Interview: Morgan Stanley---David Darce---Chief Investment Strategist
>> all right, folks, we’re back. with so many concerns, the market can’t seem to shake them, nagging inflation, oil prices, golds, commodities all putting pressure on equities. for more on how much rates might be headed and what that means for investors, i’m joined by david darce, the chief investment strategist at morgan stanley, always a good guest and has a lot to say. another tough week for the stock market , and that’s not always a bad thing, really, to shake some people out, is it. it’s an excellent thing. it is a healthy thing, matt, to have the market pull back a little bit t had been racing up. we’re in this sort of fed whiplash mode where the fed says something, three weeks later, the minutes are released, then there is congressional testimony, and then we start the cycle all over again. we’re in an odd place right now year-wise on the calendar where there is six weeks between fed meetings. from march 28, may 1 oh and then you go all the way to june 289. there is a lot of parsing going on. part two is the global meltup where prices of assets are rising at unsustainbly rapid routes a bhaw do you mean by meltup?
>> meltup is where prices in real estate, prices in gold, you mentioned golding a second ago. gold is up 39% this year. the russian stock market is up 50 this year and gas prop, their largest stock, is up 71 this year, so far this year, you have had the small cap stocks. they were up 16. they pulled back, which is healthy. now they are up 12%. this global meltup refers to the prices of many kinds of assets. last week, picasso’s portrait of dora mar, the second highest price ever paid for a painting at auction, $95.2 million and no one knows who the buyer was! it’s emblematic of this global pump up of assets where the liquidity has been pumped up by the central bank and the bank of japan.
>> i’m getting nervous. well, maft, i think the thing that is create nervousness and nervous tics for the market is the resurgence and coming back of inflationary expectations, so people think that this asset price inflation might morph itself over to consumer prices.
>> would they be wrong to think that? come on. how could they not be wrong? some people think they are wrong and naive to think that. you have always told me on your show to tell people what to watch. one of the things that we thought that before has been oil. interest rates. i think we need to watch the employment coflt index. we need to watch the ahg, average hourly earnings see that copper at a an all-time high, silver is up 56 percent, all of those metals, zinc, gold, they are a small part of the cost of goods sold for corporations. labe cert biggest thing, 60-70 for most industrialized nations, europe, japan and the united states. labor is more important.
>> the stock market is still up. we have all these records an near records and short-term records t is a good thing. the stock market is up. the g.d.p. is expected to grow later this year. it’s a good thing we are taking this to the street and as you mentioned, it is a healthy development this little pullback. don’t forget you have the lag defect of three things. interest rates have gone up for quite some time. from ‘03 to now. they have gone from 1% all the way up to 5%. oil went up last year, and the dollar went up last year, not down. it’s down again this year, 8 against the euroand 7% against the yen. don’t forget, it went up 14% against the euro. these things all work with a lag, higher oil, higher interest rates, higher dollar. we think that’s going to slow down the economy in the second half of this year. don’t forget housing either.
>> how much?
>> well, we have basically trimmed our forecast just a little bit. we are looking for the g.d.p. to be 3.5% this year --
>> that’s fantastic.
>> it’s phenomenal. don’t forget the monetary stimulus that has been put into the market by the central banks of the world and we had the 2003 tax cut. many people forget about the effects of the tax cut and this went right over the bridge a couple of days ago, but right now, it’s moving through to keep the capital gains and the dividends low tax rates on for a few more years, and that’s another tonic and moxie boost to the market mass.
>> before we take a break, is this commodity rate tantamount to the dot com rally of ‘01?
>> summary stock price charts look similar to the nasdaq rise of 18988, 1998 and ‘99 and to the nikkei 225 rise of 1988 ‘-89. when things start to go parabolically up, there is no support for them. two housing stocks harmanian enterprises and toll brothers, they may be a can nary is coal mine because they are 50% off their break.
>> i promise you, dave is not pulling in his horns. we will take a break and continue to look at stocks and get more specific on how you avoid this meltup.
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stoke inflation concerns, and that, in turn, sends stocks into a tailspin.
