ED HYMAN AND BOB DOLL TRANSCRIPT

On this week’s Consuelo Mack WealthTrack, an exclusive interview with Wall Street’s long time number one economist Ed Hyman and Great Investor Bob Doll. What they expect in the economy and markets in 2012 and strategies to prosper in it.

Consuelo Mack: This week on WealthTrack, our annual exclusive with Wall Street’s long reigning economist king, ISI group’s Ed Hyman and BlackRock’s lord of large cap stocks and strategy, Bob Doll. What do these great investors see in the economy and markets in the year ahead? How are they investing? Find out next on Consuelo Mack WealthTrack.

Hello and welcome to this first 2012 edition of WealthTrack. I’m Consuelo Mack. One of today’s WealthTrack guests, BlackRock’s Bob Doll, describes 2011 as “frustrating, volatile and disappointing for most investors.” What’s in store for 2012? With that kind of a foundation we can only hope it will be better!

As the financial times reported $6.3 trillion dollars was wiped off global stock markets in 2011, a 12.1% drop. The U.S. actually put in one of the better performances, which is not saying much… Yes, the DOW was up 5.5%, but the S&P 500 was essentially flat, and the NASDAQ was lower. And, as you can see from this chart, the wringer the market put us through to get there was barely worth the trip… The earthshaking Arab spring movement, the real earthquake and tsunami in Japan, rising unemployment and tepid economic growth here, the string of seemingly ineffective bail out deals in Europe, failed debt reduction deals in Washington and the downgrade of U.S. debt all contributed to the worst market volatility in decades.

Meanwhile corporate profits and cash levels are at record highs.

As WealthTrack great investor Hersh Cohen recently wrote to his ClearBridge advisors clients: “The biggest issue for the markets is not the jobless rate, the European debt, or the possible slowdown in China. Rather it’s the remarkable and disturbing volatility of all the financial markets that is most responsible for keeping both individuals and professional investors either very cautious, and/or out of stocks entirely.”

Well what are we in for this year? As we have in the past, we are delighted to begin the new year with the man institutional investors have voted Wall Street’s number one economist for 32 years in a row, who was recently named to the All-America research team hall of fame. He is ISI Group’s co-founder and chairman Ed Hyman who appears on WealthTrack exclusively every year. He is joined by a long time member of WealthTrack’s brain trust, Bob Doll, chief equity strategist at BlackRock, where Bob also oversees three highly regarded large cap mutual funds; BlackRock’s core, value and growth funds. I began our discussion by asking them, what are the biggest changes they expect for 2012.

Ed Hyman: I think if it’s different, and I’m not sure it’s going to be, but if it’s different it’s going to be better. There is a small chance that the economy could do a lot better in ‘12 than it did in ‘11. That’s not my best guess, but if it was really different. The economy right now, as you know, is doing remarkably well.

Consuelo Mack: You told me it was a miracle about how well the U.S. Economy is doing.

Ed Hyman: Well, maybe that was before Christmas. The economy every week for three months has done better than expected every week. Every day has been the same. And so far this week it’s again the same. For example, consumer confidence that they come out with on a daily measure, if you can believe that, has gone up significantly in the past three or four weeks, with the stock market. So if I had to answer your question about what could be different in ’12 it would be that the economy would surprise us on the up side.

Consuelo Mack: Where is the strength coming from?

Ed Hyman: The strength is very broad based, and somewhat mysterious. But the consumer is spending. Employment is picking up. And of course those two come together, and then consumer confidence picks up, which I mentioned is happening. And credit expansion is occurring. And pretty much there you have it. They had put out this morning that lending to small business was up 18% year on year. So you have credit, employment, consumer spending, confidence, and that’s creating an economy that is doing better, and as all of your guests will tell, don’t get too excited about it.

Consuelo Mack: Because it could end?

Ed Hyman: No, because it’s not doing great. It’s just doing, you know, better. And I would say looking back at the past, now three years, we’ve been growing, the economy. In hindsight, when they write the history, it will be doing okay. Not great. But if it’s better, if it’s different in ’12 than this year, I think it will be somewhat better.

Consuelo Mack: All right. Bob Doll, the economy is going to muddle thru one of your famous 10 predictions that you come out with every year. How do you feel about what ed is saying, do you agree with him?

Bob Doll: I do, but you notice how he started, that if it’s better. And I would agree. I think the probabilities are not all that high. I think we will be in a muddle through world. But if it’s not that, I think the probability is that it’s better than we saw last year, but that’s the U.S. The rest of the world at the moment most places are slowing down, while the U.S. is going the right direction. Europe for sure is in a recession, many parts of it. Asia is still slowing down in lots of places, so we have a divergence going on in the world at the moment and I think they will be interesting to watch. Does the U.S. help the rest the world do a little better or does the rest of the world slow the U.S. down?

