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CNN Money Morning

Where Do The Markets Move From Here

Aired September 11, 2001 - 06:46   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JACK CAFFERTY, CNN ANCHOR: Joining us now to talk about the markets, the economy, and where we go from here is Hugh Johnson. He's the chief investment officer at First Albany, and one of the more lucid minds when it comes to reading these tea leaves.

Nice to see you this morning.

HUGH JOHNSON, FIRST ALBANY: Nice to see you, Jack.

CAFFERTY: If you're now in the market, the trend is not your friend right now. I mean, how low can we go?

JOHNSON: Well, who knows? You know, this thing will turn at some time.

You know, one thing about markets -- bear markets, Jack, which I have been trying to figure out forever, what is it that tells you when we're at the end of the bear market, start a bull market. Looking at all of the bear markets, all of the starts of bull markets since 1950, you can't find anything that sort of is that easy-to-read signpost along the way.

We seem to reach those magical moments when you're at a level in the market that we might call undervalued, and the Federal Reserve reduces short-term interest rates. And for some reason or other, investors turn from being pessimistic to being optimistic. You see that over and over again. It doesn't have to be that capitulation...

CAFFERTY: Right.

JOHNSON: ... where everybody throws in the towel. So every bear market bottom is different -- just magical moments.

CAFFERTY: The Fed has lowered interest rates, but some people will advance the argument that stocks are still pretty richly priced in here -- that the multiples on many, many of the issues, particularly in technology, are still simply way too high. We can't get a bull market until they come down.

JOHNSON: They are dead wrong, because...

CAFFERTY: OK.

JOHNSON: ... and I'll tell you why they are dead wrong. If you -- and they may be right -- the problem is this: is that if you assume -- if we buy the assumptions, the estimates that are for technology earnings for 2002, then technology stocks are down at a level, which I would argue is either fairly value or undervalued. But what you have to do is you have to buy the estimates for 2002.

CAFFERTY: OK.

JOHNSON: If we're wrong -- if the economy doesn't recover, if spending on technology doesn't recover, then they're going to be right. But I think you're going to see some recovery in the economy and some recovery in spending on technology, so they're not all that overpriced or overvalued.

CAFFERTY: At what point do you see S&P earnings turning positive?

JOHNSON: First quarter or second quarter of next year, possibly as late as the third. The important point, Jack, is it's going to happen. You know, these things always end.

(CROSSTALK)

CAFFERTY: It keeps getting pushed out. I mean, in January, they were talking about Q3 of this year. We'd be off to the races.

JOHNSON: That's right.

CAFFERTY: Now it might be Q3 of next year or...

JOHNSON: That's right. Things have been getting worser and worser, as they say.

CAFFERTY: I know that word.

JOHNSON: And no question about it, and we looked at the third quarter as being a turn in the economy. Investors have been right. They have signaled that the economy is not going to turn in the third quarter; that the profits recession is not going to end. At some juncture here, though, I think you're going to see the market do better, and investors will be sending us the signal that indeed this profit recession is going to end. And if it's a guess, I would say first quarter or second quarter next year.

CAFFERTY: What data do you watch for that will confirm it for you? What are the numbers? Because there's so many reports come out week after week. Which ones matter to you, and which ones don't?

JOHNSON: You know, they all kind of add up together. You know, the employment numbers are important. The purchasing manager's numbers are together. But it's an aggregate. What does it all add up to and has to happen when the markets are at arguably a level that's reasonably fairly valued or even a little undervalued. And I think right now, if I'm right on my earnings assumptions, we're a little undervalued right now.

CAFFERTY: We have retail sales later this week and consumer confidence, and those are two that most of the people who watch the Street closely will pay close attention to.

JOHNSON: The big question is: is will -- you know we have seen the slowdown in business spending; well, consumer spending now joining the parade are also slow. You watch the retail sales numbers, consumer confidence numbers very carefully, because the big worry is consumers will slow their spending. I'm hoping that confidence number stays up despite the declines that we've seen in employment, which is really scary, despite the declines...

CAFFERTY: Yes.

JOHNSON: ... we've seen in the market. So cross your fingers and hope for the best on those.

CAFFERTY: Well, there is some technical advice.

(LAUGHTER)

JOHNSON: Yes.

CAFFERTY: How much equity exposure should I have?

JOHNSON: Well, you know, if you came to me, Jack, and you said, look, I want no less than 35 percent in stocks, no more than 65 percent in stocks. You play it. Don't bet the ranch. Have something like 50 to 52 percent in now, and wait for the primary and secondary trends in stock prices to start to perform a lot better.

So you really have to have confirmation from the market, but keep it in the middle of the road right now.

CAFFERTY: All right. You've got two or three stock picks before we run clear out of time -- let's talk about them.

JOHNSON: Well, if you're trying to be on the safe side of things -- and these are stock picks, which are on the safe side of things -- they're so-called defensive investments. Things like Pepsi, which would be a beverage stock. Obviously the consumer noncyclical in the health care area, Lincare Holdings, another good company, very cheaply valued or fairly valued. And then you take a look at a utility, something like Duke Energy.

The reason I mention these kinds of companies -- and KeySpan also in the utility area -- is because they are defensive investments, so if you're really scared in the current environment, there is a way you can defend your portfolio.

CAFFERTY: Fair enough. It's always a pleasure -- I enjoy the visits.

JOHNSON: My pleasure.

CAFFERTY: Good to see you. Hugh Johnson, he's the chief investment officer at First Albany.

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