One on One with Joe Battipaglia of Stifel Nicolaus
Monday, July 13, 2009
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SUSIE GHARIB: Our guest tonight says even though the markets rallied today, he does not think this is the start of a bull market. In fact, he's putting most of his clients' money in cash, not stocks. Joining us now, Joe Battipaglia, market strategist of the private client group at Stifel Nicolaus. Hi, Joe.
JOE BATTIPAGLIA, MARKET STRATEGIST, PRIVATE CLIENT GROUP, STIFEL NICOLAUS: Hi, Susie.
GHARIB: Well, say it ain't so. Why are you so cautious?
BATTIPAGLIA: I'm cautious for the U.S. economy is on very weak footing. The financial system is still de-leveraging and the consumer won't be back for quite some time. So when you look at an environment where wages are actually in decline, job losses continue, the consumer is not coming back any time soon. Businesses have overbuilt and over borrowed. We're just now going into the corrective phase of that. You can see by way of what is happening at CIT that there are more shoes to drop in that regard. As a result, the economy doesn't get back to growth until next year. The growth is very slow. And I think earnings expectations are just too optimistic. And the euphoria about bank stocks comes about simply because the Treasury and the Federal Reserve have designed a set of steps to prop up the banking system. It's an artificial prop. We're still not fully healthy yet and investors will sell them off on the other side of earnings season.
GHARIB: Speak of those bank stocks, there is a lot of eagerness this week about banks reporting their earnings. Today a prominent analyst upgraded Goldman Sachs stock and so a lot of people are thinking that the coast is clear for the financials. What are you saying on that?
BATTIPAGLIA: Well, our upgrade was on a short-term basis because indeed, when the Federal Reserve uses quantitative easing to get 0 percent interest rates, when the Treasury, the FDIC and the Federal Reserve provide banks guarantees for losses, when they change the accounting rules so they don't have to take losses on mark to market, you can create any earnings power you want. But our long-term call is that the banks are going to have much less leverage than they had before. They are going to be more highly regulated than they were before. When interest rate goes to their natural level, they're unnatural now, it's going to change the dynamics of the interest rate margins in such a way that not all of these banks are going to be very profitable. So adding to that an extended recessionary condition and I think that the banks still have a long way to go before they are truly healthy.
GHARIB: Now you told me that your asset allocation is two thirds cash and one third into stock. So you are putting some of your client money into stocks. I know you can't talk about specifics, but what sectors do you find attractive right now?
BATTIPAGLIA: Yes, this is our equity program. We are paid to go out and take risk for investors. Back in January and February we were actually 95 percent in cash. So we've actually loosened up a little bit if you will. And what we're looking to find are companies that have strong balance sheets that can withstand recessions, companies when they pay dividends can continue to pay it during recessions. We want companies that are not involved with government guarantees or bailout because the government crowds them out. As a result, we look very favorably on areas like health care, technology, consumer staples companies because they have this dynamic. We take a relatively dim view of financials because of the ongoing problem. Energies of course are all over the map but with a low energy price many of these companies don't have the earnings power they had in the past. And industrials have a long way to go in order to right themselves for credit conditions first and then expansion in the United States at some point while anemic for the foreseeable future. We under weight that group.
GHARIB: So Joe, for investors who are listening to what you are saying tonight and they have some money on the side and they're wondering what to do with it, should they put new money into the stock market now or should they wait?
BATTIPAGLIA: I think the right strategy here is to identify these companies with that financial strength that I talked about because the market clearly is much more attractive now at these levels than it was at the highs a year and a half ago. But you want to enter those investments over time because the market will be bumpy in the meantime. So strong balance sheets, ability to pay the dividend during recessions and staying away from government involvement in their business is the right formula for building out your portfolio. And I'm not going to discriminate between big stocks or small stocks or one sector or another because this bear market that we are working through has leveled all these sectors. And so you are given an opportunity to rebuild a portfolio into strength as opposed to weakness.
GHARIB: Can you give us any glimmer of when you see that the stock market will pick up for real, that it will be a real rally?
BATTIPAGLIA: Well, we have an estimate for earnings this year on the S&P 500, $50 to $55, next year $60 to $65 in rough terms. That gives the market a range between 750 and a thousand in rough terms. So we came close to the upper-end of that range. We have been selling off for that. I can understand why we are doing. As we continue to work through recession, that range stays in place. And I think the best thing to do is just keep broadening out on the basis of financial strength so that when we look at 2011, 12 and 13, these companies will have a much better profile on the marketplace.
GHARIB: All right, very interesting analysis and information. Thank you so much for coming on the program.
BATTIPAGLIA: You are very welcome.
GHARIB: My guest tonight, Joe Battipaglia of Stifel Nicolaus.
