08/11/2000: "Market Monitor"- James Stack, President, InvesTech Research
PAUL KANGAS: My guest market monitor this week is James Stack, President of InvesTech Research based in Whitefish, Montana. He comes to us tonight from Kalispell, Montana. And welcome back, Jim.
JAMES STACK, PRESIDENT, INVESTECH RESEARCH: Thank you, Paul. It's great to be here.
KANGAS: You are just one of a handful of well known stock market analysts who has been consistently saying that we are in one of the most overvalued high risk markets of modern times and it is unquestionably a bear market according to you. Prove your case, Jim.
STACK: Well, that's getting easier to defend. The advance/decline line, which tells us what the majority of stocks are doing, peaked over two years ago. Sixty-three percent of NASDAQ and New York stocks were down last year and almost two thirds are down last year and almost two thirds are down this year. We've already chopped off over $1 trillion in stock market values from the highs.
KANGAS: So aren't we overvalued anymore?
STACK: Well, if you look at historic valuation, the Dow and S&P 500 are still selling at almost twice their average P.E. ratios. That's a lot of downside risk. In terms of the NASDAQ, that risk is even higher with an average P.E. of 4,800 domestic stocks on the NASDAQ of 181 today.
KANGAS: Well, inflation doesn't seem to be a problem either. The PPI today was flat. The CPI hasn't been bad.
STACK: This is a difficult position for the Federal Reserve, even if they would like to tighten again on the 22nd. They can't without stronger evidence of inflation and the government is really doctoring those numbers pretty well.
KANGAS: Which ones?
STACK: For example, 40 percent of the CPI comes from housing and yet the government has completely dropped the average home price from housing. I don't think the average person out there thinks that housing in their area is going up at just 2 ½ percent per year like the government is telling us.
KANGAS: Jim, according to your market letter, you say the Fed has three objectives. One is to deflate the stock market, two, but do it overtime, and three don't let anybody know they're doing it.
STACK: To prevent what happened in Japan, the Federal Reserve has to let the air out very gradually. They've been very successful in doing that and we're going to continue to see that, even though we're in a period of pre-election stability. Where the trouble normally starts and will start again, I believe, is after November's election.
KANGAS: All right, what are the possible downsides for the Dow or the NASDAQ?
STACK: Well, again, when you look at the blue chips, we could lose over 40 percent and not be back to the average 70 year P.E. ratios. On the NASDAQ with a cumulative P.E. of 181, we could lose over 60, 70 percent in many of those NASDAQ stocks and just be getting back to the valuation that we saw when we started this bull market.
KANGAS: Are there bargains around? Today, for example, an analyst at Goldman Sachs said buy those tobaccos, they're severely undervalued.
STACK: There are selective values out there, but you have to be very careful in picking them out. And that's part of an important strategy is to focus on value and really build up a good defense, that is, a good defense against a probable bear market. Our managed accounts are over 70 percent in cash. I think you also have to have a good defense against what lies ahead for the U.S. dollar. With the record trade deficit, the dollar is going to run into trouble in the next 12 to 18 months, a position overseas, for example in the Scudder Japan fund, or in resource stocks like Stillwater Mining (SWC), I think would be very good bets.
KANGAS: The last time you were with us in February, you were 70 percent in cash, but you did like two stocks, Invacare (IVC) at $24. It's about the same, although it's been about 4 points higher, and Teleflex, which was 27, and it's now around 35, 36. Are you staying with those?
STACK: We still like Teleflex, which is up, as you said, about 30 percent from where we mentioned it in February. Teleflex is a good value stock. Other stocks we like are R. Donnell (DNY) and we also like Debold symbol DBD. These are the kind of stocks that are selling near their historic lows in terms of valuation as opposed to many of the momentum stocks out there.
KANGAS: We just have a moment left. How about bonds? You said you would nibble at them in February. How about now?
STACK: Bonds have been through a big bear market. They're in a low risk opportunity right now. Focus on maturities of two to five years and stay away from the longer dated maturities, which have already had a pretty big rally.
KANGAS: All right. So there are a few bargains around, but you have to be awfully careful and carry a lot of cash, basically.
STACK: Step softly and carry a big cash reserve.
KANGAS: OK. All right. Jim, thanks very much for being with us. It's been a pleasure.
STACK: My pleasure, Paul.
KANGAS: My guest, Jim Stack, President of Investech Research. |
