Air
date: October 29, 2004
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Stack interview
KAREN GIBBS: We're in the home stretch of the Presidential
race and market tensions are running high. And while you may argue that
all Presidential elections are tense times for investors, this one is
a real nail-biter. Most polls say the race is too close to call. Should
you believe the polls anyway? In 2000, almost none of them got it right.
However, there is one indicator that has predicted Presidential winners
with an amazing degree of accuracy: the stock market. Jim Stack, President
of InvesTech Research, created the model.
Jim, the envelope, please.
JIM STACK: The problem with any of these, first, Karen,
the caveat is that by the time you discover one of these Wall Street truisms,
it may not work. So with that having been said, let me mention that the
two months of the market performance leading up to Election Day in 24
of the past 26 elections has told us which party has won the White House,
the incumbent party or the challenging party. For example, in those 26
elections, the Dow has risen in that two-month period 15 out of 16 times.
When it's risen, the incumbent party has re-won the White House, won the
election again. In the 10 times in which the Dow has lost over that two-month
period, nine out of 10 the incumbent party has lost the White House. So
the key point this year is the closing figure back on September 2nd and
next Tuesday, will the Dow close above 10,290?
GIBBS: Wow.
STACK: If it does, then the incumbent party certainly has the historical advantage. If not, then it could be the challenging party or Kerry who wins and right now this is looking like a pretty close election.
GIBBS: Well, what's so important about the two months before the election?
STACK: I think the market is more of a tone of investor sentiment and public sentiment. Do they like the incumbency that they have in the White House? Are they likely to vote for them again? And the market displays those emotions, that sentiment perhaps better than all the surveys, the public surveys out there really do.
GIBBS: Jim, we've never had a period where we've had terrorism, two major wars, a big tax cut, all in one Presidential cycle. Would you be surprised if this is the year that proves the model wrong?
STACK: No, it wouldn't really surprise me. 92 percent
accuracy is still pretty strong, but there's still that 8 percent, those
two times out of the 26 that were, that turned out to be wrong. In addition,
I think more important to investors is not who wins next Tuesday, it's
where we are in the economic cycle and going into the next political cycle.
We're in the latter half of this bull market, If you look at the median
lifespan of a bull market, most investors think, oh, bull markets run
for six, eight, 10 years. That view has been biased by the decades of
the 1980s and '90s.
Historically the median lifespan of bull markets over the last 100 years
is less than three years, and that means that with this bull market just
celebrating its two-year anniversary this month, chances are we're in
the latter half of this bull market. Recessions are going to become more
likely the longer this economic expansion extends, and we're starting
to see those underlying imbalances develop that could push for some surprises
in Federal Reserve policy. Right now everyone on Wall Street and every
economist expects a very gradual, methodical, one quarter percentage point
rate hike from the Fed every 6 to 12 weeks. In 2005 if the economic news
gets too strong, that's where the unfortunate or unpleasant surprises
could come for this market in more rapid increases in rates.
GIBBS: What imbalances are you seeing?
STACK: I think this market still have longevity, because
the bond market is telling us we're going to have slow but steady growth
at least going through year end in 2005. The real danger today to the
market is not the threat of another terrorist attack or even high oil
prices. High oil prices don't, they can be a damper on economic growth,
but they don't cause bear markets. They didn't in the 1970s and they won't
cause a bear market today.
The real imbalances that are developing are broader based, the higher
commodity prices, other than just oil, the number of purchasing managers
reporting higher prices. These are the kind of bubbling inflationary pressures
under the surface that could lead to higher interest rates, that is more
frequent and bigger interest rate hikes than most economists expect
next year. Most bull markets end really with good news being too good.
We're reaching that point in the economic cycle ironically in which if
the economic news after the election is too good, if consumer confidence
rebounds strongly and spending rebounds, it may be bad news for investors
later next year because it will mean higher interest rates than what are
being forecast today.
GIBBS: There is a truism on Wall Street, and it might not be true, that Republicans are better for the stock market. But then when you see some statistics, it's almost a dead heat. Where do you stand there, Republicans or Democrats better for the stock market?
