"Market Monitor"-Ashwani Kaul, Director of Research for Thomson Reuters
Friday, July 11, 2008PAUL KANGAS: My guest "Market Monitor" this week is Ashwani Kaul, director of research for Thomson Reuters. And welcome to NIGHTLY BUSINESS REPORT, Ashwani.
ASHWANI KAUL, DIRECTOR OF RESEARCH, THOMSON REUTERS: Nice to be here, Paul.
KANGAS: Because this is your first visit with us as a "Market Monitor," I would like you to tell our viewers about your firm and its major objectives.
KAUL: Absolutely. Thomson Reuters -- specifically Thomson Reuters Markets is a leading provider of financial information, content, analysis, and technology to financial professionals all around the world. We have over 50,000 employees in 93 countries.
KANGAS: Reuters is very big, and when they joined up with Thomson, it is even bigger.
KAUL: Absolutely.
KANGAS: Well, you know, obviously the big news this week is the Fannie Mae and Freddie Mac problems. Give us your thoughts on what's going on there.
KAUL: You know, there is a lot of conflicting reports out there from liquidity and solvency issues. I do feel that the market perception has changed on these two, even though they are government-backed. I think, you know, the coming days will really tell what role the government will play. There were some rumors today circulating that they were going to allow Freddie and Fannie to borrow from the discount window. You know, from a market perspective, it seems like a good idea, but it also raises the question that if anybody can raise capital, since they are government- backed, it should be Freddie and Fannie. It tells me that they're having concerns about raising capital. So I think once we get the full information next week, because I think there is a lot of conflicting reports out there, we'll get a better indication on the state of Freddie and Fannie.
KANGAS: OK. Now obviously the financial stocks have been the worst performer so far this year. Will the selloff go on much longer or do you see some chance of recovery in the second half of the year for this group?
KAUL: It is really tough to say. I mean, I think the consensus was we hit a financial bottom a couple of months ago. That's not the case. We actually dropped even further once we had that little rally in financials. I think there is more room for drop in financials. I think the sector is poised to post the lowest growth for the second quarter upcoming, according to Thomson Reuters data. We expect that trend to continue in the third quarter. We're looking for a 9 percent drop right now. If there is any sort of recovery, I expect it to be late in the year, around December 10th.
KANGAS: OK. What other groups look vulnerable here, Ashwani?
KAUL: Consumer discretionary, obviously. We're at or approaching all-time highs for oil. There is a lot of inflationary pressure. The consumer has been tapped to the maximum. So I see a lot of weakness in consumer discretionary. Those are the two sectors that I'm really looking at, financial and consumer discretionary.
KANGAS: Now I know you don't recommend individual stocks, but what stock sectors do you believe have the most potential for gains for the rest of this year?
KAUL: I mean, technology. I mean, I think technology has been a bit oversold. If you look at the earnings growth numbers, we're looking at 16 percent growth for technology for this coming quarter. In the third and fourth quarter, we're looking for double-digit gains, once again, and these estimates have really held up. Whereas we've seen sharp downward revisions in almost all sectors, except for energy, we've actually seen a spike up in technology revision estimates. I do anticipate technology earnings to cool off a little bit, but still in positive territory and strong. Within technology, I'm looking at semiconductor to post some strong earnings gain, IT consulting, and computer hardware.
KANGAS: All right. Very interesting. And, Ashwani, any parting thoughts? We have about 30 seconds.
KAUL: Well, no, I mean, I think the markets are going to continue to this upward and downward revisions. I do think valuations don't count anymore. We're at all-time lows in valuations according to Thomson Reuters data, once again. Forward multiples are at 12, 20-year lows, but I don't think valuations matter in this marketplace right now. I think visibility is the key.
KANGAS: OK. Very good. Ashwani, I want to thank you for sharing your insights with us.
KAUL: Nice to be here, Paul.
KANGAS: My guest, Ashwani Kaul, director of research at Thomson Reuters.
