Bruce Kasman of J.P. Morgan Chase & Henry Smith of Haverford Trust, Analyze The Markets & The Economy
Thursday, August 16, 2007
|
|
|
|
SUSIE GHARIB: Joining us with more analysis Bruce Kasman, chief economist at JPMorgan Chase and Henry Smith, chief investment officer at Haverford Trust. Good evening, gentlemen.
HENRY SMITH, CHIEF INVESTMENT OFFICER, HAVERFORD TRUST: Good evening, Susie.
GHARIB: Hank, let me begin with you. I'd like to get your characterization of what happened in the markets today. Big selloff, then a big rebound. Is that a sign that maybe stabilization is coming back to the markets?
SMITH: Well, I think today and even the past several days is really about emotions trumping fundamentals, and the emotions are fear, and it's the fear of the unknown. The unknown of -- we do know that there's bad debt, we just don't know the extent of it and where it is.
But -- and it's not helped when Moody's comes out and just names an unnamed hedge fund that might -- just might -- implode, or Countrywide might declare bankruptcy.
But the fundamentals are strong here, and the valuations are very attractive in our opinion.
GHARIB: Bruce, I hear this a lot from many market strategists that they're not too worried because the fundamentals -- and usually referring to the economy -- are pretty sound. And yet we see companies like Wal-Mart saying there's weakness and the consumers are slowing down. We get reports about the housing sector like tonight, that it's getting worse and worse. So how would you characterize the shape of the U.S. economy?
BRUCE KASMAN, CHIEF ECONOMIST, JP MORGAN CHASE: Right now, I think the economy is very uneven. As you noted and we can see, the housing market continues to go down. Consumers have been soft, although I think some of the pressure is coming off there as gasoline prices go down. And the other parts of the economy are strong.
So the economy is, I think reasonably OK. The problem is, it's not booming and it is being hit by, I think, a significant shock here as credit markets reprice, as there's deleveraging going on.
There is a legitimate risk here that this will spill over into real economic activity in the months ahead.
GHARIB: When you say real economic activity, you're saying like right now this is just a market event and it's not affecting the real economy?
KASMAN: Well, I think the main street of the U.S. economy can withstand weeks and even a month or two of volatile financial conditions, tightening in credit markets. But I think a sustained move towards the removal of credit, banks that can't operate in a normal way, are things that will have significant macroeconomic reverberations if they're sustained. So I think we should be careful not to overstate what a few weeks brings, but not understate what a significant lasting effect can do.
GHARIB: Hank, the major indexes, whether you're talking about the Dow, the S&P or the NASDAQ, they're down almost 10 percent. Everyone talks about a 10 percent correction. So are we close to the end of this correction, or are we at the beginning of a bear market?
SMITH: Well, you can never time these things exactly, although today certainly might have been a selling climax when the Dow was down at one point over 300 points and had that massive reversal.
It's very unlikely that we're at the start of a bear market. Bear markets don't start with P/Es at 13 times earnings, with insiders selling having reduced to very low levels, and, again, with corporate profits consistently exceeding expectations. This is not the environment for a bear market.
GHARIB: Bruce, the Federal Reserve, as you know, injected more money into the system again today, and some analysts are saying that maybe this is the Fed's way of getting ready to do a cut in interest rates. Will there be an emergency rate cut in your view?
KASMAN: I don't think so. I think what the Fed is doing is injecting enough liquidity to defend its current policy rate and allow the markets to make their adjustments through that. If the Fed does believe there will be lasting damage and changes its macro forecast towards weaker growth, it can ease. And I think the risks of that have increased, but I think it will be a slow process to have the Fed make that decision over the coming weeks.
GHARIB: Hank, if the Fed did an emergency rate cut, do you think that the correction and the markets would be over, stocks would really and everyone would breathe easy?
SMITH: I think so, and I think it would be partly led by the financials, or at least the higher quality segments of the financials. Very interesting dynamics today to see Wells Fargo, Bank of America, WaMu, Wachovia, all increase, and they were even up at the nadir, at the low point of the market during the day.
GHARIB: Bruce, I noted looking at the economic calendar that there's not much data coming out over the next few weeks. So without economic data to help investors navigate what's going on in the economy, is it going to be pretty much volatile between now and September until we get some important economic reports?
KASMAN: Well, luckily, I don't need to forecast the markets, and I think it is right, we're not going to have a lot of economic news. We're going to be working on the basis of surveys, some high frequency indicators, and anecdotes. And I think it is going to be tough for the Fed and for us to see how much of a lasting effect this has had until we start to see data in September into October.
GHARIB: All right. We're going to have to leave it there. Gentlemen, thank you very much. Bruce and Hank, appreciate your coming on the program.
SMITH: Thank you, Susie.
KASMAN: Thank you.
GHARIB: My guest tonight, Bruce Kasman, chief economist at JPMorgan Chase, and Henry Smith, chief investment officer at Haverford Trust.
