To sell rather than buy stocks
Interview: Miller Tabak---Boockvar, Peter---Equity Strategist
>> shares of mandalay resort group rallied as much as 21% on the m.g.m. mirage bid. it’s a signal investors expect. m.g.m. majority owner kirk kerkorian to increase the $68-a-share offer. analysts believe m.g.m. may have to pay as much as $75 a share. the nearly $5 billion deal would create the nation’s largest casino resort company that would own about half of the hotel rooms on the las vegas strip and give m.g.m. mirage a larger piece of the convention business in las vegas. m.g.m. mirage is the number three casino company currently behind caesar’s and harrah’s. well, as we said, our next guest advises investors to sell rather than buy stocks because of expected higher interest rates. peter boockvar, equity strategist with miller tabak. is that an accurate paraphrase?
>> yes. right now as we get to the upper end of the recent trading range of 1150 to 11 significant in the -- 1160 in the s&p. in between, we’ve been drifting higher the last week but as opposed to going through the upper end of the range, i expect it to stop here because of the prospect of what higher interest rates will do to the economy and valuations.
>> do you expect a rate increase at the end of june in.
>> there’s no question the fed will raise 25 basis points at every meeting this year.
>> every single meeting?
>> right now the bond market is pricing in about 2.25% interest rate by year end assuming the economy stays on track and inflation shows upward pressure.
>> pulling in the case law. history would show, rising interest rates, the market doesn’t like it but historically there’s a transition period when the market anticipating a rate increase, stocks will fall on the first rate increase but will subsequently rise. this chart shows the last two rate cycles, the orange line being the s&p 500, the white line, the fed rate. you can see back here, this is april of 1999 through may of 2000, half a dozen rate increases there, the s&p 500 rising. you can see just before the first increase, you see the great plain down in the s&p 500. the previous cycle, rates rising, stocks rising, as well. returning to 1969 and 1981, three rate hikes, but it shows me the same thing. why do you disagree with history?
>> you have that middle of the road period where the economy hasn’t yet responded to rising interest rates. so the fed is raising because severg good and that allows us to rally but we’re facing a fed funds rate at 45-year lows and while the bond market through year-end is pricing 2.25% fed funds, in order to normalize, the fed will have to raise to 3% to 4%. so the market is facing 200 to 300 basis points of rate hikes so while we may have mini rallies, over the next six to 12 months, the environment for stocks gets more difficult with respect to valuations being lower because of higher interest rates and what people want to assign future earnings, the multiple on future earnings, and eventually the economy is bound to slow because of the rise in rates. yes, maybe we can have this rally we’re in the midst of right now but i only see this taking us to the upper end of the range and by doing this, the market is playing a game of chicken with interest rates because we know at some point they’ll have an impact.
>> so you don’t think that the strength of the economy will supersede really modest rate increases if you look at the historical 50 year average of the fed rates?
>> my concern is the fed. i think the fed stretched the rubber band by lowering rates to where they did and keeping this there as long as they have, creating dislocations and i think there will be a hangover from that although the bond market has adjusted to some rate hikes, i think the reality of the impact on the economy that is extremely depending on the housing market , for example, there will be a ripple effect that will be nastier than anticipated.
>> because of housing. many would argue that in this 20-year systemic decrease we’ve seen in treasury yields, at the same time we’ve seen housing prices exponential and unprecedented increases and also in the last five years, three of those years, stocks doing terribly and investors losing confidence in stocks at a time when their only performing asset was their real estate. will we see a huge transfer of wealth from the equity in homes back into stock portfolios?
>> i would initially think, because i think the impact a decline in the housing market could have will have a ripple effect throughout the economy and affect stocks at the same time. this economy was highly dependent on stocks in the late 1990’s whether compensation because of options. now our economy is most dependent on housing than we’ve been in a long time. the net worth of an individual is tied up mostly in their house, affecting spending decisions and the equity they tame from their homes so a decline in the housing market % -due to higher interest rates% -will have a more dramatic effect than anticipated.
>> peter, thank you very much. equity strategist with miller tabak. president bush hosting the g-8 summit in georgia.
