One on One with James Awad, Portfolio Manager of Awad Asset Management
Thursday, July 26, 2007
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SUSIE GHARIB: Joining us now for more analysis of today's market sell off, Jim Awad, portfolio manager of Awad Asset Management and Hugh Johnson, chairman of Johnson Illington advisors. Hello, gentlemen. Thank you for coming on the program.
JAMES AWAD, PORTFOLIO MGR., AWAD ASSET MANAGEMENT: Pleasure.
HUGH JOHNSON, CHAIRMAN, JOHNSON ILLINGTON ADVISORS: Nice to be with you.
GHARIB: Jim, let me start with you. Wall Street has had two back-to- back bad days. Is this a correction or is it the beginning of a bear market?
AWAD: No I don't think it's a bear market. It's a warranted correction. The market had come awfully far -- awfully fast and what you're getting is a correction where it should have been in the sectors of the markets that have been too speculative based on plentiful and easy money but I think that the growth overseas will compensate from the weakness in those areas and allow the economy and corporate profits to continue to grow.
GHARIB: Hugh, do you agree with that?
JOHNSON: Basically, Jim's got it right. The market came very far, very fast. It had gotten arguably overvalued. When the market gets overvalued, everything has to go right. Everything didn't go right. We've had lots of problems or news on problems on the sub prime part of things. So that's really just the catalyst that caused a predictable decline or correction in stock prices. And I wouldn't make the case for a bear market unless I could make the case that we're headed towards a recession, and quite frankly, Susie, I think it's very hard to make the case for recession. I think growth will be positive this year and next.
GHARIB: Jim, do you think that that's true? No recession in the cards?
AWAD: Yes, I do agree, and the reason is because of the growth outside of the U.S. China and India are doing fabulously well. Europe is doing well. Japan's doing better. So the U.S. is no longer the economic engine of the world. We'll grow at a below normalized rate because of the problems in the credit market and housing, but it'll be made up for by overseas growth. And if you look at corporate profits, that's where the surprise is going to be on the upside. Some disappointment domestically, some upside surprise from overseas and all and all, I think it'll be a respectable year in profits and in equities in general.
GHARIB: Hugh, what was puzzling about the massiveness of today's selling was is that we've known from a really long time there are problems in the housing sector. We've also known for a long time that many financial companies would be at risk because of this sub-prime mortgage crisis and yet today's sell-off was broad based, was across the board. So was this nervous selling or something more serious?
JOHNSON: It could be something more serious, Susie. We'll just have to wait and see. My guess is it's not that serious. You know, when I take a look at financial market history, other kinds of near crises that we've had, whether it's long-term capital management or the southeast Asia crisis of '97, the crash of '87, the problems with Continental Illinois Bank and Trust in 1984. At the time, they all feel, they all look like crises. They look like we're headed towards a recession because of the problems that we faced, but each time, they passed or we muddled through and the bull market resumes. My guess is, based on financial market history -- and it could only be a guess -- is the same thing will happen this time. We'll muddle through or we'll see that the problems we're worried about are manageable.
GHARIB: Jim, you said that the economy is in pretty good shape and that earnings are in good shape, but is the stock market telling us that those fundamentals just aren't strong enough to support or counterbalance all the other problems that we're facing?
AWAD: I think the market is justifiably concerned about the speculation that you had in housing, housing-related areas and in financial instruments related to housing fueled by cheap money and abundant money and what's going to happen is you're going to correct -- in my opinion, you'll collect the excesses in that area, but it won't affect the rest of the economy. So certain hedge funds, certain private equity funds, certain home builders will sustain fatal damage, but I think it'll be contained to that area just like when the tech bubble burst in 2000, those companies got hurt, but the rest of the economy did fine.
GHARIB: We just have a little time left. I want to ask you both this. You both have been through many, many of these financial crises. How does a sell-off like we saw today impact corporate strategy, impact investment strategy and investor psychology? Hugh?
JOHNSON: First of all, it obviously scares a lot of investors, particularly small investors and quite frankly large investors as well, so it's scary. That's the first thing. But I think what's so important for investors as well as business strategists is you have to look through these day-to-day volatility, the big swings to the upside, big swings to the downside and ask yourself, what's the trend in prices? The trend right now is still positive despite those big swings. And that's what's really important and that's what counts.
GHARIB: Jim, quick answer.
AWAD: What I would say is you got to reintroduce the respect for the risk in the system that's been lacking for the last four years and it's a good and healthy thing. Investors and corporate managers need to act conservatively and prudently, not assuming that they're going to have plentiful money to bail them out of their problems.
GHARIB: All right gentlemen, thank you so much, big help for understanding what happens. Thanks. My guests tonight, Jim Awad, portfolio manager of Awad Asset Management and Hugh Johnson, chairman of Johnson Illington Advisors.
