One on One with Tobias Levkovich, Chief U.S. Strategist for Citigroup
Monday, March 24, 2008
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SUSIE GHARIB: Our guest tonight says it's too early for the all clear signal in the markets, but he's forecasting that stocks will be up by the end of 2008. Joining us now, Tobias Levkovich, chief U.S. strategist for Citigroup. Hi, Tobias.
TOBIAS LEVKOVICH, CHIEF US STRATEGIST, CITI: Hi, Susie, how are you?
GHARIB: Good, thank you. Stocks were up. The dollar was up, investors feeling more hopeful about the markets. What's your outlook for the next few months?
LEVKOVICH: We still see the market being up about 5 percent by the end of the year, but it could still be a bumpy ride. We may have put in a bottom at 1270 on the S&P, tested it a few times. But one of the big problems still is that earnings estimates are too high going into the second half of the year. That's going to have to be trimmed and I think we're still going to see some volatility.
GHARIB: Everybody is talking about bargains in the stock market, beaten down stocks but there's also a lot of fear that there's more bad news coming. Is this a good time to put new money to work into the markets or is it too early?
LEVKOVICH: I still think you want to be putting money in. You don't put all your money in at anyone point in time anyway. I think you kind of average your way in. We still, as is said, we still think the markets will be up. So if the market pulls back, put a little bit more in and I think some of the very beaten up areas, financials, consumer discretionary really offer some of the greatest value. I would be very loath to chase some of these commodity oriented areas which have become very overweight in a lot of portfolios, heavily owned and do have some risk. For example, the dollar strengthening having some impact on the currency, on the commodity, sorry.
GHARIB: But isn't there risk also in financials that I know that you have been buying up? I know financials were up today on that news about Bear Stearns. But isn't this also a risky sector?
LEVKOVICH: Well, you know, up don't get reward if you don't take some risk. And I think the more important issue is when you think about stocks, what you think about is fundamentals but you also think about valuation and sentiment. And philosophically I would really like to buy stocks that have very attractive valuations, awful sentiment and very beaten-down expectations. That fits financials so it's not that people aren't worried about some of the issues, sub-prime, CDOs and things like that. That is priced in to a great degree. It isn't priced in in any kind of risk right now in some of the commodity areas. And I think that's where you really have to be worried.
GHARIB: There's a lot of speculation about the health of many of the big financial institutions, speculation about the future of Lehman, about Merrill Lynch, about your firm, Citigroup. Do you expect more consolidation in the financial sector?
LEVKOVICH: It's a really good question. It's possible clearly. I don't think anybody would have thought that one of the big transactions that occurred in the past couple of weeks. I think it's more important that we're going to see a lot of companies fall away and we have already. Mortgage brokers have disappeared. We've seen some of the kind of hedge funds that took incredible risk. There you're going see more consolidation I think in the hedge fund community, but it's hard to tell what deals might come down the road. I do think investors understand and particularly the Fed understands that there's real risk in these areas today. We need to keep the capital markets going if we want to have the economy going. We've seen eight financial crises in the past 20-odd years. Only two of them thus far have entered into recessions. We think this current one's going to also enter recession. When you start having real problems with credit markets, businesses can't get money and as a result start laying off people, start cutting production, start cutting orders. I think the Fed understand that risk. So they're responding.
GHARIB: Before we end this interview I want to ask you real quickly about a comment you made about earnings. We're going to get a lot of quarterly earnings coming out very soon. What impact are those quarterly reports going to have on the markets and what CEOs say about the outlook?
LEVKOVICH: Well, I hate to say it this way. I think CEOs don't necessarily have the great outlook. I think the orders are going to be more important than the earnings. We're still probably a quarter away before they really start to see the impact of tighter credit on their business conditions. So I think they're still going to be pretty robust. I've been to two Citi conferences in the last two weeks. They still think business is good. I'm very worried about them kind of getting a rude awakening over the next few months.
GHARIB: Tobias, thank you very much for your insights. Appreciate it.
LEVKOVICH: You're welcome.
GHARIB: My guest tonight, Tobias Levkovich, chief U.S. strategist for Citigroup.
