Risk Is More 'Enticing' Now: Chief Economist

bigbadwolf

Published: Friday, 6 Nov 2009  




By: JeeYeon Park
CNBC News Associate







Earlier this week, the Federal Reserve kept its federal funds rate unchanged in a range of zero to 0.25 percent, and said the economy "continued to pick up" since its last meeting.


Robert Barbera, chief economist at ITG, shared his insights on how the Fed statement impacts financial firms and the economy.





“Six months ago, the question was: The fund rate is already zero, can you invent a strategy that allows you to resuscitate the financials, banks and the like?—And I think the alphabet soup did that,” Barbera told CNBC.

He declared that the buying of Treasurys and mortgages "worked."


“And when I say worked, the name of the game is supposed to be, you reflate the financial system—risky asset prices go up, risky interest rates come down, and then you restart the economic engine,” he said. “And without the ability to take the fund rates down, it wasn’t clear how you were going to do that—but [the Fed] did.”


Barbera said as long as interest rates stay near zero and as long as investors continue to debate whether the economy is self-sustaining, there’s downward pressure on Treasury interest rates—and taking risks becomes more "enticing" for investors.


“And that is the nature of what easy money is about,” he said. “You keep the short rates low, and you try to get lenders back in to risky lending.”

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Friday's Labor Department report showed that unemployment rate unexpectedly jumped to 10.2 percent in October, even though the pace of job losses slowed.

How do the numbers affect the markets? David Joy, chief market strategist at RiverSource Investments, and Keith Goddard, president of Capital Advisors, shared their insights.

“I read it as a relatively constructive number, because the trend continues to improve and the headline number will keep consumer confidence under pressure,” Joy told CNBC.

Joy said he expects businesses to lead the global recovery instead of consumers. He added that, according to the Fed statement from earlier this week, it will take a "long time" to get into an inflationary period.

“So I think the Fed is on hold, as they said, for an extended period of time," he said. "I think that means well into next year if not beyond.”

In the meantime, Goddard said the fundamentals have stopped getting worse and are favorable for many companies and for the economy.

“The power of zero percent interest rates—it’s hard to overstate what that means,” he said. “So the zero percent interest rate is what’s important right now, and it’s that investors are confident that that will last for a couple of months.”

Goddard said investors should be watching to see when the "easy money" policy will be pulled away, which will likely trigger the next correction.

“What we got is a hint that it’s at least 4 to 6 months away and they gave you things to look at to know when it’s coming, but right now, it’s not coming,” he said.

bigbadwolf

Friday's Labor Department report showed that unemployment rate unexpectedly jumped to 10.2 percent in October, even though the pace of job losses slowed.

How do the numbers affect the markets? David Joy, chief market strategist at RiverSource Investments, and Keith Goddard, president of Capital Advisors, shared their insights.

“I read it as a relatively constructive number, because the trend continues to improve and the headline number will keep consumer confidence under pressure,” Joy told CNBC.

Joy said he expects businesses to lead the global recovery instead of consumers. He added that, according to the Fed statement from earlier this week, it will take a "long time" to get into an inflationary period.

“So I think the Fed is on hold, as they said, for an extended period of time," he said. "I think that means well into next year if not beyond.”

In the meantime, Goddard said the fundamentals have stopped getting worse and are favorable for many companies and for the economy.

“The power of zero percent interest rates—it’s hard to overstate what that means,” he said. “So the zero percent interest rate is what’s important right now, and it’s that investors are confident that that will last for a couple of months.”

Goddard said investors should be watching to see when the "easy money" policy will be pulled away, which will likely trigger the next correction.

“What we got is a hint that it’s at least 4 to 6 months away and they gave you things to look at to know when it’s coming, but right now, it’s not coming,” he said.

bigbadwolf

Expect 'At Least' Another 10-15% Upside: Fund Manager

Stocks continued to rise on Tuesday, continuing Monday's rally. Two bulls, Michelle Picard, fund manager at HighMark Geneva Growth, and Mike O’Rourke, chief market strategist at BTIG Bass Trading, said the markets have further room to run.  

“We think there are several reasons to remain bullish,” Picard told CNBC. “There’s at least another 10 to 15 percent move in the market.”

Picard said her market predictions are supported by government stimulus, which are unlikely to abate in the near-term. She pointed out that the G-20 statement said the world's major central banks will maintain the support system in the global economy.

Picard offered CNBC her stock selection criteria: “We're looking at the earnings growth of the company and the consistency of that earnings growth...The types of companies that we buy are the more consistent, above-average earnings growers and we anticipate that they’ll do better.”

In the meantime, O’Rourke said he is also bullish on the market and added that stocks are trading below average.

“[They’re] cheap relative to history and I expect estimates to come up,” he said. “We’re going to see upward revisions to estimates going forward.”

O’Rourke Likes:

Health Care

Consumer Staples

Telecom

Picard Likes:

Varian Medical [VAR  44.94    0.34  (+0.76%)   ]  

Cognizant Tech [CTSH  43.74    -0.46  (-1.04%)   ]