Experts Analyze The Stock Slide
Tuesday, February 27, 2007SUSIE GHARIB: Joining us now with more analysis, two Wall Street veterans: Stuart Schweitzer, global market strategist at JPMorgan's private bank and Michael Metz, chief investment strategist at Oppenheimer. Good evening, gentlemen.
MICHAEL METZ, CHIEF INVESTMENT STRATEGIST, OPPENHEIMER & CO.: Good evening.
STUART SCHWEITZER, GLOBAL MARKET STRATEGIST, JP MORGAN ASSET MANAGEMENT: Hello.
GHARIB: Michael, let me begin with you. Is this the beginning of a bear market?
METZ: Well, there's another factors which very important which is the carry trade. The yen rallied 2 percent and that triggered enormous liquidation by the carry trade. I think the bull market is over. Whether it's a long trading range or a bear market is another matter.
GHARIB: Stuart, what do you think?
SCHWEITZER: I think it's a correction and a material correction which has further to go. But I don't think it's a bear market. We don't deserve to have a bear market because inflation is under control. The Fed has done the job and the economy will slow and stay slow for a while but it will be OK in the end.
GHARIB: Michael, if that's the case, if Stuart is right about that about everything being stable in the U.S. economy, why did this happen today? Did anything fundamentally change in the outlook for the U.S. economy or the outlook for the Chinese economy?
METZ: Not really. But what you have is an enormously overstressed, overleveraged financial system. This is an example of the same thing we have with long-term capital management, with program trading in '87, an overstressed overleveraged financial system which has one creek and then it's a stampede to exit.
GHARIB: Let me bring my colleague Paul Kangas into this conversation. Paul?
KANGAS: Stuart, I'd like to know how you rate the effectiveness of the trading curbs during this selloff? Were they on a scale of one to 10, 10 being the best, where would you rate them?
SCHWEITZER: Well, I don't think trading curbs really have the impact that is hoped. I think ultimately markets are going to find their level and the trading curbs aren't going to make that much difference.
KANGAS: Michael, how big a factor do you think that financial derivatives were in this selloff?
METZ: Well, we'll never know. Unfortunately it's an opaque phenomenon, but I think it's an enormous factor, particularly as I mentioned, the carry trade. You have also credit default swaps. Out there is hundreds of trillions in derivative. No one knows who owes what to whom with what leverage.
KANGAS: Exactly.
GHARIB: Stuart, some money managers were telling me today that this is a buying opportunity. Were you buying today for your clients or will you tomorrow?
SCHWEITZER: I think it's too soon to buy on this weakness. I think it's got further to go. There's been just such a long period of stability in the markets, upward sloping stability with the markets climbing and people have been lulled into a kind of a false sense of security that things are going to be just fine. I think Michael is right. There's been a lot of credit risk taken on. I think there are more shoes to drop in the markets and the buying opportunity is in the future, not imminent.
KANGAS: Michael, I'd like to ask Michael if he were to be a buyer after this type of damage, what kind of stocks would you prefer, those that plunged during the selloff or those that held their own very well?
METZ: I would buy those that have underperformed for the last three years which is the big blue chips. Those are the bargains. In my opinion, there's going to be new risk aversion in the market so quality will outperform and, frankly, you're lucky in the sense these are the cheapest parts of the market.
GHARIB: Here's a question to both of you. You've both been on Wall Street a long time. You've seen meltdowns before. What's the pattern of this direction from here? What's going to happen tomorrow in the markets both in the U.S. and overseas? Stuart, start us off and then Michael.
SCHWEITZER: Well, I think there's going to be further selling. The selling was indiscriminate today as I think it was Art Cashin said in the clip a moment ago, people sold what they could and I think there's going to be more discrimination over the next couple of days. But there's further selling ahead. Margin debt in the New York Stock Exchange has recently hit an hull-time high. People have bought a lot of stock on credit. There are going to be margin calls, further selling ahead for a while.
KANGAS: As scary, Michael, as the 416-point drop in the Dow was, since 1950 it's the 37th largest percentage drop, nowhere near the top. It is the eighth-largest point drop since 1950 but do you think it's real they big -- a damaging factor?
METZ: No, it isn't, Paul, but really what disturbs me is this is a financial phenomenon. It reflects the financial structure not the economy. And that's the real fragility and the vulnerability of our system. You know, the whole stock exchange is nothing but a casino with all these derivatives/ It's an enormously dangerous environment.
GHARIB: So, Michael, then what's the key thing to watch here before things stabilize? What will be the trigger point that we know that it's stabilized?
METZ: Basically you have to get enough people, enough liquid that they stop selling. Where it is I don't know. My guess is it's a matter of days rather than weeks and that will define the low end of the trading range.
GHARIB: Do you agree with that Stuart?
SCHWEITZER: Yeah, I think that's right that we have people who want to be selling in here, who want to get more liquid. I also think getting some clarity on the economic outlook over the next several days, we got a lot of economic data out later this week including GDP which is probably going to be knocked down considerably. This is fourth quarter GDP, originally 3.5. Tomorrow the government is likely to tell us oops it was probably only a couple of a percent. So I think there's further bad news coming and it may unsettle people for a while. But the buying opportunities will come into sight.
GHARIB: Everybody's been looking at China as this miracle -- economic miracle, investment miracle. Is that over? Is that bubble over?
METZ: I don't think it is. I think China and the developing nations are the next decade. There will be bumps in the road, but I think soon there will be an opportunity there.
SCHWEITZER:: And I agree with that.
GHARIB: So would you still put money in the Chinese or Asian stock markets at this point?
METZ: I would. I think I would go in on a latter basis, gradually, because I don't know how much the crazys have left to sell before we hit bottom.
GHARIB: Stuart, last word.
SCHWEITZER:: One point to add here is that commodities are likely to - - they've started to come under pressure. They may come under further pressure. That will hit some of the emerging markets but I think non- Japan, area, the Asian emerging markets for the longer term, they're good.
GHARIB: Gentlemen, thank you so much. I really appreciate your comments. We've been speaking with Stuart Schweitzer, global market strategist at JPMorgan private bank and Michael Metz, chief investment strategist at Oppenheimer.
