Citi's Levkovich - cautious optimism that growth is returning

Back in June of 2008 I wrote a post that featured the opinions of well-known Citigroup strategist Tobias Levkovich. At the time he was declaring that it was time to buy banks. He was 9 months early in that call. What does he have to say these days?

It seems that Mr. Levkovich is reasonably positive on the state of the U.S. economy. He is projecting GDP growth a hair over 1% in the 3rd and 4th quarters of 2009 and 2.1% in 2010.

As indicators that modest growth is in store, he points to the following developments:

• Companies have cut back production and orders to an excessive extent.
• Though demand remains weak, companies are now finding it necessary to increase production.
• There has been improvement in the credit markets
• Yields of junk bonds have dropped by 10%
• Banks received government guarantees for their loans and have stabilized.
• The need to cut inventories is waning and demand remains stable

Levkovich's main point, however, revolves around the supply - demand equation. Among the ideas listed above, he makes the point that production was cut too severely in the face of slowing demand. Any increase in production can be expected to show up as an improvement in GDP and lead to a rise in the price of raw materials and in the price of transporting them. This is a process that helps to reignite the economy and encourages factories not to lay off more workers. The caveat is that it may not be enough to actually generate new jobs to replace those that have been lost in the downturn.

How to play it --

According to Levkovich, Citi is favoring energy, raw materials, industrials and financials. They suggest lightening up on defense industries, health services, software and computer services.

Do I agree? Only to a certain extent. Certainly we've seen materials and energy putting in a good performance these last six months. On the other hand, I continue to be way bullish on tech. I am still suspicious of the financials but the market seems to be positive on the sector.

So take Mr. Levkovich's opinions for what they are worth. At the least, it is another welcome data point supporting the bullish case.


Sources: TheMarker (Israel)