View on the market
Interview: GAM---Abate, James---Fund Manager
>> stocks fell after the fed’s rate cut―the fed’s rate cut was less than some economists and investors had expected. drug, industrial and software stocks led that decline. the dow jones industrial average down 98 points at 9,011. the s&p 500 at 975, lower by eight points, the nasdaq composite slipped three to 1,602. big board volume, 1.4 billion shares, advancers outpacing declines. but just about 100 stocks . nasdaq, 1.5 billion shares changed hands. take a look at the wilshire 5000 the broadest measure of the market down 54 points or a little over half a percent, 9,333. treasuries had their biggest drop in two months, two-year notes led the declines, among the most sensitive to fed rate changes. down 12/32, the three-year down a half point. 10-year note down well over a point, a pointant 10-32. yielding 3.43%. the dollar fell against the euro as the fed’s rate cut decision signalled it will keep rates at a 45 year low, diminishing demand for u.s. fixed income assets. stocks and bonds falling on the fed cut, question is what’s next? the next guest says expect continued deterioration in bonds. does that necessarily make stocks an attractive asset class now? the investment director of u.s. equities and u.s.a. joins us with his take on the market today. welcome.
>> thank you.
>> first question has got to be what do you think about what the fed did and had to say?
>> i think the fed face as dilemma. we have, let’s say a tale of two economies, the economic statistics today, the housing numbers, housing starts were at an all time high. while at the same time durable goods came in at a very low reading. in fact capacity utilization that came out last week were indicating lows that we haven’t seen since the recessions of the early 1980’s, and back in the mid 1970’s.
>> we are looking at capacity utilization now. looking at the chart like this, what does it tell you going back to ‘68?
>> it tells you given such low utilization in the industrial segment of the economy, that businesses are going to be reluctant to add to their discretionary spending in terms of capital expansion and so forth, and given that fact, what you have is the fed through its interest rate mechanisms has the capability to do four things. one is to stimulate housing by lowering interest rates. if you looked at the housing number today you’d think the fed would be raising interest rates. the fed has the capability to boost stock prices which boost confidence in other things. it has the capability to influence the dollar which can help exports. but more the from a business or industrial standpoint, the lower cost of capital should provoke investment in analysts’ estimates and productive capacities.
>> is that happening? are companies going out and taking the opportunity to borrow this money and push it into the industrial economy?
>> there is no clear evidence yet. you have to remember the stock market will anticipate that. in fact, historically stock market rallies typically are best when liquidity is flooding into the system but has not yet made its way into productive assets. we are at a critical point though when you look at the industrial economy. two things can happen. i think companies are going to look back and say do we anticipate the second half demand growth to be there. will the fiscal package and dollar weakness provide a capability to generate a higher return on capital? the company sense that they’ll actually put money to work.
>> where should investors put money to work? we saw the reaction to the bond market-a pretty big reaction. larger certainly by percentage-wise than the equity market reaction. what would you see going forward from here?
>> i think you have to step back and say what happened to the corporate bond market is probably more important. because even though the fed has been easing for the past few years and we’ve had the 13th rate cut, the corporate bond market, particularly the high yield market has been really seized up up until recently. so from that standpoint, companies are going to do two things in a few months. they are going to either recognize that demand is not going to be there and you’ll witness perhaps another round of restructuring in corporate america. that in fact may put a damper on the jub lance we are seeing in the consumer segment of the economy. that’s negative to the stock market. on the other hand, if you have a lot of the liquidity that has flowed into the corporate bond market and boosting stock prices provide capability for companies to increase confidence and increase the utilization rate, you are likely to see the stock market rally, have a second leg.
>> as a backdrop, you like g.e. we look at the bloomberg and this is g.e. going to the beginning of the year. it’s up over 20% already. but this chart looks pretty good. but when i click on it twice and take it back to the beginning of 2001, it doesn’t look as strong here.
>> probably a better chart is to look at the dividend yield of general electric versus the five-year treasury note. the dividend yield on gentlemen is 2.56 person, the federal is 2.3%. what are you gaining? the market is saying g.e. is the economy, there is going to be very little growth or no growth over the next five years. you are being issued a free call option on restructuring activities of general electric and being paid to wait.
>> what do you think of the stock price movement if it wins the bidding war for the vivendi universal media asset?
>> i think that’s a minor issue. the broader issue is looking at the all encompassing businesses which putting the general electric.
>> those so-called less sexy businesses have not done as well the jet engines and turbines have not done well.
>> medical equipment, plastics, you can think of everything else. which is why general electric represents the u.s. economy and is a very good proxy for the stock market as a whole.
>> investment director of u.s. equities. we have after-the-bell news on boeing and ex-employees facing serious accusations. that is coming up next.
