"Market Monitor"-John Hughes, President, Quantum Capital Management
Friday, April 27, 2007PAUL KANGAS: My guest "Market Monitor" this week is John Hughes, president of Quantum Capital Management, based in Northfield, New Jersey. John, welcome back to NIGHTLY BUSINESS REPORT.
JOHN J. HUGHES, PRESIDENT, QUANTUM CAPITAL MANAGEMENT: Hi Paul. It's always good to be with you.
KANGAS: Your main concern in recent visits with us has been the threat of inflation. And yet it seems to be quite well contained. Or is there some really bad news lurking out there like higher interest rates or something of that nature?
HUGHES: Well, core inflation appears to be contained. The headline number which -- which includes energy and food still seems to be a little bit on the high side. And most of us do eat.
KANGAS: But the core rate isn't.
HUGHES: Well, the core rate isn't. But I think -- I think -- irrespective, it's a basket of assets. Inflation, we subscribe to the Austrian school of economics definition of inflation which is purely and simply an excess creation of money and credit. And this excess creation of money and credit will avail itself in imbalances. And there are no greater imbalances than -- that -- there is no greater imbalance that we can identify other than the debt to GDP ratio. And we think that these imbalances will have to clear at some point. And when they do clear without going through all the machinations, I think the result will be a Federal Reserve with a choice, a choice between a raising interest rates and a debt-laden economy or trying to manage an orderly decline of the dollar.
KANGAS: So it is still a threat, in other words.
HUGHES: Well, we think -- we think that an orderly decline of the dollar will probably be the medicine of choice.
KANGAS: OK. Now has this recent spike up to record highs in the blue chips on Wall Street been overdone and if so, do you see a major correction or even a bear market in the offing?
HUGHES: Well, we don't enjoy that level of clairvoyance. We tend to look bottom up at individual ideas and we still are finding ideas here and there. And we are actually quite excited.
KANGAS: You don't care what the Dow does right at this stage.
HUGHES: I wouldn't say that we never care. But we are finding ideas right now. We're quite excited about our portfolio which is possibly a dangerous thing to say.
KANGAS: You are a stock picker. That's what you are. You have liked gold for some time John, any change in that?
HUGHES: No, we think every portfolio should have a position in gold. It is a hedge against an orderly decline of the dollar and an insurance policy against the decline that may be a little bit other than orderly.
KANGAS: On your last visit in September, you had a couple of recommendations for our viewers. Let's see how they have done since then. Dell, everybody hated Dell at the time as I recall. And it's moved up 16.5 percent. Not a bad call.
HUGHES: Like I said, that's when we just start getting interested. However they, there were some accounting irregularities. They had not issued their third quarter financials --
KANGAS: Are you in or out of it now?
HUGHES: We have got out of it in November. It was the halfway point between our point of value and our buy points.
KANGAS: And to be the very safe side, you like the two-year Treasury note, yield about 4.5 percent. You were in there for six months so you did all right.
HUGHES: Well, we think we --
KANGAS: You slept in the evenings.
HUGHES: It has -- it is a -- we like to say that Mr. Market is a manic-depressive. And what is expensive today may not be expensive tomorrow. It's not a bad idea to have some dry powder.
KANGAS: We just have a minute left John. Do you have any new recommendations?
HUGHES: 3M, it's our largest position. We started building positions about six months ago. It is a global technology company.
KANGAS: Coming alive it looks like.
HUGHES: It's largely been overlooked but they have a CEO in George Buckley who subscribes to EVA or economic value added. They deploy capital in an efficient manner. They have generated returns on equity of 25 to 30 percent over the last 10 years.
KANGAS: Our time is fleeting. We have time for one more choice.
HUGHES: We like Legg Mason. We happen to think Legg Mason is a quality asset management firm. They are being treated like a brokerage firm. However, they've divested themselves of their brokerage business. And they have some wonderful franchises. Legg Mason Value Trust, Batterymarch and others.
KANGAS: John, do you own these securities personally or have any other disclosure to make?
HUGHES: No other disclosures. And yes, we own everything that we recommend on the show.
KANGAS: Our time has run out, unfortunately. But thanks for being with us again.
HUGHES: Thank you very much, Paul.
KANGAS: My guest John Hughes of Quantum Capital Management.
