One on One with Hugh Johnson, Chairman of Johnson Illington Advisors
Tuesday, April 01, 2008
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SUSIE GHARIB: Joining us now with more analysis on today's big rally, Hugh Johnson, chairman of Johnson Illington Advisors. Hi, Hugh.
HUGH JOHNSON, CHAIRMAN, JOHNSON ILLINGTON ADVISORS: Hi, Susie.
GHARIB: So tell us, what changed between yesterday and today? What happened?
JOHNSON: You know, I think the biggest change, Susie, is confidence. I think particularly with Lehman being able to successfully raise $4 billion in the credit markets told us that it's not likely that a major investment banking institution or bank for that matter is going to go out of business. If they run into trouble, they can raise money in the financial markets. That's very positive. And what that did is increase confidence at least for one day, confidence that we weren't going to get sort of blind sided by a major bankruptcy of an important financial institution, an institution that's important in the whole process of creating credit for our economy. So I think it was confidence that was the number one thing today.
GHARIB: But we've seen this pattern before, a big rally, then a big sell-off, a big write down, another shoe to drop. Is the worst really over?
JOHNSON: No, I think it's premature to say that. Obviously I'm encouraged, as I think everybody is encouraged, by not only what happened with Lehman today but the performance of the markets over the last five weeks, not just today. And we've seen signs, for example, we've seen some of the so-called bull market sectors that performed well. We've seen small company stocks outperform large company stocks over five weeks. That never happens unless investors are starting to take on more risk, are willing to step out and take more risk on. That's a real positive sign, but even based on five weeks or one day, I think it's premature to jump to the conclusion that this is the so-called restart of the bull market or the start of a new bull market. We need a little bit more.
GHARIB: Also I guess one has to take into consideration that the outlook for earnings is not very good. The outlook for the economy is so poor, so how can anyone really make a strong case to be buying stocks right now?
JOHNSON: Well, it's almost a leap of faith. So you've asked the right question. The outlook for the economy is not good. You look at leading indicators for the economy that tell us where the economy is going. They've been down for five successive months. That's not a pretty picture. You know there is going to be, as was stated, more write offs for major banks and major investment banks. a lot more write offs. That's not particularly promising. I suspect we're going to get better economic numbers and earnings numbers in the third quarter, but it's only a suspicion. The evidence isn't strong yet. So you're actually right. That's why it's probably a little bit premature to jump to that so-called bullish side of the aisle.
GHARIB: All right. Are you seeing, though, enough positive signs that you are changing your investment strategy?
JOHNSON: I'd like to, you know. My emotions tell me gee, I'd like to get on board this. It looks fairly real, fairly strong. My disciplines tell me you don't do that yet. I'm not making any changes. I'm keeping a meaningful cash position in portfolios. I still own sectors of the market that are so-called defensive, safer sectors like consumer staples and utilities and I own a lot of large-cap companies, not small-cap companies. So I'm still pretty defensive in waiting for just more evidence. I need more days like we had, not necessarily like today, but somewhat similar to today before I'm convinced.
GHARIB: Also, I mean, what are you seeing that's going on in the credit markets? Are the credit markets operating more efficiently now?
JOHNSON: No, they're not. And that's the most important question you've asked, the most important variable to watch -- the spreads. It gets pretty tricky and technical, but spreads between credit market instruments like junk bonds and U.S. Treasuries. They've been widening out and they've been telling me that investors are not willing, as yet, to meaningfully take more risk in the credit market. And unless the credit markets are working much more smoothly, unless we get that logjam broken in the credit market, then an economy that runs on money and credit is not going to do very well. So you got to break the logjam in the credit markets and you'll see it if those spreads start to narrow and it shows that investors are willing to take more risk in the credit markets. As yet I don't see that.
GHARIB: All right, Hugh. You've given us a lot to think about. Thank you so much.
JOHNSON: You're welcome.
GHARIB: My guest tonight, Hugh Johnson, chairman of Johnson Illington Advisors.
