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Harlan Levy was an attorney at the Federal Communications Commission's Cable Television Bureau before becoming a reporter at WGTR-AM in the Boston area. He then worked as a TV news reporter at WXEX-TV Richmond, VA., WCIX-TV Miami, FL (winning an Emmy), and WVIT-TV, West Hartford, CT. He was... More
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  • Double-dip very unlikely, but fiscal policy is a disaster: Interview with Mickey Levy

    Mickey D. Levy is Bank of America’s chief economist and an adviser to several Federal Reserve banks.

    Harlan Levy is a business reporter and columnist at the Connecticut daily newspaper the Journal Inquirer.

    H.L.: What’s your prediction for the U.S. economy in 2010?

    M.L.: I expect the U.S. economy to continue to recover with healthy growth. The probability of a double-dip recession is very low. Consumer spending should grow only modestly, certainly slower than prior economic rebounds. However, businesses have slashed inventories, capital spending, and employment, and in 2010 they will be increasing production and employment. Housing will continue to rebound, and exports will be a major source of strength, reflecting a global economic rebound and the lag impact of the weaker dollar.
    Will the dollar continue to weaken?

    M.L.: I don’t profess to be a foreign exchange expert, however, the Federal Reserve is expected to extend their low interest-rate policy even after other central banks start raising rates. U.S. fiscal policy is a disaster, and global portfolio managers know it. These factors suggest that the dollar will fall further as a natural adjustment to the high U.S. trade and current account deficits.
     What do you mean when you say fiscal policy is a disaster?

    M.L.: Deficit spending is so large it is unsustainable. My concern is not the current budget deficits but the fact that they are expected to persist even when the economy gets back to potential and full employment.
    I would note that official long-run projections assume the unemployment rate will get down to below 5 percent.

    Current government policies point toward high unemployment for a long time to come, which will perpetuate poor budget outcomes.

    It’s not just the sustained high budget deficits and dramatic increases in government debt: It’s what we’re deficit- spending for. Most of the deficit spending is for income support and does not add to productive capacity. That translates into slower longer-run growth — that means slower growth and lower standards of living — and higher costs of financing government debt for future generations.

    Actions speak louder than words, and the current thrust of fiscal policies is downright scary. I’m optimistic about the economy for 2010, but we and future generations are going to pay the price for the financial crisis and the government responses to it.

    What do you think will happen when the federal stimulus money stops flowing?

    M.L.: Rather than be concerned about when the fiscal stimulus stops flowing, I’m looking forward to it. The private sector has gone through painful adjustments — for example, the sharp declines in housing prices and activity and the huge inventory liquidation and job losses — and has not begun to grow.

    The government’s capital infusions and the Federal Reserve’s liquidity provisions into the financial system have helped to stabilize financial markets, and the Fed’s purchases of mortgages have contributed to lower mortgage rates. These have helped repair household balance sheets.

    I am concerned about whether the Fed will be able to gracefully exit from its quantitative easing and low interest rate policies without upsetting the economy. However, independent of the significant positive impact of the Fed’s policies, I am much more skeptical about the efficacy of the lasting stimulative impacts of the government’s fiscal policies. Therefore, I project sustained economic expansion, even when the government’s fiscal stimulus package funs its course.

    How long do you think job losses will continue?

    M.L.: I expect employment will begin to grow in early 2010. Businesses responded very aggressively to the decline in product demand due to the financial shock in 2008. A total of 6.5 million jobs were cut, and the unemployment rate soared. That was associated with unprecedented inventory reduction, cuts in capital spending, and a sharp fall-off in exports. Now, product demand has begun to rebound gradually.

    I expect only a small portion of those jobs will be rehired in 2010, but the job numbers will turn positive nonetheless. On top of this, nearly 1.4 million government jobs will be added for the 2010 census, and if history is any guideline, not all of those jobs will be temporary.

    With the jobless rate still high, do you see consumer spending staying weak?

    M.L.: At the initial stages of prior economic recoveries, consumer spending bounces even before employment rises. Ion response to the increase in product demand, businesses hire and the increase in income supports sustained consumer spending. I expect that trend will unfold in 2010. However, consumers are continuing to deleverage, and the unemployment rate will remain very, very high, and this will constrain the growth in consumer spending relative to prior economic recoveries.

    The stock market’s surge since March has been way ahead of the economy’s recovery. Do you expect a stock market correction soon and then a resumption of the market’s rise?

    M.L.: I am not a stock market strategist but would like to make a simple observation: Even though the stock market has enjoyed a dramatic rebound, it’s still remains below its level just prior to the collapse of Lehman Brothers and the financial crisis of fall 2008. Back then, the economy was already in recession, and profits were falling, and analysts were revising down their profit expectations.

    Presently, the economy is rebounding. Profits are rising rapidly, benefiting from businesses’ aggressive constraints on operating costs, and the Fed signals it will keep rates low for an extended period. So why shouldn’t the stock market get back at least to its pre-crisis level? I’ll leave the timing and short-term price swings to the stock market strategists.

