JPMorgan Chase (JPM), Wells Fargo (WFC) and State Street (STT) Part Of Lemon Asset Management Incs. Portfolio
February 28, 2010 - The Wall Street Transcript has just published High-Yield Investing Strategies Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Frederic G. Burke is President and Chief Investment Officer of Johnston Lemon Asset Management, Inc. He began his financial career with Loeb, Rhodes in 1973. Prior to joining Johnston Lemon Asset Management in 1998, he was employed as the Senior Vice President/Managing Trust Officer at three banking institutions in the Washington, DC, metropolitan area. He earned his undergraduate degree from Xavier University and his graduate degrees from The American University and the Georgetown Law Center. He is a member of the Washington Association of Money Managers, the DC Bar Association, and the Financial Planning Association.
TWST: Have you made any shift in emphasis or changes in your investments as a result of all these events taking place in the market and the economy?
Mr. Burke: We continue to monitor macroeconomic trends as reflected by the business cycle. From an asset allocation standpoint, we continue to maintain a high cash and fixed income position. We have not amended our equity sector emphasis despite the events that have taken place in the market and economy. We continue to emphasize the energy, industrial and technology sectors. The premise that we have been working under with respect to the energy sector has not changed.
The price of oil has nearly doubled since January. The so-called demand destruction that began in October last year has been arrested by the growth in China, dollar weakness and renewed consumer confidence. Finally, the reduced demand for oil in 2008 and early 2009, is directly responsible for the deferral of between 4 and 10 million barrels of production of oil and that deferral will eventually cause a significant rise in the price of oil.We have maintained our positions in ConocoPhillips (COP), Chevron (CVX) and Exxon (XOM). We think they will continue to outperform the market based on the tailwinds that they will have behind them as a result of a demand re-emerging in both the developed and in the developing world.
We invest in Devon Energy (DVN), a major oil and gas exploration company with properties concentrated in the United States. Devon has an excellent balance sheet and sizeable reserves.Finally we continue to invest in Schlumberger (SLB), which is unilaterally recognized for production capabilities. Schlumberger is currently attempting to raise the production of the Mexican PEMEX fields. The Obama Administration is a vocal supporter of alternative energy sources and energy conservation. The economics of alternative energy are interpreted differently by numerous partisan advocates. The short-term and long-term benefits of cap and trade, clean coal, nuclear engineering and tax credits should be tied to a national energy policy. Nevertheless wind, solar and nuclear energy will be supported by prospective government policy. We continue to maintain our position in Exelon (EXC), which has a fleet of nuclear reactors providing electricity in the Midwest. We continue to be underweighted in the financial sector.
We don't believe that the first quarter earnings and the recent rise in the stock market show a clear path out of the banking crisis. The bank investment crisis, which started in 2007 and which resulted in the demise of Lehman Brothers and Merrill Lynch among others has been muted by a too-big-to-fail policy. Due to the aggressive response of the Federal Reserve Board and FDIC, which included TARP, the stress tests and additional deposit insurance, the banking sector was not nationalized. The second part of the banking crisis, which is still in flux, is the commercial lending crisis. Commercial lending entails commercial real estate loans, credit cards, auto loans, all of which continue to be affected by the economic downturn. Commercial bank loans are subject to hold-to-maturity accounting rather than fair market accounting. Under hold-to-maturity accounting, loan losses are recognized when the loans actually default.
Based on an assumption that credit card losses are highly correlated with unemployment, certain undercapitalized financial institutions will be required to dilute their shareholders again. Surviving banks will be those that have large deposit gathering capabilities, investment banking skills or security processing capabilities. Consequently we maintain our position in JPMorgan Chase (JPM), Wells Fargo (WFC) and State Street (STT). We overweight the technology sector, but have become more selective. We focus on performance and applications.
Almost daily, Google (GOOG) makes an announcement with respect to a new technical approach and product improvement. Microsoft's (MSFT) margins continue to expand and that trend should continue with the introduction of Windows 7. It has introduced Bing and has excess capital for possible add-on acquisitions. IBM (IBM) is maintaining its revenue growth through corporate acquisitions and an adaptive business model. Finally, for aggressive management of technology companies, Cisco (CSCO) and Oracle (ORCL) have positioned their organizations as primary participants in the telecommunication and application subsector.
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