One On One With Joe Battipaglia, Chief Investment Officer of Ryan Beck.
Wednesday, April 26, 2006
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SUSIE GHARIB: Our guest tonight expects the Dow and the S&P to post gains of 12 percent this year. Joining us now to explain, Joe Battipaglia, chief investment officer of Ryan Beck.
Hi, Joe, nice to have you on the program.
JOSEPH BATTIPAGLIA, CHIEF INVESTMENT OFFICER, RYAN, BECK: Good to be with you.
GHARIB: Glad you are. You heard our report at the top of the show, a lot of concern about higher interest rates given today`s economic data and other data that we`ve gotten recently. Won`t that dampen enthusiasm for stocks if rates do go higher?
BATTIPAGLIA: Well, I think the reason why there is concern in the market is that because the economy is that much stronger than expected, the Fed may move further on rates. Ironically, that`s probably the best thing that could happen for the Fed because when they raise rates, as we believe they will on May 10th, then at that point they will watch the data. The market will behave in response to that. But the fact of the matter is, it`s a positive thing when the economy has this lift because at the end of the day, investors will find a stronger profit profile, a broader market opportunity and that sustains the bull market, even though they are worried about the Fed going beyond this point. And I think that that`s just a straw dog in this case and that the rates don`t move materially higher beyond that.
GHARIB: But let`s say they do. Let`s say that the Federal funds rate gets to 6 percent. Everybody right now is thinking 5 percent and that`s it. But let`s stay it gets to 6 percent or 6.5 percent. What do you think the market reaction will be?
BATTIPAGLIA: Well, clearly, if the Fed decides that they need to move even more strongly on the rate front, that`s going to deter the economy. That`s going to push investor expectations down. I think that`s a dampening effect on the market. I don`t believe they need to do that. But we have seen the Fed in the past go beyond the point of no return and put the economy at risk by such moves. So I think we are now entering that stage where Mr. Bernanke will be challenged by good data on the economy, a 5 percent handle for Fed funds which is a reasonable level. I think that`s the nominal right rate for them to be at. But if it goes beyond that, it will challenge the market.
GHARIB: Let`s talk about another possible challenge, oil prices. We have seen that the markets and also corporate America have been pretty resilient as oil prices have gone from $60 to $70 and even higher than that. But let`s say again that oil prices do go higher. At $100, for example, would that be a risk for the markets and for the economy?
BATTIPAGLIA: Yes. I think there will be a direct outcome from that and that is that consumers will change their behavior. Their confidence will slip dramatically and would have adverse consequences for the economy on a quarterly basis. The other part of the story if those oil prices that probably will come because of supply disruptions, either for crude or for finished goods. And if that`s true, then that`s going to change the way business thinks. It`s going to change output profiles. And if that happens, the economy will then start to shrink and that has an adverse consequence role (INAUDIBLE).
GHARIB: Now Joe, I know you are very upbeat about the market. So I would like to hear some of the stocks that you like and that you are investing for your portfolios given your positive scenario.
BATTIPAGLIA: Yes. We think larger companies will outperform the smaller brethren. We think growth stocks will have a better chance than value which has not been the case in the past. We like U.S. Bancorp in the financial services sector. It`s got a strong dividend yield, over 4 percent. It`s a growing franchise with an important percent of their revenues coming from fees, so less rate sensitive. Another is Chicos in the retailing sector for women. We think the 40 and older category is a strong one. They are going to double their stores over the coming months and year and I think it`s a growth play to be had. And the last is American Science and Engineering which is essentially X-ray equipment that`s used by the Defense Department and also for homeland security, another growth category. Each of these stocks have strong growth (INAUDIBLE) and will lift valuations by at least 20 to 25 percent. We don`t have a banking relationship with them. I don`t own these stocks at this time, but we do recommend them.
GHARIB: I was just going to ask you that, OK, well, really great recommendations.
BATTIPAGLIA: (INAUDIBLE)
GHARIB: Thanks for saying that. OK, thank you so much and thanks for coming on the program. We have been speaking with Joe Battipaglia, chief investment officer of Ryan Beck.
