INTERVIEW: Reluctant Rally Still Has Life by Sandra Ward
Summary: Interview of James Paulsen, Well's Fargo strategist. A year-ago he boldly predicted oil prices would fall and stocks would continue to deliver superior returns; he offers some key market expectations:
Quick comment: Here are some links to recent Barron's interviews: (1) Charley Maxwell: Where Oil Prices and Producers Are Headed (2) Chris Ceraso: Auto Industry Analysis (3) Rudolph-Riad Younes: Value Stocks Can Be Found -- Beyond U.S. Borders (4) Seth Glickenhaus Picks Four Stocks for a Weak Economy (5) J. Kyle Rosen: Using Options to Take Risk-Free Bets (6) Marty Cohen: U.S. REITs Look Strong, International Better
- Current market: A few months ago disaster loomed. Now mortgage yields have fallen, stocks have risen, gas prices are down, and we are near full employment. The present recovery cycle, which began in March 2003, tends to go through 120 day phases, but its undertow remains strong. The ten-year yield, at 4.8%, is where it's been for the past 5 years. Before this recovery ends/peaks, long-term borrowing costs will have to increase.
- Oil prices: Based on the rise in other commodities, oil belongs at about $50/barrel; anything above that is a result of speculation. Coming of its highs, oil is likely to overshoot on the way down. Paulsen would consider investing in the complex once it breaks into the 40s.
- Fed interest-rate policy: "We have got to go higher." Core inflation remains and will continue.
- Investor caution: Corporate excess cash-flow is "off the charts," but they aren't spending it. Every quarter they "beat their numbers," but say the future looks tough. Investors have been putting their money in 5% money-market funds and foregoing superior stock market returns. All this caution is bullish -- businesses still have money to spend and investors to invest: "I think bravado and optimism begets bad times and chronic cautiousness paints a beautiful picture for the future."
- Trade deficit: Emerging economies have been the beneficiaries of the record U.S. trade deficit, driving worldwide economic growth, particularly in emerging markets. In a stroke of unintentional genius, this policy will result in a huge payback in coming years as the world's nouveau middle-class brings the U.S. trade deficit down with their new-found wealth.
- Dollar: "The dollar is going a lot lower." The G-7 will force China to float their currency, and the dollar will weaken against Japan and emerging currencies, if not Canada and Europe. If the dollar breaks to new lows, commodity prices will rise, leading to core inflation; this is the bond market's biggest risk, and makes investing overseas a good idea.
- Private equity boom: "It tells you how much excess liquidity we have in the system."
- Housing: He agrees with Greenspan; the worst might be over. Refinancing has exploded, lumber is showing signs of bottoming, yields are down, and housing stocks are up since July despite bad reports.