"Market Monitor"-James Stack, President of Investech Research
Friday, July 14, 2006PAUL KANGAS: My guest market monitor this week is James Stack, president of Investech Research based in Whitefish, Montana. Welcome back to NIGHTLY BUSINESS REPORT, Jim.
JAMES STACK, INVESTECH RESEARCH: Thank you Paul. It`s great to be here.
KANGAS: When you were last with us in mid-December, you were growing very cautious on stocks, noting the bull market was already older than most and showing warning flags. You had moved to 40 percent cash, the highest level in 3 1/2 years. Has this week`s sharp drop turned you into a full- fledged bear?
STACK: Well, Paul, for the past five months, we`ve actually increased to a 60 percent cash position and yes in Montana, you learn that if it walks like a bear and growls like a bear, you better treat it like one.
KANGAS: And things don`t seem to be going the market`s way. I mean, how much of an impact will the Middle East hostilities have on Wall Street?
STACK: Well, geo political instabilities like what is going on in the Middle East conflict seldom have any lasting impact on Wall Street. The problems on Wall Street have been developing for a number of months. Our technical indicators are heading downward. In addition, we have a flat yield curve today that carries over an 85 percent historical probability that we could be looking at a recession in the next 12 months.
KANGAS: When will the Fed relent in its long campaign of interest rate hikes?
STACK: I don`t think we`re far off from Bernanke and company basically standing pat on interest rates. With record oil prices and Wall Street starting to head south, we could see the head Fed not raise rates at their August 8th meeting. The thing to keep in mind is that that is not necessarily bullish on Wall Street. In fact, if you look at Federal Reserve history, in the past 80 years, there has been over a 71 percent probability that stock prices will be lower six months after the final rate hike. So even if we have seen the final rate hike, it doesn`t necessarily mean stocks are going to go up.
KANGAS: How about a quick comment on oil, headed for $100 a barrel?
STACK: I wouldn`t want to guess what is going on in, at least in the Middle East and how it will impact oil, but the important points on the strategy is to have some energy positions in your portfolio as a hedge against that development.
KANGAS: Is that one of the safety first steps that an investor should take now?
STACK: I think it is. You have to have diversification. You have to protect yourself against what is going on in the Middle East. But I think more importantly than that, you have to look at cash. You have to sell down to a level of comfort. You choose your own investment odds. And right now the odds on Wall Street are not that great.
KANGAS: Last December, you recommended buying three securities. Let`s see how they have done since then. You were with us on the 16th. PepsiCo is up 3.3 percent, not bad. Aflac, the big insurance company down 6.3 percent, although it was in a profitable position. Are you still with Aflac?
STACK: You know, we still like the company. I think it sold off in sympathy to Wall Street but it is still a good valuation on that company. I think it will still be higher six, 12 months from now.
KANGAS: You had a third recommendation which was the I shares of Japan. They`re down 3.2 percent, but they too were higher, over 15 at one stage. Did you take some profit there?
STACK: Well, no, we haven`t and part of the reason is because the turmoil in Japan, it is really a reflection of what`s happening on Wall Street. It`s moved more or less in tandem with the S&P 500 index.
KANGAS: How about some new recommendations? Any new recommendations?
STACK: I would still stick with PepsiCo. They reported excellent earnings this week. In addition 35 percent of their revenues are coming from international sales. So it is going to be more resilient to a bear market if we are in one on Wall Street.
KANGAS: It is a pretty strong chart, pretty strong chart.
STACK: It is a strong chart.
KANGAS: OK.
STACK: That`s what you want to be looking at for today, is stability and those kind of companies that are showing resilience.
KANGAS: OK.
STACK: Another stock that we like is Johnson & Johnson. It`s a diversified health care product manufacturer. Almost half of their revenues come from international sales. It`s got one of the lowest valuations that that company has had in over 12 years and it has 20 consecutive years of double-digit earnings growth.
KANGAS: Very good. Do you personally own any of the securities you`ve talked about here?
STACK: Absolutely, Paul. I wouldn`t recommend them if we didn`t.
KANGAS: OK. Jim, thanks for sharing with us your insights, appreciate it very much.
STACK: Always my pleasure, Paul.
KANGAS: My guest Jim Stack of Investech Research.
