Thursday, August 7, 2008

Notes From NYSSA’s Market Forecast Event and the Forbes and Furman Interviews

The great value add in moderating events and conducting interviews is the ability to select the topics to discuss and questions to pose to some of the best minds in the investment, economic, and geopolitical worlds. So, here are a few takeaways from this Tuesday’s NYSSA Market Forecast luncheon and the two recent interviews conducted with the economic advisors to the US presidential candidates.

My panelists for the NYSSA event – Rich Bernstein, Marty Fridson, Don Rissmiller, and Phil Roth – covered a wide range of key investment strategy (fundamental and technical), economic, and credit market (specifically high yield) issues.

• The equity markets are solidly in the grips of the bear with narrowing leadership a major signal that a reversal is not quite in the cards. That said, the current rally phase bears monitoring for any signs of broadening strength, which has thus far not developed. In other words, a bear rally at best.

• The risks of a US economic double dip next year remain elevated. This is not the consensus view most investors generally have but one that is gaining traction, particularly when you consider the following two points.

• The credit crisis is far from over and was exemplified by one example – the coming dramatic rise in corporate defaults, specifically at the low end of the quality spectrum: high yield issues. Default rates, suppressed by recent generous covenants, will begin to rise in 2009 from current levels of just under 3% to 8% in the spring of 2009 and then to a likely peak of 11% in 2010. The ramifications to the banking sector in the form of credit default swaps could be substantial (remember Bill Gross' $250 billion in CDS write downs?).

• The US consumer will begin to save when he/she finally buys into the idea that prior postives periods of the wealth effect are gone for good. At that point, spending will decline and savings (from earnings) must rise as it becomes increasingly apparent that their retirement nest eggs – in the form of assets (real estate and financial) – cannot be counted on.

• Long-term US Treasury rates appear poised for a substantial decline largely due to the likelihood that inflation will not be a sustainable problem in the US, that the US economy will experience a period of longer economic weakness, and for the reasons noted above re the credit crisis. In this regard, it is worth noting that investment professional sentiment re the prospects of lower long term rates is almost non-existent. A contrarian signal for sure.

There were many other valuable thoughts and insights, which I will share with subscribers in next week’s “Sectors and Styles Strategy Report”*.

As for the Forbes and Furman interviews, what was most striking to me was the clear difference in tone and temperament of each economic advisor. The Steve Forbes interview was much more assertive, more decisive in the economic action steps a McCain administration would take. Whereas, the Jason Furman interview sounded far less ideological with a far more pragmatic view from an Obama administration than one would be led to believe from the primaries. These contrasting points can be clearly heard not only in the tone and style of Forbes versus Furman but also in the substantive areas of tax policy and, strikingly, in Furman’s responses to my questions re what the US budget deficit would look like at the end of an Obama first term.

If you haven’t taken the time to compare and contrast the two interviews, perhaps you might want to consider doing just that. What you will notice is that my questions and interview style allows the guest to more room to fully develop his/her thoughts thereby revealing their more deeply held views.

Note: The Forbes and Furman interviews can be found at

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