    Do you think there will be effective new regulation of derivatives and the other unregulated financial instruments that played a role in the financial meltdown?

    M.L.: Yes. Some of the derivative products will be traded through newly established exchanges with tighter regulations that avoid future problems, but the broader issue is whether the new regulatory apparatus will address the true causes of the financial crisis, and this is a complex issue.

    Jan 07 6:54 AM | Link | Comment!
  • Stock uptrend intact, expect no sharp pullback: Interview with Todd Salamone

    Todd Salamone, vice president of research for Cincinnati-based Schaeffer’s Investment Research, also manages the Put Selling portfolio in Bernie Schaeffer’s Option Advisor newsletter. His comments appear in several publications, and he is interviewed regularly on CNBC. To read his comments every Monday morning, visit

    Harlan Levy is a business reporter and columnist at the Connecticut daily newspaper the Journal Inquirer.

    H.L.: How strong is the economy in light of August’s 9.7 percent joH.L.: bless rate, up from 9.4 in July, and the decline in job losses from 276,000 in July to 216,000 in August?

    T.S.: There still seems to be a lot of concerns and doubts surrounding the economy, especially as it relates to the employment numbers. We think this is a positive, since stocks, especially in the consumer discretionary area, are more apt to respond favorably to positive surprises and less negatively to poor numbers that may already be reflected in share prices.

    The stock market seems to be indicating that the economy is stronger than expected. We view this as a positive for the longer term, as many believe the market has surpassed fundamentals. In other words, while stocks seem to be discounting favorable news on the economy, many investors are expecting poor news on the economy, and, thus, sitting on the sidelines, waiting for a retreat. This money represents cash that can support the market on pullbacks and also keep intact the current uptrend from the March lows.

    H.L.: Can the economy grow before there’s some hiring?

    T.S.: Yes. That could be evident in strong productivity numbers we’re seeing. This puts some companies in a strong position from an earnings perspective, even as many investors seem to be extremely cautious about earnings driven by cost-cutting.

    Even a slight increase in top-line growth amid expenses that are relatively low could create very favorable margins in the future, creating an environment of continued positive surprises.

    How do you read investor sentiment?

    T.S.: We’re seeing a lot of skepticism in the context of the uptrend. Retail investors, for example, according to the American Association of Individual Investors, have been noticeably negative throughout the summer months.

    Professional investors seem to be retreating to the sidelines as well in anticipation of higher volatility in September and October.

    From a contrarian perspective, the negative sentiment that we are seeing is a positive within the context of the current strong price action in equities. That being said, from a technical perspective, there will be continuous hurdles for the benchmark S&P 500 to overcome in the weeks and months ahead. For example, we see major resistance in the 1,000 to 1,040 area on the S&P. This could create sideways action before the next leg higher, but we, as opposed to many others, are not expecting a sharp pullback.

    What stocks do you recommend?

    T.S: We are currently favoring the consumer discretionary area, financials, and technology stocks. Some of our favorites include Netlogic (NASDAQ:NETL), Palm (PALM), AutoNation (NYSE:AN), Polo Ralph Lauren (NYSE:RL), Starbucks (NASDAQ:SBUX), Citigroup (NYSE:C), Aflac (NYSE:AFL), and Credit Suisse (NYSE:CS).

    We just think these are sectors that have rallied significantly, but there really isn’t a lot of buy-in. There are a lot of skeptics out there doubting that the trends in these equities will persist.

    You said there’s a lot of skepticism. What are people afraid of?

    T.S.: There’s a number of factors, ranging from skepticism about the Federal Reserve either removing stimuli too early, thus hampering a recovery, or removing stimuli too late, therefore fostering inflation. There’s a lot of skepticism relating to the consumer in terms of debt load, unemployment trends, and a higher savings rate. Since the consumer is such a major part of the economy, consumer-oriented concerns translate into skepticism related to the economic outlook.

    Other areas of fear relate to what is happening in the commercial real estate market, corporate earnings, upcoming regulations and reforms, and the “we’ve come too far too fast” mentality.

    What troubles commercial real estate?

    T.S.: There are some definite fundamental issues, relating to load defaults, refinancings, and the possibility of a relapse. However, unlike the housing crisis, I think the Federal Reserve is aware of them and is prepared to deal with them much more quickly than it did with the housing bubble.

    What also is important is that the issues have been so well-publicized that they could be factored into the stock market.

    When do you think the economy will start growing?

    T.S.: Expectations are that the second half of the year will show a rebound. Should this not occur, it would be a disappointment. While we cannot say what 2010 holds, there does seem to be a huge number of investors betting on a U- or W-shaped recovery. Should a V-shaped recovery take hold, the stock market would advance much more strongly than anyone anticipates.

    Sep 07 10:01 PM | Link | Comment!
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