recession but depression. The second factor is Latin America. We all know about [the developments in] Argentina. When you have a major player in Latin America threatening to default on its debt–and it’s spreading throughout Brazil and other Latin American countries–I think that can be a problem.
B.E.: Isn’t the strong dollar going to have an impact on overseas earnings as well?
LAY: It’s a big debate going on now in Washington, D.C., and throughout the country, by a lot of corporate leaders, that a stronger dollar is not to the best interests of corporate America and their earnings because it makes our goods more expensive overseas and makes products coming in from overseas a lot cheaper in the United States. I think a strong dollar policy is in our best interest because it keeps inflation low, and the lower inflation is, I think the better it is for financial assets across the board. Low inflation allows price/earnings multiples to expand. Lower inflation allows bond yields to come down. In both of those scenarios, corporate America wins.
FRANCIS: We already have low inflation, and I don’t think that in the small-cap area it’s a real factor [because] most small companies don’t have a lot of foreign sales. It’s more the multinational, large-cap corporations that are going to be heavily exposed to foreign sales, as a percentage of revenues. If we continue to see the major corporations have huge layoffs, even though the unemployment rate is still at a very low level, it could start to shake consumer confidence, and that is something that we really just can’t afford to go the other way on.
RAHIMAH LATEEF: I’m agreeing with [Mark] because there has been a great beneficial effect [through] the strength of the dollar. Europeans [have been] investing in our market, and we don’t want them to pull out. They have been in, in a big way, for the last six years, because of the strength of the dollar, in a sense, buoying the market.
RAY: I would have to say that the troublesome factors we run into with a strong dollar probably outweigh the benefits on the other side. With companies that derive a fair amount of their revenues
from overseas, the strong dollar is very hurtful to their sales overseas and, as James said, and I’ll reiterate this, when these guys have shrinking sales and lower revenues overseas, it hits their bottom line. The other half of that is that you are going to see layoffs and restructuring where people are going to lose their jobs. The top two most important factors in this economy and this market: consumer spending continues at the rate it has been over the last couple of years, and No. 2, capital spending by the large corporations improves, especially on the technology side.
B.E.: Rahimah, how is your investment strategy and the use of convertible bonds faring in the current environment?
RAHIMAH LATEEF: Well, a convertible is a hybrid structure. It’s part straight bond, part call option. It’s a fixed-income