"The market is pricing a very bad scenario"

Abby Joseph Cohen played a part in Cornell University's partnership with the Technion in the New York technology campus. She talks to "Globes" about that, and about the US economy, with typical optimism.

"The are two main concerns on investors' minds at the moment that are preventing the market from rising: the first is the situation in Europe, and the second is the political situation in the US, which is entering an election year, with the Republican candidate so far unknown," says Abby Joseph Cohen, senior US investment strategist at investment bank Goldman Sachs, in an exclusive interview with "Globes". "The Americans are less concerned about the domestic economy, and more about these two matters, and when the political uncertainty in the US is dispelled, the markets will have a spur to rise," she adds.

Joseph Cohen, one of the best-known figures on Wall Street, is also active in the Jewish community, and has visited Israel many times. This time, she is here on the occasion of the announcement by New York City of the setting up of a new applied sciences campus by Cornell University in partnership with the Technion - Israel Institute of Technology. The project is expected to cost $2 billion.

Joseph Cohen was part of the team set up at Cornell for this project; she herself took a degree in economics and computer sciences (then part of the electronic engineering department) at Cornell in 1973. Today, incidentally, she has a relative studying architecture at the Technion. Talking to "Globes", she analyses the global economic situation, and also talks about Cornell's choice of the Technion as its partner in New York.

What can the Technion bring to this venture?

"The Technion is a small institution, but exceptional for its success, and so it was described as bringing "international star power” to the project, which testifies to a high standard of education and entrepreneurship. I know that those who made the decision knew about the quality of the students and faculty at the Technion, and how many Nobel Prize winners had emerged from it. The idea behind setting up the campus is not just a matter of technology, but also of innovation and enterprise, that will generate growth and jobs.

"I was chosen by the White House to serve as a consultant to the innovation and competitiveness team, and the research I did shows that innovation and science studies are very important to technological development. The Mayor of New York has placed a very strong emphasis on the environment, and, beyond the fact that the campus itself will create zero air pollution, it will not only have computer science faculties, but also faculties for green architecture and energy efficiency, and one faculty will be directed towards creating a healthier life."

"The Fed did the right thing"

It's a little difficult to sit with Joseph Cohen and resist asking her opinion of the burning issues in the global economy. She supports the way the US Federal Reserve Bank has dealt with the crisis, saying, "You must understand that the Fed has to respond not just to events in the US economy, but also what is happening in the world. The US is in effect the world's central bank, and the Fed demonstrated great leadership when it set up a coalition with other central banks in an attempt to stabilize the financial system. That was the right thing to do."

How far does the crisis in Europe affect the US economy and Wall Street?

"There are several ways of looking at this. The first is that Europe is a very large export market for the US; 18% of total US exports are to Europe, so that, in this respect, there is a similarity between the relationship between Israel and Europe and that between the US and Europe. However, what the US exports are things with added value, such as software, high level services, and technological know-how, so that even a change in the exchange rate will not materially affect the US economy.

"The second aspect is that the dollar has become a safe have in relation to the euro, and when the latter weakens, we see money flowing to the US from investors from all over the world who want to buy US Treasury bonds. As far as the effect on the US financial system is concerned, the US regulator has carried out stress tests for the banks and examined them under various scenarios in order to ensure that they are stable. So although the problems in Europe will have an impact on the whole world, the US economy is in a stable condition."

How do you explain the fact that, after S&P downgraded the US's perfect credit rating, US Treasury bond yields actually fell?

"When the rating agency downgraded the AAA rating, I don't think it had more information that the market had, and the market already knew there were problems. S&P looked at the dollar and at the fact that Congress was not functioning well, and these are things clear to everybody, so the rating downgrade did not provide new information to investors.

"Something else that led to a fall in yields was that in the global world, when financial information flows, everything is relative. With the crisis in Europe now in investors' focus, the problems in the US receded into the background. We will have to deal with our problems, but we have time."

What is the main problem of the US economy at present?

"If you look at the deficit, it will get dramatically smaller in the next two to three years. The data in recent months look better, the number of jobs rises from month to month, businesses are investing in new equipment, and consumers are spending more. And when the economy grows, people pay more taxes.

"The problem of the deficit will have an impact in the more distant future, and it's connected to the demographics of the baby-boom generation. In the next few years there will be more workers retiring, and they will be entitled to medical cover, which means that medical expenditure will grow, and that will affect the deficit. That's an important matter, and the Democrats and the Republicans are now meeting to solve this problem for the coming years."

"We need a catalyst to move the market"

Joseph Cohen is known for her optimistic forecasts. She won recognition and great popularity after she predicted the bull market in the US at the end of the1990s. She did not however manage to predict the latest credit crisis.

What's your view of the US stock market today?

"If we go to the history, we told our customers to sell stocks in March 2000, at what later turned out to be the market peak. It wasn't that we were concerned because of the technology; what concerned us was its pricing. When you look at the stock market now, the pricing is of a very bad scenario. The S&P 500 is at a p/e ratio of 12, when, in a normal situation and with regular inflation, its pricing is between 16 and 18.

"In 2000, the assumption was that everything was perfect. Today, the prices of stocks on the market assume a reduction in company profits in the next five years. That scenario is possible, but it won’t necessarily happen. The thing is that the valuation model can't do timing. You need some catalyst to move the market."

Published by Globes [online], Israel business news - www.globes-online.com - on December 29, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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