TEXT OF INTERVIEW
BOB MOON: We’re grateful to have you with us on this Monday, the first day of October — a day that the Dow Jones Industrial Average didn’t merely make it back above the 14,000 threshold for the first time since the credit crisis began… It crashed through that psychological barrier and kept right on going to a new all-time closing high of 14,087.
Now, it seems fair to ask how that could happen, especially on a day that the world’s largest company, Citigroup, announced a huge blow to profits from the housing mess. There were similar dismal warnings from Credit Suisse and UBS.
We caught up with Art Hogan in the Boston trading center at Jeffries and Company — he’s their chief market strategist. Thanks for joining us.
ART HOGAN: Thank you very much for having me.
MOON: So, Citigroup says quarterly profit is going to drop 60 percent, it’s got $5.9 billion in losses — and yet, Citigroup stock goes up, the market seems to celebrate… What’s going on here?
HOGAN: As early as July, we had a black hole that was an unknown quantity. And that was the damages that were going to be caused by the subprime mortgage debacle and residential real estate slump. As time comes on, and we actually hear from some of the folks holding the risk or taking the losses, it helps us compartmentalize the damage that’s been done and actually get a better handle on where we think pricing should be on a go-forward basis.
So we’re not celebrating the fact that Citibank had to take large losses… UBS and CS also had similar reports that were negative. We’re celebrating now that we have concrete knowledge of what’s actually going on.
MOON: So this is one of those infamous cases where the market is pricing it in, or has already priced in the subprime mess?
HOGAN: No, I think it’s more of a case of we didn’t know the magnitude of the damage created by this subprime debacle, and as we start to know what the damages actually are, when we get a better handle on what we can physically say is the finite damage, the market can then move forward and start focusing on other things.
MOON: And yet there was a report from Goldman Sachs today that pointed out declines in home sales and prices have actually been accelerating. So how do we know that the worst is over here?
HOGAN: Well, we know the worst is over on the credit part of this. We’ve been through residential real estate slumps before, and we know that those can be long-lived. And I think that’s going to be the problem here. This residential real estate bubble, if you will, wasn’t created in a couple of months and it’s certainly not going to go away in a couple of months. That’s something that’s a little more manageable.
What our major concern was, how much damage was done to the financial portion of the U.S. economy, and how much of that was going to seep over into the broader economy — and was that going to cause a recession. I think the impression that we get today from the numbers coming out of Citibank is the opposite of that. We know what the damages are, but we don’t think it’s going to cause a recession in the broader economy. And that’s something the market wants to celebrate.
MOON: We also got word today that manufacturing seemed to lose steam in the past month. That gave rise to some speculation that the Fed might give us another interest rate cut.
HOGAN: I think there’s going to be a cut — I don’t know if it happens on Halloween or it happens sometime before the end of the year. I think we cut another 25 basis points on both the discount rate and the Fed funds rate and work our way into the first half of next year, and see how much traction we get with the original cuts that we’ve had so far.
MOON: Art Hogan is chief market strategist with Jeffries and Company in Boston. Thank you for joining us.
HOGAN: Thanks a lot for having me.
MOON: For the record, it probably helped today that former Fed chief Alan Greenspan added his voice to those saying the credit slump may be ending.
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