One On One With Tom McManus of Banc of America Securities
Monday, April 17, 2006SUSIE GHARIB: Our guest tonight says that interest rates, not oil prices or earnings, are key to market performance. Joining us now Tom McManus, chief investment strategist at Banc of America Securities. Hi, Tom.
THOMAS McMANUS, BANC OF AMERICA SECURITIES: Hi, Susie. How are you?
GHARIB: I`m good. Thank you. So give us a little bit of your thoughts on this. As we reported, we saw oil prices hitting a record, over $70 a barrel. Are you saying that there is no correlation between these high prices and market performance?
McMANUS: We don`t mean to say there is no correlation. I think that the U.S. consumer is facing at least three headwinds right now. One is rising interest rates, both in the short end controlled by the Federal Reserve and most recently the intermediate term Treasury, the 10-year Treasury note which affects mortgage rates has been moving up as well. Secondly, it`s not just oil prices, but very real prospect or the reality really of $3 gasoline which has affected a lot of us recently and lastly is moderating home prices and significant increases in the inventories of unsold homes.
GHARIB: If we were to see then interest rates really move to the up side, then that would be very critical to what happens in the market, is that what you are saying? And do you expect that to happen? And do you expect that to happen?
McMANUS: Well, we expect the Fed will raise the short-term lending rate, the Fed funds rate one more time and then perhaps pause for awhile to assess the situation. The Fed is becoming more data dependent. I think that if the 10-year Treasury yields remains about this 5 percent level, it`s putting enough upward pressure on mortgage rates, it`s going to limit the amount of refinancing that some consumers do and, therefore, put a crimp on consumer spending especially consumer discretionary spending.
GHARIB: Let`s talk a little bit about earnings. We saw for example today, Citigroup came out with some strong earnings. We`re expecting a whole bunch of other earnings over the next couple of weeks. What`s your view about earnings as a catalyst in terms of market performance?
McMANUS: Well, the market wants to have this quarterly injection of new information. And this is about the most timely economic information that investors can get their hands on. It`s much more timely than almost anything the government puts out. So we encourage people to listen to or read the press releases of the companies that they own for very real time information as to what`s going on in the economy. We think that we are seeing a gradual deceleration. We`re seeing some sectors which are earning significantly above their normal trend for earnings and therefore we think investors should be thinking about paying a lower P/E multiple than what might be considered normal at the normal point in the cycle.
GHARIB: Is that your strategy at this point?
McMANUS: It is.
GHARIB: Of investing?
McMANUS: Yes, it is. We don`t mind paying a high P/E multiple for depressed earnings if we can expect a cyclical bump up in those earnings. But if companies are earning above normal, we`d expect to pay a lower P/E multiple because at some point, those earnings will start to revert back to the mean.
GHARIB: Any quick advice? You have 30 seconds left for investors.
McMANUS: We have been suggesting a strategy, we`ve actually been underperforming the market a little bit this year because we have been overweighting some large capitalization, high quality stocks, companies that have been able to earn reasonable growth in good times and bad. And those stocks we think are probably more attractively valued as compared to the bond market and also as compared to the broad market than they have been in 10 years.
GHARIB: All right, Tom. Thanks you very much, great to have you on the program.
McMANUS: Thank you, thanks Susie. Happy tax day.
GHARIB: The same to you, my guest tonight, Tom McManus, chief investment strategist at Banc of America Securities.
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