One on One With Tom McManus, chief investment strategist of Bank of America Securities.
Tuesday, September 26, 2006
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SUSIE GHARIB:The Dow is getting close to setting a new record high. But our guest tonight is still cautious in his outlook. Joining us now, Tom McManus, chief investment strategist of Bank of America Securities. Hi, Tom.
TOM MCMANUS, CHIEF INVESTMENT STRATEGIST, BANK OF AMERICA SECURITIES: Hello, Susie. How are you? GHARIB: I`m fine, thank you. So you told me today that you`ve been surprised by the strength of this rally. Tell us why. What`s your analysis?
McMANUS: Well, I think your opening piece did it. On the bond market we`ve been surprised by the strength of the bond market. The 10-year Treasury yield is down almost 70 basis points from the highs in the past three months. And so that`s a much bigger rally than we would have expected. Energy prices are down. That`s not really a big surprise. The magnitude of the drop, perhaps is, especially given what happened last week with the big hedge fund problem. And I think that the reaction in retailing stocks and other consumer discretionary stocks is also larger than what we would have expected given the decline in gasoline prices that we`ve seen so far.
GHARIB: Investors, as you know, are waiting eagerly for the Dow to rack up 54 more points and hit this new all-time high. Let`s say that that happens whenever. Will it be sustainable after that or is there enough momentum to keep the rally going or are there troubling signs out there?
McMANUS: Well, I think that there are some troubling signs and that we`ve already enjoyed a tremendous recovery in profits, a cyclical recovery in profits and we don`t expect profits to fall off a cliff, but we do think that with the Fed having pushed rate up, short-term interest rates up above 5 percent, there will be a deceleration in the economy. It will affect largely consumer discretionary spending, high-end consumer discretionary spending because that`s tied into what we`re seeing in the housing market. We don`t think the housing market is turning around any time soon and we think despite the drop in gasoline prices, which should stimulate the low end consumer spending, we think that the bulk of discretionary spending actually occurs at the high end. So we think that`s where the disappointments will be.
GHARIB: So what are you saying then? So what is the threat, what is the biggest threat to this market rally?
McMANUS: Well, I think that profits... We go through the weighing season of corporate profit results that starts in just a couple of weeks, I think you`re going to see an increasing number of companies that will be guiding down their profit expectations, just as Lowe`s did yesterday, guiding down their profit expectations for the fourth quarter and into 2007.
GHARIB: All right. Now, as much as you are cautious, you`re not bearish, because your asset allocation is 55 percent in stocks, in equities. So where are you investing your client money?
McMANUS: Well, that 55 percent is a little bit less than what the traditional 60/40 mix or we actually consider 65 percent to be normal. But we`re much more optimistic about the prospects for large cap stocks. We think that large caps under performed for a number of years, clearly were victims of the rise in commodity prices that we saw over the last couple of years. Now that commodity prices appear to be coming down, we think that profit margins can expand for a lot of these companies and they`ve actually gotten a boost from the rally that we`ve seen in bonds.
GHARIB: What`s the sector that you find most attractive right now?
McMANUS: Well, the two sectors, actually, health care and consumer staples currently make up about 40 percent of our recommended model portfolio weightings, almost twice the weighting in the market. So we have a big defensive bet on companies that where we expect to see a P/E multiple expansion and we expect them to continue to drive sustainable profit gains.
GHARIB: all right. Interesting information. Thank you so much, Tom.
McMANUS: Thank you, Susie.
GHARIB: We`ve been speaking with Tom McManus, chief investment strategist of Bank of America Securities.
