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Hummer 'not sanguine'
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August 27, 1998: 2:08 p.m. ET
Strategist sees currency crisis spreading, Fed staying pat
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NEW YORK (CNNfn) - As the shadow of currency devaluation pressure falls over more and more national economies, Wayne Hummer market strategist William Hummer says that falling stock expectations could push the world economy further into crisis.
He also told CNNfn's "In the Game" that although investors should consider boosting their cash liquidity as part of a policy of increasing caution, there were still some bargains to be found in the market.
A partial transcript of his comments follows.
DEBORAH MARCHINI, CNNfn ANCHOR, "IN THE GAME": OK, how far does the sell-off go, do you think?
WILLIAM HUMMER, MARKET STRATEGIST, WAYNE HUMMER: I think it could go another 5 to 10 percent. The problem is that global deflation is now colliding with overextended market values. And this is a problem that's not going to evaporate quickly.
In fact, we already were in the worst world monetary crisis since World War II, and in recent days this has deteriorated even further and is spreading rapidly into China, Japan, Russia and Latin America. Now, it's starting to lap at our shores.
JOHN DEFTERIOS, CNNfn ANCHOR, "IN THE GAME": We had one stock that was not open, 3M (MMM). Trading in 3M was held up because it has a very positive report. It's saying that it's expecting double-digit earnings growth for the next three years.
However, earnings is the big problem going forward here, with the warnings coming on the third quarter, is that right, William?
HUMMER: That's exactly right. The earnings estimates must be revised down, because the deflationary pressures on pricing -- combined with rising wages and benefits and costs -- mean that profit margins are going to be squeezed inexorably. This will lead to large-scale revisions downward in earnings for the second half, in my opinion.
MARCHINI: The bond market would seem to be telling the Federal Reserve, 'Hey, cut interest rates -- things are bad out there.' Do you think the Fed's likely to do that?
HUMMER: No. They would react to disorderly market conditions. Short of that, on an economic basis, the economy is not weak enough for them to do anything. So, rates will stay unchanged unless and until stock market conditions warrant action, but not on the basis of economic conditions at this time.
MARCHINI: Why is it that the United States equity market is being so substantially affected by what's taking place in Russia and Latin America?
HUMMER: The problem today in the markets is competitive devaluations. It started in Thailand 14 months ago. It rapidly spread around the world. Now we have Russia virtually repudiating their debt. This is causing problems in Europe. Europe's causing and will cause problems here. So, it's not the size of their market, but rather the transmission belt of competitive devaluation that is spreading this poison all over the global markets. And I don't see it ending very quickly.
DEFTERIOS: Bill, it's almost a disconnect in the markets right now. We had an economist from the Conference Board the last half hour, who was saying we're going to see 3 percent growth in the second half of this year and about 2-1/2 to 3 percent in the first half of 1999.
If that's the case, corporate earnings should hold up, but it's certainly not a consensus. Why such a huge gap between what you're saying and what some of the top-up economists are saying?
HUMMER: Well, I'm optimistic on the second-half growth rate, but where I differ is on profit margins. The deflation worldwide is terrific. There's no pricing power left for companies and vendors, but their costs go up. That means the squeeze is on their margins. So, the economy can go forward, and I think it will in the second half.
I'm not sanguine about next year. I agree with that economist, but I don't think it's good for the market, because what's holding the market up right now worldwide is stock market expectations. Should the market go down, the economies could head south also.
MARCHINI: What would you recommend investors do right now? Is cash the only good place to be?
HUMMER: I think that this is a good time to raise cash and be very cautious and defensive. As far as looking beyond the valley, I think it's OK to look at some stocks that are way down. Look and be patient and buy selectively -- stocks such as Applied Materials (AMAT), Royal Dutch (RD), Banc One (ONE), and ConAgra Incorporated (CAG), for example.
DEFTERIOS: OK. Energy's been a very dangerous area to go into. You'd still suggest it, with oil prices really at these ten-year lows?
HUMMER: The reason I suggested it is I think OPEC, sooner or later, will get their act together. In fact, they're trying to right now. And I think that could happen sooner rather than later. No one buys at the exact bottom, and I think the leading energy stocks may be in a buying range. 
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