The Daily Interview: A True Believer

While many of the same economists who predicted an economic recovery by the second half of the year are now starting to push that off until sometime in 2002, Mary Lisanti, chief investment officer for domestic equities at ING Pilgrim Investments, says the stock market is about to rebound in anticipation of an economic recovery in the late fall. Not only that, but Lisanti anticipates companies will increase their IT investments by 20% once the economy rebounds.

Mary Lisanti Chief investment officer, domestic equities, ING Pilgrim Investments

Recent Daily Interviews

VeriSign's Bob Korzienewski

UBS Warburg's Jeffrey Schlesinger

Robertson Stephens' Bill Dreher

The Conference Board's Ken Goldstein

Bear markets usually last between 12 and 18 months, she says, and this one has been trudging along for 16 months. So the end, according to Lisanti, is near.

TSC: You are one of the few economists who still believe that the economy will recover before year's end. What makes you so optimistic?

Lisanti: A few things are making me optimistic. The economy started to slow in November 2000. Normally, capital spending slowdowns last 12 months. So it would make sense that the economy would bottom in October or November. This has been true of every postwar recession, and that's 56 years of data.

In addition, there's a lag of two to three quarters from the first Fed ease to a bottom for capital spending. We are now six months and two weeks [from the first Fed easing], and the spread between the cost of labor and the cost of capital goods is 5%. Labor costs are up 4% and capital goods costs are down 1%, and if you factor in some of the technology, it's down even more. Normally, historically whenever you've had that kind of a spread, over the next 12 months you get a 20% increase in technology spending in capital investment.

The other thing is that normally, the market bottoms three months after the first Federal Reserve rate cut, and the economy bottoms six to nine months after. So, a couple of economists are starting to say that it might be bottoming now. My guess is that it won't start turning until October.

And the consumer has remained in reasonably good shape, and now they're about to get a tax cut. They are already benefiting from lower rates by trading credit card debt for mortgage debt because it's tax deductible and the interest rates are so much lower. The consumers are getting their balance sheets in order, too. This is what you need to see before you have a pickup in spending.

TSC: What caused the capital spending slowdown and is there any reason [other than the labor/capital goods spread] to believe that this will improve, especially given the inventory overhang?

Lisanti: The capital spending slowdown was caused, first, by Y2K, and second, by the price of technology, which had not gone down. There was such demand for technology that the normal price decline of 20% to 25% in technology didn't happen.

So, what's changed? Two very important things. The first is that the fed funds rate has come down by [close to] 50%. Most companies finance their business equipment through short-term or long-term debt, whichever is cheaper. Companies may not be spending this money on IT capital right now, but when a company makes a decision to spend money, they look at their total cost and return on investment. And by lowering interest rates, we have greatly lowered the cost of doing this.

The other thing is that technology prices are dropping. We've seen the price of DRAMs [dynamic random access memory] come down precipitously, as well as the cost of service. That also changes the equation. And as for inventories, a lot of companies are starting to write them off. The truth is, if you don't sell it within a year or two, it's obsolete. So we have a couple of things going on that increase the odds that businesses will start spending again on technology. And the fact is that businesses have budgeted for IT spending. They just haven't spent the money because they've been worried about the economy.

TSC: It's hard to have faith in the light at the end of the tunnel when the news continues to be so bad on Wall Street. How confident are you in all of this?

Lisanti: Things look lousy, they look really lousy, and for the economy, they might even get worse through the summer. And I know that no one on Wall Street believes that things are going to get better.

Don't forget: I'm not expecting the economy to bottom until the late fall. For the recovery not to occur at that time would be very unusual because it has happened in every other business cycle, with one exception, which was the 1930s. The government made a mistake with monetary policy at that time with a tax increase.

If the economies of the rest of the world suffer, the industrial side of the economy could continue to lag for another 12 months. Europe is slowing, Japan is in a recession and Singapore has also just gone into a recession. Is there a possibility of Europe going into a recession? Yes. Is it likely that Europe will go into a recession? No. If a worldwide recession were to happen, or the consumer to become terrified and decide to go home, all that means is that you push things out a couple of months and interest rates go even lower.

The Federal Reserve has never lowered interest rates this aggressively going into a slowdown. And right now, this is the worst quarter, comparison wise, and I believe that earnings will start to improve in the fourth quarter and that the market will start to anticipate that as we go forward.

So I would argue that the medicine is about to work. I can't tell you with certainty that it is going to work, but I believe that it's possible. Bear markets usually last 12 to 18 months. This one started in March of 2000, so we've been doing this for 16 months.

TSC: You've also been optimistic about current valuations, and have said that now is a great buying opportunity in the market. What are some stocks or sectors that you like?

Lisanti: The clearest area to me is technology because it's the new capital goods. Take the traditional technology companies, like semiconductors. If you do, indeed, believe that semiconductors are everywhere, or are certainly a proxy for corporate America growth, it's gotten beaten and battered to death. Even some of the Internet companies are prospering. Quite honestly, the area where I think you are going to make the most money is in mainstream technology.

I also like biotechnology. What's fascinating about it, to me, is that of the patents filed for new drug approvals, 31% of the drugs that have been filed are biotechs. Over the next several years, 20% of the phase-two drugs and 30% of the phase-three drugs are biotech-related, so there is more representation.

I also like retailing. Consumers are spending, particularly at the specialty retailers. And in the second-half of the year, comparisons get easier, and the odds are that Christmas will be decent. Also, some of the financials have done very well.