One on One with Tobias Levkovich, Chief U.S. Strategist at Citigroup
Monday, November 27, 2006
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SUSIE GHARIB: For more analysis now on today's market sell-off, we're joined by Tobias Levkovich, chief U.S. strategist at Citigroup. Hi Tobias.
TOBIAS LEVKOVICH, CHIEF US STRATEGIST, CITIGROUP: Hi, Susie.
GHARIB: As you know, investors have a lot of worries on their worry list. They're worried about the economy. They're worried about housing, the high oil prices and now the dollar. How worried should they be that a decline in the dollar will be bad for the market?
LEVKOVICH: It's not really that big a deal. I mean, think of it in these terms, 1985 through '87 the dollar plunged significantly more than anyone is looking for right now. And the markets actually rallied pretty strongly. On the other hand, from 1997 through 2000, the dollar was strong, as was the stock market and more interestingly, the dollar was very strong from 2000 through 2002, didn't protect anyone from the big sell-off.
GHARIB: So what is your outlook for the markets between now and the end of the year and the beginning of 2007?
LEVKOVICH: Well, we're looking for the S&P 500 to close at 1400 which is pretty much where we were as of Friday's close. So I think we'll recoup what we have lost today over the course of the next month. But to a great extent, we still see a move to 1500 by the end of next year. We could have a little bit of a rough spot early next year as investors kind of deal with the slowdown in what has been very powerful earnings growth to something a little more moderate and we suspect there will be concerns even on the housing market as we move into the spring.
GHARIB: So have we seen the highs for the Dow and the NASDAQ for 2006?
LEVKOVICH: Well, we suspect so. It is hard to definitively say if something changes on December 30th versus what happens on January 2nd, but generally speaking, we hit pretty much our targets a couple of days ago.
GHARIB: Some people say that these high prices that we have seen in stocks recently have resulted in an overvalued market. What is your view on all of that?
LEVKOVICH: You know, we think that's false. If we look at where the market multiples are relative to interest rates, relative to equity versus premiums, they're very attractive. One of our measures, we're sitting at a level that we have seen about 85 times before in the past 45 years and in every single one of those instances, the market was up a year later. So we definitely disagree with that view that the market is overvalued by any stretch. There are certain areas of the market that can be a little bit stretched at times. But overall, it looks pretty good, particularly in the large-cap areas.
GHARIB: Has today's sell-off in any way caused you to begin to rethink your strategy?
LEVKOVICH: When we look at the data, sentiment is still pretty skeptical. We can look at just the money flows into domestic equity mutual funds. They've been outflows for five months straight ending in September. Last time we had five months straight or five months in a row of outflows was back in October 2002 and that was the bottom of the market. We see earnings expectations pretty much being cautious as we go forward. And they've been cautious for the past 12 quarters which has lead to earnings upside surprises. And again as I indicated before, the valuation looks pretty good. Clearly some people got spooked by large retailers' numbers. But on the other hand, the rest of the retailing area was very strong with I think the National Association of Realtors talking about 19 percent gains over the holiday weekend.
GHARIB: OK. Tomorrow, Federal Reserve Chairman Ben Bernanke is going to make his first speech in months. What do you think the markets need to hear from Ben Bernanke?
LEVKOVICH: I think they are going to want to continue to hear that the inflation is going to moderate, that the economy is still on firm footing, but not excessively strong. And I think this is a key issue. You know, everybody keeps talking about this constant called the Goldilocks economy as if it were a fairy tale. We've had this quote, unquote, Goldilocks economy for about 40 quarters in a row. I mean when does it stop becoming a fairy tale and become something very real?
GHARIB: All right, Tobias thank you very much for coming on the program. We really appreciate it.
LEVKOVICH: You are very welcome.
GHARIB: We've been speaking with Tobias Levkovich, chief U.S. strategist at Citigroup.
