"Market Monitor"- John Hughes, President of Quantum Capital Management
Friday, June 13, 2008PAUL KANGAS: My guest "Market Monitor" this week is John Hughes, president of Quantum Capital Management. Welcome back to NIGHTLY BUSINESS REPORT John.
JOHN HUGHES, PRESIDENT, QUANTUM CAPITAL MANAGEMENT: Hi Paul it's always good to be with you.
KANGAS: On your last visit with us in December, to your credit you expressed concern about inflation which just now the Federal Reserve is warning us about. Given today's rather sharp rise in May consumer prices are you more concerned about inflation now than before?
HUGHES: Well, yeah, I mean, we've been talking -- you and I have been talking about the debt to GDP imbalance for the last four years or so, and August of last year, I think that was the shot heard around the world with Bear Stearns and credit has certainly turned. Whether it's made an epochal turn or not, we don't know. But I think it has. I think it portends inflationary pressures in terms of rises in the price level and also deflationary pressures. It depends on the Fed's response, but we certainly have economic headwinds going forward.
KANGAS: How do you think the Fed should respond, briefly?
HUGHES: My personal view is that the Fed should exist to regulate the banks and to clear checks, if necessary. But they should not be in the business of intermediating in the price discovery process.
KANGAS: I understand.
HUGHES: So I think they're between a rock and a hard place.
KANGAS: The driving force behind this inflationary move here seems to be skyrocketing oil prices. What are your thoughts on the outlook for oil?
HUGHES: I gave up a long time ago trying to determine the short run movements of the price of oil. It appears that the demand for oil is accelerating in the long term. The supply of oil is decelerating and monetary growth worldwide is growing at a faster rate than both. I think in the long run, we're talking about higher prices.
KANGAS: All right. Six months ago, you told our viewers that gold was a good hedge against inflation, and, indeed, the precious yellow has done well. Are you still in favor of gold or gold stocks and how high do you think gold can go?
HUGHES: Again, gold, we have no idea how high it can go, but we do know that it will be higher tomorrow than it is today and by tomorrow, I mean 10 years from now.
KANGAS: The figurative tomorrow.
HUGHES: The figurative tomorrow. And I think there are better hedges against inflation than gold, per se. But against a loss of faith in a faith-based currency system -- whether it's the U.S. dollar or whether it's any currency -- gold is durable. It's divisible and it's a medium of exchange that you can contract for future goods and services and is transportable. You can carry it in your pocket, Paul. You can't do with a barrel of oil. So, we own gold.
KANGAS: But on that same visit you suggested buying the gold tracking stock GLD on the New York Stock Exchange. Let's see how it fared and you also had two other recommendations but the spider gold trust up 9.2 percent, very good. Are you still with it?
HUGHES: We're still with it up or down, my clients love their insurance to go up, sometimes it goes down. Then we still keep it in the portfolio.
KANGAS: Then another recommendation was Copart (CPRT), which is in the auto salvaging business. It's done well, up over 14 percent. Still with that?
HUGHES: We're still with it. It's the largest processor of total loss vehicles for the insurance industry. We jokingly say that it is a quasi-monopolistic technology company that only masquerades as a junk yard.
KANGAS: OK, you had a third choice, too, which didn't fare too well, Epicor Software (EPIC). You still with it?
HUGHES: We're out of it. It seems like right after we recommend it, we tend to buy companies with pricing power, with low debt loads. They acquired a heavy debt load, to buy a company that compromised their pricing power
KANGAS: We just have about 40 seconds left, two new recommendations.
HUGHES: Cohen & Steers (CNS), it's an asset manager of income- producing investments primarily real estate..
KANGAS: CNS on the big board.
HUGHES: It's an A-level asset manager run by two seasoned managers and you're getting it for a B-level price.
KANGAS: Second choice.
HUGHES: Autodesk, (ADSK). It's a software developer in the architectural construction and engineering industry.
KANGAS: ADSK on the NASDAQ.
HUGHES: ADSK. We believe that it trades at a significant discount to its intrinsic value.
KANGAS: John, do you personally own these securities we've mentioned or have any other disclosure to make?
HUGHES: We only recommend them if we own them and 100 percent of our assets are invested in Quantum.
KANGAS: OK. we've run out of time but I want to thank you for being with us once again.
HUGHES: Thanks Paul. It's always good to see you.
KANGAS: My guest, John Hughes, president of Quantum Capital Management.
