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March 21, 2008
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It's been another bumpy week on Wall Street, but the good news is, the bulls have come out on top. After the Dow's stunning 420 point gain in response to the Fed's rate cut on Tuesday, the market grew skittish and sold off nearly 300 points on Wednesday. On Thursday, traders were in a feel-good mood as they headed out to start their 3-day weekends, and the Dow surged 261.66 points to end at 12,361.32. The NASDAQ finished 48.15 points higher at 2,258.11.
Don't Be Fooled by the Dollar's "Reflex Rally"
The Fed did the right thing when it cut interest rates by 0.75% and not a full 1.0% like some traders hoped. As I mentioned in our Tuesday Flash Alert, the fact that the Fed cut 0.75% shows us how much they care about the U.S. dollar.
And speaking of the dollar, it certainly firmed up this week! On Wednesday, the euro fell to 1.5475 dollars from 1.5618, and in Japan, the dollar rose to 100.02 yen from 99.01.
As I mentioned in our new April issue, oil and commodity prices move in tandem with the dollar, so naturally, when the dollar firmed up this week, some of our stocks, like Barrick Gold Corporation (ABX) and Southern Copper (PCU) took a hit. However, I expect the dollar's resurgence to be merely temporary—the dollar may have strengthened for a brief moment, but long-term, I expect it will continue to fall.
The major reason why I'm so convinced the dollar will continue to fall is that the 3-Month Treasury is now only yielding 0.63%, so the dollar is not going to rally too much. So please, don’t worry about any short-term softness in our multinational, commodity and oil-related plays—long-term we'll be fine, and we already have the triple-digit gains to prove it! Additionally, I expect that our commodity and energy related stocks will post stunning first quarter earnings in the upcoming weeks.
Other Market News
Besides the Fed meeting and the incredible news that JPMorgan Chase bought out Bear Stearns for $2 per share—as I mentioned on my blog, Bear was trading at $150 per share just a year ago!—there were more signs this week that the economy’s in trouble.
Industrial production fell by 0.5% in February, which was far below the 0.1% decline economists expected. Manufacturing output was down 0.2% and vehicle output fell by 0.1%. Core manufacturing was flat.
Over in the mortgage market, Fannie Mae and Freddie Mac were up after the Federal Housing Enterprise Oversight office cut their surplus capital requirement to 20% (from 30%), which could add as much as $200 billion in liquidity back into the mortgage-backed securities market.
Treasury Secretary Paulson was quick to applaud the move, saying "Additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market."
Well, the housing market needs something to help get it back on track! It’s pretty dead out there right now. Permits fell 7.8% in February, and single-family housing starts were down 6.7%.
Jobless claims rose to 378,000 last week, which was more than the 360,000 economists were expecting. This is not surprising—just wait until all the Wall Street layoffs pick up! Obviously this is just another sign that the U.S. economy is decaying.
Producer prices rose 0.3% in February, and the core rate was up 0.5%–economists were only expecting the core rate to rise 0.2%, so it's clear that the inflation monster is rearing its ugly head. We'll need to keep a close watch on how the Fed’s latest interest rate cut affects these inflationary forces, and just what other tricks the Fed might has up its sleeve in order to help our broader economy.
Leading indicators fell for the fifth straight month in February. This time they were down 0.3%. The January number was revised down in a big way, from -0.1% to -0.4%! The January downward revision will serve as more evidence for negative GDP growth in the first quarter.
In oil news, crude oil prices fell $4.94 a barrel on Wednesday, which was the biggest one-day decline since January 1991. As I mentioned, even though we have a lot of oil-service and commodity related stocks on our Buy List, I’m not worried about any short-term softness, especially since if commodity prices fall significantly, because that will help solve a lot of the inflation problems that have been brewing. The Dow's gain on Thursday was due to a huge short-covering rally in financials now that the Fed has opened its discount window to brokerage firms. Much of the commodity sell-off in the past couple days was linked to de-leveraging their commodity and other hedge fund bets.
One pleasant surprise was that the fourth-quarter account deficit fell to $172.9 billion from $177.4 billion due to higher exports and lower interest payments on Treasury securities.
Now it’s time for more of your questions:
Your Questions Answered
Question: Hi Louis, at present I am just a little more concerned about the Energy and Metal sectors. There appears to be heavy selling in all of these. What are your thoughts?
