One On One With Abby Joseph Cohen of Goldman Sachs
Tuesday, April 11, 2006
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SUSIE GHARIB: Our guest tonight says there`s a disconnect in the markets between good corporate performance and stock performance, but she says this creates an opportunity. Joining us now Abby Joseph Cohen, chief U.S. investment strategist at Goldman Sachs. Hi Abby.
ABBY JOSEPH COHEN, CHIEF U.S. INVESTMENT STRATEGIST, GOLDMAN SACHS: Hello, Susie, how are you?
GHARIB: I`m good. Thank you. Tell us about this disconnect. What do you mean by it and what`s the opportunity that comes from it?
COHEN: A day like today in the markets makes it clear that investors are concerned about a whole host of factors, rising energy prices, concerns about Iran and so on. The underlying condition, though of the U.S. economy and corporate profits is quite robust. The economy continues to grow above trend. Corporate profits continue to grow. Corporate balance sheets are in the best condition we`ve seen in many, many years. And so we do have a disconnect in which that nervousness that investors are facing makes it a little bit uncomfortable to pay for those earnings and to pay for that cash flow.
GHARIB: But looking at some of the issues like tensions in the Middle East and also the rising price of commodities, are these risks for the market?
COHEN: These are, indeed, risks for the market but we think at current levels they`re already fully discounted. For example, in our own mathematical work, we have been assuming that crude oil prices would be in the $68 to $72 trading range. We`d assume the 10-year Treasury yields would be at about 5.25 percent, 25 basis points above where we are right now. And the mathematics, at least, tell us that the fair value for the S&P 500 would be about 1400 compared to about 1300 over the last several trading sessions.
GHARIB: But then there`s always that issue of a global crisis waiting to happen, that you can`t really gauge one way or another what the impact of that would be. With prices this high from oil, for gold, is there the possibility of some kind of geopolitical crisis that you can`t predict?
COHEN: There`s always the possibility of a crisis. One of the questions, though, is the following: if assets are overpriced and there is a crisis, there is more concern in terms of what might happen next. However, to the extent that investors are already pricing in a somewhat uglier scenario, that provides some protection. Basically, if investors are nervous, the risks in the market are somewhat lessened by that.
GHARIB: Now, you told me that for your client portfolios you`re investing in technology and industrial stocks. Can you tell us a little bit more about why you`ve chosen these areas and a little more specifically the categories within those sectors?
COHEN: We think that 2006 is an important year of inflection. First we think stocks do much better than bonds. Secondly, within the stock market, we expect a rotation away from consumer-related issues into those things which are related to a long-lasting economic cycle in which businesses are doing well. Capital spending is improving not just in the United States but around the world and we do see that much of that capital spending investment is going towards technology, new computer hardware, computer software and applications and for the first time in several years, telecommunications equipment.
GHARIB: And how about on the industrial side? What do you find attractive there? What sectors within industrials?
COHEN: Within the industrial side, we`re looking at some fairly standard capital goods because we`re seeing something for the first time, again, in several years. Not only is cap-ex up in the United States, but also in other major industrial economies, including Europe. And the United States is a major manufacturer of industrial equipment, including machinery. We`re also seeing an up turn in global demand for high-level service from the United States. Typically that includes things like computer software and applications but also financial services.
GHARIB: OK. You`ve given us a lot to think about. Always nice to have you on the program, Abby. Thank you very much. We`ve been speaking with Abby Joseph Cohen, chief U.S. investment strategist at Goldman Sachs.