Consuelo Mack: And your best estimate, guess is?

Bob Doll: That the U.S. will slow down. The U.S. accelerated during the course of 2011, the fourth quarter being the strongest, let’s call it three point something % real GDP. I don’t know how many threes we’re going to get in 2012. I think we’ll average two to two and a half. So my message is when you get the three, don’t extrapolate three forever or four or five any more than when you get to one, which we might have a 1% quarter in 2012, don’t forecast a recession. We’re going to average two to two and a half and economies never grow in straight lines.

Consuelo Mack: So let’s talk about the impact that could have on the U.S. stock market specifically. And if you look back at 2011, we had a tale of two markets, the first half was decent, and pretty good as a matter of fact, and the second half it just kind of fizzled. So, as a matter of fact I quoted you earlier saying that 2011 was frustrating, volatile and disappointing for most investors. What do you think it will look like for most investors in 2012?

Bob Doll: Probably more of the same, but a positive tone on top of that. I’d be disappointed and surprised if we didn’t have a better year for stocks here in the U.S. It comes back to the things that Ed was talking about for the economy, allowing earnings to be pretty decent. And the fact that the rest of the world is slowing, so you have non-U.S. investors saying where am I going to put my money, and the U.S. all of a sudden becomes a more attractive place to go. That is part of the reason the U.S. stock market, while flat in 2011, was far better than most any other market in the world, many of them down 10, 20 or more %.

Consuelo Mack: So, Ed, the impact that Europe, for instance, is going to have on the U.S. economy and when you and I had talked earlier you said that basically the euro zone is a nightmare, how nightmarish is it going to be?

Ed Hyman: Pretty nightmarish. The problem is that the peripheral economies, the smaller economies in the south, are clearly weakening, and we are applying significant fiscal drag, tax increases, bad hikes and spending cuts on these economies, all in the name of it’s going to get better. And it may not. I worry that it gets to be a nightmare, and the economies get worse and you say your deficit is worse so you have to have more medicine, more spending cuts, tax increases. And I’m not being, I’m not throwing rocks at policy makers, these are very difficult tradeoffs that are being made. But it looks very problematical. I read Bob’s ten surprises with frankly, great interest Bob, and I noticed that you have the euro zone crisis could be easing. The economy is continuing to deteriorate, which I think is quite plausible. But Europe is a real question mark, because of this negative mix between the economy doing worse and fiscal drag being applied to it. It’s a dark part. The sister to that is that inflation is going to slow, or is slowing. And I think there will be a round of easing globally during 2012. The euro zone, hopefully —

Bob Doll: Hopefully is right.

Ed Hyman: On ECB front.

Consuelo Mack: It’s starting.

Ed Hyman: Starting. And the inflation easing would be a big positive. And then over on the other side of the world for China, which is also starting, but if you could get a full throated roar of easing in both Europe and China, that could make a big difference.

Consuelo Mack: So let me ask you then about your outlook for China, because I know ISI Group has a strong focus on China and has for several years now. So the hard landing, soft landing, what’s your —

Ed Hyman: On Europe, I really see a dark picture. On China, I really don’t. I think that they face problems, but they are able to deal with them in ways that Europe has no chance of dealing. So they can do fiscal stimulus, they could start tomorrow, in fact could start tomorrow, and they have plenty of room on monetary policy, they have 3 trillion in cash reserves, they have a huge labor force in poverty, half a billion people. So they have these assets, attributes, plus a steely determination to win economically. Where as in Europe, you have a lot of political cross winds that make it difficult to say this is our goal for 2012. And China they have that ability. So Consuelo, maybe I’m wrong on that. But compared to Europe, I’m much more relaxed about China than I am about Europe.

Consuelo Mack: So to your point to Bob’s, one of your predictions being that you think the euro zone crisis actually eases. So where the optimism, where is it coming from?

Bob Doll: It’s just less bad news, Consuelo, I don’t think Europe solves its credit problems, I just think it finds ways to continue to muddle through, while the economy is in a recession. I agree with Ed, you can’t get unity in Europe, austerity in Europe and growth in Europe, and they need all three. They are mutually exclusive. So there’s a problem that’s ongoing. My view in that prediction is we make it through. We muddle our way through without the euro collapsing. That’s the first prediction, because it’s the most important. If we get that wrong, a lot of the other things go kafluie, if you will, so Europe has to hang together from a financial standpoint. And I would further amplify to say that we think recession in Europe stays mild, if there are not significant financial busts along the way. And that will not be sufficient to drag the U.S. down. The difference will be if we have a financial contagion, because there’s a financial break, then that could bring the rest of the developed world down, we think that’s a minority probability. Then back to China and India, we think China and India make up more than half of the world’s growth in 2012, and if you add the U.S. to it, China, India and the U.S., it’s more than 2/3 of the growth on planet earth in 2012.

