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Growth Equities Portfolio
Weekly Portfolio Update
as of September 13, 2002
The Market This Week
- It was again a directionless market with the S&P 500 down
–0.4% for the week, while the growth sectors, the Russell 1000 Growth and the NASDAQ were down –0.1% and –0.3% respectively. The news was mixed, if not a little on the downside.
- The market, while trying to find its way, has been extremely volatile. On Thursday alone, the S&P
500 was down –2.5% before recovering modestly on Friday. Weak jobless claims, war tensions as Bush
gave his speech to the U.N., and Greenspan’s uninspiring testimony on the economy led to the
weakness. It is interesting that in the recent year since the terrorist attack on 9/11, the S&P 500
has moved at least one percent on 45% of the trading days. The last comparable year was 1974 when the economy was in a severe recession, oil prices were soaring, there were fears the U.S. was losing its
competitive edge, and stocks were deep into a bear market.
- The economic news this week was not thrilling, but then again it was really not that bad. Also,
because of a number of crosscurrents and the ambiguity in the data, the trends were somewhat
difficult to read. We tend to be a little more optimistic than most because of the robust trends in
consumer spending, bolstered by a record level of home refinancings.
- On the negative side:
- Jobless claims were 426,000, again above consensus and the magic 400,000. The closing of
a large trucking company (Consolidated) may have been a factor, but the trend in recent weeks
has been up. The data increases the likelihood that the modest pickup in payrolls in recent
months is starting to fade again. Nevertheless the increases in payroll have still so far
been better than the recovery of 1991.
- For what it’s worth, the labor market weakness indicated by the claims data is not being
confirmed by ISI Group’s temp survey or layoff announcements.
- The Michigan sentiment index was 86.2 in early September (consensus 88.0), down from 87.6
in August. Fortunately the decline in sentiment doesn’t seem to be having a major impact on
consumer spending.
- The current account deficit widened to a record $130 billion in Q2 (above consensus),
which represents 5.0% of GDP. Despite also the weakness in the dollar, the U.S. still remains the economy of choice. Foreign assets in the U.S. jumped sharply.
- The “beige book”, the Federal Reserve’s latest survey of business conditions, showed that
manufacturing activity and consumer spending slowed to a crawl in recent weeks, which
contrasts with the previous report released in late July that found the economy expanding
modestly. The real estate markets and automobile sales were found strong, but conditions
elsewhere were generally sluggish.
- On the positive side were:
- Total retail sales rose +0.8% m/m in August (+0.5% consensus) following gains of +1.4% in
June and +1.1% in July. Excluding auto, spending rose a solid +0.4%. So far in Q3 total real
consumer spending is increasing at an estimated +5½% annual rate (around +3% excl.
autos).
- Labor Day weekend chain-store sales were apparently quite good, which ISI’s retail survey seemed to confirm.
- Interestingly, if real consumer spending is unchanged in September, real consumer
spending for Q3 should be up at a 5½% q/q annual rate, which suggest that Q3 real GDP could
be up as much as +4.0%.
- A regression analysis by ISI Group correlating stock prices and mortgage refi activity to consumer spending (R-squared = 81%) suggests that we should have a 10% plus q/q annual rate
of increase in Q4 nominal retail sales –well, you never know, certainly the figure is well
above current expectations.
- Although there is considerable worry concerning what companies will report for Q3 EPS, so far
First Call analyst’s estimates are holding up better than in times past.
- We are, of course, constantly looking at the economy to give us the signal that it’s okay to
invest in the stock market, but when all is said and done, is it really the economy we are worrying
about, or do we first need to get the impending war with Iraq over-with.
Portfolio This Week:
- Despite the weakness in Technology, we did reasonably well this week (+1.0%). Our Consumer
Discretionary sector (+5.2%) was the strongest.
- Outliers in our results were Cablevision (+15.8%), Forest Labs (+10.9%) and Concord EFS (+9.7%)
on the positive side; and Intersil Holdings (-14.6%), Washington Mutual (-7.2%), and Genentech
(-4.0%) on the negative side.
- Genentech (DNA) – In what was always a high-risk trial for breast cancer, the
company’s drug, Avastin showed activity, but it failed to clear the difficult primary
end-point of progression-free survival. The market’s reaction was less savage than many had
anticipated as stock was down only 4.0% for the week, most likely because the risks were
already well understood and factored-in. Avastin is still in development for other cancers including an important Phase III study for colorectal cancer. The failure of the breast
cancer trial on-the-surface lowers the probability of success of Avastin in other cancers,
however the initial testing for other indications have shown a much higher probability of
success. We lowered modestly our EPS growth rate for the company but still find it
attractive. The company has three drugs in Phase III trials.
- Washington Mutual was impacted by Astoria Financial, another thrift, saying it
would miss its profit forecast. We believe WM has more moving parts and is more sheltered
from a decline in net interest income.
- Intersil Holdings was impacted by poor stock performance of the semi group in
general, fears of slower growth in PCs (they supply power chips), and fears generated by
competitive announcements in the wireless LAN area. Nevertheless, the indications we are
getting are that the company is doing exceptionally well this quarter and is still
maintaining its dominant position in WLANs. We believe the feared pricing
pressures are a manageable issue.
- Concord EFS – seems to be rebounding from an oversold position and several new
recommendations.
- Cablevision – rose because of a greater likelihood of it selling its North Coast cellular assets as a result of a FCC proposal. The sale would bring an estimated $500-$700 million to Cablevision. Its stock has been extremely depressed, primarily because of liquidity issues.
- Forest Laboratories is experiencing excellent results with its new anti-depressant drug, Lexapro, which increases the likely success of its “switch strategy” with its older drug, Celexa.
Trading Activity
- We made no changes to the portfolio this week.
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The opinions expressed are those of Berkeley Capital Management and
based upon sources deemed reliable. BCM shall not be held liable for
inaccurate information obtained from these sources from which BCM could
normally, reasonably depend on as accurate.
Past performance does not guarantee future results.
FOR BROKER-DEALER USE ONLY. NOT FOR USE WITH CLIENTS.
A complete list and description of all the firm’s composites and individual
securities’ transactions and returns for the past twelve months are available upon
request.
Security description and write ups are for informational purposes only, they are
not offered as recommendations.
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