TOM HUDSON: The economy is growing and look for the pace to pick up as the end of the year nears. That`s the forecast from tonight`s “Market Monitor” on this Friday. David Kotok is the chairman and chief investment officer at Cumberland Advisors. David, welcome to NIGHTLY BUSINESS REPORT. It`s nice to see you.
DAVID KOTOK, CHMN. & CHIEF INVEST. OFFICER, CUMBERLAND ADVISORS: Hey, nice to be with you for sure after a difficult week.
HUDSON: It`s been a very difficult week, difficult month. So what gives you the confidence that not only the economy will strengthen in the latter half of this year, but I imagine the stock market along with it?
KOTOK: Well, the stock market will anticipate the economy getting stronger. I think we`re already seeing a little bit of that. But we`ve got some things in the works. People are ignoring the supply chain shock from Japan. The worst of it hits in Q2. We`ve just seen that in the GDP reports. We think it starts to improve in Q3, but by Q4 of this year, we`re going to be doing better. Our guess is and it`s an educated guess, is that we`re between 2 and 3 percent real growth in the fourth quarter of this year. And it`s an improving situation.
HUDSON: Now we know that the Federal Reserve is likely on hold in terms of interest rates. Congress, though, returns. This could be a matter of some volatility, returns to the debt talks. Could that shape your outlook for the rest of the year?
KOTOK: It could. Congress introduces uncertainty. They make markets more volatile — Democrats, Republicans, House and Senate. They are not helping. They are hurting. Bernanke was very clear on that today and he was right. So we`ve got low interest rates the rest of this year next, year. The Fed policies pretty much script it. They told you what it was on August 9th. He affirmed it today by adding nothing new. There`s nothing new for him to do. It`s the Congress that is the risky side to this equation.
HUDSON: So despite that risk, you like financials, perhaps the most beaten-down sector. Specifically, we`ll begin with the sub-sector, which is commercial real estate. The Cohen & Steers reality fund, ICF the ticker similar symbol, big drop along with the rest of the market this month. What fuels it higher?
KOTOK: Well, we think the REITs and the financials as a group were beaten down, in the case of the financials generally, beaten up for four years. At this stage in time, what`s new? What`s going to derail them now? And we saw that validated by Warren Buffett in his Bank of America (NYSE: BAC) deal. So our view is this is a washed-out sector. It`s time to be nibbling at it, raising rates, do it broadly.
HUDSON: And you`re doing that with real estate and with banks and the banks idea is regional banks, KRE is the ticker symbol for this exchange- traded fund. What gives you confidence that the bottom is in for the regional banks?
KOTOK: Well, the valuation of banks, regional and the big banks, there are questions. This is not a clear-cut situation. It is a problematic situation. And so you say to yourself, if they are beaten down for four years, if the auditors have taken the notes, if they`ve built in reserves for bad loans, all the things that have been going on for a year, write- offs, capital, we know the story. Then you have to say, can I start to believe these numbers, because there isn`t an auditor in their right mind who would fudge a number today. They`d get murdered. So you can begin to think of these things as maybe over reserved, not under reserved.
HUDSON: Think all the worries are priced in. Do you or your clients have positions in these ETFs, David?
KOTOK: Yes, we do.
HUDSON: David, we`ll leave it there. Our Friday “Market Monitor” guest David Kotok with Cumberland Advisers. Thank you sir.
KOTOK: Thank you. Thank you.