Stuart Schweitzer of JPMorgan Private Bank Reacts to the Market's Rally Reversal
Tuesday, February 19, 2008SUZANNE PRATT: Joining me now to discuss today's market activity, as well as look into the future, is Stuart Schweitzer of JPMorgan Private Bank. Stuart, welcome back to the program.
STUART SCHWEITZER, GLOBAL MKT. STRATEGIST, J.P. MORGAN PRIVATE BANK: Thanks Suzanne. Good to be here.
PRATT: What happened to today's rally? Should we blame it on oil and the commodities for the reversal?
SCHWEITZER: I think so, but I think you've got to start a little before even oil had the impact because this morning when shares were up, there just wasn't a whole lot of volume behind it. There was not the weight of money that I think you need to see for the market to be able to advance in a sustainable way. And then you had the weakness that came from higher oil prices. And oil is a rock versus a hard place kind of thing because on the one hand, if oil stays high, it's going to constrain the consumer and that's going to make it tough overall for the economy and the market. And on the other hand, if the consumer comes back, as I think you could argue the consumer will when the tax refund checks start coming, then I think higher oil prices are going to be a source of potential inflation. So it's a very tough situation.
PRATT: Does that mean tomorrow's consumer price index is going to be a big focus for Wall Street? Is everybody nervous about that number?
SCHWEITZER: Absolutely. Just look at the back up in bond yields in the last 10 days. Bond yields are up something like 20 basis points on 10- year Treasuries over that time span. And I think that is partly because very much really because of a concern about the inflationary potential of higher oil and other commodity prices.
PRATT: Are you worried about stagflation at all?
SCHWEITZER: I'm a little bit more concerned than I'd like to be frankly. I think in the near term as the economy cools down and I think we're either in a recession or we're going to find ourselves shortly to be in more recessionary kind of conditions, that that may reduce oil demand enough to take a little bit of the heat away from the oil market. But once this economy gets going, if oil stays high and it's not just OPEC's supply, it's supply from non-OPEC as well that's very constrained, if oil stays high, I think there will be inflation risks and I think that's going to mean higher interest rates sooner than anyone would like.
PRATT: When we spoke earlier today, you told me that you were recommending to your client...
SCHWEITZER: I'm sorry. I lost it my earpiece. Just let me get it back in.
PRATT: OK. All right.
SCHWEITZER: Sorry about that.
PRATT: Can you hear me now?
SCHWEITZER: I can hear you now.
PRATT: Great. When we spoke earlier today, you told me that you're recommending to clients that they keep 14 percent of their portfolio in cash. That seems like a rather large number. What's average for you and why that high number for cash?
SCHWEITZER: Well, what's average is 3 or 4 percent. Normally cash is a wasting asset in a portfolio that clients want to use as a source of preserving and then growing capital. But what's behind it is a concern that we may not yet have seen the bottom in the market. I will say that we had a little bit more cash than that at the beginning of the year. We had as much as 17 percent cash. And then when stocks got hit back in January, we did put a little bit of money to work, but it's one toe at a time into the water. We're not rushing in; picking your spots is going to be really critical.
PRATT: So what are your spots?
SCHWEITZER: It's a very challenging year.
PRATT: What are your spots?
SCHWEITZER: Number one is large cap U.S., not small cap and number two would be non-Japan Asia, which has gotten hit back pretty hard over the last three months. And I think non-Japan Asia will be positioned to benefit from growth when growth resumes.
PRATT: OK. Let's leave it there. Thank you so much for joining us tonight.
SCHWEITZER: Always a pleasure.
PRATT: My guest this evening, Stu Schweitzer of JPMorgan Private Bank.
