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[Ace Hanlon]

I do not subscribe to Stack's service, but always note his views when reported in the media:

"Market Monitor"-James Stack, president of Investech Research

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18 February 2005, 10:00pm ET

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, PRES., INVESTECH RESEARCH: Thank you, Paul. It`s great to be here.
KANGAS: I`m going to go back to our New Year`s Day program, and you said, and I quote, 2005 will bring unpleasant surprises with higher than expected interest rates, and a topping bull market, end quote. Jim, is today`s 8 /10 percent jump in the core producer price index one of the first unpleasant surprises?
STACK: I`m afraid it might be, Paul. That was the biggest increase in six years and our major concern going into 2005 has not been the falling dollar, the twin deficits or the threat of another terrorist attack. It lies in the fact that this is an aging bull market, an aging economic recovery in which imbalances at some point start to develop and that creates the inflation surprises and if we have upside surprises in inflation, we know where the surprises in interest rates will be.
KANGAS: In other words the Fed will have to become more aggressive in raising rates?
STACK: Even with six discount rate hikes so far, you have to keep in mind that inflation has been rising as fast as or faster than that increase in short term interest rates. So the Fed is playing catch up. And at some point over the next three to five months, they might have to move to that half point increase and Wall Street certainly is not expecting that.
KANGAS: Where would you guess they`d be at the end of the year?
STACK: I wouldn`t be surprised to see short term interest rates approaching 4 percent. Again, it`s not an overly dangerous level, but it`s a level that`s going to weigh heavily on a market where we still have fairly high valuations in many sectors.
KANGAS: How long in the tooth is this bull market?
STACK: Well, historically the median life span for all of the bull markets of the past 75 years has been 3.4 years. Now, we`re in our third year, and only 37 percent of the bull markets over the past century have lived to celebrate that third birthday. So chances are we`re not at the end of the bull game, but so, to speak, we`re in the latter innings.
KANGAS: OK. What is your defensive investment strategy, briefly? Mentioned Last Change
PH 67.55 1.06dollars or (1.59%)
STACK: Very briefly, avoid the interest rate sensitive areas. Those areas that are going to be impact by inflation or interest rates.
KANGAS: Home builders.
STACK: Home builders, real estate investment trusts, the mortgage finance companies like Fannie Mae and Freddie Mac, very high risk going forward from this point. Focus instead on sectors and particularly stocks that are more insulated from up side surprises in inflation or interest rates.