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The TSC Streetside Chat: Peter Boockvar of Miller Tabak

Kristen French

This week on the TSC Streetside Chat, we thought we'd catch up with a source frequently cited in our daily market stories: Miller Tabak equity strategist Peter Boockvar. A small boutique investment firm, Miller Tabak provides market analysis and executes brokerage business for institutional clients, such as hedge funds and mutual funds. Boockvar trades individual stocks for many of these clients on a daily basis.

Boockvar thinks the recent market decline might not wring itself out for several years, but he sees a near-term rally in what is basically a bear market. Last week's three-day mini-rally was obviously a good sign, he says. So are a pickup in refinancing and in the corporate bond market following the Federal Reserve's half-point interest-rate cut last week. But it may take a bit more consumer confidence.

Kristen French: I'd like to start by asking, what is your overall outlook for the market right now?

Peter Boockvar: Well, Thursday actually marked the first time since August that the Nasdaq was up three days in a row. That's a good sign. Tuesday, we had bad news from Nokia (NOK - Cramer's Take - Stockpickr) and the market held up very well. Wednesday, we had the downgrade on Cisco(CSCO - Cramer's Take - Stockpickr), and the market held up very well. So the market's beginning to take some bad news in stride, which I think is a good sign.

Kristen French: How do you interpret the erratic up-and-down action the market has seen recently?

Peter Boockvar: I think it's clear that we're still in a down market. The market's doing a lot of churning, and it's shaking a lot of weak people out. There's a lot of confusion and lack of conviction. That's evident in the churning feel of the market, but I think in the last couple of days the market has begun to dig in and not be as negatively affected by bad news. And I say this on a short-term basis.

You have the Fed meeting in a couple of weeks and there's a high potential that they're going to cut -- definitely once, possibly even two more times. So I think that on top of the cuts we've already seen, the market is setting itself up for -- hopefully -- a good rally. I still think that because of technology it's a down market, and if we do get a rally, it could be a big rally in a down market.

In bear markets -- looking back over the history of the markets -- we do have violent rallies, where people think that everything's OK. It can last one day, it can last a couple of weeks, it can last a couple of months. But at least for now the Nasdaq is way oversold and we're setting ourselves up for a pretty good rally. The Fed cuts are coming up. Everyone knows fourth-quarter earnings will be poor. So there aren't many people that are going to surprise us when earnings come out over the next couple of weeks. And it's still too early to say what the effects of the rate cuts are going to be on first- and second-quarter earnings.

So I think that, at least for the short term, we're setting ourselves up for a good rally in the Nasdaq and in the S&P . The market will probably begin to sell defensive-type names that they ran to when they were nervous about the rest of the market. So we'll see an outperformance in technology, financials, cyclicals and probably underperformance in utilities, consumer nondurables, energy, food stocks, the names that they went to when they were nervous about the market.

Now, whether this is going to be the beginning of a new bull market remains to be seen. I think we have to see how the economy responds to the Fed cutting rtes.

Kristen French: But investors are already getting a peek at first- and second-quarter earnings because the fourth-quarter reporting season began this week. If earnings outlooks are disappointing, or if severe inventory and capital spending problems crop up in the next few weeks, that could certainly spoil a rally.

Peter Boockvar: That's a tug of war the market is dealing with. We know the economy is dramatically slowing, and now that's having a very negative effect on corporate earnings.

But in the back of people's minds, they know that the Fed is looking to cut rates aggressively. And it depends on how far out the market wants to look with this counting mechanism. Right now, everyone's focused on the here and now. But, with the potential for further rate cuts -- possibly 100 more basis points from here -- six months from now the economy could be responding.

So if you really want to look out six months -- bad news now shouldn't have that much of a negative effect on your view of the market. And what we're seeing is that bad news in specific companies is affecting only those specific companies. The broad market is not being affected, which I think is a good sign. It means the market is becoming discriminating; it means that people are still finding value out there. "So the market's beginning to take some bad news in stride, which I think is a good sign."

Kristen French: Do you think the Fed acted in time, or do you think there's still a chance that the fall-off in the economy could snowball and lead to a recession?

Peter Boockvar: Well, our economist actually made the point today that you need to look at the housing market, which is probably one of the most sensitive parts of the economy to interest rates. The lower interest rates have sparked a huge interest in refinancing, but they have not sparked a big increase in mortgage applications and new home purchases. So, the first job of the rate cuts is to create confidence. We've seen refinancing and now we need to see a pickup in mortgage applications and new home purchases -- basically, a pickup in income and confidence. When you see that, that will be the sign that the consumer is responding to the rate cuts.

