Pat Dorsey Says Market Doesn’t Need More QE
Pat Dorsey, Vice Chairman, Director of Research & Strategy, The Sanibel Captiva Trust Company, was on CNBC stating the bullish case for stocks which he claimed have been propelled by their own earnings power. Dorsey was formerly the director of equity research at Morningstar.
Dorsey reminded us that the Fed’s bond buying episodes have been started and stopped in fits and starts and stocks haven’t been “smoked” during any of those times.
While admitting Operation Twist has kept interest rates down, Dorsey doesn’t feel it’s what has been pushing equities up. Corporate earnings have been very strong with this earnings season being similarly strong according to Dorsey. Margins have been quite steady across the board despite labor being 70% of costs.
Dorsey stated that with the market at 14 times earnings it’s pretty supportive of equities.
When asked whether Treasuries could take a hit, Dorsey said that was a possibility because a 10-year Treasury yielding 2% deserved to get “smoked.”
As far as equities go, Dorsey didn’t feel there was any broad sector of the market that was more attractive than any other. However, he does find an interesting opportunity in Express Scripts (ESRX), the huge pharmacy benefit manager which completed a merger with Medco. They’ll own about 40% of the pharmacy benefit market and trade at around 14 times earnings. ESRX is part of the solution to health care cost problem in the U.S. They encourage customers to use generic drugs and make more money from generics versus the branded drugs.
Dorsey mentioned Kinder Morgan (KMI), the large pipeline operator yielding about 3.5% with a 10% dividend growth rate for income oriented portfolios.
When asked how he sees the international area, Dorsey said Europe is in an unpleasant recession so stocks are cheaper over there. Most European markets are trading at 10 or even 9 times earnings with much higher yields according to Dorsey. Despite the weakness a lot of European companies want to be exporters, which will help. Dorsey also sees the situation in Asia allowing them to ease later this year which will be very supportive of Asian growth.