Ezrati sees stocks benefiting if the incoming Bush Administration is able to achieve a tax cut and some privatization of Social Security. He also expects Bush's less stringent regulatory agenda to be a plus. Meanwhile, though, the real pain will be on the earnings front -- possibly not just slower growth but actual declines.
Globally, Ezrati expects oil prices to stay below $30 a barrel and the euro to strengthen in relation to the dollar. On Japan -- about which he has recently published a book -- he thinks both deregulation and a tax cut must come before its economy rebounds.
Ezrati expressed these views in a Dec. 28 chat presented by Business Week Online on America Online, in response to questions from the audience and BW Online's Jack Dierdorff and Margaret Popper. Edited excerpts from the chat follow. A complete transcript of this chat is available from BW Online on AOL, keyword: BW Talk.
Q: Milton, only one trading day left this year -- what do you see as you reflect on the past months and on the months to come in 2001?A: Well, I think the market is still adjusting to the earnings implication of the economic slowdown. There may be a January rebound, but it will probably be short-lived.
Q: Do you think the Nasdaq has hit bottom yet?
A: No, I think the Nasdaq will test its old lows, which are very close to here -- again, probably during the first quarter. My guess is that will be the bottom. Then, I think, the Nasdaq will stage a modest recovery until much later in the year and probably begin to accelerate.
Q: When do you see the recession coming -- if indeed you use the "R" word -- and what symptoms are you seeing now?
A: Well, I think a recession is unlikely -- I would say a 20% probability, at the highest. We are, however, in the throes of a major slowdown. The consumer has cut back -- we have seen that in retail sales -- and manufacturing is adjusting for a modest inventory overhang.... On corporate profits, it will seem like a real recession. We'll be lucky to get growth of 5% next year in earnings numbers and very well may see an outright decline.
Q: What sectors do you like for 2001?
A: In the early part of 2001, we like utilities, health care, and energy in particular. We would avoid technology until the Nasdaq bottoms, as I said, at its old lows, probably late in the first quarter. Then we'd be buyers of technology. We would avoid capital-spending stocks and consumer cyclicals until much later in the year.
Q: Can you comment on the health-care arena?
A: The medical area is going to benefit from the [Bush] Administration, and so we've lost a lot of the risk.... It's difficult to characterize the whole sector, and I would look for firms that have a broad array of products and do not depend on only one or two.
Q: What are your 2001 prospects for financials? And what do you see from Greenspan in the way of interest-rate cuts?
A: I've been waiting for that question. Greenspan has signaled that he's looking for a rate cut, and so we should expect one late in the month, but I do not think it's as foregone a conclusion as most market commentators believe. And Greenspan will look very carefully at the employment numbers that come out next week and a complete picture of the Christmas sales, which we don't have yet, before he makes up his mind. If they're strong, he will skip the rate cut and retain the easing bias. As a consequence, financials short term carry a good deal of risk, and we would avoid this sector until the situation becomes clearer.
Q: Your opinion on a tax cut -- good or bad for the economy, long term?
A: Generally, good for the long term -- but a lot depends on the nature and size. A huge cut of the sort Bush talked about during the campaign could cause problems down the road, but clearly when the government is running a large surplus, some kind of tax cut is appropriate, especially now with the economy weakening. I'd rather see tax reform and Social Security reform than a simple tax cut, especially one that makes the code even more complex.
Q: What kind of Social Security reform would you propose? Money in private markets?
A: I'd like to see a controlled privatization scheme. I think controls to limit people from too-speculative behavior is important, but I believe that private accounts would benefit the beneficiaries by giving them wealth that they wouldn't otherwise have, and it would enhance the economy's growth potential by making funds available to investors that weren't previously available.... In other countries where they have partially privatized, it has been successful and has enhanced savings.
Q: Do you see the euro rebounding in 2001?
A: I do see the euro gaining strength against the dollar in 2001 for two reasons. The first is that European and U.S. growth rates are converging, and the second is that the European central bank has finally ended its counterproductive policy of raising interest rates. There's a third factor in that with the price of oil down, any major impediment to European growth has been removed. We've already seen the euro rebound dramatically in just the last few weeks, and it's not hard to see it at par with the dollar by the end of the year 2001.
Q: Do you predict that energy prices will stay below $30 per barrel?
A: Yes, I think they will. OPEC has a vested interest in keeping the price below $30 a barrel. They realize that their discipline is tenuous at best, and they need buyers all over the world to maintain their source of revenue and maintain any control over the price. They know that if, by raising oil prices, they drive any major sector of the world into recession, they'll lose control of the price, and the perfect illustration is the Asia crisis of 1997-98.
Q: Can biotech growth keep up its speed, and how risky is the sector now?
A: Biotech on a secular basis probably can keep up its speed. And on a regulatory basis, the Bush victory probably relieves certain concerns in the sector going forward. But there's tremendous risk in any individual name, so if you're buying into the sector, be extremely well diversified. We're not buying any of it right now.
Q: Bad (and sad) news today about Montgomery Ward. What's your prognosis for retailing?
A: In retailing, the wealth effect of the market decline probably makes the high-end retailers riskier than the low-end retailers.... The low end of the sector is the only place where we have any interest.
Q: How will the new Republican Administration affect the market and the economy in the future, short and long term?
A: The Republican Administration is a pro-equity Administration, as opposed to bonds. The tax cut itself is stimulative, and whether it's good for the economy in the long run or not, it's good for equities. Bush's plan to privatize Social Security, even though it's vague at the moment, would tend to release funds for the equity market that were previously segregated in Treasury bonds.
The most important for the immediate future is that a Bush Administration has a very different regulatory agenda than Clinton has had or than Gore would've had -- in particular, the litigation in tobacco, antitrust, and land-use policies that are particularly important to the energy sector.
Q: When will Japan rebound? I understand you have a book on Japan, Milton.
A: Japan's rebound depends heavily on long-term fundamental reform and deregulation. Here I'm going to plug my book, Kawari: How Japan's Economic and Cultural Transformation Will Alter the Balance of Power Among Nations. It explains how the Japanese model that served the country so well up until 1990 is no longer applicable, and they need to change it radically and fundamentally. For the immediate future, I would look for two triggers to signal a Japanese recovery: a tax cut (Japan has the highest statutory tax rates in the world) and a major move to securitize bank debt.
Q: Are energy and utilities too extended to buy now?
A: Obviously, the bulk of it's done, but there's still money to be made, especially relative to most other sectors. In oil, I wouldn't buy the drillers, I would buy the major internationals.... In utilities, I would choose names that have a presence in the unregulated area and are able to sell energy nationally.
Q: And also on energy, what's the outlook for natural gas?
A: Well, natural gas will follow oil with a lag, so we'll probably see some moderate relief from recent price pressure. And then, if I'm right on oil, and prices remain in the high 20s, natural gas will also stabilize at levels above a year ago -- but not at the spikes they reached earlier.