I think another good repercussion of the rate cuts is that not only has the government bond market picked up, but the corporate bond market has picked up as well.

The investment grade bond market has picked up. Companies are coming to market to issue debt, and it's being received well. So fears of a credit crunch have certainly been eased a lot by the Fed cutting rates when they did. And they probably thought, yeah, we should have cut in December, but we felt it was pretty important to cut now. And I do think that the situation in California definitely had an effect. I mean, here's the state of California -- which is one of the biggest economies in the world -- with the potential of the two biggest utilities going out of business, and the state going into a recession. So I think that had something to do with the Fed cutting rates. If the California situation hadn't happened, maybe they wouldn't have cut 50 in between meetings. Maybe they would have cut 25 basis points, maybe they just would have waited until the end of January.

Kristen French: What convinced the market that the Fed will continue to be aggressive about cutting interest rates?

Peter Boockvar: Partly the size of that first interest-rate cut, the surprise element, and the fact that a lot of the data we've seen show that the economy has dramatically fallen. I mean the NAPM was dramatically weaker than expected -- data after data point show that the economy is dramatically slowing. With the unemployment rate at 4%, you can say to yourself, "Well, it may be slowing, but most people are still employed." But because it's happening so quickly, they could see a quick rise in the unemployment rate if the economy continues to slow.

Obviously, they're trying to head it off with these rate cuts. There's a lot of gloom and doom out there: "We're going into a recession," "the world's falling apart." I think we're slowing down from a very high rate, and it remains to be seen whether we're going into a recession.

If the Fed continues to be aggressive, if the stock market stabilizes, I think people will collect their thoughts again and say, "We're just slowing down, we're not falling off a cliff yet."

And then that could help the market. I think part of the correction of the stock market is not just a slowdown in corporate earnings, it's the big fall-off in price/earnings multiples. Whereas earnings rose, P/E multiples rose a lot faster than earnings did. So you had a situation where earnings fall, and P/E ratios fall a lot more than earnings fall. "But at least for now, the Nasdaq is way oversold and we're setting ourselves up for a pretty good rally."

Kristen French: Do you think that has happened already?

Peter Boockvar: I think that's happened, yes, because stock prices have fallen to a much greater degree than earnings have decreased, just as on the upside when stock prices rose a lot faster than earnings rose. So I think that has something to do with what's been going on in stocks, just a gigantic multiple-compression brought on by slower earnings.

And as extreme as it was on the upside, it potentially can be as extreme on the downside, because of stock prices and not necessarily earnings. So you could have very poor stock performance and the economy only slowing down, not going into a recession.

Kristen French: Are there any sectors in particular within tech that you're recommending right now?

Peter Boockvar: Well, I think with the correction in the market, investors have to be very, very careful about what stocks they're buying. I'm not going to pick big-cap vs. small-cap, but I think investors have to buy quality companies. Because the days of just closing your eyes and buying four-letter tech stocks and watching them go up are over. You have to buy quality companies that are well-positioned in high-growth areas, which have attractive valuations. I mean, valuation is important. You can't just buy Cisco because it's a great company, because now, the true valuation of Cisco is finally catching up to it.

But the price of the stock fell maybe 50%-plus from its high. Earnings certainly didn't fall 50% at Cisco, but people are unwilling to pay the same multiple that they used to in tech. So investors have to focus on valuations. And I think there are certain technology stocks that have gotten into attractive valuation areas -- Gateway (GTW - Cramer's Take - Stockpickr), Dell (DELL - Cramer's Take - Stockpickr), Hewlett-Packard (HWP - Cramer's Take - Stockpickr), IBM (IBM - Cramer's Take - Stockpickr).

So there are certainly areas in technology where companies are much more attractively valued, where your downside is limited and your upside is great.

Kristen French: Other than valuations, what do you base your picks on?

Peter Boockvar: The high-growth areas. PCs are obviously not a high-growth area; it's an attractively valued, multiple-earnings sector. But networking and semiconductors are two attractive places to be. Of course, semiconductors are still in a downturn -- who knows if it's going to be a bust? -- but it's still a downturn.

But a lot of them are way off their highs and are going through an inventory correction, brought on by the slower economy, and I think there are places to be in semiconductor stocks.

