Market briefing
will john thain handle changes it’s the new york stock exchange?% will the u.s. dollar fall against the euro? will housing movehigher and will the federal reserve raise rates? stephen roach of morgan stanley says don’t expect the economic strength we had in the second half of 2003 to continue into 2004.
>> we end the year on two hot quarters but it follows the moment anemic and disappointing recovery on record. and we’re left at the end of this growth burst in 2003 with a record bunelest deficit, a record current account deficit, record low national savings rates, record debt burdens and sharply elevated debt service burdens. this is not the stuff of a sustainable, vigorous expansion in the u.s. and we’re borrowing ahead of gains that otherwise would have occurred in 2004 and there’s no free lunch so the bill will come do at some point next year. we certainly have momentum right now. but i hesitate to extrapolate on the basis of a couple of good quarters.
>> when in 2004 do you think it will hit us? and how severely? could it really completely halt an upward trend for the u.s. economy to worry about the triple deficits we have and the low savings rate?
>> i do think there’s a good chanc of a payback by the middle of next year. whether or not we tip into a serious slowdown or a podest one, it’s hard to tell.
>> but you have to admit that the jobs picture is improving?
>> no, i don’t. i think it’s crummy and it’s absurd for us to spin this and say the great american job machine is humming again. 71% of the jobs that have been created over the last four months have been temporary hiring in education and healthcare. the idea that corporate america is stepping up and hiring again is ludicrous. it is not supported by the facts.
>> talk to us about the dollar’s decline. do the forex markets know or see something in the u.s. market and the bond and equity markets are overlooking?
>> yeah, i think the forex markets are realistic, seeing a mass of current account deficits building up and diminished appetite for dollar-denominated assets and we have a lopsided u.s.-centric world and the best way to realign that world is to change the relative price structure. the dollar is the most important relative price and it’s going down. fixed income and equity markets for denial but i think that denial will crack when it’s more evident we have tougher times ahead.
>> could you give us an idea of how low you think the dollar may go?
>> i think the dollar on a broad trade-weighted basis, including the currencies of all of our major trading partners, possibly has another 10% to 15% to go on the downside. down about 11% from its peak. that was 23 months ago. but i think it will take more than that to clear up or at least begin to turn the corner on our massive balance of payments deficit.%
>> the s&p 500 rallied over 20% in 2003. but as richard bernstien, chief u.s. strategist at merrill lynch, told carol massar, that is about to change.
>> we think the key issue for 2004 is that the profit cycle will probably decelerate next year. even the biggest of bulls on the street forecast that profits will decelerate next year. that means earnings for the s&p will be up 60% to 65% in 2003 on a reported basis and it’s hard to get a growth rate of earnings in 2004 higher than that 65%. the consensus is 10% to 20% growth next year.
>> you are among the most bearish of strategists. why?
>> valuation, i think it’s the deceleration of profits and sort of our secular view that the financial markets, not only in the united states but around the world, are still very, very speculative and we’ve never gotten rid of the speculative fervor associated with the bubble.
>> a lot of folks we talk to, economists and strategists, point to the improving economic environment, although the jobs report on friday was disappointing, it was a round of job creation. what else do you see as weakness? what do you say to those folks?
>> i don’t think the issue is whether or not the economy is strengthening but a matter of what do you pay for stocks . not many people would pay bentley prices for volkswagen. there’s a point where you asking if you’re paying too much for the asset you’re receiving and part of the story is that people have ignored that and they have been momentum driven as opposed to fundamentally driven.
>> back in march, your 12-month forecast at that point was for the s&p of 860, where it was at that point. we’ve rallied 24% since that point nine months ago. what happened this year that caught you by surprise?
>> i think what caught us by surprise, we knew we were in a speculative environment and profits would improve but we didn’t see fuel on the fire that the speculation would increase. we anticipated for 2003 that investors would become more risk averse as profits didn’t meet expectations. what happened was we never got a chance to make that comparison because what happened is that as the profit cycle turned, valuations expanded on the most speculative universe. a year ago, people said you couldn’t judge the market based on a p.e. because earnings were depressed, the only reason p.e. was high.% here we are, experiencing the strongest acceleration of profits in the post-war period and the p.e. is just as high. it shows we’re still very much in a speculative environment.
>> the i.p.o. market picked up in 2003. what’s the outlook for mergers and acquisitions in 2004? that’s coming up.