>> hello, this is “marketweek.” it is a view of the week that was and what investors should focus on in the week ahead. in the past week, stocks limped into the weekend with a two-day slump that saw the s&p 500 posting its biggest weekly decline since october. the fed, of course, took rates to 5. they still may not be done. that pushed the yield on the ten-year treasury to a four-year high. oil prices recovered more than half the ground they lost a week ago, while wholesale gasoline looked to test a record of its own, and both precious metals and industrial metals set a new record because of supply and demand fundamentals, good old fashioned speculation. it was the worst five-day run for the stock market since okay toke ber.
>> i guess we will see what it means as we go forward from here. one notable thing about last week’s decline, especially the last couple of days of the week is how broad based it was. all ten groups were were lower for the week in the s&p ben marks. we will begin with the s&p. it dropped 2.6% this week a quick look at the individual stocks that led the drop, technology, those are the types of stocks that led the decline, legg mason thrown in there as well. as for the d dow industrials, coming within 100 points of an all-time high wednesday, ending the week with a 2300-point decline and in worse shape, the nasdaq. we talked about the tech sell-off that led things with the nasdaq dropping by more than 4. that sell-off was broad based. the question we have been asking is this―are the markets sending some sort of a message with the broad-based nature of this decline? some of the strategists i have spoken to say yes. what really is going on is the new fed chairman ben bernanke is being tested. the concern is he will respond by raising interest rates too much, and then the market pulls back significantly. others, though, take a different angle ax you we have an optimistic view that the sell-off creates more of an opportunity. we think interest rates are close to a peak. we think in general, inflation is going to be absorbed in large part by productivity so that as a standard of living around the world improving, we think there are opportunities in a broad range of industries.
>> will stocks continue this downward trend that started at the end of this past week, ores a elizabeth was suggesting there, matt, is it nothing more than a buying opportunity?
>> you have to put your money where you think it. thanks very much.
>> on the economic front, a surprise improvement in the trade deficit. the gap between imports and exports in the u.s. fell to 62 billion dollars. that was the smallest figure we have seen since last august. the value of outbound goods climbed to a reported while a temporary decline in petroleum prices also helped narrow that gap. the net result is a seemingly good headline number reduced concerns that inflation may accelerate. speaking of which, the same inflation concerns sent treasuries and the dollar lower. the yield on the ten-year treasury reaching its highest level, the yield at its highest level of may of ‘02. one strategist says it’s a buying opportunity. we’re looking for the yield curve to steepen. we like the shorter end of the curve. we’re overweighted in mortgage-backed securities because there is not a credit concern, but there is extra yields there. that’s what we feel is the best award profile right now. as treasuries fell, so did the dollar continuing its weakening trend as the trade gap reports failed to lessen concerns about global trade flows as investment imbalances, the dow now trading at its lowest level in a year versus the euroand an eight-month low against the yen. on the commodity front, that rally continues. oil prices moved higher by $2 a barrel this week but pulled back friday after the international energy agency cut its global demand estimate for its demand growth for this year. a bloomberg survey says crude oil prices may rise next week as violence in nigeria hietsdens the risk of disruption at a time of tight supply and demand. crude prices are up about 18% year to date and 50% from where they were a year ago. well, another record-breaking week in the metals market . gold pulled back on friday, but still was up 4% for the week. silver also with a friday giveback but only after touching new records earlier in the five-day session. copper trimmed gains on friday as well, but still put up more than 10 on the board for the week. friday’s pullback in metals came after investors lost concern that the surge in prices over the past year may not be justified after hedge funds and other speculators put so much money in to the group. trinity holdings, south africa ale second largest gold fund, predicts that the precious metal may top $850 an ounce by the end of next year. trinity says oil and geopolitical problems in the middle east are causing the surge in gold but the manager of the world’s gold council says it is the hedge against the dollar. most economists believe it is a hedge against inflation and geopolitical tensions and poor performance and other investments. those are the real reasons why gold has been going up for five years.
>> well, just in the past 60 days alone, the price of gold is up more than 30%.
>> well, up next, those rising commodity prices stoke inflation concerns. we’re going to get insight on what that means for investors. david darce is morgan stanley is our guest
