4th Quarter Report With Sam Stovall, Chief Investment Strategist at Standard & Poor's
Friday, December 29, 2006JEFF YASTINE: The fourth quarter has come to an end on Wall Street and that can mean only one thing: Sam Stovall, chief investment strategist at Standard & Poor's joining me for a look at the quarter's winners and losers. Sam, happy New Year. Welcome back to NIGHTLY BUSINESS REPORT.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Happy to be here Jeff.
YASTINE: Let's jump right in with a look at the relative performances of the major averages, the Dow, the S&P and the NASDAQ 100, all with respectable gains for the quarter.
STOVALL: Absolutely, and interestingly enough, very close to one another. So the fourth quarter was fairly equal versus the whole year, where the non-NASDAQ did the best.
YASTINE: Let's look at the individual winners and losers in the fourth quarter as well, and starting things off, the big gainers among the Dow, we have IBM leading that list.
STOVALL: Well, IBM came out with very strong third quarter earnings, particularly in the crucial services area.
YASTINE: And then moving on to the Dow losers, Pfizer topping that list.
STOVALL: Pfizer share prices tumbled as the company ended the development of a new blockbuster drug.
YASTINE: And then if we go to the S&P 500, again, looking at the winners in that particular group, Allegheny Technologies topping that one.
STOVALL: Its third quarter results were better than expected, further enhancing its year-long momentum.
YASTINE: What happened with Goodyear Tire, again, up 40 percent or plus?
STOVALL: The company benefited from strong third quarter earnings driven by a better product mix and pricing as well as cost cutting.
YASTINE: All right now. If we go to the losers in the S&P 500, the biggest drop seen there is Citrix Systems.
STOVALL: Well, Q3 results and Q4 guidance was less than encouraging, implying that lofty expectations would not be fulfilled.
YASTINE: And then Circuit City, what's wrong with them? With Best Buy seeming to have done fairly well and yet, they're a competitor. What happened?
STOVALL: I think it came down to investors buying concerned over razor-thin flat-panel margins that might hurt overall gross margins.
YASTINE: All right. Let's slip over to the NASDAQ 100 and we're looking at the biggest gainers there and that's Millicom International Cellular.
STOVALL: This is a holding company that offers a pure play on wireless and emerging market which were two very hot areas in '06.
YASTINE: And then again, the loser, Citrix Systems as you mentioned a moment ago.
STOVALL: That's right.
YASTINE: All right, Sam, what's your feeling for 2007? We come off a pretty good 2006, especially here in the last half of the year. What do you see as we head into this New Year?
STOVALL: I think most of the good news has already been baked in. What we have to focus on now is the Fed and whether earnings will actually advance by 10 percent as S&P projects. So we think we'll probably end up seeing about a 6 percent game to 1510 on the S&P 500.
YASTINE: What do you see, when you say about the Fed, are you one of those folks who may be expecting them to step back up and start increasing rates again, perhaps being scared a little bit by some of the newer economic data we've seen the last couple of weeks?
STOVALL: I think that might cause investors to be a little bit worried heading into the New Year, but I think once we approach the second half, we're probably going to see the Fed start its rate reduction program. We forecast right now, the Fed funds rate at 5.25 percent to end '07 at 4.5 percent.
YASTINE: And then with oil being where it is, how much of a wild card is that in this particular factor?
STOVALL: I think it's a wild card. Right now, we expect it to stay a page three story, but if it becomes a page one story all over again, that could affect profit margins, as well as consumer sentiment.
YASTINE: And then again this year, we've seen the blue chips outperform the NASDAQ for the year by a considerable margin. Do you see that continuing, this particular emphasis among fund managers, the institutions, on buying these big, liquid, steady growth type of names?
STOVALL: Well, in 2006, technology only posted about a 2 percent profit improvement. Yet, in 2007, they're expected to show more than a 20 percent advance. Also, if we do get the rate cut and if history repeats itself -- and there's no guarantee it will -- tech could be among the better performers in '07.
YASTINE: But you need to have that rate cut in order for that to happen, it sounds like.
STOVALL: Well, the rate cut certainly wouldn't hurt, but I think if we do get the substantial improvement in earnings, then that could definitely benefit not only telecom but also technology.
YASTINE: All right, Sam, any particular disclosures amongst what we've discussed here?
STOVALL: No, I don't own any of the stocks that we might have discussed here.
YASTINE: All right, Sam, appreciate your time very much. Thank you. Have a great new year's as we head into 2007.
STOVALL: Thanks a lot, Jeff.
YASTINE: Our guest, Sam Stovall, chief investment strategist for Standard & Poor's.
