03/19/04: "Market Monitor"-John J. Hughes, President & CIO of Quantum Capital Management
PAUL KANGAS: My guest "Market Monitor" this week is John J. Hughes, president and chief investment officer of Quantum Capital Management based in Northfield, New Jersey. And on this, your first visit with us, a special welcome to you, John.
JOHN J. HUGHES, PRESIDENT, QUANTUM CAPITAL MGMT.: Thank you, Paul, great to be here.
KANGAS: Just yesterday you submitted to us your latest position statement on the financial markets. And for our viewers, let me quote it. You said: "We are underweight in U.S. financial assets, we are overweight in hard assets like commodities and we see opportunities in the emerging markets of Asia and Japan." Let`s look at the first part of that. Why are you underweighted in U.S. assets?
HUGHES: Well, it seems logical to us, Paul. I mean, if you go back to 1929 before the great crash, equities were priced at a lower level than they are right now. In 1973 equities were priced at a lower level than they are right now. I also believe that we have structural problems that there`s very little talk about, we`ve done some work on debt recently, and I think we brought a chart.
KANGAS: Mm-hmm. There it is, we can see that debt on the right-hand side, present day.
HUGHES: That`s right.
KANGAS: Monstrous.
HUGHES: That`s right. That has grown from 170 percent of GDP, 20 years ago, to about 310 percent today - 310 percent of GDP.
KANGAS: This obviously worries you.
HUGHES: Well, it worries me unless you believe that one can borrow their way to prosperity. We do not.
KANGAS: Ok. So the market is overpriced in light of this - especially this factor?
HUGHES: That is correct.
KANGAS: OK. Now you mentioned also in your statement that you like hard assets, which commodities in particular?
HUGHES: Well, let me tell you why we like commodities, Paul, there`s two reasons to like commodities. There are some wonderful things happening in the emerging markets right now. GDP growth in China, in particular, India, Eastern Europe, is averaging about 6 percent, which is double the GDP growth in the U.S. Commodities are benefiting from that growth. I think China generates 5 percent of the world`s GDP, yet it gives uses 20 percent of the base metals.
KANGAS: So the demand is there?
HUGHES: The demand is there. Also going back to the structural problems that I talked about, we think that the government will be the borrower of last resort, going forward. In the last three years, debt has grown seven times the GDP growth rate. It is something that can`t continue, we think if we`re going to maintain trend GDP, the government is going to have to become a bigger part of the economy. And if the government will do what it has a predisposition to do, which is borrow and print money, once the government assumes that role, currency is at risk. And we believe the commodities are a great hedge against an outlier occurrence like that.
KANGAS: Against this background, what are you buying, if anything?
H
UGHES: Well, we still like some companies in the U.S., but we`re basically market neutral. We`re only 10 percent long in the U.S.
KANGAS: Give us an idea of one of these companies you like in the U.S.
HUGHES: Well, Helen of Troy (HELE), Helen of Troy is a small cap company, they sell personal care products to the mass market retailers and the drugstore chains, combs, hair brushes, accessories. But what they do best is generate cash. They generate 14 percent returns on invested capital. They are - we think they`re a 20 percent grower, even based on low market multiples...
KANGAS: Mid 20s priced stock, OK.
HUGHES: That`s right.
KANGAS: All right. Let`s - we`ve got time for another one.
HUGHES: And our balance fund, our largest holding, is Berkshire Hathaway (BRK).
KANGAS: Oh boy, that`s a biggie.
HUGHES: That`s right, it`s run by Warren Buffet, who owns 38 percent. And he is probably the most effective asset allocator in history.
KANGAS: We know, we know that, don`t we?
HUGHES: And he`s sitting on $35 million in cash. And that`s...
KANGAS: We have less than a minute left.
HUGHES: OK.
KANGAS: Other choices.
HUGHES: The PIMCO Commodities Real Return Fund. Again, own the world, own hard assets, do not have an overly U.S.-centric portfolio.
KANGAS: They own commodities outright.
HUGHES: That`s right.
KANGAS: OK. And any others?
HUGHES: Yes, recently we started to look at Japan. We took a small position in Japan. We`ve seen a trend in the last three years where intrinsic value is growing faster than stock prices. We think Japan has bottomed...
KANGAS: And this is a basket of Japanese stocks, Tokyo Exchange stocks?
HUGHES: It`s an exchange-traded fund, 273 companies.
KANGAS: OK. So not too bullish on the U.S. assets, but you find buys here and there in the other place.
HUGHES: They are always opportunities.
KANGAS: John, thanks very much for being with us.
HUGHES: It has been a pleasure.
KANGAS: My guest, John J. Hughes of Quantum Capital Management, and by the way, John owns all of the stocks mentioned in his Quantum Balanced Fund.
Nightly Business Report transcripts are available on-line post broadcast. The program is transcribed by eMediaMillWorks. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Community Television Foundation of South Florida, Inc. Nightly Business Report, or WPBT. Information presented on Nightly Business Report is not and should not be considered as investment advice. Copyright (c) 2004 Community Television Foundation of South Florida, Inc. ALL RIGHTS RESERVED.
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