"Market Monitor"-James Stack, President of Investech Research
Friday, January 26, 2007
PAUL KANGAS: My guest market monitor this week is James stack, president of Investech Research, based in Whitefish, Montana and welcome back to NIGHTLY BUSINESS REPORT, Jim.
JAMES STACK, INVESTECH RESEARCH: Thank you, Paul. It's great to be here.
KANGAS: You know, it's been a wild and wooly week on Wall Street with the Dow posting its best point gain of the year on Wednesday and its biggest point loss of the year yesterday. What do you think is behind all this volatility and do you see it continuing?
STACK: Paul, the volatility that we're seeing is confirmation that this is an emotional market. It's the second longest period in the past 75 years without a 10 percent correction in the blue chip indexes and the volatility, I think, is also a reflection of the difficult past facing the Fed in navigating a soft landing.
KANGAS: There has been talk, a lot of talk that the Federal Reserve has pretty well achieved a soft landing. Does that mean that the housing and real estate slump is just about over?
STACK: I think the jury is still out on the so-called soft landing and will be for another three to six months. The Fed is dealing with two very opposing pressures. One is firming inflation pressures from the tight labor market and from high commodity prices. And the other as you said is the housing market. I think it would be naive to think that the worst of the housing market is behind us. I'm surprised how many analysts are claiming that when in fact we have a very difficult affordability problem out there from the run-up in prices, and at the same time, we have a lot of excesses to unwind, including the inventory. I think looking back two years from now, we will look at today and realize that we have -- were not near the bottom in the unwinding of the housing boom.
KANGAS: Interesting. I know it's impossible of course to predict where oil prices are going, but in the current environment, what strategy are you advising for your clients?
STACK: A simple three-part strategy because this bull market is already about 30 percent longer than the average bull market life span of the last 100 years. Simply strategy number one, sell down to a level of comfort. For us, that's raising cash to our highest level in five years, over 30 percent. Secondly, focus on defensive sectors, those that are more resilient to rising inflation and rising interest rates. And third, be very, very selective.
KANGAS: Give us your opinion where the stock market stands now from both the fundamental and technical viewpoints.
STACK: From a technical standpoint, the blocks (ph) are still in place for a bull market. Our technical gauges have not confirmed a bear market yet, but this is a rising risk market and 2007 could be a year of surprises. On the inflation front, I think any surprises will be to the upside. You have another risk in the U.S. dollar where any surprises will be to the down side, and if either of those developments occur, we could see the Fed, unfortunately, be forced back to the tightening table which no one on Wall Street expects. So it's a year of potential surprises. That means it has to be a year of increasing defensiveness from a strategy.
KANGAS: On your last visit in mid-July, you recommend the purchase of two stocks for our viewers. Let's have a look and see how they've done since then. We see Pepsico, very conservative choice, up 4.3 percent and Johnson & Johnson up 9.3 percent. They're both in the plus column and I congratulate you on that.
STACK: They're good steady gainers, the kind of blue chips that pay decent dividends that are going to be holding up well, regardless of what happens to the broader market I think.
KANGAS: And so you would stay with these two issues?
STACK: Yes, we're still holding them in our managed accounts.
KANGAS: Now given your cautious outlook, do you have any new stock recommendations?
STACK: In the defensive sectors, which would include the pharmaceutical sector, we like Abbott Laboratories, symbol ABT.
KANGAS: There we see on the chart and it's had quite a move.
STACK: It pays over a 2.2 percent dividend yield. It has had 33 consecutive years of increasing its dividends. It has close to double- digit gains in both revenue and earnings of the past 10 years.
KANGAS: Another choice? We have time for one more.
STACK: Another would be Automatic Data Processing. It provides financial and data processing services to corporate America. Again, very steady revenue growth, good dividend yield, good, solid performer, regardless of (INAUDIBLE).
KANGAS: It's had a little setback recently so this might be a good entry point.
STACK: Yeah, it is. I think that ABT and Abbott Labs are good steady...
KANGAS: OK, how about one more?
STACK: Another one I think from a defensive standpoint, to provide defense both against weakness in the U.S. market and a potential weakness in the dollar, look international. After a year of consolidation, the Japanese market, I think, will be moving higher this year. The Ishares, Japan symbol EWJ is one of the best opportunities to take advantage of that.
KANGAS: Jim, do you personally own any of the stocks you mentioned?
STACK: Absolutely, Paul, we own all of them. I wouldn't recommend them if we didn't like them.
KANGAS: That's a confidence builder. Jim, it's great to have you back. Thanks for being with us. We look forward to your next visit.
STACK: Thank you, Paul, it's also a pleasure being here.
KANGAS: My guest, James Stack of Investech Research.