03/01/99:The Bull, The Bear & What's Next On Wall Street
Mark:
In case you missed the news last night.
Here is one my favorite strategists on Wall Street,Joe 'The Bull' Battapaglia,the other man is from Merrill Richard something,says he is a quantitative analyst,yea well so are that Nobel Price winning guys who used to managed that hedge fund LTCM something and you know where they ended up.<g>
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Courtesy:NBR
SUSIE GHARIB: Our guests this evening don't agree on the outlook for tech stocks or on what's next for the stock market. Joe Battipaglia, the chief investment officer at Gruntal and Company, is bullish. He expects the Dow to hit 10,000 by the end of May. By contrast, Richard Bernstein, the chief quantitative analyst at Merrill Lynch, is bearish. He says the Dow will end the year at 9300 at best. Nice to have both of you here. Joe, I want to start with you. You've been an unwavering bull. And even though this year I guess pretty much the stock market's been flat so far, you are still very positive. Give us your reasoning at this point.
JOE BATTIPAGLIA, CHIEF INVESTMENT STRATEGIST, GRUNTAL & COMPANY: Very simply the economy is picking up new vigor at a time when the global economy has been flat. What happens is the U.S. economy will lead a global recovery into next year. That gives us the conditions of rising earnings pretty soon, so that analysts fears about a recession go away, interest rates remain table because inflation isn't back on the table. We have multiples towards 30 which gives us higher valuations.
GHARIB: Rich, how does that sound to you?
RICHARD BERNSTEIN, CHIEF QUANTITATIVE ANALYST, MERRILL LYNCH: I don't disagree with Joe in terms of the economy. The economy certainly is very, very strong, no doubt about that. Our problem is that we see sort of a decoupling of the economic and and profit cycles. You know, last quarter GDP was up about 6 percent. Be it corporate profits measure by S&P 500 reported earnings were down 5 percent. You had a huge decoupling. The question we're asking is, if the economy slows at all, what does that mean for corporate profits?
GHARIB: What do you say?
BATTIPAGLIA: Well, the question is if, of course and I don't see the economy slowing. But we have to keep in mind one thing. We have two things going on in the economy. One, the sectors that have been strong where money has been going from consumers and business like technology have been very robust. However, there's a great number of commodity product kinds of companies that have no pricing flexibility, seeing their margins erode and their stocks are struggling. Even in that environment, with the disparity between the rich and the poor, the have's and the have not's, you can still get a stock market. And then it becomes a matter of stock selection. And under the cover of that, you can make money in stocks and that's what I'm looking to do.
GHARIB: All right, and everybody wants to make money in stocks. The question, which ones. Because even in your portfolios you are recommending certain stocks. Lets take various sectors. For example, technology. You feel, to lighten up on technology. Joe, you're saying, go in almost full speed ahead. Tell us why you are negative on the techs.
BERNSTEIN: I think there's two things that we worry about with technology stocks. Number one, technology is the most foreign exposed sector and I guess I do disagree with Joe. My outlook for the global economy. We're very bearish on Japan and we think the impact of what Japan is going to have on the rest of the world will be very negative as the year progresses. So we're very concerned about technology from their foreign exposure point of view. Second tech is much more cyclical than people give them credit for. '91-'95 we had the strongest experience in the profit cycle in the entire post-war period. Profitability drives investment. That spurred an unprecedented investment boom. The techs reaped that benefit. If we are right in our corporate earnings outlook and obviously Joe and I disagree on that. But if we're correct in that, it says that investment spending will slow in 1999 and the tech stocks will feel that.
BATTIPAGLIA: There is no choice in business though because if you want to remain a world leader and you want to be positioned for the next up cycle, you got to make investments. Jack Welsh this past weekend talked about going into Japan right now because it looks like Asia, looks like Latin America did in the 1970's. So if corporate American is looking to seize that opportunity, they think they are in front of the next cycle, the timing might be a little questionable but my suspicion is the hand off might be in 1999 late into 2000, in which case you get an expansion again and this cycle continues.
GHARIB: All right, let's find out what you are telling your respective clients. Joe, what are you tell them in terms-fully invested.
BATTIPAGLIA: Fully invested, absolutely.
GHARIB: What stocks?
BATTIPAGLIA: What stocks? They include Intel, Texas Instruments (TXN), IBM (IBM), Lucent (LU). They include an overweighing in pharmaceuticals like Merck (MRK) and Schering Plough (SGP) and Pfizer (PFE). We didn't even talk about the fact that there are certain sectors that aren't tied to our economy that are very important part of S&P investing. And that's where you want to be there as well.
GHARIB: All right. You were telling me 40 percent of your asset allocation to stocks..
BERNSTEIN: Correct, 50 in bonds, 10 percent in cash.
GHARIB: All right, what are the stock groups?
BERNSTEIN: Stock groups we like, actually Joe mentioned some of them. We do like the traditional consumer staples. We do like the drug group, the pharmaceutical group quite a bit. We do like foods under the theme that no matter what goes on the in the world, we all still eat. Utilities are still attractive in our work as well.
GHARIB: So you agree on some stuff. You turned bearish back last summer. What would make you bullish?
BERNSTEIN: What would make...
BATTIPAGLIA: When I turn bearish.
BERNSTEIN: I'll use Joe as my signal. But, no, I think what would really change the story for us would be an aggressive easing by the Fed. In other words, the Fed's really trying to stimulate the economy or we get some kind of sizable tax cut out of Washington. Probably either of those are not imminent.
GHARIB: OK. Joe.
BATTIPAGLIA: Well, the other thing that's important here is that the government now has a surplus working for it which gives them a lot of policy alternatives including debt forgiveness which could accelerate the recovery.
GHARIB: No, I actually wanted to find out from you what would turn you bearish.
BATTIPAGLIA: Well, I think that the next big issue is trade flows and we got to make sure that we still have good relationships out of southeast Asia. If they deteriorate, China in particular, then you could have a problem.
GHARIB: All right, thank you very much, gentlemen. Great having you here as always. And we've been speaking with Joe Battipaglia of Gruntal and Company and Richard Bernstein of Merrill Lynch. They are our bull and bear guests this evening.
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