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(photo credit: Courtesy Photo)
Tobias M. Levkovich is bullish on markets and technology - and that could be good news for Israel.
Speaking to The Jerusalem Post during a recent visit to the country, Citigroup's chief US equity strategist reiterated his 2006 targets of 1,400 for the S&P 500 and 11,900 for the Dow Jones Industrial Average - calling them, in fact, "conservative."
"That means the markets can do better and, clearly, if the US market is leading, it can help global markets in general," Levkovich says.
The optimistic view is based on where the firm sees investor sentiment, where it sees valuations and where it sees implied earnings.
Right now, he says, The State Street Investor Confidence Index, which determines investors' risk tolerance, is at the lowest level in eight years. "We don't like it when everybody's excited, we like it when people are much more cautious - and they're about as cautious as they've been since the inception of this study in 1988."
Among the things he sees worrying investors are oil prices, housing bubble fears, high corporate profit margins, current account deficits, the geopolitical environment and terrorism. Bottom line though, he says, their fear is really the impact these factors have on corporate earnings.
Yet Levkovich believes the real determining factor on earnings is labor costs, because they lean into margins - something he's not worried about right now.
"What we would find distressing would be a real plunge in oil prices. If oil prices fell very sharply, it would enable consumers to be more aggressive in their spending - emboldened - and as a result the Fed would feel probably more inclined to raise rates even further."
Stable oil prices, he says, are fine and even a modestly lower oil price is good, but he believes a significant decline would probably be much more inflationary.
Levkovich also maintains that spending on information technology, or IT, has been healthy as corporations increase their cash flow and unemployment rates decline.
"If you add jobs, you add IT," Levkovich says, noting that office workers get personal computers, truck drivers get global positioning systems, warehouses get scanning devices. Even appointments with hairdressers now can be made over the Internet, he notes.
"It's amazing when it gets down to that kind of permeation into an economy."
Although Levkovich, who was the third-ranked strategist in a 2004 Institutional Investor poll, doesn't specifically follow Israeli markets and says he is somewhat uncomfortable talking about them because of their unique position of being impacted by geopolitical and even local factors, he does believe the country will benefit from this trend of higher IT spending.
"In general, the spending should come here," he says. "If they're spending more money on technology capital investment, it should certainly back into the Israeli market. Israel is a force in technology."
Nevertheless, Levkovich, in his Strategy & Tactics report for February, said some caution was warranted for technology early in the year and he acted on that concern just days after speaking with the Post by downgrading his firm's ratings on the semiconductor and semiconductor equipment industries to "market weight" from "overweight," citing the increased likelihood for earnings disappointments.
Late last week, on the heels of his call, Intel Corp., the world's largest chipmaker, cut its revenue forecast.
Levkovich also likes drug companies, in general, finding the most attractive values in "big pharma," which he notes has been beaten up pretty badly on fears about product liability and pipeline issues.
He finds, however, that products in the pipeline, while maybe not the billion dollar blockbusters to which investors have become accustomed, are solid drugs with potential for annual sales in the $300 million to $400m. range.
Also creating a uniquely favorable environment for branded drugs, Levkovich notes, is the US prescription drug plan for senior citizens, which shifts responsibility for payment to the government, and will likely encourage customers to choose branded products rather than generics for the next few years.
Nevertheless, he believes, that's not necessarily bad news for generic producers like Israel's Teva Pharmaceutical Industries Ltd.
"Does that take away from the longer-term story for generic and cost reduction in health care? Probably not," he says. "There's room for the generic market [too]."
Finally, as Stanley Fischer approaches his one-year anniversary as head of the Bank of Israel, Levkovich expresses enormous confidence in his former Citigroup colleague.
"I think he's one of the truly brilliant and gifted macroeconomists globally," Levkovich said. "Israel is very lucky to have somebody, not just who I think is impressive, but also somebody who has been on the firing line in a lot of very difficult environments."
But it's more than just Fischer's experience and economic talent that impress Levkovich. "He has a great demeanor as a person - he'll think things through thoroughly, he'll listen to people, he won't make rash judgements. Those are the qualities you want in any senior executive, let alone somebody who's sitting at the reins of a central bank," Levkovich concludes.
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