U.S. economic growth is continuing to slow, with additional unpleasant surprises possible in the credit and equity markets, three top financial analysts said in remarks prepared for a panel discussion presented
by the CFA Society of Los Angeles, according to the following release:
The panelists differed on the investment outlook, with one bearish on stocks, one
bullish and the other cautioning that commodities, which have recently attracted the
interest of more individual investors, may be the next "bubble." The analysts were
interviewed by Maria Bartiromo, anchor of CNBC’s Closing Bell with Maria Bartiromo.
The economy has already entered a recession, according to Donald H. Straszheim, Vice
Chairman of Roth Capital Partners, former global Chief Economist for Merrill Lynch &
Co., and an expert on China and Asia.
"It’s clear to me that the U.S. economy is in a recession," Straszheim said in remarks
prepared for the society’s 2008 Economic & Investment Forecast Dinner at the Biltmore
Millennium hotel Wednesday. The CFA Society of Los Angeles is a network of investment
management professionals that works to disseminate useful financial information and
increase awareness of the value of the Chartered Financial Analyst (CFA)
designation, which is intended to lead the investment profession by setting the highest
standards of ethics, education, and professional excellence.
"Recessions come and go and this one will too," Straszheim said. "The decline in
housing, the damage done to consumers by falling home and equity prices, and higher
energy costs, will sour consumer spending. The turmoil in the financial markets is not
over, nor is the ugliness in equities. History tells us that when market sentiment
turns as sour as it has, ultimately every stock gets taken apart."
While agreeing that the economy faces further challenges, Alison A. Deans, Managing
Director and Deputy Head of Private Asset Management at Neuberger Berman, noted that
her firm is positive on equities.
"We actually like the stock market at these levels," she said in her prepared remarks.
"We’re at a point in the Fed’s easing cycle that usually bodes well for equities. When
the Fed eases, 90% of the time equities do better - the exceptions being when stocks
have been significantly overvalued or when we’ve had a serious recession. Stock
valuations are not high at 15 times forward earnings, compared with 20 to 21 in the
late ‘90s. As well, we anticipate slow growth, but not a recession."
The nation’s credit markets, wèé;4´0»2±²picture improves, concerns about corporate cash
flows will subside, pushing investors out on the risk spectrum."
While noting that economic data may worsen in the coming months, Crescenzi agreed with
Deans that most of the bad news is already priced in and added that investors should
now be alert for buying opportunities. The key factors to watch, he said, are the
nation’s production cycle and consumer spending.
"Track whether consumer spending is picking up relative to output, because spending
levels that outstrip production will inevitably lead market-share minded companies to
raise output, lest they lose market share," he said in his remarks.
"This will turn the production cycle from vicious, where it is now, to virtuous,
leading to a renewed period of self-reinforcing economic expansion. By focusing on
spending, particularly chain store sales, car sales, and home sales, investors will be
able to spot the trough in the economic cycle. I emphasize that it is spending relative
to production that is key to watch. When you see a turn, start betting on an economic
recovery and don’t be deterred by sour news on employment and production, because it
will inevitably turn."
When production turns up, Crescenzi explained, payrolls rise and consumer spending
follows, leading to increased demand for goods and services - a virtuous cycle.
"More hours worked mean more income, resulting in increases in consumer spending and
round and round it goes, a virtuous cycle of increases in production, income, and
spending," he said.
"This is the stuff that expansions are made of. A turn in spending is probably a few
months away, but it could happen at anytime, so we must be on the lookout for contrasts
between spending and production. Spending could pick up for any number of reasons, the
most prominent which include the Fed’s rate cuts, which are reducing debt burdens and
resulting in a boom in mortgage refinancing. Fiscal stimulus will certainly boost
growth, although there is a debate about its lasting effects. I am hoping it jumpstarts
the production cycle, but much will depend on the mood of the nation at the time.
Pent-up demand can also help turn things around."
Deans said investors should be very choosy about stocks, adding that there may be
opportunities in the beaten-down financial sector.
"We’re being very selective, but we do think financial services and technology shares
could do well. We also think large-cap and global industrials -- because they aren’t
tied only to U.S. demand, which will slow -- will benefit from global demand. The
weaker dollar also helps companies that operate globally. Large cap and global are the
places to be right now."
Deans said portfolio managers at Neuberger Berman Private Asset Management have
adjusted their mix of international stocks.
"Overall, we are evenly split between domestic and foreign equities right now. We had
been overweight international, but as the dollar has come down we have become more
U.S.-centric," she said.
"Emerging markets in general, which rely on our consumption, could be soft for a while
and are not going to see the kind of growth they’ve enjoyed in the past, although some
specific markets have good prospects. As a whole, we are neutral to underweight
emerging markets."
Crescenzi said investors should be wary of the boom in commodity prices.
"If you are looking for the next price bubble, the commodity market is probably where
you will find it," he said. "The price action there fits with the mentality that grips
every bubble: ‘Just buy X and you will make money.’ In past bubbles, X stood for
dot-com stocks, housing, and credit instruments. Now it stands for commodities."
On other fronts, Straszheim anticipates new economic marching orders in China.
"The news coming out of China is about to change," he said in his prepared remarks.
"Over the last year, the talk has been that China is growing too fast with too much
inflation. China has been allowing their currency to appreciate rapidly and raising
interest rates to slow growth and to fight inflation. The recession in the U.S. and
near recessionary conditions in Japan and Europe will reduce China’s growth rate to
less than 9% in 2008 - the lowest rate since 2001. So Beijing’s concern is soon going
to shift 180 degrees, with their Number One worry being that the economy is at risk of
getting too cold, not staying too hot. Consequently, we see an end to their tightening
policy and an end to their rapid currency appreciation by mid-2008."
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