If Wall Street has two worries right now, it's shaky banks and worried consumers. Yet that's exactly where Tobias Levkovich, Citigroup's often contrarian chief U.S. equity strategist, advises investors to focus their attention. He says the ongoing housing mess hasn't drained all the cash from the almighty American consumer. For investors, he sees some big opportunities right now in the two most unloved sectors of all—consumer discretionary (think suvs and granite countertops) and financials. Excerpts from his conversation with U.S. News:
What's the biggest misconception about the health of the consumer and the housing slowdown?
If U.S. homeowners truly extracted all their home equity and spent it, then real consumer spending would have been growing anywhere between 6 and 13 percent per quarter over the last five years. The growth rate averaged 3.2 percent. So obviously they couldn't have been spending all that money.
Where did that leftover money go?
Two places: One, people refinanced high-cost credit card debt with lower-cost, tax-deductible home equity. They borrowed money from Peter to pay back Paul at much lower rates. It's what you call smart cash-flow management. No. 2: They put some money in the bank. For a country that allegedly has no savings, $1.5 trillion in the past five years has appeared in checking, savings, and money market accounts and [short-term] cds.
So how are stocks going to do this year?
We're looking for markets to close up this year about 5 percent. That's 1550 on the S&P 500. That doesn't mean it's going to happen tomorrow. There's no all-clear signal being waved around.... But you don't have the kind of conditions to anticipate another absolute drubbing in the markets.
Why turn bearish on high-fliers like industrials, energy, and commodities?
The deep concern is that corporate profit margins in the United States are at 40-year highs and hence have nowhere to go but down. If that's our concern, where are margins most extended? Three sectors: industrials, energy, and materials.
So why should investors buy sectors that are some of the worst performers of the year?
When I look at financials and certain areas in consumer discretionary, the reverse is true. These margins aren't about to be destroyed. They already have been. Financials are sitting at earnings levels they last saw in 1989. Consumer discretionary margins peaked over four years ago. They're very attractive based on historical valuations.