After the Fed: Taskmaster and REITs Guru Tackle the Market - TheStreet

After the Fed: Taskmaster and REITs Guru Tackle the Market

Aaron Task and Chris Edmonds discuss energy, the major indices and the president-elect, among other issues.
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Christopher Edmonds and Aaron Task chatted on TheStreet.com Tuesday, Dec. 19 at 3 p.m. EST.

RM_Aaron-2:

Glad Chris was able to (finally) make it. Looking forward to the chat. Obviously some disappointment with the Fed's decision today but I think they did they right thing. Let's discuss.

chat-guest537:

Chris, could you comment on the Calif. situation, specifically with regards to natural gas? Do you think they will reregulate the utilities and, if so, how would that affect natural gas traders?

RM_Chris:

The California situation continues to suggest that natural gas will remain in tight supply. That, combined with high demand and short supply of electricity, have caused California power prices to skyrocket. As I've written

recently, the solution isn't to regulate utilities, but to allow the market to more accurately set prices, which hasn't been allowed under the California model.

RM_Chris:

I think the FERC ruling last week is a good first step in resolving longer-term power problems in California. However, I still would avoid companies like PG&E, Edison International and Sempra. There's too much political risk.

RM_Aaron-2:

As an aside, it doesn't seem like anyone in SF is doing anything different b/c of this "crises," judging by the Xmas lights up in our SF neighborhood.

chat-guest325:

What will the effect of a weaker dollar (i.e., stronger euro) be on the market, in general, and energy sector specifically? Thanks for all your work.

RM_Aaron-2:

If the dollar continues to weaken, it could pressure the market. The trade deficit becomes a bigger risk if the dollar weakens. I think that's one reason the Fed didn't cut rates today b/c doing so might have sent a message to foreign investors that the situation here is worse than originally thought, which would have hurt the dollar. It's a potentially vicious cycle.

RM_Chris:

As far as energy, I would focus on companies that are more leveraged to domestic oil, and especially natural gas markets.

chat-guest472:

Am I the only one who thinks the Fed decision is closer to a better-case scenario (for longs) than worse? Did anyone really think they would cut?

RM_Aaron-2:

I think obviously a lot of people were thinking/hoping they'd cut. But I agree them not doing so was the right decision. A rate cut today would have gotten the "mo-mo" folks in a lather again, which isn't healthy at the end of the day.

RM_Chris:

I did not think the Fed would cut today. However, I do think that the change in policy bias suggests that Greenspan believes that the Fed will have to reduce interest rates in the first quarter of next year.

chat-guest430:

Are FNM and FRE a good way to play lower rates that will be coming? And, is QQQ a good way to play the NAZZ, providing an investor with diversification within tech? Thanks, Task - you rock!

RM_Aaron-2:

Thanks! FNM and FRE have done well and will likely do better if/when the Fed cuts rates. As for the QQQs, they give you diversity, but only within the LARGEST tech names in the Nasdaq. Truer diversity could be found in a tech fund that invests in mix of small- med- and/or large-caps

RM_Chris:

I agree with Aaron on FNM and FRE. After all, he rocks.

RM_Chris:

However, I do think there is slight political risk still in both stocks. As for the QQQ, Aaron is right about the focus on only large technology companies. After all, again, he rocks.

RM_Aaron-2:

I agree re: political risk of FNM and FRE -- few investors seem to be focused on that right now, and Chris -- you rock too, dude.

chat-guest404:

Do you really think the FERC ruling is a long-term solution from a market perspective? It appears to me the ruling is focused on capping prices. Generation projects can't take off unless they can get a number of high-priced hours per year and reasonable environmental standards. I don't see either in FERC's ruling.

RM_Chris:

The FERC ruling caps prices until May of next year. In the meantime, the FERC is encouraging utilities to enter and develop long-term supply contracts with generators. If that happens, the certainty of long-term cash flows should encourage development of more generation in California.

RM_Chris:

However, that will only happen if California allows new power plants to be built. Overall, while the FERC ruling is not a panacea, it is the first step to placing deregulation back on track.

chat-guest635:

Aaron- still think there's a concrete floor under the mkt, and if so, what's the level?

RM_Aaron-2:

That was a comment made by Scott Bleier after Grenspan's speech on Dec. 5. He pegged it at 2500. Looks like we're going to test that soon, if not today. I still think Don Hays' call bears watching and he's said the Comp could fall as low as 1800 by mid-Jan.

chat-guest810:

Isn't it usually the case that the Fed will move rates until it gets what it wants, and if that is the case, shouldn't we use weakness to buy stocks that have decent earnings prospects?

RM_Chris:

The Fed is clearly more interested in the behavior of the economy than in the direction of the markets in a vacuum. The Fed felt that raising rates six times was necessary to bring potential inflationary pressures under control.

