J.P. Morgan and Co equities strategists are cutting their 2008 outlook for the market and shaving earnings outlooks, but they still see upside for some sectors, particularly financials and energy.
Thomas Lee, chief U.S. equities strategist, said the strategists are revising their outlook to reflect J.P. Morgan's call that the economy has entered a recession. The firm cuts its S&P 500 target to 1450 for year end, from 1590. "With the forecast of a short recession, we cut our earnings estimate for the S&P 500 to $90 for '08. We were at $97," he said, adding that J.P. is now $8 below the consensus.
Lee said the firm pared back its GDP view from one percent growth in the first half to negative 0.5 percent. Their forecast for the second half fell to growth of two percent from growth of three percent.
"The biggest (earnings) cuts were really in consumer discretionary and technology. The only sector forecast to have double digit growth is energy, and that's 10 percent growth in 08 versus 07," he said in a telephone interview. Lee is scheduled to appear on "Closing Bell" at 3 p.m.
Lee, in December, told us he expects financials to lead the market higher this year. He still likes the group despite the fact that its been getting thrashed. "The financial system is holding the economy hostage," he said. J.P. Morgan now expects the Fed to cut the target Fed funds rate by 0.75 percent at its meeting March 18, and another 0.50 by mid year. He said the Fed funds rate has to get lower before institutions start easing up on capital.
Lee also pointed to comments made by Pimco's Paul McCauley on "Squawk Box" today. "The best trade he said for the next couple weeks is long mortgages and out of Treasurys. That's a huge deal for financials," he said. "That's what the banks are sitting on right now."
Financial stocks, meanwhile, aren't looking so good today. The S&P financial sector is getting battered today, down more than 2 percent after a more than 5 percent decline last week. Citigroup is slumping to a multi-year low. Bear Stearns was sharply lower on rumors of liquidity problems, but Bear Executive Committee Chairman Ace Greenberg tells us that's a "ridiculous" story. Fannie Mae and Freddie Mac, meanwhile are down nearly 15 percent each after Barron's cover asked, "Is Fannie Mae Toast?"
"The two sectors with the best upside are financials and energy," he said. Of defensive sectors, J.P. is overweighting telecoms, utilities and health care.
"If oil doesn't change from here, there's 29 percent upside to energy stocks," said Lee. Oil today is $107 per barrel on the NYMEX.
Lee said he is beginning to look at for opportunities in cyclical, particularly consumer discretionary stocks. He says those stocks have seen a decline of about 38 percent from their highs and select retail and restaurant names are starting to look like good buys. "These stocks are priced for more than Armageddon. They're ridiculously cheap, but then again we know the consumer is at the center of the storm right know," he said.
Lee said investors should be looking for opportunities now because stocks typically are higher 12 months out from the start of a recession, and they could be up 12 percent by Dec. 31 if you look at January as the starting point for the recession.
We also heard from Byron Wein, chief investment strategist at Pequot Capital on "Squawk Box" today. He has a different view. "I think we've got further to go on the downside...especially with the financials," said Wein.
"Sometime before the summer, I think the market will bottom but I don't think it has bottomed yet," he said. "But then I there will be opportunities as there always are in a bear market bottom."
For now, he's interested in macro plays. "I think the dollar is going to be weaker. I think gold is going to go higher. I think oil is going to go higher, and I'm a particular fan of cotton," he said.