"Market Monitor" -James Stack, President of Stack Financial Management
Friday, July 25, 2008PAUL KANGAS: My guest "Market Monitor" this week is James Stack, president of Stack Financial Management and publisher of the "Investech Research Market Letter" based in Whitefish, Montana. Jim, welcome back to NIGHTLY BUSINESS REPORT.
JAMES STACK, PRESIDENT, STACK FINANCIAL MANAGEMENT: Thank you, Paul, it's great to be with you again.
KANGAS: When you were last with us in mid-February of this year, you said we were already in a bear market with most evidence pointing to a recession. Well, let's tackle the market first. Did last week's rally signal a bottom to the bear market or was it just a trap for the bulls?
STACK: Well, it's a little too early to say whether last week's low was the bear market bottom. And the average bear market in the past 80 years has lasted 15 months. This bear market is already nine months old, so it is not too early to look for a bottom. We also track a table of what we call sentiment extremes that tell us whether or not we are approaching one of those best buying opportunities. All of those blocks are in place. Unfortunately, we still don't have the confirmation of the market bottom yet.
KANGAS: What is the downside potential from here?
STACK: Well, it depends on which sector you are in. I think the financial sector and home building sector still are open-ended on the downside. The key point here is that we are seeing some encouraging signs. For example last week, the small cap Russell 2000 index did not hit a new bear market low. It did not drop under its March lows. If that Russell 2000 index stays above that March bottom over the next six to eight weeks, I think the last half of this year will present investors with a good profit opportunity.
KANGAS: Jim, now let's get to the economy and its major problem, the housing crisis. How close to a bottom are we in housing?
STACK: Well, this bailout that has been passed by Congress and the $25 billion going to Freddie Mac and Fannie Mae is really trying to put a finger in the dike. This bailout will be, turn out to be much bigger before the smoke clears. And the problem is the inventory. We have a record inventory of unsold existing homes on the market. It's not coming down yet. And until it starts coming down, housing prices are going to continue to fall and we're going to see an increase in mortgage debt defaults. That means that we still have more downside risk in the housing over the next 18 months. But for investors it's important to keep in mind that does not necessarily mean 18 more months of bear market on Wall Street.
KANGAS: All right. Now what are your thoughts on oil, briefly?
STACK: On oil, we have been looking for the peak in oil really for the last eight weeks. And fortunately oil is now down $22. I think we've seen the highs globally. Economies are slowing. I think any surprises between now and election will be lower oil prices, not higher.
KANGAS: OK. Now on your February visit, you gave our viewers three stocks to buy. Let's see how they have done since then. We see Sysco (SYY) down 3 percent, not bad, very defensive issue and Johnson & Johnson (JNJ) more than making up for that, 9.7 percent gain. Are you still with those two stocks?
STACK: Yes, we certainly are.
KANGAS: OK. And you had a third recommendation at the time. That was Pepsico (PEP) which is down a little over 6 percent. Still with it?
STACK: Yes, we are. And they've held up much better than the broad indexes. The S&P is down over 7 percent since that point.
KANGAS: You're right. You're right. Do you have some new recommendations, Jim?
STACK: Yes, we do, Paul. And the focus right now is continue to stay defensive. Focus on those safe sectors. Don't go out and go bottom- fishing, look for value in this market. The technology sector is showing additional strength, resilience. I think one of the most attractive positions there is Microsoft.
KANGAS: We just saw a chart.
STACK: There is the chart, MSFT. It's seeing its revenues continue to grow at a 20 percent annual rate right through this recession. It's selling at the best valuation in 20 years.
KANGAS: We have less than a minute left. How about another choice?
STACK: Another one that we like in the financial sector is Schwab, Charles Schwab and Company (SCHW). Now their revenues are continuing to grow through this recession. It's a conservative financial stock. And historically once you get to a buying opportunity in the market, the brokerage stocks are one of the best performers. I think that has the best risk/reward, SCHW.
KANGAS: And quickly now, a third one?
STACK: Striker Corp. (SYK), manufacturers orthopedic products used in surgery. It's benefiting from the graying of America. And the fact the baby boomers want to stay more active. Price-to-earnings and price to cash flow, really has the best level in 15 years on that company.
KANGAS: Very good, Jim, do you personally own or have other disclosures regarding the stocks we just mentioned?
STACK: We own all three of those positions in our managed accounts. We also use Schwab institutional as a custodial firm for our managed accounts Paul.
KANGAS: As always Jim, it has been a pleasure to have you with us.
STACK: It's my pleasure, Paul.
KANGAS: My guest, James Stack of Investech Research.
