Roundtable Review of the Economy & Stock Market
Tuesday, January 01, 2008SUSIE GHARIB: So what's ahead for the stock market and the economy in 2008? I got some answers from Joe Battipaglia, Market Strategist for the private client group at Stiffel Nicolaus; Jim Awad, Chairman of WP Stewart Asset Management, and Josh Feinman Chief Economist at Deutche Asset Management. I began the discussion by asking Josh to describe the U.S. economy in 2008, growth or recession?
JOSH FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MANAGEMENT: It's a very challenging year for the economy. It faces two major shocks. The housing slump and the tightening of credit conditions. Neither of which is going to go away quickly. It is going to take time to work through these things. In the interim, I think growth is going to be pretty sluggish at least through the first half of 2008. And then take time gradually to get better aided by easier monetary policy from the Fed and then a slow workout of some of these credit problems.
GHARIB: So Jim, does this make you a bull or a bear for 2008?
JIM AWAD, CHAIRMAN, W.P. STEWART ASSET MANAGEMENT: Well, a very moderate bull. Really you're going to have two different economies and two different stock markets. The overseas markets are in a secular group. Trying companies that service that market will do well. Export-oriented companies that will create jobs. On the other hand, you are in the middle of a deep recession in U.S. financial and housing. It's going to take time to work that out. I think they will net each other out, have a year of very modest growth in the economy, stock prices, and profits. But its going to be some prosper and some do badly.
GHARIB: Joe, are you cautious?
JOE BATTIPAGLIA, MARKET STRATEGIST, STIFEL NICOLAUS: It might be a cliche, but we are at a tipping point as far as the U.S. economy is concerned. But I really think we are. We have very little room now given that we have a major housing recession and a credit crunch. We are not growing the job market. So to say we're going to get a rebound this year is a question mark. And the vulnerability for the stock market is the fact that maybe it doesn't happen. And we remain sluggish for a longer period of time with more inflation than we thought was going to be there. The Fed has identified as not having closed the situation as in they keep cutting rates and nothing happens. And we could have a real crisis. Remember the United States is 25% of global consumption. If it goes cold, it will affect other economies.
GHARIB: So that is the big question. Can the Fed engineer this happy ending to the credit crisis?
FEINMAN: I think they can help with the margin. And I think we're going to see more easing from the Fed in 2008. Maybe another 50 basis points this spring. But what the Fed can't do directly is get people to take risks again. And that's really at the center of this credit crunch. And I think that's simply going to take time for people to become comfortable again, understanding what these securities are really worth. Understanding their losses potential losses on their balance sheets. It's not going to be like flipping a light switch and turning it on.
GHARIB: So Jim. What is it going to take to make investors confident again? Is it going to be a turnaround in the housing market? The job market? The oil market?
AWAD: Time is the most important thing. We have to get to spring. If we haven't had disasterous write downs and the consumer hasn't collapsed. If the credit markets haven't seized up as we roll into spring, then we will have passed the point of maximum vulnerability. It's unlikely we're going to stay good and then drop off in the spring. If we are going to drop off, we are going to drop off early in the year. I think investors will get more optimistic as we work our way through the year.
BATTIPAGLIA: Unfortunately Jim, that reminds me of the housing industry's remarks last winter. As soon as we get to the spring and the selling season, we're going to come out of this this rip roaring and of course it never did happen.
AWAD: Well it might not happen. But I was addressing the point of where the maximum risk is. If the rollover is going to happen, it should happen now.
BATTIPAGLIA: But there's going to be, month after month, foreclosure upon foreclosure, and falling prices on housing which affects the consumer which keeps the consumer out of the market. Companies will react because their profits aren't there by cutting their capital spending and the whole thing unwinds. And that's why your point is right about time. I just don't think the framework is that short.
AWAD: Unless overseas growth can compensate for it.
BATTIPAGLIA: It's gotta be a lot of that.
AWAD: We'll find out.
GHARIB: Does that mean that investors should put more of their money in international stocks vs. U.S. stocks.
AWAD: The U.S. market is cheaper than most other markets and what you want to own are companies in the U.S. market that are leveraged to international growth, which would be your large cap multi-national companies that are somewhat insulated from the from the problems in the United States. So that to me is the cheapest and the best risk reward in the markets.
BATTIPAGLIA: Be prepared for a couple of points of multiple contraction. Even with the best of companies should these economies have hiccups related to the slowdown in the United States. But if your best agreed companies are outside the U.S. you need to put those in the portfolio too.
GHARIB: Is severe dollar weakness over?
BATTIPAGLIA: I think so. I think the dollar's going to benefit from a couple of things. One, globally interest rates are going to move down not up with the exception of China, which has its own set of problems. Number two, I expect the price of oil to come down, which means less dollars going out of the country in a circulation issue. And as Jim pointed out, trade is improving for the U.S. so the current account deficit is rolling down. So I think the worst of dollar problems are over.
GHARIB: Josh, do you agree with this forecast? Do prices go down or do they cross $100?
FEINMAN: I think we are more likely to see prices come down a little bit. I think a little softer global growth will help. Of course geo-political risks are still out there. I also agree the dollar might improve a little bit against some of the currencies against whom its fallen dramatically. But on a medium term basis, I still would look for the dollar to weaken a bit against some of the Asian currencies against whom it has yet to fall that much.
GHARIB: Jim, what is the absolute best sector to invest in in 2008 and what's the worst? What to avoid?
AWAD: The U.S. market is cheaper than most other markets. So I would buy, as Joe was saying, best of breed world class large cap growth companies that are levered to international growth in the United States. So companies with maximum overseas exposure. I think the worst area to be is going to be U.S. financial institutions that have not yet recognized how bad their problems are. And they are going to struggle during much of 2008.
GHARIB: I want to get your view, all of you on presidential politics and what does Wall Street want: a Democrat or Republican in the White House? Joe.
BATTIPAGLIA: I think what they want is stability on the spending front so it doesn't grow faster than the economy. They'd like to see tax policy that's rational and simplified. Since we're not getting either one of those from either party, it's going to be a free for all and I'm affraid it's going to be an ill tasting election this year because the promises are going to be wild and the deliverables are very few.
GHARIB: Josh what is your prediction?
FEINMAN: I think the market probably prefers some sort of divided government where one party controls the White House and the other party controls the legislative branch. I think that maximizes the chances of restraint and nothing radical being done. And also might set the stage for some entitlement reform.
GHARIB: And Jim, last word.
AWAD: I think the markets, the capital markets are more comfortable with the Republican platform. Putting aside social issues and foreign policy issues. In terms of tax spending and regulation and I think the markets will likely be disappointed.
GHARIB: All right gentlemen. Thank you very much and Happy New Year. Josh Feinman, Jim Awad, and Joe Battipaglia.