Consuelo Mack: That’s a positive so, that can offset the drag of Europe.

Bob Doll: To some degree.

Ed Hyman: I would think that the economies in Europe are pretty bad, a severe recession would be–

Consuelo Mack: Oh, really severe recession?

Ed Hyman: Would be my base case. I think the point you raise that the credit markets could be in their worst moments in here, you could get a difference between the credit markets going through their worst part and the economy. But one thing that I’d like to get on the table for the three of us here is that, and get your reaction, is that in all this, for investors, rates are zero. The alternative is pretty bad.

Consuelo Mack: So talk to me about this.

Ed Hyman: Well, talk to bob about this.

Consuelo Mack: So the alternative of them going, of increase, of rates increasing —

Ed Hyman: Rates aren’t increasing.

Consuelo Mack: Alright, rates are not increasing.

Ed Hyman: Or, and there will be cuts in ECB, but they don’t have a lot, I guess 100.

Consuelo Mack: 100 basis points, one full percentage point to get to zero.

Ed Hyman: And China has room, and then all the emerging economies that tightened will be easing, like Brazil. But rates in Europe will basically be zero.

Consuelo Mack: So what were you referring to as the big risk with rates?

Bob Doll: What Ed was saying is the alternatives, you can invest in cash, but you have in this country zero, many other places not far from, and maybe heading in a lower direction towards zero. Fixed income, meaning out the yield curve you don’t get much in return.

Consuelo Mack: Right, the yield curve means longer maturities?

Bob Doll: Right, so therefore, do equities, backdoor way of saying if I’m going to make some money maybe that’s where I need to go, and what I would throw on the table to add to that is what is in the price. In my view is with the cheapness in most equity markets relative to inflation and the government bond markets, some bad news is in them. A left tail event, if you will. If we skirt through the year without having the big bust, earnings and economic growth, modest as it is, should allow these assets to do a little better.

Consuelo Mack: Can I just mention one thing and that is if you are a fixed income investor, for instance and let’s say the 10-year treasury note which was up 17% last year, let’s say it goes from around 2% down to let’s say 1.5 or something like that. That is a big jump in capital appreciation. So you might not be getting income, but you’re sure getting capital appreciation, so it’s not all negative, right, from a fixed income point of view if you’re looking for the capital appreciation aspect if rates go down even from these low levels, right?

Bob Doll: True. But I think to get from two to one and a half you have to have a pretty bad world. Maybe worse than we’re describing. The main line scenario to me, in my mind, allows rates to begin to think about moving up. Not because we have inflation, not because growth is too strong, but because the crisis premium that’s in markets slowly lowers a bit, and that could allow rates here in the U.S. out the treasury curve to move up a bit.

Consuelo Mack: In which case you lose on both ends if you’re a fixed income investor.

Ed Hyman: One of the great, of course this is the beginning of the year, one of the great things you go through at the beginning of every year is looking at what did the worst last year, and then pondering whether you want to buy that. And bonds, you know, the biggest winner last year were bonds, were treasury bonds. And if my view of the U.S. economy is correct, that it is pushing ahead, I find muddling a little too muddling, but if it’s pushing ahead and if the stock market is doing what you think it’s going to do, bond yields are not going to go down. They are going to go up. And they will be cheered by everyone, except those that happen to own them. Now, there’s still money in fixed income, on spread products, on high yielding products that might do well in that environment. But when I look at it, I would see yields more likely to be two and a half than one and a half in your framework.

Consuelo Mack: So stocks then, Ed Hyman, looking around the globe, you and Bob, stocks then are you think the asset of choice on their own merits or just relative to what you could get in other —

Ed Hyman: I think both.You know, it’s a very difficult environment, as we’ve I think done justice with the euro zone crisis. It’s really sort of an unknowable and has, as you pointed out, a political overlay in addition to an economic overlay. And that makes it a difficult environment. But in that environment, when I look at what I would do with my own money, I say, well, I could put it in cash, that’s nothing, the next step would be to buy treasuries, and I don’t want to do that. So then I’m out buying municipals or high yield corporates. And then you get to the sort of stocks that you’re recommending, which look to me like a better place to put money for a year, and I’m not going to get rich doing it. But there’s a chance I might do well, and it’s better than keeping it in cash or in bonds, in my view.

