One on One with Stuart Schweitzer of JPMorgan Asset Management & Fadel Gheit of Oppenheimer & Co
Thursday, July 12, 2007
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SUSIE GHARIB: Joining us now with more analysis, Stuart Schweitzer, global market strategist with JPMorgan Asset Management. Boy, what a day, Stu, right.
STUART SCHWEITZER, GLOBAL MARKET STRATEGIST, JP MORGAN ASSET MANAGEMENT: Sure was, Susie.
GHARIB: Two days ago everybody was so worried that there was 150 point drop on the Dow and now two days later we get this almost 300 point rally on the Dow. That's a swing of 400 points. Is this rally for real?
SCHWEITZER: Well, I think it's for real, Susie. Remember that there is a lot of money around, still a lot of money around. You saw it in the way consumers came back. You saw it in the Rio Tinto bill which bid -- which by the way is one-third more than Alcoa was offering to pay for Alcan. And there is an old rule, if there's money around and there is disappointment and then you get positive news, the market will generally move. And we saw it with a vengeance today.
GHARIB: I don't need to tell you this, but most Wall Street strategists and traders focus on the S&P 500 more than the Dow. And today the S&P 500 also hit a record. So what's the message of the markets here?
SCHWEITZER: Well, I think the message first of all is that stocks want to go up. Now the question will they be able to continue to go up, I think that's going to depend fundamentally on two key issues. Number one is inflation going to be kept at bay so that interest rates can remain low enough to stay affordable and then will the recent credit risks that flared in the sub-prime mortgage space, will they spread to corporate America? I think the answer is probably going to be pretty good on both counts, but I think we are going to be nervous along the way. A lot of volatility is what we are going it to have for the coming months.
GHARIB: Stu, let me bring my colleague in, Paul. Paul go ahead, do you have any questions?
KANGAS: Yes, Stuart, I was curious to know, with all these huge premium buyout bids we're getting from private equity and corporations, is that an indication that the market in general is under priced?
SCHWEITZER: Well, I think it's an indication, Paul, that there is opportunity for people to restructure companies and make them worth a lot more money, at least that's the view of the investors. And I tend to agree with that. I think the question is going to be the degree to which people can raise money at cheap interest rates to leverage up these buyouts. If they can continue to do that, I think that's going to be a very important source of support for equities going forward.
KANGAS: Do you think short-covering was a big part of this afternoon's rally especially late in the day?
SCHWEITZER: Oh, sure. As I said a moment ago, I think there was a lot of nervousness around -- the markets do best when they are climbing a wall of worry and we had one giant wall of worry this week.
GHARIB: Let's talk about that wall of worry. I mean, what are the risks here? Can the bull run survive the sub-prime crisis? Can it survive high oil prices?
SCHWEITZER: Well, if anyone would have asked me a couple of years ago would the market be doing what it is if oil was going to reach $70, I would have said pretty unlikely. And here we are at $70 plus and we've done just fine. So I'm not sure what the implications of higher oil prices are as long as inflation is kept down overall. And that's something that the Fed has been very successful at. If I could add one more thing though, you just had a clip on globalization. I think globalization has been really key to helping to hold inflation down. And if globalization becomes threatened, that would make me a lot more nervous about the economy and the equity market.
GHARIB: You know, Stu, all year long, you've been optimistic about the market but you've also been very, very cautious. Given what has happened today with this rally, are you changing your investment strategy and your forecast for the second half of the year?
SCHWEITZER: No, I wouldn't change it a bit. I think it makes sense for most individual investors to maintain a balance between higher risk assets on the one hand and lower risk assets on the other. I think putting all your eggs in one basket, betting on this thing to just keep on soaring could be a very, very risky thing and I wouldn't recommend that. But I also wouldn't recommend that people get too worried. So I like the balance.
GHARIB: OK, Stu, on behalf of Paul and myself, thank you very much. We really appreciate it.
SCHWEITZER: Thank you, always a pleasure.
GHARIB: We have been speaking with Stuart Schweitzer, global market strategist with JPMorgan Asset Management.
SUSIE GHARIB: Well, not only are stock prices surging, so are oil prices. In New York trading today, August crude futures slipped slightly, but they jumped about 10 percent in the last four weeks and prices are now creeping toward $80 a barrel. Joining us now to talk about the outlook for oil, Fadel Gheit, oil analyst at Oppenheimer & Co. Hi, Fadel.
FADEL GHEIT, OIL ANALYST, OPPENHEIMER & CO.: Good afternoon.
GHARIB: A lot of people have now been talking about $80 oil. Is $80 oil the new baseline?
GHARIB: The view that supports $80 oil is saying that the supply/demand picture points to very tight supplies. I mean how do you see the supply-demand outlook?
GHEIT: There is no shortage of anything. There is no shortage of crude oil. There is no shortage of natural gas, refined product. There is adequate supply of oil. But there is also tremendous speculation right here. There is a fear premium which will be with us for a long period of time. The global tension is not any easier than it was two years ago or a year ago. Actually, it is on the rise. So therefore, energy traders are always speculating. What is going to happen next month, next week and so forth. And right now we see that there is tremendous apprehension in the event of any supply disruption whether it's natural or man-made. It could push oil prices to $80 very easily.
GHARIB: Last summer we saw oil prices drop slowly but drop from $70 down to about $50. Do you see $50 oil?
GHEIT: Actually, we saw $78 oil last July and we ended up the year was close to $50 oil. And again we saw oil prices moving up from $50 to $70. I do believe that volatility will continue but I think we are going to see higher oil (ph) all the time if oil prices pull back. I don't believe we're going to go to $50, but could pull back to $60, but then we will go up again.
GHARIB: Real quickly on earnings for this quarter, for the second quarter coming up from oil companies, expected to be pretty strong. Is this a good time for investors to put their money into oil stocks?
GHEIT: It is always good time to buy oil stocks, especially on a pullback. A couple of weeks ago ConocoPhilips, everybody thought the stock was going to go lower and all of a sudden, the stock is up almost 10 percent and it's going to go higher. So I do believe investors should take any pullback a a buying opportunity because the long-term view for oil is very positive.
GHARIB: All right, very good information, thank you so much Fadel, always a pleasure having you on the program.
GHEIT: Thank you.
GHARIB: We've been speaking with Fadel Gheit, oil analyst at Oppenheimer & Co.