STACK: The answer to that depends ironically to when you ask me that question. If you asked me that question, for example, 24 years ago in 1980, every study would have shown that the stock market did better under a Democratic president, Democratic administration. If you jumped 10 years ahead to 1990 after the Reagan years and when the Dow went from 800 to over 3,000, most studies would show that the market actually did better under a Republican administration. Now if you jump forward to today, of course after the bubble of the late '90s, but it was still healthy returns under the Clinton administration, all of the studies swing back and they show that the market did better under Democrat. Bottom line, what it boils down to is you can have great bull markets or big bear markets under either
GIBBS: How does one play possibly the last year of a bull market. Are there any recession-proof stocks?
STACK: Technically, basically my indoctrination in the
market came in 1973-'74. I know that in a big bear market there is no
place to hide. There is no bear-proof or recession-proof stock. But in
this stage, there are sectors that tend to do better, that hold up better
in the latter half of a bull market. In fact, one study pointed out those
sectors that tend to hold up better, tend to provide better risk-adjusted
returns after three discount rate hikes. Generally those sectors tend
to fall along the lines of health care, also energy tends to be a later
performer. And that's why our model portfolios and our managed accounts
are over-weighted in energy, about 18 percent versus an average weighting
of 7 percent in the S&P 500 index.
GIBBS: Are you going for the big oil companies? Are you going for the drillers, the explorers?
STACK: I don't like the risk of the exploration companies.
I go for the independent companies, the ones that have the assets and
are producing it out of the ground, stocks like Devon Energy. It produces
5 percent of the natural gas in North America.
You also have Apache Corp, one of the larger independent international
oil and gas producers. These companies have been increasing their reserves
at the same time while they've been making very good profits, and their
price to cash flow levels are at very low levels right now. On a valuation
basis you can't, I don't think you can go wrong with them, other than
the fact that oil prices I think are too high. They have to come down
a little bit in here.
GIBBS: Any other stocks that look attractive to you?
STACK: We're focusing on value and on consumer staples.
We just added PepsiCo to our portfolio. PepsiCo, people tend to think
of PepsiCo as being Pepsi, but it owns Frito-Lay, Gatorade, a number of
products that people would recognize on their store shelves. The company
pays about a 2 to 3 percent dividend yield, and at the same time it's selling
at a price to cash flow level that's 20 percent below its historic average. So
it's a great value company. It's a consumer staple. It will be more defensive
if we are entering the latter stages of a bull market next year.
I think the pharmaceutical stocks represent good value today. They're
being shunned because of the election, potential change in leadership,
potential new regulations coming out of Congress. But when all is said
and done, a lot more will have been said and done. And I think the pharmaceutical
stocks actually based just on cash flow and earnings actually represent
one of the more out of favor and value areas out there. Walgreens is a
drug store stock that, again showing very stable growth. It will be one
of the more defensive holdings, and that's the key at this stage of a
bull market and economic cycle. Focus on protecting your profits, not
just going after those profits.
GIBBS: Jim Stack, always good to see you. Thanks for joining us.
STACK: My pleasure, Karen.
Zogby's prediction
GEOFF COLVIN: Analyzing the stock market is one way to try to predict the outcome of the presidential election; another more conventional way is relentless, intensive polling. During this whole campaign season, we've been visiting with one of America's preeminent pollsters, John Zogby of Zogby International, and here is what he is finding now.
JOHN ZOGBY: Right now as we speak, it’s a tie -- not a virtual tie -- but a tie, 47-47. What makes things very, very different is the level of anger, the fact that in many ways we are two even-sized warring nations going to the polls this year. The anger is palpable, it’s vitriolic. It has hurt the public discourse, not only on the Presidential level, but all the way down to the neighborhoods and within families.
Right now we're seeing the President doing very, very well among NASCAR dads, which suggests: a) they're probably voting for values; but b) that the economy may be less of an issue for them right now, or at least perceived to be less of an issue for them. The real gap is between married women and single women. Single women voting against the war, pro-Democrat and so on, it's married women who for reasons of both family values but also defense, homeland security, concern for the future of their children that are giving the President a significant double-digit lead.
The investor class is very significant. Right now the President is leading by 12 or 14 points among investors. That's good for him.
Many voters have told us that they do not like the war. They don't like the reason why we went to war. But the nation is divided on that. There's a real passion on the war, though, among the opposition. And that's very important. In many ways this is a referendum on an incumbent President. What we find is that the President still is polling a net negative on the direction of the country, whether or not he deserves to be re-elected, and his job performance. He's not posting winning numbers for an incumbent President. And many of the undecided voters have told us flat out that they're agonizing over this and will vote, but may not make up their minds until Election Day itself.
