goldman and jp morgan differ a lot on interest rat

difference of opinions here big time. i homed in on this bit from the text : since 1950 eh ?

Corporate profits rose to $1.75 trillion in the second quarter, equivalent to 13.3 percent of gross domestic product. Profits' share of GDP was the highest since a record 14.1 percent in the last three months of 1950.




the article from bloomberg ..
Goldman, JPMorgan Split on Rates, Investing Strategy (Update1)

By Michael R. Sesit

Oct. 16 (Bloomberg) -- Goldman Sachs Group Inc. says the Federal Reserve's benchmark rate will fall from its current 5.25 percent during 2007, ending the year at 4 percent.

The economic gurus at JPMorgan Chase & Co. see it rising to 6 percent.

The difference means billions of dollars of investor money may be headed to the wrong place. On the basis of its economic forecast, Goldman recommends equities. JPMorgan prefers cash as a defensive strategy.

``It's not unusual for firms to have different views, but the difference in magnitude and direction between Goldman and JPMorgan is unusually large,'' said Nicholas Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which has about $30 billion under management. ``What matters is that investors should understand the logic behind each view and then decide whichÿview is right.''

The focus of the debate is arguably the world's most important interest rate. The federal funds rate, which banks charge each other for overnight loans, is controlled by the world's most powerful central bank in the world's biggest economy. The New York-based firms' projection of that rate is key to the investment advice they give institutional investors and wealthy individuals.

Housing Slump

Interest-rate futures show that traders expect the Federal Reserve will lower its benchmark rate next year, though not as far as Goldman projects. The yield on the December 2007 Eurodollar futures contract is 5.00 percent.

Goldman bases its forecast on the slumping housing market, which it says will drag down the U.S. economy enough to persuade the Fed to lower short-term rates. The firm sees U.S. consumption growth slowing from an annualized 4.8 percent in the first quarter of 2006 to 1.8 percent in the second quarter of next year.

All of that will come from a declining housing market, said Jim O'Neill, Goldman's head of global economic research in London.

``The big difference between us and them is that they see little consequence of the housing slowdown, whereas we see significant consequences,'' he said. Prices of existing homes in the U.S. fell in August for the first time in 11 years and purchases declined 0.5 percent.

Goldman forecasts U.S. gross domestic product growth will slow to 2.3 percent in 2007 from 3.4 percent this year. By yearend 2007, O'Neill also projected 10-year Treasuries to yield about 4.5 percent, compared with 4.80 percent now.

Cheap Credit

JPMorgan, by contrast, says U.S. growth will be buoyed by the continued flow of cheap credit from abroad and falling oil prices, said Bruce Kasman, JPMorgan's chief economist in New York. Companies are benefiting from the weak dollar and profit margins are at a 40-year high.

Though falling housing prices will buffet the economy, U.S. growth will average about 3 percent in 2007, Kasman said. Oil prices that stayed near the current $59 a barrel would boost U.S. growth by 0.75 percentage point during the next two to three quarters. He also noted that the 4.6 percent U.S. unemployment rate hasn't risen even as housing contracts.

``We're seeing the economy getting hit by a sectoral shock but not being hit by a spillover into other sectors,'' he said.

Corporate profits rose to $1.75 trillion in the second quarter, equivalent to 13.3 percent of gross domestic product. Profits' share of GDP was the highest since a record 14.1 percent in the last three months of 1950.

Defensive Stocks

As other evidence of U.S. economic strength, Kasman forecasts that core inflation, which excludes food and energy prices, will remain in the mid-2 percent range. JPMorgan economists see 10-year Treasury yields peaking at 5.75 percent.

Goldman's O'Neill noted that JPMorgan was one of the few firms that remained bullish about the economy. Indeed, Goldman has some big-league company in the bearish camp, including Merrill Lynch & Co and U.S. Trust Corp. -- and outside the U.S., HSBC Holdings Plc and BNP Paribas.

For his part, Kasman said: ``To get the Fed to ease by over 100 basis points during the next 12 months, you have to get something that feels and smells like a recession, which we don't see.''

The Fed raised borrowing costs 17 consecutive times to 5.25 percent between June 2004 and June of this year. The Standard & Poor's 500 Index has risen 9.4 percent so far this year.

Underweight

JPMorgan advises that clients protect themselves from rising interest rates by investing less in stocks and bonds than the amounts dictated by portfolio benchmarks. In a report earlier this month, they recommended allocating 55 percent to stocks versus a benchmark weight of 60 percent and 25 percent to bonds, compared with the benchmark's 30 percent. Instead, JPMorgan recommended that 20 percent of a portfolio be parked in cash, twice the benchmark weighting.

The report favored so-called defensive stocks, companies with high dividend yields and secure earnings. Favored sectors were telecommunications services, consumer staples and health care.

An investor purchasing stocks now would be buying an asset that had already benefited from very favorable circumstances, said Abhijit Chakrabortti, JPMorgan's New York-based head of global equity strategy. He noted the peak in corporate profit margins as well as bond yields at relatively low levels and investors who showed a high tolerance for risk.

Cash is King

Meantime, anyone buying bonds at this point would be buying after prices had already discounted anticipated 2007 rate cuts, essentially turning a blind eye to rising inflation pressure. With short-term rates higher than long-term rates, an investor wouldn't be compensated for the risks associated with investing in longer maturities, such as 10 years.

``Against this backdrop, cash remains our preferred asset class,'' said Chakrabortti.

Unlike JPMorgan, Goldman strategists advise overweighting equities, while underweighting bonds and cash. ``Bigger-than- expected U.S. rate cuts next year and relative global de-coupling from a U.S. slowdown provide the foundations for strong equity market returns over the coming months,'' the firm's European equity strategists told clients in an Oct. 6 report.

Favorite sectors include pharmaceuticals, basic resources and insurance. Goldman also likes capital-goods, software and oil and gas companies. Meanwhile, the firm is underweight auto and chemical companies and consumer-staple stocks, such as beverages, food producers and tobacco.

So where does Fort Washington's Sargen -- who once worked as an economist at JPMorgan of 6-percent fame -- come out? ``My call would be that fed funds is headed for 4.5 percent to 4.75 percent,'' he said.

To contact the reporter on this story: Michael Sesit in Paris at [email protected]

Last Updated: October 16, 2006 06:10 EDT