Answer: This week was essentially a massive de-leveraging of many hedge fund bets in commodity and crude oil contracts. This was triggered by the fact that the Fed did not cut a full 1% on Tuesday, which signaled that they might actually care about the U.S. dollar. Additionally, the Fed opened its discount window for the first time to investment firms like Goldman Sachs (GS), so there was aggressive borrowing as these firms tried to shore up troubled markets with this latest infusion of liquidity.
Financial stocks rallied on short-covering and in my opinion, the sell-off in commodity and energy related stocks was just profit-taking. In fact, our commodity and energy related stocks will post stunning first quarter earnings in the upcoming weeks, so I am very optimistic that they will rebound shortly.
Question: I noticed that Gerdau (GGB) is estimated to be valued at $29.91 next year and that is lower than its recent price of $31.00. What are your thoughts on this?
Answer: I do not know where you got that value from, but the bottom line is that steel stocks have been hot lately. Brazil is also the hottest emerging market and recently passed China in overall stock market capitalization. The bottom line is that Gerdau (GGB) is a well-run steel company in one of the hottest sectors and countries, so I remain very confident that this stock will be a big winner for us.
Question: Dear Louis, I am a new subscriber and following your advice carefully. I understand that you like us to be invested in energy and commodity stocks. The market sold off on Wednesday morning when the news came out about reduced oil demand and falling commodity prices. Should I still stick to your advice and continue putting more money into those stocks or should I wait and see what happens next week or so? Are there any fundamental changes coming?
Answer: I realize that crude oil suffered it largest one-day drop since 1991 on Wednesday. According to the Energy Department, crude oil inventories rose less than expected last week and gasoline inventories fell by a whopping 3.5 million barrels! Although gasoline inventories recently hit a 14-year high, it appears that as the summer driving season approaches and refineries switch over from oxygenated winter fuel blends to summer blends, inventories of crude oil and gasoline are anticipated to tighten up quickly. Our energy-related stocks will post stunning first quarter earnings in the upcoming weeks, so I am very optimistic that they will rebound shortly.
Question: What do you think about commodity prices coming down? Will or won't this have an affect on Monsanto’s (MON) earnings?
Answer: Corn prices remain incredibly high, and Monsanto (MON) will likely post stunning quarterly earnings in early April. The sell-off in commodity related stocks was just profit-taking as many hedge funds de-leveraged their bets last week and the U.S. dollar briefly strengthened as the Fed signaled that they might actually care about the U.S. dollar.
Question: With the overall cell phone industry experiencing a slowdown, do you still consider Nokia (NOK) an excellent buy? Should we begin to pull back in time with the industry?
Answer: Cell phones usage is exploding around the world and Nokia (NOK) is the market leader. The company’s customers are constantly upgrading to new and improved models. The analyst community recently revised their earnings estimates 11% higher for Nokia. Typically, such strong analyst earnings revisions precede future earnings surprises. I expect that the stock will recover soon.
Let’s take a look at our Blue Chip Growth Buy List:
Our Blue Chip Growth Movers and Shakers
Air Products & Chemicals (APD) is an improving good buy.
America Movil (AMX) is a good buy that’s improving.
Baxter International (BAX) is an improving good buy.
Cameron International Corporation (CAM) pulled back recently due to profit taking in the oil sector as a result of the commodity and oil price sell off as hedge funds de-leverage their bets. The stock is a good buy.
Colgate-Palmolive (CL) is an improving good buy.
Constellation Energy Group Inc. (CEG) pulled back but is a good buy.
CSX Corp. (CSX) is very strong right now. The stock is currently out of range, so I want you to wait and buy it below $52. CSX recently forecasted that its first quarter earnings will rise 42% to 48%, boosting its dividend 20%. They have plans to buy back $3 billion in stock by 2009!
Deere & Company (DE) pulled back but is a good buy.
EnCana Corporation (ECA) pulled back due to profit-taking but remains a good buy.
Exelon Corp. (EXC) is an improving good buy.
Express Scripts (ESRX) broke out and is out of range. Please be sure to buy this stock below $61.
FPL Group (FPL) is a good buy.
Gilead Sciences (GILD) is an improving good buy.
Goodrich Corporation (GR) is a good buy, though rumors of another delay in the Boeing 787 is holding back aviation suppliers.
Lockheed Martin (LMT) is a good buy.
McDonald's (MCD) is an improving good buy.
