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"Market Monitor"-James Stack, President of Stack Financial Management
Friday, July 27, 2007
PAUL KANGAS: My guest market monitor this week is James Stack, president of Stack Financial Management based in Whitefish, Montana. Welcome back to NIGHTLY BUSINESS REPORT Jim.
JAMES STACK, PRESIDENT, STACK FINANCIAL MANAGEMENT: Thank you Paul. It's great to be here.
KANGAS: On your last visit with us in late January, you suggested it was looking like the beginning of the end for the bull market. Well, given the heavy selling and sharp losses this past week, has the bear market now officially arrived in your opinion?
STACK: In January, we were waiting for the final blocks to drop into place. An now we think they have. We think there is a 70 percent probability that we're in a bear market. If you look at the deterioration, it has been dramatic even before this week. We were seeing a narrowing in participation -- that is market breadth -- and our key leadership index started signaling bear market distribution two days ago, before this decline.
KANGAS: How about your monetary indicators?
STACK: Both of our two primary monetary models are now negative. That means that both the Federal Reserve and to some extent the bond market are not on the side of the investor.
KANGAS: We have incessantly heard that the cause of the sharp recent sell off on Wall Street is due to big problems in the sub-prime mortgage market. But are there other major causes?
STACK: Well, the sub-prime mortgage market is really just the tip of the iceberg in terms of leverage problems in this market. If you ignore the housing market, the Federal Reserve has done almost everything perfectly for a soft landing. They have slowed the economy. We might see slower inflation the later half of this year, but housing remains the big wild card out there and it is a high risk wild card. The outlook actually we believe, is very gloomy.
KANGAS: So what is your investment strategy against this background?
STACK: Well, the strategy at this point, at least in Montana, you learn if it looks like a bear and growls like a bear, you treat it like one. This certainly looks like a bear market has dropped into place. Economists have underestimated the downside risk in the housing market up until this point. And I think they're still underestimating it. We have a long-term housing bellwether index that right now is in a freefall. That means that the headlines in housing are going to be much worse by fall. This is the time to sell down to a level of comfort, focus on defensive sectors and try to be very selective.
KANGAS: Bear markets are generally defined as markets that lose 20 percent or more of their value. How rough do you think this one could be now that it started, in your opinion?
STACK: You're right, Paul, the general Wall Street definition is a 20 percent decline. I think nominal downside risk from this point is probably 20 to 25 percent. But if the mortgage problem starts to spread and it is already spreading into lower quality prime mortgages, then the housing situation worsens substantially, we could easily see a 30 percent or more bear market. This isn't the time to underestimate the downside risk. We have already moved, even before this week, we have already moved our portfolio to a net invested position of only 50 percent. In other words, we have a net cash level of almost 50 percent. That's our highest in over five years.
KANGAS: Very good. We're running out of time. You gave the viewers three buy recommendations in January. Let's see how they're done since then. Abbott Labs down about 4.8 percent. Automatic Data, actually that price then would be lowered because they had a spin off of Broadridge (ph), so you actually would have had a small profit there. And then the "I" shares of Japan are up a half percent. Do you have all three stocks and the "I" shares, still?
STACK: These are still defensive, late stage bull market stocks. They haven't done as well as this spurt in the market averages in the first half of this year, but they're going to hold up much better going ahead into the bear market if we are in one. Yes, they are still a hold.
KANGAS: Despite your bearish outlook, do you have any new buy recommendations? And we're running out of time, only have a minute left.
STACK: We think there are several stocks that are good defensive stocks, Coca-Cola (KO), we think of it as a U.S. company, but 80 percent of their sales or profits are international. Good defense against the U.S. bear market. Sigma Aldrich (SIAL) is another one. They sell 85,000 different chemical products in 150 companies. It's a good defensive - again a good defensive hedge against the U.S. market risk. And the last one is Walgreens (WAG). Walgreens is selling at one of its best valuations in many years and they have 32 consecutive years of good solid earnings growth.
KANGAS: Jim, do you personally own the securities you've mentioned or have other disclosures?
STACK: Absolutely, Paul. We own them all in our managed accounts. We wouldn't recommend them if we didn't like them.
KANGAS: Very good, Jim, thanks for being with us once again.
STACK: Always my pleasure Paul.
KANGAS: My guest, Jim Stack of Stack Financial Market.
