Underweighted in financial stocks
Sanford C Bernstein & Co---Zlotnikov, Vadim---Chief Investment Officer
>> merrill lynch picked morning star and jaywalk to provide independent research to clients. it’s part of the company’s settlement with regulators over biased stock advice. merrill and 10 other securities firms paid $1.4 billion to settle allegations that their stock analysts produced tainted research for investment banking businesses. the firms agreed to spend $432 million over five years to provide clients with research produced by outside firms. lehman and u.b.s. have also hired jaywalk. our next guest says even though he is underweighted in financial stocks, he is starting to look at them because of their recent pullback. he is the chief equity strategist at sanford bernstein. he joins us here in the studio. so why financials now?
>> the financial stocks have already started to discount the rise in the rates. if you can identify those that can still give you good earnings growth and not susceptible to potential credit problems and mortgage or commercial, have you a winner.
>> when you say they have already discounted the rise in the rates, that means they have already fallen because they think rising rates will be bad for them.
>> exactly.
>> why when the rates do go up is it going to be suddenly good for financials?
>> because financial sector when the rates rise initially, it sells off indiscriminately. whether fundamentals are tied to rates or not.
>> that could be said about the broader markets . few look at correlation between rates, markets fall before rates start to rise and they rise before rates start to fall.
>> this time has been quite similar. if you look at patterns versus previous cycles or versus previous―when the economy was peaking. this cycle almost a textbook example of what normally happens.
>> so why all the crying and the tears that the fed will raise rates and it will kill the economy? is this because of the major research firms and big, big wall street houses are huge holders of bonds?
>> no, i don’t think that is the reason. i think the reason is until the fed starts to raise rates and there is some confidence that people understand how far they’re willing to go, there is a fear of catastrophic risk. there is a fear that it could be like the 1970’s where you have a huge rise in the rates. until people settle in, until there’s a greater visibility of inflation, until there’s a greater visibility of how far the fed is willing to go, there’s a fear. that fear creates opportunity.
>> with that transition period -- when i look back historically at rate hike cycles, it’s the transition period that drives investors nuts. the savvy investor who looks back is buying stocks, especially when the market is down and some of the groups like financial sincere down 6.5% quart tore date.
>> i think that’s right. you still have to discriminate. i think interest rates are going up. i think there will be pressure on margins. there will be a credit risk developing. financial companies that are leveraged to mortgage origination could get hurt. on the other hand, some insurers conglomerates could do quite well. it is that discrimination that will trade out performance of people.
>> switching gears. you are like energy stocks. some people think like taxation, if the government raises taxes, they don’t necessarily get more income. when oil prices are high, oil companies don’t necessarily make more money.
>> depends on the oil company. by in large they have been because they’re able to increase both of their refining margins and get more money for the oil itself. in this particular case, they have been. there are interesting reasons to like energy, not just the high oil price, although that’s a factor. 3% to 4% yield. the stocks are not overly expensive. they do some assurance against political instability.
>> speaking of political unstability. we have health care. that’s a wild card. by all polls, a very close race. we have a good five months of campaigning to g.what effect do you think politics would have on health care?
>> that’s a great point. what we have been doing is focus on areas that are innovators -- medical products, biotechnology that will preserve pricing power. they’re less susceptible to generic competition. they can be justifiable on an economic basis. on the pharma side, i have been benchmark weight. you have to wait until the election to see how much the pricing pressure you will get on some of the drugs.
>> there are people building kerry portfolios and people out there building bush portfolios because clearly the two will be different in terms of their effect on the stock market and the economy.
>> yes, but i think as a stock analyst or stock strategist i think less like a political commentator. if you cannot research, why bet on it?
>> terrorism clearly always a wild card. it is moving the commodities market particularly, petroleum markets right now. that will always overhang the stock market . 30 seconds left. your thoughts on that and how you play through the uncertainty of terrorism.
>> one of the major impacts will be to destroy consumer confidence.you underweight consumer cyclicals, retailers and others. they’ll be the most hurt by a decline in consumer confidence.
>> all right. good to have you on. appreciate it. chief equity strategist at son ford bernstein. stay with us. there’s still more to come after the break. you won’t want to miss it. i can’t tell you what it will be because i don’t know yet but it will be good, i promise you that.
