What: Debating the continuation of the market rise.
Where: Power Lunch
When: December, 2006
Who: CNBC's Sue Herera, Darin Richards (AKT Wealth Advisors), David Goertz (Highmark Capital)

Sue Herera: Friday’s market rally had many on Wall Street wondering just how quickly the market could break the 13,000 mark, but my next two guests have slightly differing opinions on how likely a long-term continued runup might be. In San Francisco, David Goertz. He’s Chief Investment Officer at Highmark Capital. He’s fairly bullish on the market’s next move. In Portland, Oregon, Darin Richards is Chief Investment Officer at AKT Wealth Advisors. He’s a little bit more cautious these days. Welcome gentlemen, pleasure to have you here.

Darin Richards: Hi Sue.

David Goertz: Good afternoon.

Sue Herera: Dave, let me start with you. Make the case for a continued bull run.

David Goertz: Well we’ve made the case over the last two years that this rally in equities is really all about earnings. And so we’ve been focused on what’s happened over the summer and how we think this pent-up demand that’s kind of squelched demand overall in the U.S; the concerns about Iraq, the concerns about Israel, the concerns about all of these other geopolitical concerns on top of oil, interest rates, have all come together to pent-up demand we think in the U.S. And we think this is all going to be released in ’07. So, as we look forward in earnings, we’re still looking at what we thought was going to be about a 10% year turning into 14% earnings growth year for 2006. Continuing in ’07 of about 9% and 8% following on that.

Sue Herera: Okay, Darin, I know that you aren’t necessarily bearish but you’ve raised a few caution flags given the levels that we’re at in some of these markets. What are your concerns?

Darin Richards: Well I think equities have definitely reached kind of a fair-valuation point. We’ve seen PE ratios come down now a level where they’ve kind of stabilized of late. And its really going to be earnings that drive returns in 2007 where I don’t think we’re going to see any PE expansion from that standpoint. So my concern is that earnings may not come in in the double digit range that Mr. Goertz just talked about. We may see some of the 7-9%. I think I’m not bearish necessarily, but I definitely think we’re going to see sort of a slower growth in the economy and its going to affect earnings a little bit negatively next year.

Sue Herera: Now Dave, what about that? What about the expectations that are built into this market? Because you have a lot of company in the very bullish camp. Does that make you nervous?

David Goertz: Well you’ve had a lot of people shifting back and forth--I would characterize it almost as whiplash over the last three months it seems. People were very pessimistic coming into September and October and yet earnings came through very strongly. I think the focus is really on what happens with inflation? What happens to wage costs? And how do we think about profit margins? Because that’s really the key here, I think, as we look forward. Will we be able to sustain these higher profit margins that we’ve seen, this slightly above potential growth that we’ve been seeing out of the economy. And it is our case that we think we can because of what we see as certain secular disinflationary forces that we think are important.

Sue Herera: Darin, you know the last time we talked, you still were advocating an international exposure to your portfolio and I’m assuming that you’re continuing that, and a lot of people are taking money out of the international component and putting it in domestic equities. Does that provide another opportunity to diversify overseas?

Darin Richards: I think it still does. If you actually look at international returns, roughly half of it has come from the fact that the dollar has depreciated. If you look at it really in local dollar terms, international stocks have actually underperformed domestic stocks in the last year. So we’re still bullish on international stocks. Emerging market stocks have had quite a run and they don’t look quite as compelling as they did at the beginning of the year when we overweighted them but we still have an overweight position and we like the growth prospects, just not quite as much valuation upside as there was earlier in the year Sue.

Sue Herera: Alright gentlemen, thank you so much. Merry Christmas, Happy Holidays to you. Might not get a chance to say that to you before the holiday comes. Good to see you again.

David Goertz: Happy Holidays.

Darin Richards: Merry Christmas to you.

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