One on One With Rod Smyth, Chief Investment Strategist at Wachovia Securities
Monday, July 24, 2006
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SUSIE GHARIB: Our guest tonight is bullish on stocks, but still says the markets are in a quote, decision box. Joining us now to explain, Rod Smyth, chief investment strategist at Wachovia Securities. Hi Rod.
ROD SMYTH, CHIEF INVESTMENT STRATEGIST, WACHOVIA SECURITIES: Good evening.
GHARIB: Let`s begin by you explaining what do you mean by this decision box?
SMYTH: I think from time to time, markets are unsure about the future direction and they usually tell you that by trading within a range and the longer they trade in that range, the more significant both the upper end and the lower end become. So we`ve seen this now for a couple of months on the S&P, the upper end is 1290. For the Dow it`s about 11,300. On the low side, 1200 for the S&P and the Dow about 10,700. Clearly, the markets are trying to decide between a nice soft landing of the kind described by Ben Bernanke last week or something worse, a landing that is a little bit harder and has consequences for the economy and earnings.
GHARIB: Well we had a really good rally today on the markets. Are you saying that it`s unlikely to see a follow through on this rally?
SMYTH: I think today`s rally was very important for the bulls which as you said, I am one. Because the first bands (ph) that you get, like we got last Wednesday, you often get those moves but then what we often look for is, is there a follow through day? Do you within the next three or four days get another move in the same direction on good volume and we got that today. I don`t think the bulls can claim victory until we break outside the up end of the decision box. But do I think today was a very positive day if you`re hoping that that`s going to happen and we are.
GHARIB: What`s on the worry list? Is it earnings? Although there were some good ones today, but is it earnings? Is it interest rates? Is it what`s going on in the Middle East with all the hostility, high oil prices? What is it?
SMYTH: I think it`s all of the above. But if you step back from this a little bit, what really would be bad news for the stock market is if it could sense that sometime in the next year or 18 months, the economy was going to go back into maybe not a recession but a significant slowdown or a recession. And all of these things play into that. High oil prices plays into that because it affects consumer. Geopolitics plays into that because it might affect business and consumer confidence. They all play into that and that`s what the market`s trying to decide. Our judgment is that you won`t, but that`s clearly the fear. Inflation and interest rates also play into that decision.
GHARIB: Let`s talk a little bit about your investment strategy in this environment. You said in your latest report that you are investing in large cap, high quality, less cyclical stocks. Give us your analysis on why you`re going that route?
SMYTH: Yes, I think Susie, what I would say is if you look at the outlook, if you look at what the Fed is trying to achieve for the economy, it`s going to be some kind of a landing. Either a soft landing which is what everybody would like to see where growth cools off a little bit, allows inflation to cool off a little bit, or they`re going to overdo it and you`ll get some kind of a harder landing. But either way, it`s going to be some kind of a landing. In that environment, what we`re looking at is a cyclical slowing of the economy. When you go into a cyclical slowing, you won`t be less exposed to the kind of cyclical stocks whose earnings are currently have been doing very, very well, but who are vulnerable to a slowdown. And so higher quality, larger cap, less cyclical is where you want to be and you want to be getting out of or lightning up on small cap, lower quality, more cyclical names.
GHARIB: All right. Well, we appreciate your thoughts. Thank you so much for coming on the program tonight.
SMYTH: My pleasure Susie.
GHARIB: We`ve been speaking with Rod Smyth, chief investment strategist, Wachovia Securities.
