One on One with Joe Battipaglia of Stifel Nicolaus
Wednesday, August 22, 2007
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SUSIE GHARIB: Joining us now for more analysis on today`s stock market rally, Joe Battipaglia, market strategist for the private client group at Stifel Nicolaus. Hi, Joe.
JOE BATTIPAGLIA, MARKET STRATEGIST, STIFEL NICOLAUS: Good to see you, Susie.
GHARIB: Good to see you, too. A lot of people were relieved today to see the market come back. Do you think things are settling down? Is the worst over?
BATTIPAGLIA: Well, certainly as it relates to the credit crunch, the Fed has made the right moves. The banking system is re-liquefying. Commercial paper markets are opening. Debt funding can be raised and so from that perspective, with each passing day, more confidence is restored in the system. The lingering question, of course, is what will be the effect of all this on the U.S. economy, particularly the consumer because we`re only now starting to see foreclosures, only now starting to see the resetting of a variety of mortgage products, a big chunk of it, almost $600 billion of it, being reset in the sub-prime arena alone over the next 14 months. So clearly that`s the challenge -- what happens to the U.S. economy. So a sigh of relief, a snap-back rally but then the question is now what?
GHARIB: Well and what is your answer to that question? What is the outlook for the economy?
BATTIPAGLIA: I think what will happen is that we`ll have a slower growth rate through the rest of this year to next. Durable good spending will continue to slow by the consumer and our economy may grow to only 1.5 to 2 percent at best. There`s still the risk of recession if the credit conditions were to deteriorate once again. And once you have that kind of mentality set in, then I would expect profit expectations to be cut somewhat and so, the performance of the stock market is going to be highly dependent on what happens in this economy going into 2008.
GHARIB: So sounds like you`re saying for investors who are seeing all these bargain-basement prices for stocks right now, too early to go bargain hunting?
BATTIPAGLIA: Well, it`s hard to say that this is, indeed, the bottom. For one thing, many financial companies are going to have to write off bad investments. It will be a hit to their earnings and to their book value. The housing industry is in a recession and all the related areas are also slumping as well. And we`ve seen car sales come off dramatically from last year to this year. So durable good are in question as well. So while there is this sense that you can get some cheap stocks here, perhaps it`s better to wait a bit and only stay with the strongest companies in the growth areas.
GHARIB: Joe, the last time you were on our program and again today, you brought us the word about recession, 50-50 chance of there being a recession. A lot of investors are counting on the Fed to cut interest rates at its September 18 meeting. Do you think that is going to happen? Is the economy going to be in that much of need for an interest rate cut by mid-September?
BATTIPAGLIA: The Fed has been very interesting through this process because going back to December, they declared the sub-prime mortgage issue to be self-contained and the economy will do fine. And then suddenly, their last meeting, they come out and say the same types of things, only a few days later to come into the market in a dramatic way to flush it with reserves. Why? We have a credit seizure. They then turn around and cut the discount rate and say that the risk is on the economy. So, clearly, when they cut rates, they will continue to do that into a weakening economy, which means the value of those rate cuts won`t be felt for quite a while yet, so they are somewhat behind the curve as it relates to the economy.
GHARIB: As we reported, a number of big banks went to the discount window, borrowed on the hope that other banks will do the same thing. Do you think that these moves are of -- are easing the credit crunch that we`ve been going through?
BATTIPAGLIA: There`s no question. Where you can see it is the fact that the commercial paper market has opened up again. The borrowing window is open for permanent finance in the corporations. Even some takeover activity has reemerged on to the scene. And I think investors generally feel a little bit more comfortable about general conditions for a prime borrower, for a customer whose got good credit. Now the question is beyond the banking system, what happens to the non-bank banks and other institutions who still have to go through this contracted phase. The Fed has nuanced their response so far. They are now going to be very sensitive to the economic data on durable goods, on spending and on employment, which may show softness in the coming months.
GHARIB: We have to leave it there, sounds like a lot of unknowns, a lot of uncertainties still out there. Thank you very much, Joe.
BATTIPAGLIA: You`re very welcome.
GHARIB: My guest tonight, Joe Battipaglia, market strategist for the private client group at Stifel Nicolaus.
