One on One with Bernie Schaeffer, Chairman, Schaeffer Investment Research
Tuesday, December 26, 2006
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SUSIE GHARIB: Our guest tonight is the most bullish market strategist for 2007, according to a recent survey of 80 Wall Street pros. He's predicting the Dow will close next year at 14,400. That would be a gain of 16 percent. He's also forecasting an all- time record for the S&P 500 at 1,580. Joining us now, Bernie Schaeffer, chairman of his own investment firm, Schaeffer's Investment Research. Hi, Bernie.
BERNIE SCHAEFFER, CHAIRMAN, SCHAEFFER'S INVESTMENT RESEARCH: Hi, Susie. Great to be here.
GHARIB: Nice to have you on the program. You know, it's interesting to see your turnaround in thinking. In the same survey last year at this time, you were one of the most bearish, predicting that the Dow would close 2000 at 10,000 and now you're the most optimistic about 2007. So why the switch?
SCHAEFFER: Well, I think the market really showed tremendous resiliency this year in the face of sort of the tail end of the Fed rate tightening, this boom in commodities that we had in the first half of the year where copper doubled in price just over the course of the second quarter. Continued double-digit earnings growth despite some of these head winds that the market was facing and I think we're in an environment right now where there's a tremendous amount of concern for 2007, whether it be soaring energy prices or a plummeting dollar or a severe recession in the economy. Yet basically we're in pretty good shape earnings growth wise, valuation wise. The market has put on a nice gain in the second half of the year. I think it's about expectations. I was concerned that expectations were too high going into 2006. And amazingly given how well we've performed particularly in the second half of the year, expectations as I see them right now in the options market, among short sellers, among analysts, among Wall Street strategists are actually more bearish now than they were at the end of 2005. That amazes me and that juxtaposition indicates to me there's sideline cash that can be committed to this market as the year -- as we move into the New Year.
GHARIB: As you know, for some time people have been very worried about the disappearance of the consumer. If that were to happen in 2007, that would certainly impact earnings and that would also impact stocks, wouldn't it?
SCHAEFFER: It would, but again, just thinking in terms of the backdrop, I mean, the old expression, it's already in there, basically this is a market that's positioned for surprises to the upside. There is a lot of concern about the consumer. There is a lot of concern about recession. This is why the forecast -- I'm amazed that my 15 percent forecast for the Dow, for example, was the most aggressive forecast in that survey. I mean, basically that's where the market averages are finishing in 2006. So it's not such a stretch to imagine that we're going to put in a year in 2007 like we did in 2006. Another factor which you don't really hear about is that third year of the presidential cycle, which we're going into in 2007. We haven't had a down year in a third year of the presidential cycle since 1960, and very often we get a gain from the lows like the low in 2006, second year of term, we get a 50 percent gain from second year of term to third year of term. If in fact, this would happen this year, that would make my forecast look very, very conservative.
GHARIB: That's very interesting. I also want to point out something else that I found was interesting in this survey because you said your top stock pick for 2007 is Lennar. That's the home builder. Given the sharp slowdown in housing and also the sharp fall in that stock, why are you so positive about Lennar?
SCHAEFFER: OK again, a difference between the industry, which is housing, and the stocks. Merrill Lynch did a great study a couple months ago which showed how the home building stocks will bottom well, well in advance of the bottom in the actual housing cycle. We've seen a 30 percent rally so far since the middle of the year in the typical housing stock. Lennar trades at an eight times, eight P/E relative to its forward earnings. There is a lot of recession, housing cycle bust mentality already built into those stocks. Wall Street analysts have very few buy recommendations on these stocks. The stocks are extremely heavily shorted. Again, similar to the market, a little bit more accentuated in the case of the housing sector, this is a sector that's positioned to react to surprises to the upside and negative news, the kind of news we've been seeing month after month, I don't think it's going to have a significant impact on these stocks. As a matter of fact, these stocks have been rallying in the face of negative news.
GHARIB: I got to jump in. We've run out of time. Real quickly for disclosure purposes, do you own Lennar stock?
SCHAEFFER: No I do not.
GHARIB: OK. Thanks so much, Bernie. We appreciate you coming on the program, hope you have a happy new year.
SCHAEFFER: A pleasure. Thank you, Susie.
GHARIB: We've been speaking with Bernie Schaeffer, chairman of Schaeffer's Investment Research.
