which the financial commentator interviews both top-quality CEOs as well as top-quality money managers. And when it comes to quality, few compare to fund manager, Michael Holland.

"Michael’s opinions on the Fed, conditions in China, and even what surprises might be in store are the kind of insights you won’t find anywhere else," notes Lou Dobbs. "His three decades of investing give him what I consider to be unique market expertise. He’s an extremely successful investor with a stellar career that has included senior positions at Blackstone Group, Oppenheimer and Co., and Salomon Brothers. Currently, he runs his own fund, the Holland Balanced Fund. I’m sure you’ll agree that Michael’s take on the current state of the market is insightful, intelligent, and well worth paying attention to." Here are some highlights from his interview:

Lou Dobbs: Michael, welcome back. Let’s start with the economy as we go into the last quarter of the year. What do you expect?

Michael Holland: My initial observation is that the consumer and business spenders have been both quite resilient given what has been going on, including the incredibly sharp rise in energy prices. If we have any break whatsoever in the recent spate of negative news, I think that by the end of the year the market could surprise to the upside. What if we had a dramatic decline in gasoline at the pump? And what if we have good news on the reconstruction effort in the South? And what if the news coming out of the Middle East is not nearly as dour as it has been?

But these are best-case scenarios, or nearly so. And rarely does the market ever expect that.

"You’re exactly right. The psychology of the stock market is negative. Expectations are so low for how things are turning out. Instead, we have concerns about everything not working out. Investor sentiment has been so scared over the last few quarters that good news is not reflected in the prices of stocks. The expectations bar has been set low for how events could play out, and I think that’s really important. The possibility of a positive surprise is magnified.

Do you think the market is scared of anything that is actually real?

"The market is worried about consumers spending less. Consumers have been very resilient and are two-thirds of the US economy. I also believe the market right now is worrying that the Fed is going to repeat the mistakes from 1999–2000, when it actually over-responded to an imagined inflationary foe and raised rates too high. I believe the Fed should just go on vacation right now and leave us alone.

Let’s move now to some of your recommended companies.

"American Express (AXP NYSE) is a very exciting situation as they are in the process of spinning out the financial services operation. The package of securities is extremely attractively priced. I think the underlying businesses are really robust. To my mind, AXP is particularly well-positioned. Citigroup (C NYSE) continues to be challenged by the flattening yield curve. But that’s being offset by vitality in the capital markets, the stock market, the bond markets, and in corporate finance activities. I think the stock is cheap and likely to have good dividend growth.

"The Roberts family continues to do all of the right things at Comcast (CMCSA NASDAQ). As the largest cable operator in the US, it is at the forefront of the rapidly changing technology that determines how we view things on monitors or use cell phones. I think one of the most interesting things they’ve done is to grab the National Hockey League, which is one of first steps to becoming a major competitor to ESPN. There’s no money to be made on the contract with the NHL, but I think they are going to get football. I think this company is very cheap and very exciting.

"Johnson and Johnson (JNJ NYSE): This is a company that has come through the last couple of years in an industry that has been under siege. It has weathered the storm incredibly well. I believe it is one of the best, if not the best, managed company in the world. PepsiCo (PEP NYSE) is still one of the best-managed consumer companies ever. Compared to its archrival Coca-Cola, the continuing progress its management makes is beyond admirable.

"Schlumberger (SLB NYSE) continues to be one of my largest holdings in the fund, and I like it because of the ongoing need for replacement of the energy. And that’s not a function of today’s or next week’s commodity prices. Rather, it’s a physical reality of supply and demand. This stock has done incredibly well and is always subject to profit-taking. But, it is actually one of the best-positioned companies in the stock market today.

"The incredible thing about Wal-Mart (WMT NYSE) is that even after daily headlines about which group is going to sue it or attack it or which union is going to go after it, the company continues to throw out profitability that defies the stock price, which has declined. They continue, in the face of Katrina, to produce same-store sales that are very robust. More importantly, they are the single most admired champion of the Katrina response. Someone in The New York Times recently suggested that FEMA be replaced by WEMA, the Wal-Mart Emergency Management Agency.

"They anticipated the problem, and they were the first responders, and they have been there afterwards. Forgetting for a moment the tens of millions of dollars that Wal-Mart people gave personally, they were there with the water, the ice, and the generators. They continue to be the single most important source of solutions to the Katrina response. I think they remain one of the best managements the retail industry has ever seen. I think if you buy WMT and close your eyes for three or four years, forget the headlines and all that, you’ll be very happy."

Thank you, Michael, for sharing your wisdom and your recommendations. We’ll talk again soon.

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