Satya Pradhuman founded Cirrus Research in 2007 after more than 20 years on Wall Street as a respected and often-quoted executive in the equity research departments of E.F. Hutton, Lehman Brothers, and Merrill Lynch.
Harlan Levy: What do you think of Federal Reserve Chairman Ben Bernanke's comments Friday that the Fed will consider further interest rate action if warranted, and what do you think he will do?
Satya Pradhuman: He's in a very difficult position. The reality is that we're seeing some real inconsistencies between weak global growth and the U.S. credit cycle. The immediate data points stateside suggest that the U.S. credit markets continue to improve. However, the U.S. economy will be adversely impacted by whatever happens overseas. Bernanke's dilemma is whether to take action in face of some of the critical metrics that they watch that happen to be improving. That's what creates a challenge for Bernanke.
H.L.: So will Bernanke do some easing?
S.P.: His action will be delayed. Part of it has to do with watching what goes on in Europe and waiting for the European bankers to take action. Part of it has to do with the credit markets in the U.S., and part of it has to do with the election. It seems Bernanke needs to wait, watch, and carefully pay attention.
H.L.: Former Fed governor Robert Heller said that the Fed will be on the sidelines for the next two months and the future of the U.S. economy depends on the election and what happens after that to the fiscal cliff. Do you agree?
S.P.: I agree. The concerns for growth will also hang on the fiscal changes that have to come.
H.L.: Do the extreme gyrations of the stock market during and after Bernanke's speech cause concerns about how much the market is controlled by electronic and program trading and high-speed computer trading?
S.P.: I don't think they are as related. Electronic trading reflects two types of market participants: much shorter-term decision makers blended in with longer term investors. From time to time the direction of the stock tape will be dependent on one party or the other. The challenge to the direction of the tape is not driven by the technology behind trading. The volatility in the markets has more to do with the headline risks that currently exist, whether it be European banks, whether it be the fiscal cliff, whether it be an election year.
H.L.: How strong or weak is the U.S. economy right now?
S.P.: Our team view is that the U.S. economy continues to recover from the recession of three or four years ago. The recent data we've looked at over the last three quarters suggest a softer patch and that there are enough signs that there is a longer-term recovery underway. It has always been a less robust recovery, and the softer patches are offset by some very robust signs that interest rates are low, spreads are narrow, and loan growth continues to improve.
H.L.: How financially healthy are U.S. corporations?
S.P.: We recently published a piece on mergers and acquisitions, and the cash on the balance sheets of U.S. corporations is healthy, which underscores why we may see more corporate action for the remainder of 2012.
H.L.: What sectors of the economy are healthiest?
S.P.: We see fairly solid results coming from the consumer sector of the economy. The consumer has been surprisingly strong. The industrials component has been more mixed this year, and technology consumption data has also been constructive.
Those are the three broader sectors we look at. One area that deserves close attention is the housing sector. What we have seen is some signs of stabilization in the sector and more importantly recovery in home-building stocks.
The industrials are one of the weaker segments that we've seen as well as the energy sector. Some of that may have to do with challenges to the coal industry.
H.L.: What equity strategy seems right for these times?
S.P.: The house view remains more selective. We've positioned a barbell strategy. What that entails is running higher-quality portfolio stocks, and sprinkled in there are selective risk positions.
From a defensive standpoint, we like food companies, healthcare services, and IT consulting. From a cyclical standpoint we like oil services, electrical equipment, and specialty retailers. From a "risk-on" position we have such industries as semiconductors, smaller investment banks, and human resources employment services. One of the things we're observing is that the employment-HR company stocks have been beaten down over the last four months to what we would consider near-recessionary valuations. We like the group, because they are discounting a challenging backdrop.
H.L.: Is the stock market heading for a correction?
S.P.: The market has been actually pretty strong. The year-to-date numbers for the equity markets have been pretty good. So, considering how severe some of the concerns are, whether it's the fiscal cliff or the European banking situation, or a slowdown overseas, it does seem as if the equity markets have done quite well this year. So there is some expectation that the European Central Bank or the Fed will act at some point. It's very difficult to reconcile the performance of stocks unless you bring in the possibility that the Fed or the ECB will act.
Given the resilience of the equity markets to date, some of the slowing signals will likely generate increased volatility as we close the year, and it does seem as if the markets have overshot a bit.