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Milken panel tries to read economic tea leaves

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Modern Money

A collection of sage investment executives gathered at the Milken Institute Global Conference this week to discuss the state of financial markets. Here is some of the insight shared by panelists during the Reading the Tea Leaves: Where are Markets Headed? session.

Michael Cembalest, Chairman of Market and Investment Strategy, J.P. Morgan Asset Management

Cembalest says he is watching four issues closely: two market issues and two policy issues. Citing the remarkable correlation between manufacturing surveys and corporate profits that follow three to six months later, Cembalest said, “The next couple quarters of business surveys and corporate-profits growth are probably more important than they have been in a while.”

On the policy side, Cembalest shared insight on brewing energy and housing matters. “It would be a huge mistake to accelerate the pace of [liquefied natural gas] exports. … There is a huge multiplier-effect benefit from the U.S. having electricity prices for homes and businesses that are 50% to 60% of what the rest of the world pays. Accelerating export-facility approvals will eventually lead into higher domestic natural gas and electricity prices.”

Cembalest says he doubts reform of government-sponsored enterprises will happen, but he still cautions against reform that requires banks to absorb the bottom tranche of conforming-mortgage securitization. “If that raises the cost of conforming loans by half a percent or so, it could slow down the housing recovery.”

James Litinsky, Founder and Chief Investment Officer, JHL Capital Group

“Spending and profits are completely disjointed from what the market may do. We may, in fact, have an increase in [capital expenditures], and we may, in fact, see corporate profits go up, but that doesn’t mean that market might still not significantly correct from where we are. … Eventually, maybe it’s years down the line, there is a reset moment. And the markets will react to that. All that we are talking about here is in advance of that moment.”

Morris Mark, President and Managing Partner, Mark Asset Management

Mark says he sees potential for good to possibly great growth in the U.S. economy. Citing the potential Pfizer-AstraZeneca deal, Mark noted that there is a “good chance” the tax code will be restructured sometime soon. “That is an awful lot of revenue that our government and our economy are going to miss because they figured out a really interesting way of moving.”

Justin Slatky, Senior Portfolio Manager, Shenkman Capital Management

On the impact enhanced communication from the Federal Reserve is having on markets: “Most investors are skeptical. When the Fed says they are being transparent, you don’t believe them … They are trying to give as much information as possible, but the market is going to read into the next data point they aren’t telling us.”