ROSS MARGOLIES on NBR Friday night (mkt view, stock picks):
SUSIE GHARIB: Our market monitor guest tonight is Ross Margolies. He oversees more than $8 billion of client money at Salomon Brothers Asset Management where he is the co-chief investment officer. Nice to have you with us, Ross.
ROSS MARGOLIES, MANAGING DIR., SALOMON SMITH BARNEY: Good to be here Susie.
GHARIB: Nice rally today and the Dow closing in on that 11, 000 mark. What's your take on the markets?
MARGOLIES: Well, it's nice to see a gain but I still think that we're in a trading range. It was nice to see it hold onto it, but I think we're in an environment where we have to focus on interest rates. The interest rate outlook is still not that positive. I think that we still have a little bit of bad news to get by us and the market's going to digest that over a period of time.
GHARIB: So let's say that the Federal Reserve does raise interest rates on August 24th at its next meeting. Would that make you more bullish or more cautious?
MARGOLIES: It would keep me with a similar opinion. I think there would be stocks that I'd be looking to buy on that news that are interest sensitive stocks, because I think that would be the bad part, the near-term bad part news, part of the bad news. But I think that overall we're still going to be in that churning environment for a few months to come.
GHARIB: All right. We're going to find out which stocks you want to buy. But first, let's go to our questions from our viewers and see what they want to ask the market monitor. The first one comes from Cathy Sminkey in Chelmsford, Massachusetts who watches our program on WGBX in Boston. And she asks, "if a substantial tax cut is approved, how would it be received on Wall Street? And, which sectors of the economy would be most affected by a cut?"
MARGOLIES: I think a really large tax cut counter-intuitively might not be received too well. You normally think Wall Street wants a cut in taxes, but it would be very stimulative and the economy's on fire right now. I think it might cause the bond market to react very negatively and if that's the case, then the areas like housing and autos would get hurt. I think that the economy could overall get hurt right now if it happened, but I think you'd like to save a tax cut for sometime when the economy's not doing well.
GHARIB: All right, next question from Dennis McDaniel, in Wolworth, Texas, Walforth, Texas, rather, who watches us on KTXT in Lubbock. Natural gas prices he says, have been soaring over the past few weeks. What is your view on investing in stocks of natural gas producers?"
MARGOLIES: I think it's a great place to be investing for the next six to 18 months. We have several positions in natural gas companies that we've been accumulating recently. Devon Energy (DVN) is one of them. They've got a big field coming on in the first quarter of next year, right when you need natural gas to heat the homes. Other companies with exposure that we've had are Tesoro and Conoco (COC).
GHARIB: And you would be buying those now.
MARGOLIES: I would be buying on-I've been buying them over the last couple months.
GHARIB: Ross, tell us about some of the other stocks that you like right now.
MARGOLIES: OK, a couple of other areas. We tend to run a portfolio that has a very broad market exposure and we have Seagate (SEG) is a stock that I added to. It's come down on weakness because the company has had very rough pricing in disk drives. Seagate makes disk drives for computers. But they're changing the way the business is done. And they've got the strongest balance sheet in the industry so we think that not only are they going to be the winner, we think that they're going to emerge from the consolidation and the stock's got a lot of upside. Other stocks, Rogers Cantel (RCN), a leading cellular company in Canada. AT&T and British Telecom (BT) just paid $23.15 for a third of the company. The stock's at 20 right now, a real bargain. And the last one I'll mention is Costco (COST). It's come down with higher interest rates. Retailers have some interest rate susceptibility. On the other hand, this is a dominant franchise company. It's a real good buying opportunity and it's in the 74, 75 range.
GHARIB: If interest rates go up, are there any stocks that you would be buying? You mentioned, sort of alluded to it earlier?
MARGOLIES: I think there is a couple of areas. I would think that Costco (COST), I might be a little early on, I might add to that. But other financial service stocks particularly companies like Bank of New York (BK) which tend to be the baby that gets thrown out with the bath water. What happens on Bank of New York, even though less than half of its business is really, what you would call traditional banking, when the bank stocks go down on higher rates, it gets sold. That's a quality company to pick up on a sell-off.
GHARIB: You were telling me that the Salomon Brothers Capital Fund which you really oversee closely is not your normal investment portfolio. In that regard, what are some of the areas that you are avoiding?
MARGOLIES: Right now, what we are avoiding are the nifty-fifty type stocks and the Internet stocks, the very speculative stocks. We have the flexibility in this fund to go exactly where we want. We don't have to buy one specific type of stock based on size or growth or value or anything like that. So, we use that as flexibility. For instance in the Internet, we think the Internet pure plays are very, very overvalued right now. On the other hand, there are a lot of ways to indirectly play the Internet, things like Federated Department Stores (FD), a cheap stock, it has an Internet business, too.
GHARIB: We will look into all of that. Thank you so much for coming and talking to us today.
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