From Nightly Business Report.
"Market Monitor"-James Stack Of InvesTech Research
PAUL KANGAS: My guest market monitor this week is James Stack,
president of InvesTech Research based in White Fish, Montana. Welcome
back Jim.
JAMES STACK, PRESIDENT, INVESTECH RESEARCH: Thank you Paul.
It's great to be here.
KANGAS: On our New Year's Day program on the very first day of 1998, we
featured your one line stock market forecast and I quote: "A combination of
global deflation, economic slowdown and extreme overvaluation will make
this one of the highest risk years in decades." Although that prediction seemed
well off the market till mid-July, it appears now that vindication is yours. And
I don't believe you're the kind to gloat, are you?
STACK: Well, certainly not, Paul, especially with what's happening on Wall
Street, because I don't think the worst is over. This is a confirmed bear market.
One of our long-term leadership gauges that measures downside leadership
turned negative two months ago. It's showing very heavy bear market
distribution. In addition, one survey shows the average NASDAQ and New
York Stock has now lost 35 percent from its 52-week high. That doesn't look a
temporary correction.
KANGAS: But some say a bear market can't happen with interest rates this
low.
STACK: Perhaps one of the biggest misconceptions on the Wall Street today,
because we haven't seen that happen in over 60 years. But it did happen back
in the 1930s in two deflationary bear markets. And it happened more recently
over in Japan where both stock prices and interest rates were coming down at
the same time. It has happened, but just not in a long time here in this country.
KANGAS: Do you think the Fed's monetary position will change, they'll hike,
lower? What'll they do, or do nothing?
STACK: Fed policy is being dictated by market forces. The Fed can't tighten
right now because of deflationary pressures from Asia and Russia, and yet
they're afraid to ease because we have one of the tightest labor markets in 30
years. So they're sitting on the fence, and I think it's partially in the hope of
seeing some of the air let out of Wall Street's bubble gradually. That has to be
one of the objectives in Greenspan's agenda.
KANGAS: And speaking of Russia, is that real or imagined? Should we really
be that concerned about Russia? Isn't Japan much more important?
STACK: Well it certainly is. In fact only 1 percent of our exports go to
Russia, but Asia and Russia provided the trigger for a far more serious
problem on Wall Street. And that is the record overvaluation levels along with
unrealistic investor expectations. Today the S&P 500 Index could still lose 40
percent from today's close, and still be above its average historic valuation
based on dividends, book value or even earnings.
KANGAS: So you're saying that even though we're down this sharply, some
1300 points from the top in mid-July, we can still see a crash?
STACK: Well, the jury is still out on a crash. In both 1929 and 1987, the crash
didn't hit until after the Dow was down 13 to 15 percent. As of today's close,
we're just touching that threshold. I think the next 200 to 400 points down will
tell the story.
KANGAS: What about the billions of dollars being poured into equity mutual
funds? Doesn't that suggest good buying support, or do you see panicky
redemptions coming?
STACK: Well, it's certainly a common argument on Wall Street but in the last
mutual fund boom of the 1960s, we continued to see inflows into mutual funds
all the way through the bear market that ended that boom. In addition, the
second point about mutual funds is the fact that 91 percent of the money in
equity mutual funds today has come in since 1990, and has never seen a bear
market.
KANGAS: You are a bear. There's no question about it, but what's your
strategy here?
STACK: Well, the strategy has to be to walk softly and carry a big cash
reserve.
KANGAS: 80 percent. Is that what you have now?
STACK: Well, right now we're averaging over 80 percent. What lies ahead
could get very ugly, but I think it's also going to lead to one of the best buying
opportunities in over 20 years.
KANGAS: OK.
STACK: The key is to not get caught up in the meantime in what may be a lot
more downside risk than what Wall Street believes. I think it's time to avoid
the highest vulnerable sectors, those would be the financial, like the banks and
brokerage.
KANGAS: OK.
STACK: ... the technology stocks and Internet.
KANGAS: Last February, when you were with us as a market monitor, you
said you liked some of the gold stocks. They've done nothing except maybe go
down a little bit more. Quickly, what do you now?
STACK: Well, gold at that time, gold stocks at that time were off well over 50
percent and it looked like pretty good buys. But now they're down another 20
percent. Gold is riding a deflationary fear...
KANGAS: OK.
STACK: ... that's spreading globally. We are not at the bottom yet. Obviously.
But I can't help but believe that we're nearing the bottom, particularly if the
central bank starts to panic and ease.
KANGAS: So you're not buying anything right now. Just holding steady with a
lot of cash.
STACK: As well as a bear market fund, the right (OFF-MIKE) so that is
providing a return as the market goes down.
KANGAS: Jim, thanks very much for being with us.
STACK: Always my pleasure Paul.
KANGAS: My guest, James Stack, president of InvesTech Research.
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