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Personal Finance > Investing
Froehlich likes financials
August 31, 1998: 12:12 p.m. ET

Analyst says investment banks will thrive with a low interest rate
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NEW YORK (CNNfn) - With the Asian economic crisis and Russia's financial troubles, the market continues to spiral downward. The Dow, the Nasdaq, the S&P 500, and the Russell 2000 have all fallen from their highs just a month ago.
     In these times of market volatility, are there any "safe bets" in the stock market? Probably not, but Robert Froehlich, chief market strategist at Scudder Kemper Investments, thinks some stocks are a better bet than others.
     He appeared on "Before Hours" for more analysis of the markets and what investors can expect in the days ahead, as well as a few stock picks of his own.
     Here's a partial transcript.


     JOHN DEFTERIOS, CNNfn ANCHOR, BEFORE HOURS: What is going to be the key event that turns this market around? Is there going to be one thing that can turn it to the upside before the end of the year?
     ROBERT FROEHLICH, SCUDDER KEMPER INVESTMENTS: Well, John, I think there's going to be a couple of things that happen. The first is, I think, you're going to see great support for corporate stock buybacks. I think the fact that the market has moved down 10, 14 percent -- I think that corporations are going to start stepping up to the plate, buying back their stocks. And don't forget, corporate America compensates their executives with stocks and options. So, it's in their own personal interest to use that cash to buy back stocks. I think that's the first thing that's going to happen.
     I think you're going to see the Federal Reserve Board cut interest rates within the next three months. I think that will be a great foundation. And, I also think that you're going to see a change of heart in Congress. I think they're going to look at fast-track trade legislation and IMF funding to sort of calm the international events. I think the combination of these three things are going to serve as a nice foundation to start our market to rally.

     DEFTERIOS: That's much more optimistic than many analysts. With that as your premise, do you think we've cleared out enough, in terms of the core 25, 50 stocks that have been driving these markets; in terms of price-to-earnings ratios that we're still seeing well over 20?

FROEHLICH: Well, I think that the P/E ratio issue is always going to be an issue because we're comparing it to historic levels that we really haven't been in a economy like this. Even with the slowdown globally, in a global marketplace with no inflation, people are going to tend to pay more for stock prices, and so we're going to see P/E ratios continue to climb. So, right now, for the levels that they're at, I think it's tremendous valuation levels. You know, think about it - Alan Greenspan was concerned with P/E ratios when the market was at 6800. So, from 9300 down to 8000 - this is a good level and I think it's a level that people ought to seriously consider getting in at.

DEFTERIOS: How about this gap between reality of what the earnings are and what the earnings projections are slated to be in 1999? Still, in the books, we're looking at 12 percent. I know we ratcheted down in the second quarter. We can do that again and continue to do so, but with those high valuations, it's pretty hard to justify, right?
     FROEHLICH: John, I think 1999 is really the key issue because we have to get some answers to the global marketplace by then. This isn't about what's going on in Russia. It's really about what is Japan's plan going to finally be - because Japan holds the key to all the emerging markets in Southeast Asia.
     And so, there's going to be a tremendous amount of focus on what type of plan they can put together to really pull the banking system up. Because if the banking system is supported, then I think you can see a rebound both in consumption internally in Japan, which will pull the rest of Southeast Asia. So, I think that these earnings are at levels that are really stretched because we're assuming that Japan will be able to turn things around, as will Southeast Asia in 1999. That's still a big question mark.
     DEFTERIOS: Some big stocks have done incredibly well over the last three years. I'm thinking of Travelers (TRV), for example or Dell (DELL). But in the case of Travelers, it's come down considerably from its 52-week high. Would you still stick with the good core names? And if so, do you want to give us two or three that you particularly like after the selling?

     FROEHLICH: Well, you know, I think that you have great value in the financial services area, and I'll tell you why: I think what we tend to do when there's an international crisis is we step back and say, my goodness, all these companies that have global exposure Now, they're going to be in trouble, when a year and a half ago, we looked for companies that had that global exposure as being the best-run companies out there. So, it's amazing how we shift so quickly. I still think the foundation is in place. We're in a low interest rate environment. Financial services companies can make money in that environment.
     I think those that are the global players - I think Travelers is an absolute great example. I think Bank of New York (BK) and Bank of America are great examples, even though they're going to have to write off some things with what's going on in Russia. I think when you combine global franchise with the demographics in the U.S., it's going pull up the savings rate. Wit a low interest rate environment, I think financial services will probably be the best performing sector for the next six months, and it's where the best value in the marketplace is today because of where the valuations have come. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.