Masking the future
COLVIN: In a presidential race where the candidates have battled neck and neck for months, we found one more contest where they're facing off, this time literally. George Bush and John Kerry are going head-to-head in Halloween mask sales. Yes, Halloween masks. While pirates, witches, even candy stripers may still be bigger sellers, this year the political season has merged with the time of the year usually associated with ghouls and goblins. And guess what, it may actually matter which candidate sells more masks. Seems the candidate whose mask sells best gets the biggest treat of all -- the White House. According to the folks at costume sales titan buycostumes.com, they've been able to predict who wins the White House the last six straight times. So how is the race shaping up this time around? Well, George Bush is leading John Kerry.
Roundtable
COLVIN: Which candidate looks less frightening to America's workers, business owners, investors, and retirees? Voters consistently say the economy is their No. 1 issue in this election, and no wonder -- it's the issue that most directly affects the most people. The candidates have had their say, but now, with just days left in the campaign, we wanted the perspective from the trenches of real-world business.
Leo Hindery is former CEO of AT&T Broadband, more recently CEO of YES Network, America's largest regional sports TV network, which he left in April largely to work and raise money for John Kerry.
John Dillon is former CEO of International Paper, also former chairman of the Business Roundtable, which is about 150 CEOs of some of America's largest companies. He's supporting President Bush.
Mr. Hindery, trying to convince your fellow CEOs that they should support a liberal Democrat, the most liberal senator by one non-partisan ranking, who has chosen a plaintiff's lawyer for his running mate, it sounds to me like a tough sale. What do you say to them?
LEO HINDERY: Geoff, I think you have to parse this whole economic debate for the American public, the American voters. I don't think it's going to be John Kerry's success to convince the Business Roundtable CEOs. There were 200 of us, an extraordinary number, who signed very publicly a statement supporting Senator Kerry's platform, his approaches to the concerns we have. But I'm here today, it's really to chat with you and try to convey concerns I have that manifest themselves mostly in the employees of the companies.
I think the CEO class has voted with its money for years and typically voted Republican. But I've had the privilege of running these large companies, as has John, and for me it's about what's best for my shareholders and my employees, and I've concluded easily that it's John Kerry.
COLVIN: Mr. Dillon, John Kerry's correct when he says that President Bush is the first president in 72 years under whom the country has lost jobs rather than gained them. In light of that record, why should Americans who are concerned about jobs vote for the President?
JOHN DILLON: Well, think about what happened. We were in a recession. We had one of the largest meltdowns in the stock exchange that we've ever seen. We were coming off a period of a strong dollar, and we had 9/11.
So I mean the U.S. economy was having problems, and what the President did was recognize this, recognize it early, and say let's -- he provided the leadership to take some action to turn it around. And therefore, you know, we experienced one of the shortest recessions in the history of the nation, economic growth resumed, job growth resumed. We've had six or eight quarters of very attractive economic growth, and although it may be slowing a bit, I believe we're going to have a solid growth next year.
And so we're recovering from a period of a lot of pressure on this economy, and the President recognized that, recognized it early, provided the leadership required to fix it rather than wringing our hands about it and saying, "Well, maybe it will fix itself."
COLVIN: On the question of jobs, now, Senator Kerry has said that he will create 10 million new jobs in his first term, four years. But you know, Mr. Hindery, better than most people that presidents don't create jobs; companies create jobs. Now, why should we think that Senator Kerry would have some way of making companies create jobs more rapidly than they have been doing anyway?
HINDERY: For me, Geoff, it's about recognizing problems and fixing them. That's what CEOs do. That's what John and I do for livings. And what concerns me about listening to John's comments are it seems to ignore the depths of the problems.
There has been a recovery underway, (but) it's modest. It's called the jobless recovery by most pundits. It's a qualityless recovery.
We have 5 million more people without healthcare than we did at the start of this administration, 4.3 million more in poverty. We've lost 2.7 million manufacturing jobs, 1.6 million private sector jobs, and we've lost in this concurrent period 1.3 million jobs to off shoring, with 830,000 predicted for next year. The depths of these problems, the personal impacts of these problems are not being addressed by this administration.
