One On One With Hugh Johnson, chairman of Johnson Illington Advisors
Monday, March 27, 2006
|
|
|
|
SUSIE GHARIB: Our market guest tonight says what happens with interest rates, the economy, and earnings will set the tone for stocks over the next few weeks. Joining us now, Hugh Johnson, chairman of Johnson Illington Advisors, an Albany, New York, investment firm. Hi, Hugh.
HUGH JOHNSON, CHIEF INVESTMENT OFFICER, JOHNSON ILLINGTON ADVISORS: Hi, Susie.
GHARIB: Hugh, you heard our report about the Fed. I`m just wondering, what`s your analysis on what the Fed does tomorrow and for the rest of the year.
JOHNSON: Well, I think everybody`s got it right that the Fed is going to go to 4.75. They`ll raise short term interest rates a quarter of one percent at their meeting tomorrow. The real issue is first of all what they say and then secondly what they do at their May 10 meeting. I kind of agree with what your guests said which is not only will they go to 4.75 tomorrow, that will be their decision, but on May 10 they`re likely to go to 5 percent and then I hope -- my fingers are crossed -- they that they`ll stop at 5 percent. I think they`ve got plenty of reason to stop at 5 percent. So let`s hope that that`s the outcome.
GHARIB: You said that besides interest rates, the economy and earnings will also be a catalyst for which way stocks go. Tell us a little bit more in your thinking on that.
JOHNSON: Well, Susie, we`re at that stage in a cycle now where you have two things that are sort of facing off in the financial markets. One is the economy and earnings and the second is, of course, interest rates. And you certainly hope that the good news on the economy and earnings or the economy and earnings will be strong enough to offset the bad news of rising short-term interest rates as the Fed raises rates and rising long- term interest rates. My guess is right now when I crunch all the numbers, that that`s going to be the outcome. The economy will be strong enough.
Earnings will be good enough to offset the bad news of rising interest rates, but probably not by a whole lot, which means the kinds of returns you`ll get from the stock market will be single digit, somewhere between, say, 4 and 8 percent.
GHARIB: After the Fed meeting tomorrow over the rest of this week and into next week, we`ve got a lot of economic numbers. Do you think they`ll be market movers? What are you watching?
JOHNSON: There`s no question there`s going to be some market movers in the numbers. When we see the March numbers -- and that`s mostly next week -- you look at the ISM report on manufacturing. You look at automobile and light truck sales to see what the consumer is doing, that`s March numbers and that`s coming next week. And, of course, the most important number you see in any given month is the employment report. And you`ll see that at the end of next week. Those are important. They`ll give us a sense of if the economy is continuing its positive momentum.
GHARIB: How should investors factor in the mixed numbers that we`ve been getting from the housing sector?
JOHNSON: That`s a danger. You know, there are always risks out there, the risks of rising energy prices, the risk that the Fed will go so far. The big -- one of the big risks is now housing. Housing is clearly starting to moderate, not only in the level of activity, but prices are now no longer going up at double digit rates. It`s now single-digit rates. It`s really kind of a, really a dicey thing. It was in my judgment, a bubble. I think the bubble is beginning to dissipate. I don`t see yet any evidence of a so-called race to the exits so that there will be a sharp decline in housing prices. But you watch it very carefully. It`s a big risk.
GHARIB: So for your portfolios at your firm, what stocks are you buying right now given your analysis of the markets?
JOHNSON: We`re overweighting. We`re continuing to overweight basic materials so we have some chemical companies in there. People should take a look at companies perhaps in the mining and metals area but it`s very risky, Freeport McMoran is an example, Phelps Dodge, Newmont Mining, but it`s very risky. Still overweighting energy, looking at the drillers in energy, Western Gas Resources is an exploration production company, I own that one. Probably the best sector in the market now are the industrials. Companies like Boeing, United Technologies, General Electric, really good solid industrials performing very well. Those are the three that I would overweight and don`t forget small capitalization stocks. They`re still working better than large capitalization stocks.
GHARIB: Hugh, I know you mentioned so many stocks on that list. Do you or your firm own any of these stocks?
JOHNSON: Yes, some of them, I mentioned Western Gas Resources, Susie, own that one, own United Technologies and General Electric. I don`t own Boeing but they`re all pretty good companies.
GHARIB: All right, Hugh, always a pleasure to talk to you. Thank you so much for your analysis. We appreciate it.
JOHNSON: My pleasure.
GHARIB: We`ve been speaking with Hugh Johnson, chairman of Johnson, Illington Advisors.
