What: Discussion of the anticipated length of the current rally.
Where: CNBC
When: April, 2007
Who: CNBC host, Darin Richards (AKT Wealth Advisors)

Host: Here with more on his investment strategy is Darin Richards in Portland, Oregon. He’s Chief Investment Officer at AKT Wealth Advisors overseeing about $400 M. Good to have you back with us Darin. So how much longer do you think this rally’s going to last?

Darin Richards: I guess I wouldn’t quite call it a rally—we’ve had some nice gains over the last several weeks, kind of making up for what we lost last February. Year to date, the markets are in positive territory, but we’re expecting them to kind of stay in a tight range—kind of choppy for the next several months. I think you’re going to see a similar situation to maybe what we saw last year where spring and summer, not a lot happened, and maybe the markets even trended a little bit lower. And at the end of the year, that’s really where if you’re going to get any gains, that’s where you’re going to see the gains.

Host: Is this just a seasonal blip? Is the rally that we’re seeing—or the bounce that we’re seeing—and what is the one major reason why stocks aren’t going to go any higher from here on out?

Darin Richards: Well I think you know we’re looking at the economic data and you’re seeing durable orders down, manufacturing down, the service industry’s down a little bit, so there aren’t a lot of positive things going on right now from an economic standpoint. I guess the only thing to really hang your hat on is the unemployment situation still looks pretty strong. So we feel like we’re really on the precipice here of a potential situation where inflation is a little bit higher than where the Fed wants it, and the economy is growing a little bit slower than we thought. So we’re going to wait and see what happens to first quarter earnings, if they come in the 3-4% year over year gain range, which is a dramatic slowdown from the double digits that we’ve seen over the last several years, I think you’re going to see people pull back a little bit and you’re going to see the market stagnate.

Host: Now the Fed is now in a bind because it is trying to contain inflationary pressures in a cooling economy, Do you think the economy has gone into stagflation, a period of inflation and slow growth and what are the implications for you and stocks?

Darin Richards: I don’t think we’re in stagflation yet but I think we’re pretty close, and by targeting the 2% by the upper range, the Fed’s kind of put the stake in the sand and the PCE right now is right about 2.4 so they’re well above where they need to be to cut rates so I think their hands are pretty much tied. There are some positives when you look at the economy when corporate balance sheets are still in very good shape, we’ve had a long period of very good earnings so we have a lot of cash. And the employment situation looks good so I don’t think the economy’s going to go into a recessionary period but its certainly slowing down and we’re even seeing some things like what happened in the housing market, in the subprime market, the automobile, we’ve got a couple of weak areas, if we can kind of pull through that I think we’re going to be fine but if housing kind of permeates the rest of the industry and you start to see consumer spending slow down, then I think stagflation becomes a reality and then its time to batton down the hatches a little bit and really become defensive, move a little more towards large-cap stock, look overseas, because some of the problems we’re having in the United States are just that—they’re in the United States only. So housing as I mentioned, automobile, manufacturing, these are not necessarily things that are occurring overseas.

Host: Is that the reason why you’re staying neutral for financials and real estate given the concerns that you’ve gotten from the subprime mortgage market?

Darin Richards: That’s one of them yeah. I think real estate’s definitely—we feel like it’s been overvalued in the United States for a while now so we’re avoiding that. Financials: there are still some areas in financials, I like investment banking, I think insurance is a pretty solid place to be, some of the commercial banks are definitely going to be impacted by the subprime loans and even if they don’t originate them, they’ve been buying them, packaging them, selling them, and they’re going to take a hit.

Host: And your underwrite consumer discretionary stocks. What do you need to see before adding to your positions again?

Darin Richards: We’re avoiding discretionary stocks in general. I think that even though consumer spending’s held up fairly well, you’re seeing oil prices that are a little bit higher, you’re seeing food-based inflation, so its tapping the wallet and one of the things that consumers do is have to cut spending somewhere and discretionary items are the first place to go, so the high oil prices at the pump are impacting consumers and I think the $3-a gallon we’re paying here right now is going to have some negative impact on consumer spending.

Host: What about for energy stocks? How are you playing them? They were the biggest drag in the S&P 500 today because of the crude’s tumbled more than 250 a barrel in New York.

Darin Richards: Yeah. Our plan for energy stocks for the most part has been the oil services areas, so the smaller-cap type stocks. For the most part we don’t have a thought on—or we don’t have a real good opinion on where oil’s going to go. Its been trading in the 50s and 60s, if it stays there, oil companies are going to do fine. If it comes back down, you’re going to see some issues. Its obviously attracted a lot of attention and it might not be a bad place for some investors to hedge high oil prices by investing in the consolidated type companies, but for us, we haven’t actively played that space.

Host: Now how are your risk appetites looking from here on out? Are you going to be risk averse or are do you think you’re going to have an appetite for risk as the months go by?

Darin Richards: It’s more where we’re taking our risks. So we’ve trimmed our small, we’ve trimmed our mid-cap U.S. stock exposure, we felt like there were some overvaluation issues there and when you’re looking at the U.S. economy, these smaller to mid-sized stocks tend to be focused domestically and we’re moving some of that money into large-cap stocks which have much more of an international focus so large-cap domestic equities in the United States—generally 40% of their income comes from overseas—and we’re seeing more global growth than we are domestic growth, so we’re actually overweight in emerging markets and we’re overweight in international stocks as well so, net our exposure to equities versus fixed-income is about the same—we’ve just moved it to those areas we think are more growthy-oriented. If I do see a slowdown in the domestic market, and I think that could even impact the global market, we will start to peel back equity exposure and become more defensive, more focused on fixed-income.

Host: What about a slowdown in China, is that one of the risks that you’re probably considering when you think about the international stocks that you’re invested in?

Darin Richards: I guess not as much of an economic slowdown, but the Chinese market has run so fast—we saw that major correction in February where it dropped 9%. Even though the Chinese market is very small in relation to the global market, it had a huge impact. You saw a dramatic decline across the globe. So I think there’s still some issues: China seems to be going at a pretty good clip and the government seems to be trying to slow things down to a more manageable level. But say they get 8% growth—that’s still dramatically higher than what you’re seeing in any other country so it should help to continue to drive the global economy.

Host: And Darin, trade tensions between the U.S. and China escalating once again, we’ve seen the counterveiling terrorists last week and now plans for a WU2 complaint against China. How do you think this is going to affect your strategy for Chinese stocks?

Darin Richards: You know I really don’t look att he political situation when thinking about the Chinese markets. It seems to be one that receives more press maybe than its worth. You can always invest in the Chinese market through the countries that provide resources to China. So part of our overweight in emerging markets are some of these commodities type countries that export to China so we’re playing it, but I really don’t monitor the geopolitical issues. I think there’s more probably to follow in the Middle East where it impacts oil prices, may have more of an impact than some of the trade issues going on between the United States and China—at this point in time.

Host: We’ve got about thirty seconds. Do you think you’re going to be more overweight in the emerging markets or do you think you’re going to be leaning more towards U.S. stocks towards the end of this year?

Darin Richards: On a relative basis we’re going to have a larger overweight to emerging market stocks I think for the remainder of the year. However they’re a much smaller percentage of our portfolio. So for instance if we normally would have 5% in emerging markets, we’d have 7-8% right now so it’s a pretty big overweight, yet still 50-60% of our portfolio are domestic stocks, but I like to go where growth is and right now emerging markets is the place to be.

Host: Alright Darin, thank you so much for joining us.

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