If I were being judged, as the President is now going to be judged, for my performance, and I sat four years into this administration with the depths of the ills, and I'm very respectful of the burdens that were placed on the administration by 9/11, by the war in Iraq, by the external conditions that John talked about, but I also look at the numbers, and I say that Senator Kerry has a sensitivity to the quality of the problems, to the depths of the problems, Geoff, that this president does not have.
COLVIN: Well, you mentioned healthcare. It's a huge issue. It shows up in polls all the time as a huge issue. In fact, one reason America's employers, especially large employers, believe they are becoming less competitive is that America does have the highest healthcare costs in the world by a large margin. Both candidates seem to realize that the current system is untenable, but they have very different approaches to fixing it. John Dillon, President Bush seems to want to place at least some of the burden more on individuals. Now does that make sense at a time when the greatest fear of many individuals is that they won't be able to pay for their healthcare?
DILLON: Well, I'll share with you some experiences that we've had in International Paper in trying to deal with this serious healthcare problem we've taken a tack that one of the ways to deal with the healthcare issue is to make the individual, myself and all of our employees, more knowledgeable and having a greater stake in the whole healthcare debate, and therefore we're trying to make them smarter consumers. And I think we've accomplished that through having our employees share -- now it's shifting some of the cost to employees, clearly -- but it's also pretty clear that when our employees understand what the cost of healthcare is, they are smarter consumers. And so one of the tactics that we see coming from the administration is a recognition that solving this through government mandate and through more government spending is probably not the conclusion or probably not the right way to go.
COLVIN: Mr. Hindery, let me ask you about that, because Senator Kerry's proposal does include shifting more of the burden on to the federal government. Now why would companies want to see the creation of a big new federal bureaucracy?
HINDERY: I think to get our hands around this issue, Geoff, you've got to acknowledge that President Bush isn't the candidate; he's the incumbent. We had this debate four years ago when Vice President Gore and then-Governor Bush met with the American people and spoke to the same concerns that we're having today.
What concerns me about the President is he's had four years. Why don't we judge him on the inaction in this issue. Don't try to compare Senator Kerry's plan with "President Bush's." President Bush has been in the bloody job for four years, Geoff, and nothing has happened. And the concerns that John has are legitimate, which is why Senator Kerry has said let's go after catastrophic. It's politically attainable. Catastrophic healthcare costs are 80 percent of the cost and 20 percent of the claims, and we're going to share that burden with American companies in a way that takes some of the burden that's of concern to John off of their backs. But give Senator Kerry a chance. We've given President Bush a chance, and we're deeper in the hole by everybody's measure.
COLVIN: Senator Kerry has said that his goal is the same as President Bush's on the deficit. They both say they want to cut it in half in the next four years. Senator Kerry has said he will cut middle class taxes, reduce the tax burden on small business, invest in job creation, healthcare and education. The only tax increase he has mentioned is on those making over $200,000 a year. A lot of people are skeptical that this can all add up. Do you believe that it does?
HINDERY: I believe it does, and it dismays me that the Business Roundtable, who so passionately and thoughtfully argued for pay-as-you-go as a principle and embraced it, they've headed for the woods now that we've abandoned it. There's no outrage on the part of people like John and the Business Roundtable on this deficit. Clearly some of the deficit is attributable to this tragic war in Iraq. Some of the deficit is attributable to the tragedy of 9/11. But that's about a third by everybody's measure. The other two-thirds is in the hands of this president who gave a tax break to the wealthiest of Americans, the wealthiest of Americans that doesn't trickle down. I am wealthy, John is wealthy. When you give me a tax break, Geoff, I just get wealthier. And to your comment about taking, raising taxes on the wealthy, all that Senator Kerry has said, let's go back to where it was before. It's not a raise. It's simply a regression back to where it was before.
DILLON: Leo, everybody in the U.S. economy who pays taxes got tax relief, and so it was broad, it was across the spectrum of taxpayers and was fair. So this rhetoric of rich versus somebody else is a mongering that we don't need in the times that we're in. Frankly I can think of nothing that could perhaps cause us more problems right now than a tax increase.
I mean you're fundamentally talking about raising taxes. I wonder what will happen to the dividend. I wonder what will happen to the capital gains rate. And this economy and the consumers in the United States -- think of what's happening with oil prices. I mean we don't need to consume more of our disposable income in taxes.
COLVIN: Okay, well, there's a lot more to be said on all these substantial issues, but we don't have time to say it. So, Leo Hindery, John Dillon, thanks for your views.
Next week: Election fallout
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