Consuelo Mack: And the down side risk to the stock market, which is what so many investors have been so troubled by, especially given the volatility that we’ve had this year, so the down side risk you think is limited in the stock market?

Bob Doll: These valuation levels I would say yes. Now, if someone presents a scenario that says Europe is going to go bust, the euro is going to disintegrate, you don’t want to be in stocks no matter how cheap they are.

Consuelo Mack: So if risk averse, then stay that way.

Bob Doll: Absolutely right. But you’re not going to get, in my view, a risk reward that we see today, that’s as interesting as it is. Having said that, I’m going to agree, best house in a bad neighborhood. We may not get a great return out stock market, but I think we’ll do better there than most common alternatives, cash and fixed income.

Consuelo Mack: And your specialty of course is large cap stocks, so do you think the large cap stays the big multi-national high quality dividend paying type stocks, are those the ones that are the most attractive?

Bob Doll: Generally, although I’ll modify it a bit. I think we’re in an environment where because the U.S. economy is growing and the most of the rest of the world is deteriorating, you want earnings domestically, and that generally takes you down in capitalization. So I’m not convinced that high quality, small and mid cap stocks aren’t going to be the best place to be. The overlay, whether it’s small, mid or large, is the cash flow question. Dividends, yes, but I’d much rather go after cash flow. Tell me if the company is going to have acceleration in their free cash flow. If so, I get a whole lot more interested.

Consuelo Mack: Why is that so important, Bob?

Bob Doll: Because we’re in a slow growth world and in a slow growth world you want companies that have flexibility. You want companies that have extra degrees of freedom, as I call it. And if I have accelerating free cash flow, I have the opportunity to do all kinds of things. I can buy my stock back, I can increase the dividend, I can buy the company down the street. And you know if there’s a business proposition out there and I can go invest, hire a worker, modernize a plant, I might do that too. They’re the companies I think did will do the best because they have the flexibility.

Consuelo Mack: And actually for the last year the ones that have been buying back their stock have done better than the overall market. One investment for long term diversified portfolio, Bob Doll what would your choice be this year?

Bob Doll: This year I think U.S. stocks are going to win, so the S&P 500, if you allow me to put an overlay of those companies that have the accelerating free cash flow onto it, I think that’s the exciting place to be.

Consuelo Mack: Third year in a row you think the U.S. will outperform non-U.S. stocks. And Ed Hyman, one investment for long term diversified portfolio?

Ed Hyman: I don’t think exciting is the right word. I hope so. I like the emerging market consumer. And in that space we like Ralph Lauren, they address the emerging market consumer. And then in the U.S., as we’ve discussed, we like dividend paying stocks that are buying back their shares, and home depot is a name that strikes me as being attractive in the U.S. It also is domestic play. So I guess I’m bar-belling it. I have one that’s really a global play, and one that is a domestic play.

Consuelo Mack: Well we certainly appreciate two suggestions from you. And before I wrap this up I want to ask each of you, the election, how big a deal is the election going to be for your view of what’s going on, going to happen in the markets and the economy, ed?

Ed Hyman: It’s a big deal. It’s uncertain, and the research we did this week, presented this week, shows that when you get a change in presidency, the market goes up a lot. If Obama was to be defeated that would be a good thing for the market. I don’t think he’s going to be defeated, so I’m not putting that as, its close, but I’m not putting that as a positive for the market.

Consuelo Mack: How important is the election as far as you’re concerned?

Bob Doll: I think it’s very important. Ed mentioned earlier fiscal policy post the election, what’s it going to look like? We need some fixes here in the U.S., and the makeup of the new administration and the new congress, whether it’s a D or R on all sides will be key. And the uncertainty between here and there will cause lots of consternation.

Consuelo Mack: Ed Hyman from ISI group, thank you so much for joining us exclusively on “WealthTrack” as you do at this time every year, we really appreciate it. And Bob Doll from BlackRock from the “WealthTrack” brain trust, we appreciate you being here as well. Thank you so much both of you.

At the conclusion of every WealthTrack we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s action point picks up on a theme mentioned by many of our WealthTrack guests. It is make sure you own some high quality dividend paying stocks or funds that invest in them, which many of our great investor guests run. In a low income world, dividends deliver valuable cash to spend or reinvest… They represent financial quality and strength, and, particularly in companies with a history of increasing their dividends every year, they protect your purchasing power from the ravages of inflation.

I hope you can join us next week. We will be talking to Loomis Sayles legendary bond investor Dan Fuss and financial thought leader, Peter fisher head of global fixed income investing at BlackRock. Where in the world are they finding income? We’ll find out… And that concludes this edition of WealthTrack. Thank you for watching and make the week ahead a profitable and a productive one.