This consolidation period, this chopping around, this decline can take a couple of years, because the excesses were so great on the upside that it's going to take a period of time before we wring them out on the downside.

Kristen French: A couple of years?

Peter Boockvar: But again, short term, I think we're setting ourselves up for a nice rally.

Kristen French: Do you think that kind of rally would happen after the Fed meets and after earnings season is over?

Peter Boockvar: I think it could happen any day. I think we're setting the stage right now for a rally up until, and through, the Fed meeting.

Kristen French: Is there any magic to three up days in a row?

Peter Boockvar: There's no magic. It's just a good sign. And what makes it a good sign is that we're up three days in a row with the news from Nokia, with Cisco being downgraded and people getting nervous about that. So in the face of bad news, to have that kind of outperformance, is a sign. Now, obviously it can change tomorrow, we can be down a ton, but I think we're setting ourselves up for a good rally going into the Fed meeting.

Kristen French: Are there any defensive areas that you think are still worthwhile even as the Fed begins to cut interest rates?

Peter Boockvar: If we do get this rally, I think the defensive stocks will be for sale. If we get a shift and are patient, in the market people are going to be selling defensive names. I still think that until we get signs that the economy is picking up again, defensive names will be a good place to be. But in the very short term, they're not.

Kristen French: I was reading somewhere that the only time the Fed has been able to reverse a bursting bubble in the economy was in Japan recently and then in the U.S. in the 1930s, when we took interest rates down to 0%. That's a long way to go. Is that a concern at all in this situation?

Peter Boockvar: It certainly is a concern if consumers don't respond to the cut in rates. Like you say, Japan, we saw it not too long ago. That is certainly the concern of the Fed -- that we get into this liquidity trap and the credit crunch gets so extreme that lenders will not lend under any circumstances and consumers won't spend under any circumstances. So that's always the fear when the economy goes into a downturn. And it remains to be seen whether we're going to respond to rate cuts.

We've seen some early signs of it. I mentioned the capital markets freeing up a bit, consumers refinancing, putting some more money into their pockets, maybe now it will give them some more confidence to spend. But it's still very early in the game to say whether it's going to work or not. It is certainly a concern. "From an investing standpoint, over time, over the next couple of years, this could be a good opportunity, because the market is down a lot, a lot of sectors are down a lot."

Kristen French: What else should the market watch for to determine whether or not we're headed for a recession?

Peter Boockvar: I think a pickup in the sectors most sensitive to interest rates -- housing, autos, big-ticket purchases. You want to see an increase in mortgage applications. A pickup in auto sales would indicate a pickup in consumer confidence, because retail sales are so highly correlated to consumer confidence. There are a few things that you can look at on a month-to-month basis to see whether people are beginning to respond.

If the stock market stabilizes, and people get the sense that maybe the worst is over, investors will put their feet back in there, buy something that they held back on. History has shown in the U.S. that the economy does respond well to rate cuts. There's no reason to think that this is going to be any different.

But it's too early to say whether we will. I'm confident that we will respond positively, but you never know for sure.

Kristen French: Are there any other pieces of advice you would give investors right now?

Peter Boockvar: I think investors should get positioned because we could have a very nice rally. From an investing standpoint, over time, over the next couple of years, this could be a good opportunity, because the market is down a lot, a lot of sectors are down a lot.

Even within the cyclicals, which is the place to be when the Fed is cutting rates, you have chemicals, papers, metals, you have these stocks at multiyear lows, like Caterpillar (CAT - Cramer's Take - Stockpickr) and the auto machinery stocks. If the economy does respond to these rate cuts, if we do begin to pick up, these stocks are at multiyear lows, so you can get a really nice rally if you get in on a low in those stocks. International Paper (IP - Cramer's Take - Stockpickr) is at a 10-year low. I think there's potential for outperformance here, because they have gone through their own bear market.

Kristen French: For our readers, can you define cyclical stocks?

Peter Boockvar: Cyclicals are the basic materials companies like papers, chemicals, copper stocks and machinery stocks, Caterpillar, Deere (DE - Cramer's Take - Stockpickr), Ingersoll-Rand (IR - Cramer's Take - Stockpickr), United Technology (UTX - Cramer's Take - Stockpickr) and tech stocks. They are companies that are heavily dependent on the health of the economy.

Kristen French: OK. Great. Thanks very much.