NEW YORK (Reuters) - Economic growth in the United States is “lumpy,” but the chance of a double-dip recession is low and the U.S. dollar remains a better alternative than the euro, according to one noted market strategist.
“The odds suggest a double-dip recession, especially with the data not showing the sort of pervasive negative factors that have accompanied other double-dip recessions, just isn’t there,” Barry Ritholtz, director of equity research at Fusion IQ in New York said at the Reuters Investment Outlook Summit.
Ritholtz, far from pounding the table for U.S. economic recovery, said gross domestic product growth was likely to muddle along in the 2-3 percent range, while Europe’s fiscal troubles make the euro currency a poor investment choice.
European finance officials are struggling to complete a financial safety net for the euro zone in the wake of the Greek debt crisis and the percolating fiscal problems in Spain.
“The euro is going to have problems for a long time. People are talking about $1.15? I could see parity,” he said, qualifying the statement by saying it will be a long process that he does not expect to happen, at least, by year end.
Ritholtz said his firm went to 100 percent cash from 69 percent cash on May 5. However in the last two weeks he bought back shares in Citigroup Inc C.N and, combined with other new positions, has about 75 percent in cash.
The S&P 500 .SPX rallied 80 percent from the March 2009 nadir but has since dropped 12 percent from its April high.
The still-high cash position, however, leaves him prepared for a normalization of rates by the U.S. Federal Reserve.
“Once the market recognizes that this is happening, that is where you’ll get that 25 percent correction off of the 70 percent plus rally,” he said.
In that scenario, benchmark 10-year U.S. Treasury yields will creep higher but won’t likely reach the 4-percent area until the second half of 2011.
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WATCH THE YIELD CURVE
His view on the banks is not rosy, and he points to a continued lack of transparency in bank financial statements.
The steep U.S. Treasury yield curve remains a stealth funding model for the banks to nurse them back to health given the still sizable non-performing debt held on their books.
It was the massive leverage created by easy lending in the mortgage market that sparked the financial crisis, the impact of which continues to haunt investor sentiment.
Ritholtz said U.S. house prices are still too expensive after stabilizing in recent months. “We are still looking for another leg down in housing... By all the metrics housing is too expensive, except in areas where you have massive foreclosures,” he said.
As long as the benchmark fed funds rate holds between zero and 0.25 percent and banks charge borrowers higher rates for mortgages, commercial and consumer loans, or lend the U.S. government cash via the Treasury market, “that is the bailout that very few people seem to be talking about,” he said.
The fed funds rate is the amount at which banks lend to one another for overnight loans.
“As long as the yield curve stays fairly steep and with quantitative easing and zero interest rate policy, it is hard to see ... how the financial sector runs into a lot of trouble, so long as they don’t have to report their losses,” Ritholtz said.
“What we are doing is a decade-long tear-off of the Band-Aid when it comes to real estate and finance.... On paper a lot of banks are actually insolvent because of the losses from these holdings,” he said.
The automobile sector is showing signs of economic repair as sales have started to climb, indicating consumers are getting some financing and have the jobs to prove they can pay the bills.
“Autos have been really surprising,” Ritholtz said. That is another factor that implies the economy is getting slowly better.”
WHAT TO HOLD?
Ritholtz may have moved some cash off of the sidelines in the last few weeks, but he expects the U.S. stock market to end the year roughly at current levels.
“These huge up days and huge down days, that is emblematic of a cyclical bull market within a longer secular bear market.”
In addition to the Citigroup investment, Ritholtz says the firm has bought BJ'S Wholesale Club Inc BJ.N, Intercontinental ICE.N, MetroPCS Communications Inc PCS.N, Tellabs Inc TLAB.O and Navistar International Corp NAV.N.
The portfolio is hedged with the Pro-Shares Ultra-short QQQ ETF, a fund that seeks a 200 percent inverse of the Nasdaq 100 index.
The portfolio is also dipping back into airlines.
“People don’t realize how much the airlines have reduced capacity.,” he said. “There is no more of these empty planes flying around the country, and oil prices have certainly eased.”
Ritholtz holds a $1,350 an ounce target on gold, a favored safe haven recently, with a $2,000 price take in the 1-to-5 year timeframe.
“Right now, it is hard to put a valuation on gold because there is no income stream, there is no earnings discounted model that you can come up with. It is strictly a function of psychology and supply and demand,” he said.
Editing by Padraic Cassidy
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