Monsanto (MON) pulled back as a result of profit taking in commodities as hedge funds de-leverage their bets. The stock remains a good buy.
National Oilwell Varco Inc. (NOV) also pulled back. The stock remains a good buy.
Noble Corporation (NE) also experienced some profit taking and pulled back. The stock is a good buy.
Nokia (NOK) pulled back but remains a good buy.
Northrop Grumman (NOC) is an improving good buy.
NRG Energy (NRG) pulled back but is a good buy.
Occidental Petroleum (OXY) pulled back as a result of profit taking in commodities as hedge funds de-leverage their bets. The stock remains a good buy.
Owens-Illinois (OI) is an improving good buy.
PepsiCo (PEP) is an improving good buy.
Potash (POT) pulled back as a result of profit taking in commodities as hedge funds de-leverage their bets. The stock remains a good buy.
Praxair Inc. (PX) is a good buy.
Range Resources Corporation (RRC) pulled back after experiencing some profit taking in the energy sector due to the commodity and oil price sell off. The stock remains a good buy.
Raytheon (RTN) is an improving good buy.
Rogers Communication (RCI) pulled back but is a good buy.
Stryker (SYK) is a strong buy. Be sure to buy it below $65.
Transocean Inc. (RIG) pulled back after experiencing some profit taking in the energy sector due to the commodity and oil price sell off as hedge funds de-leverage their bets. The stock remains a good buy.
Weatherford International (WFT) also pulled back after experiencing some profit taking in the energy sector. The stock remains a good buy.
Activision (ATVI) is a good buy.
Barrick Gold Corporation (ABX) suffered due to falling gold and commodity prices caused by a high volume sell off. However the stock should recover as selling pressure subsides.
FMC Technologies (FTI) pulled back after experiencing some profit taking in the energy sector due to the commodity and oil price sell off as hedge funds de-leverage their bets. The stock remains a good buy.
Gerdau (GGB) pulled back but is a good buy.
Google (GOOG) is a good buy.
Hess Corporation (HES) recently won 25 new contracts for deep water drilling in the Gulf of Mexico during an oil auction this week. HES remains a good buy.
Jacobs Engineering Group (JEC) is a good buy.
Mastercard (MA) is a very strong buy. Visa’s IPO was very successful and helped the stock.
MEMC Electronic Materials (WFR) is an improving good buy.
Mosaic Company (MOS) pulled back after experiencing some profit taking. The stock remains a good buy.
Precision Castparts (PCP) is a good buy, though rumors of another delay in the Boeing 787 is holding back aviation suppliers. The stock is improving.
Research In Motion (RIMM) is improving but remains a good buy.
Schlumberger (SLB) held up better than most other oil service stocks last week. Aggressive bidding in the Gulf for new tracts should be good for business. SLB remains a good buy.
Smith International Inc. (SII) pulled back but is a good buy.
Southern Copper (PCU) pulled back after experiencing some commodity-related profit taking. The stock remains a good buy.
Vimpel Communications (VIP) is a good buy.
Apple Inc. (AAPL) is an improving good buy.
First Solar (FSLR) is a good buy.
Foster Wheeler (FWLT) is a good buy.
McDermott International (MDR) is also a very good buy.
SunPower Corporation (SPWR) is an improving good buy.
Don't get stressed out over the U.S. dollar's strength—I expect it to be temporary. The market is successfully retesting its lows, the Fed has once again come to the rescue, and our Blue Chip Buy List stocks simply have awesome fundamentals!
I’ll be in touch with you again next Friday like I always am, and of course, I’ll continue to send you Flash Alerts whenever the Dow closes up or down 300 points or the NASDAQ closes up or down 100 points. Keep checking my Blog and now my new Navellier Growth website! Take care.
P.S. A good friend of mine was in Barnes & Noble recently and noticed my new book, The Little Book That Makes You Rich on the special "Gifts under $20" table. After he picked up a copy to read, he called me and said it was "the little gift that keeps on giving." What a compliment!
In fact, I have to say thank you to my Blue Chip Growth readers who’ve written to me with stories of how you’ve been buying copies for your friends and family to help them get through 2008 on a healthier, wealthier, financial note. That’s the very reason I wrote this book—so I’m so glad to hear it!
For a sneak peek of chapter 2, simply visit
www.getrichwithgrowth.com. Or check out my Little Book at your local Barnes and Noble bookstore—there's a special display set up just for them!
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