ولو اني ضعيف باللغه لكني فهمت واستفدت الحمدلله ان شالله تستفيدون وتدعون لي وكل ما قريت شي بحطه لكم
Friday, July 27, 2007
PAUL KANGAS: My guest market monitor this week is James Stack, president of Stack Financial Management based in Whitefish, Montana. Welcome back to NIGHTLY BUSINESS REPORT Jim.
JAMES STACK, PRESIDENT, STACK FINANCIAL MANAGEMENT: Thank you Paul. It's great to be here.
KANGAS: On your last visit with us in late January, you suggested it was looking like the beginning of the end for the bull market. Well, given the heavy selling and sharp losses this past week, has the bear market now officially arrived in your opinion?
STACK: In January, we were waiting for the final blocks to drop into place. An now we think they have. We think there is a 70 percent probability that we're in a bear market. If you look at the deterioration, it has been dramatic even before this week. We were seeing a narrowing in participation -- that is market breadth -- and our key leadership index started signaling bear market distribution two days ago, before this decline.
KANGAS: How about your monetary indicators?
STACK: Both of our two primary monetary models are now negative. That means that both the Federal Reserve and to some extent the bond market are not on the side of the investor.
KANGAS: We have incessantly heard that the cause of the sharp recent sell off on Wall Street is due to big problems in the sub-prime mortgage market. But are there other major causes?
STACK: Well, the sub-prime mortgage market is really just the tip of the iceberg in terms of leverage problems in this market. If you ignore the housing market, the Federal Reserve has done almost everything perfectly for a soft landing. They have slowed the economy. We might see slower inflation the later half of this year, but housing remains the big wild card out there and it is a high risk wild card. The outlook actually we believe, is very gloomy.
KANGAS: So what is your investment strategy against this background?
STACK: Well, the strategy at this point, at least in Montana, you learn if it looks like a bear and growls like a bear, you treat it like one. This certainly looks like a bear market has dropped into place. Economists have underestimated the downside risk in the housing market up until this point. And I think they're still underestimating it. We have a long-term housing bellwether index that right now is in a freefall. That means that the headlines in housing are going to be much worse by fall. This is the time to sell down to a level of comfort, focus on defensive sectors and try to be very selective.
KANGAS: Bear markets are generally defined as markets that lose 20 percent or more of their value. How rough do you think this one could be now that it started, in your opinion?
STACK: You're right, Paul, the general Wall Street definition is a 20 percent decline. I think nominal downside risk from this point is probably 20 to 25 percent. But if the mortgage problem starts to spread and it is already spreading into lower quality prime mortgages, then the housing situation worsens substantially, we could easily see a 30 percent or more bear market. This isn't the time to underestimate the downside risk. We have already moved, even before this week, we have already moved our portfolio to a net invested position of only 50 percent. In other words, we have a net cash level of almost 50 percent. That's our highest in over five years.
KANGAS: Very good. We're running out of time. You gave the viewers three buy recommendations in January. Let's see how they're done since then. Abbott Labs down about 4.8 percent. Automatic Data, actually that price then would be lowered because they had a spin off of Broadridge (ph), so you actually would have had a small profit there. And then the "I" shares of Japan are up a half percent. Do you have all three stocks and the "I" shares, still?
STACK: These are still defensive, late stage bull market stocks. They haven't done as well as this spurt in the market averages in the first half of this year, but they're going to hold up much better going ahead into the bear market if we are in one. Yes, they are still a hold.
KANGAS: Despite your bearish outlook, do you have any new buy recommendations? And we're running out of time, only have a minute left.
STACK: We think there are several stocks that are good defensive stocks, Coca-Cola (KO), we think of it as a U.S. company, but 80 percent of their sales or profits are international. Good defense against the U.S. bear market. Sigma Aldrich (SIAL) is another one. They sell 85,000 different chemical products in 150 companies. It's a good defensive - again a good defensive hedge against the U.S. market risk. And the last one is Walgreens (WAG). Walgreens is selling at one of its best valuations in many years and they have 32 consecutive years of good solid earnings growth.
KANGAS: Jim, do you personally own the securities you've mentioned or have other disclosures?
STACK: Absolutely, Paul. We own them all in our managed accounts. We wouldn't recommend them if we didn't like them.
KANGAS: Very good, Jim, thanks for being with us once again.
STACK: Always my pleasure Paul.
KANGAS: My guest, Jim Stack of Stack Financial Market.
ولو اني ضعيف باللغه لكني فهمت واستفدت الحمدلله ان شالله تستفيدون وتدعون لي وكل ما قريت شي بحطه لكم