A Heads-Up on the Coming Bounce

Economist Kathleen Camilli foresaw a recession last year. Now, she says, watch for second-half growth.
By Robert Mann ,

SAN FRANCISCO -- Given the avalanche of negativity in both the press and investor sentiment, today's session really wasn't so bad. Given the news

after the close from

Oracle

(ORCL) - Get Report

, tomorrow actually might be pretty good.

Sure, the

Nasdaq Composite

fell 2% today -- its seventh consecutive decline -- but the

S&P 500

shed just 0.5% and the

Dow Jones Industrial Average

gained 0.2%.

The New York Times

,

The Wall Street Journal

,

USA Today

, and

Investors Business Daily

each had prominently placed stories about the demise of the telecom-fiber optics sector today. Given the news Friday from

Nortel

(NT)

that's not so surprising.

"This collection of bearish stories is a manifestation of the bearish talk and price action in the investment community," commented

Bondtalk.com

. "Of course, the contrarian's view should be that the pervasive pessimism that has infiltrated the markets will limit the degree of weakness in stocks and the strength in bonds."

In a similar vein,

Friday's prediction that a bounce is coming still stands -- even if the bounce is just of the trading variety, and even if it's just because anticipation about another 50 basis point ease continues to grow.

A coming bounce also was the message delivered today by Kathleen Camilli, director of economic research at

Tucker Anthony Sutro

, at a luncheon presentation here at the

St. Francis Hotel

.

One caveat is that Camilli was talking about the economy, not the stock market.

Camilli began by reviewing her "recession" call in December 2000 and why it was the right one.

"We're in

a recession now," she said, reiterating a

prediction that first-quarter GDP ultimately will be revised to negative 0.5% and that second-quarter GDP will be negative 1.5%. "The economy is contracting as we speak."

When the

National Bureau of Economic Research

officially opines early in 2002, she believes it'll declare that the economic expansion ended in December 2000 or January 2001 and that the trough of the downturn occurred sometime in the fourth quarter of 2001.

But while many economists are currently scrambling to reduce growth estimates and are getting more concerned, Camilli is looking ahead to "shallow growth" in the second half of the year and to the next expansion beginning next year.

That prediction is partially based on history. The average post-World War II recession has lasted 10 months, meaning the current one would end sometime in the September-October time frame if it started in December-January. If the current slowdown matched the recession of the early 1980s, which lasted 18 months, that would push recovery well into 2002.

But Camilli does not foresee the latter. The rebound and recovery will be fostered sooner rather than later, she said, because of the currently stimulative monetary and fiscal policies. A new cycle of information technology spending by businesses, beginning early next year, will provide another boost.

Additionally, the economist believes Baby Boomers' spending will be relatively unscathed by the slowdown. Concerns about the nation's negative savings rate are overdone, she said, because those figures don't include 401K programs or pension plans.

Camilli also believes the next expansion, beginning in 2002, will be characterized by another period of low inflation and solid economic growth, aided by even higher productivity gains than in the previous upturn.

All of that appears to bode well for stocks, and Camilli does believe financial assets will outperform real ones (such as commodities) in the coming cycle.

However, the economist cautioned that

Warren Buffett

probably was right when he

recently said "stocks are likely to be boring" for the next decade. Her interpretation is that the S&P 500 will likely revert to its historic average returns around 10% -- at best -- rather than the 20% to 25% generated in the late 1990s.

Additionally, she cautioned that another cycle of IT spending might not be sufficient to alleviate the "structural excesses" built into the telecom/technology sector in the late 1990s. Even if the broader economy recovers, that sector will require "a longer workout" -- perhaps two or three years -- she said.

Edward Schuller, director of equity strategy at

Sutro

, the firm's West Coast brokerage and investment banking arm, followed Camilli and gave a similar outlook. Investors should remain wary of "pure technology" because it's difficult to find the bottom and hard to figure relative valuations in the sector, he said. Despite the big drop since March 2000, tech sector valuations are "still excessive."

Schuller recommended energy plays such as

Royal Dutch Shell

(RD)

and

Exxon Mobil

(XOM) - Get Report

; retailers such as

Safeway

(SWY)

,

Gap

(GPS) - Get Report

,

Home Depot

(HD) - Get Report

, and

Starbucks

(SBUX) - Get Report

; as well as capital goods companies

General Electric

(GE) - Get Report

and

Boeing

(BA) - Get Report

.

The common denominator he cited among those picks (aside from being big-cap and nontech) is that they all have strong balance sheets, produce strong free cash flow that can sustain research and development, and are market leaders and/or proxies for their given sectors.

Among technology companies,

Microsoft

(MSFT) - Get Report

and

Intel

(INTC) - Get Report

fit the bill, he said.

Maybe not the most exciting or daring of picks, but neither was the stuffed chicken.

Things That Make You Go Hmm...

One somewhat daring portion of Camilli's presentation was her observation that the fall of the Berlin Wall in 1989 (and technology) led to more rapid circulation of global assets, which, in turn, led to a series of booms and busts in various markets. She cited exchange rate mechanism (ERM) currencies led by the Swedish krona in 1992, U.S. Treasuries in 1993, Latin American markets in 1994, Southeast Asian currencies in 1996, Russian debt in 1998, and the Nasdaq in 1999 as examples of bubbles that inevitably burst.

Late last year, Camilli believed that as the U.S. economy slowed, assets would start migrating to European stocks, creating another bubble there. But she conceded today that has not been the case and noted dollar-denominated assets continue to be the "destination point" for the global financial community.

That led to my inquiring whether the dollar itself is a bubble -- as has been theorized -- and what the implications of its bursting might be.

But Camilli denied the dollar-bubble analogy. "Unless something changes drastically" in our strong dollar policy or there's an exogenous event such as another oil shock or war, "I don't expect the dollar to weaken" materially, she said.

Notably, continued strength in the dollar fits nicely with Camilli's view that inflation remains contained.

Once again, I don't have to fully agree with folks to quote 'em here.

Things that Make You Go Hmm... Part 2

The best-performing sector last week (up 3.7%) and for the year to date (up 19%) is gold-oriented funds, according to

Barron's

.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.

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