One on One with Jim Awad, chairman of Awad Asset Management
Thursday, February 22, 2007SUZANNE PRATT: The Dow headed lower today, in part because of concerns about Iran's nuclear policy. That makes two straight down days. Nevertheless, the blue chips are still trading fairly close to their all-time high. Joining me this evening to talk about today's market action and what the future may hold is Jim Awad, chairman of Awad Asset Management. Jim, thanks for joining us.
JAMES AWAD, CHAIRMAN, AWAD ASSET MANAGEMENT: It's my pleasure.
PRATT: What happened to the market today?
AWAD: Well, today was mostly about Iran and then there were some rumors during the middle of the day that perhaps the threat level was going to be increased. That ended up being unfounded and the market really gave a reasonable account for itself. The Dow was weaker than the other indices, but today like yesterday the market really showed some staying power and able to rally itself from the lows. Not a bad showing.
PRATT: So what is your feeling about stocks at current levels?
AWAD: Well, I think this year the factors that drove the stock market last year remain in place, which is an economy that's growing reasonably, a corporate sector that is very efficient, that can deliver very good profit growth with reasonable economic growth, tolerable inflation and interest rates. The Fed is out of the way for now, fair valuations and tremendous buying power on the part of private equity and corporate buyers. And I think that those factors will coalesce to give you a good year again in the stock market this year.
I'm starting to have a little bit of concern about next year because you have almost a classic cycle here. As you get deeper into the economic recovery, growth slows, profit growth slows, inflation edges a little bit higher, valuations end up getting -- going from cheap to not so cheap. And then all these private equity buyers, they have to put the money to work. And history shows it's likely that some of them will put together deals that are too high priced, with a lot of debt on them. They will assume that the liquidity in the system will remain the same. And actually the excess liquidity will get eaten up as the economy matures around the world and you do all these deals, so there is no margin for error in terms of interest rates. And also, valuations will become stressed and then the private equity buyers will become sellers as they try to liquefy their investments. So ultimately you end up with slower growth, higher inflation, less attractive valuations, less excess liquidity in the system and buyers becoming sellers. So this year looks good and I'm getting concerned about next year.
PRATT: OK. So 2008 is what you are worried about. But what about the fact that we've had absolutely no correction really to speak of, in the last several months. Isn't that a concern for you at these levels?
AWAD: That makes the market vulnerable in the short term to any disappointment. But for this year, I think that any correction will be contained because the fundamentals still remain positive. But the broad picture is that there is a great appetite for risk in the system. Junk bond yields are low. Margin debt is high. The LBO buyers are -- the private equity buyers are putting a lot of debt in the system. There is a great appetite for risk and no respect for preservation of capital. And I think at some point, that will come home to roost. But again I think that's an '08 story, not an '07 story. So again corrections in '07 will be hot.
PRATT: All right. We're going to have to leave it there, Jim, thank you. We've been speaking with Jim Awad of Awad Asset Management.
