Stuart Schweitzer of JP Morgan Private Bank; Fadel Gheit of Oppenheimer & Co.; & Josh Feinman of Deutsche Asset Management Discuss Interest Rates
Wednesday, November 28, 2007
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SUSIE GHARIB: Back now to our top story, expectations of another interest rate cut as the U.S. economy continues to deteriorate. To discuss that and investor concerns about recession, high oil prices and stock market volatility, I gathered a panel of experts today: Stuart Schweitzer, global market strategist at JPMorgan Private Bank; Fadel Gheit, senior oil analyst at Oppenheimer and Company and Josh Feinman, chief economist at Deutsche Asset Management. I began by asking Josh if the Fed can keep the U.S. economy from sliding into a recession.
JOSH FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MGMT: I think they can but I think it's going to be a fairly close call because the economy has to cope right now with two very severe shocks: the housing correction and the tightening of financial conditions, both of which are putting downward pressure on growth. Layered on top of that, you've got higher energy prices so it all adds up to several quarters probably of pretty subdued growth at best. I think the Fed with further easing can keep the economy out of recession, but I think it's going to be tight.
GHARIB: Fadel, speaking of higher oil prices, is $100 a barrel the new baseline for oil?
FADEL GHEIT, SR. OIL ANALYST, OPPENHEIMER & CO.: I do believe $100 oil prices will be possible but not likely to be the baseline. I don't believe that industry fundamental support $60 oil, let alone $100 oil. So I would say $50 oil is the more realistic going forward price than $100 oil.
GHARIB: Well, maybe fundamentals don't support it, but the fact is is that $100 is right around the corner and some people say that is going to trigger $4 a gallon gasoline. And what's the impact of that going to have on the American consumer?
GHEIT: A huge impact. There is an inverse correlation between gasoline prices and consumer confidence. And obviously we're going to see with the weakening economy all we need is consumer confidence galore that will really brought into a recession which will reduce the demand for oil.
GHARIB: So Stu, these are all the things that investors are worried about, high oil prices, housing prices and we've seen these schizophrenic markets. Today we have a rally. Tomorrow it could be a sell-off. So what do you see as the message of the markets?
STUART SCHWEITZER, GLOBAL MARKETS STRATEGIST, JP MORGAN CHASE: The message is the markets are very uncertain and investors are very skittish. The Fed needs to act pretty quickly here to right the ship and keep us out of recession. It's part of the reason why we have been recommending to our clients that they keep a balance between higher and lower risk assets and that they have plenty of cash. Cash is (INAUDIBLE) to be able to buy when things are cheaper. It's also money that helps you sleep better at night.
GHARIB: So are we in a bear market or is this a correction?
SCHWEITZER: I think it's just a correction but it would become a bear market if we went into recession. And we're close, but I don't think we'll get there, not if the Fed acts as I think they will to cut interest rates beginning in December.
GHARIB: Josh, do you think that the Fed is going to cut rates based on what you heard Fed officials saying today and in view of today's economic numbers, what's going to happen at the December meeting?
FEINMAN: I think most likely we'll see another 25 basis point cut from the Fed. That certainly was priced into the market. I don't think the Fed has said anything to dissuade the markets of that view. And I think that the Fed has become somewhat worried again about the renewed weakness in financial markets in recent weeks, the renewed tightening of credit conditions. So I think that increases downside risks to the economy and I think the Fed will want to take another step to buy some insurance against those downside risks.
GHARIB: If the Fed does not cut rates in December Stu, is that a sell signal for stocks?
SCHWEITZER: Watch out below. I'll tell you because it's both the bond market and the stock market that are sending the message to the Fed that there's weakness ahead. Bond yields are down. Stock prices are down since the Fed started cutting rates in September. The Fed ought to be getting the message. I'm sure they are.
GHARIB: So Fadel, the flip side of lower interests means a weaker dollar and higher oil prices.
GHEIT: Which (INAUDIBLE) the vicious circle again because it's going to back to the consumer. As gasoline prices hit $4 the consumer will pull back and that will exacerbate the decline in the economic growth.
FEINMAN: I would just say one thing. I don't know that there's a non- linearity that if the oil prices go to X, you know, non-linear effect on the consumer. I think each increase in oil prices has a negative effect.
GHEIT: Correct, correct.
FEINMAN: But I think what's worrisome now is that this impact of higher oil prices is happening at the same time that the economy has to deal with these other things.
GHEIT: Right.
FEINMAN: The housing problem, the credit -- so the economy's ability to deal with increases in oil prices over the last few years might not have been as taxing on the economy because the economy wasn't at the same time having to deal with these things.
GHERIT: Correct. That's a very good point. But there is also another thing it will exacerbate. One will feed on the other.
SCHWEITZER: They interact. They interact, right.
GHEIT: Because the Fed is trying to correct something, like a doctor giving a medication but it is going to affect other parts of your body. I mean he will cure this but he'll destroy another part.
SCHWEITZER: I think there's one other thing that we haven't really hit on. The credit crunch is real. But the solvency of the financial system is not really the issue even though the markets sometimes act as though it is. The real challenge is that financial institutions -- banks, other lenders -- are being forced to take more assets back onto their books and they don't have a sufficient capital to be able to carry that. So capital adequacy is the issue when Citi raised new capital this week. Freddie Mac is raising new capital. We need to see more of that.
GHARIB: So Josh, what's it going to take to turn around the economy? What's it going to take to cure housing?
FEINMAN: I think time first of all. It's going to take time for investors to reckon with the credit problems and financial intermediary problems. I think it's going to take time and a longer period where house prices are sluggish and incomes can catch up to sort of offset the stretched valuations that we have.
GHARIB: Is 2008 going to be better or worse?
FEINMAN: I think the early part of 2008 is going to be a struggle for the economy. I think maybe by the second half of the year, things start to get a little better.
SCHWEITZER: I think the other thing we're going to need is the rating agencies are going to need to downgrade more of these securities that we know are not worth as much as was earlier thought. They have to be more bank write-offs I'm sure. And I think the financial institutions -- banks, Wall Street firms, insurance companies -- are going to have to raise more capital as has begun to happen.
GHARIB: So what do investors do in this uncertain environment? Do they put new money into stocks, bonds or just keep it in cash?
SCHWEITZER: I think they keep a lot of cash, more than normal. Normally we'd say three or four percent cash. Now I'd say 12 to 15 but you don't completely avoid the stock market because valuations are cheaper. The stocks are going on sale.
GHARIB: All right, we'll leave it there. Gentlemen, thank you so much. Stu Schweitzer, Fadel Gheit and Josh Feinman.
FEINMAN: Thank you.