RM_Chris:

Clearly, while that has had an impact on the market, it appears to have also controlled inflation. The question is is it too much for both the economy and the market? The first six months of next year should tell.

RM_Aaron-2:

Remember the Fed eased dramatically from June 1989 to Sept. 1992 and couldn't prevent the steep recession in late 1990, early 1991 -- I think you have to be careful about putting too much faith in the Fed.

chat-guest567:

Chris, any thoughts on WMB? It seems unable to rally when the rest of the sector does, but the fundamentals and current environment would seem good for this stock. Is it too late for this stock?

RM_Chris:

Williams is a good long-term integrated energy play. However, the overhang and the pressure on the stock relative to other pure gas plays, is its exposure and the uncertainly of technology and telecom.

chat-guest863:

Anyone think that Greenspan meeting with Bush altered his thinking?

RM_Aaron-2:

I doubt it, but it's possible that Greenspan got an inkling that Bush is going to go ahead full-bore with tax-cut proposals which would be stimulating and thus obviate the need for easier monetary policy. But again, I doubt it.

RM_Chris:

Who's thinking? Two pretty bull-headed people, if you ask me.

chat-guest725:

Would you classify Sun and Cisco as stocks back to proper valuation?

RM_Chris:

It entirely depends on what the market thinks. Seriously, while they are certainly more fairly valued than they were six months ago, the answer lies in what your perception is of what fair value really is. The contraction of multiples suggests there may be more downside.

RM_Aaron-2:

Chris is right, all of a sudden people think SUNW's technology is a commodity; a huge perception shift.

chat-guest868:

Chris: We are shutting down steam generators to sell the gas instead of producing more oil. Any thoughts on how long gas prices will stay this high? The electric power producing turbines are still online, after all, this is California. Thanks!

RM_Chris:

I just finished a meeting with six oil and gas analysts and investors, and without exception, all feel that gas prices will remain well above $5 through the winter. The consensus forecast is for prices to average above $5 through 2001.

chat-guest95:

What is the near term outlook for Mister Softee?

RM_Aaron-2:

It's down 5.6% right now. But seriously, they are dealing with serious problems both internally and with the perception that they're old news. The stock is now at a new 52-week low, suggesting the pain isn't over.

chat-guest635:

Chris, do REITs still have the stuff when the fed starts cutting rates?

RM_Chris:

The cost of capital, like for any business, will decline as rates are reduced. However, with few REITs planning significant new development that would require new capital, interest rate cuts are likely neutral for the sector.

chat-guest292:

what do you guys think about EOG at these levels? Any reasonably priced natural gas plays? Thanks.

RM_Chris:

I like EOG as I think they are an innovative EMP company leveraged to natural gas. And I like the innovative strategy of teaming with independent power producers to guarantee demand for new natural gas finds. It's a company that has performed very well this year, but assuming gas prices above $5 in the coming year, it's earnings should accelerate rapidly in 2001.

chat-guest567:

Any thoughts on where we go tomorrow after the market has digested the no-rate-cut news? Is it back to safety and defensive stocks?

RM_Aaron-2:

As an aside, COMP is now down below its intraday low of Dec. 4 -- that "concrete floor" is starting to crack.

RM_Aaron-2:

Thus, it's likely investors will stay defensive, the no-Fed-rate cut today pretty much ended hopes for a year-end rally. Then again, this market is great for challenging expectations.

RM_Chris:

I think Aaron is right. I would say especially regarding technology, that the technicals are so poor that many investors are taking a show-me attitude before even considering re-entering the sector. That is likely disheartening for the people hoping for a year-end NASDAQ rally.

chat-guest725:

Do you believe Yahoo can maintain 20%+ EPS growth over the next few years?

RM_Chris:

Probably not.

chat-guest460:

What are your outlooks for the market in 2001 both NYSE and Nasdaq.

RM_Chris:

Assuming you mean the

Dow

, I think we will finish with pretty average total returns, meaning a total return of 15 percent, give or take. As for the NASDAQ, I think the first quarter or two quarters will continue to be very difficult, but I think you will see the Nasdaq finish up above 15 per cent for the year.

RM_Aaron-2:

Assuming Chris' assumption about the Dow is correct, I agree, although I think total return will be closer to 10%.

RM_Aaron-2:

As for the Comp -- I think a lot depends on when the Fed cuts rates, if they wait too long we could already be on a path toward recession, which will not be pleasant for high multiple stocks.

TSC-RealMoneyStephen:

Any final comments?

RM_Aaron-2:

Yes, Chris rocks, but seriously, I know it's difficult out there but there are opportunities out there, you just may have to look in places other than what's worked in the past few years. This year has proven that, for sure.

RM_Chris:

Great questions, as always! Certainly the year is not ending as many had hoped, but remember, there's always next year. And happy holidays - have a profitable new year!

RM_Chris:

Oh ... one more thing, Aaron rocks!