Session of 03/27/2007

[DragonAMG]

Great call on CIMT.  I was fortunate to get in yesterday at $2.65

I also bought NVTL and GIGM.  CHEERS

[David Randolph]

I'm not in the game of making general market calls, but I don't know for how long the general market will be worried about the housing market when LEND itself  is now up 4% after being down more than 10% earlier in the session.

[Windsurfer]

Keep the recommendations coming David we still have more time to make money in this Bull market.  The Fed is pumping out money. our government will keep spending like crazy, and the rest of the world is awash in Global Liquidity.

Below is from a market analyst:

A few days ago, Chairman Ben Bernanke confused everyone by making a slight change in the Federal Reserve's policy.  Essentially, he deleted the part that implied a bias towards higher interest rates.  Now the major financial houses are divided over which way rates will move next.  Because interest rates have a big impact on investments, we want to clarify the situation for you...

If you're a long-term reader of these updates, you may recall that when Bernanke took office, we suggested that the key to Ben's mind lay in his previous body of work.  Bernanke rose to fame in academic circles because of his research on the Great Depression -- specifically what caused it and how to avoid another big D in the future.

We theorized that if the Fed today must choose between inflation and depression, Bernanke will do everything he can to prevent the latter, even (to use his own expression) if that means dropping money from a helicopter to keep liquidity as high as possible.  We might add, even if that liquidity results in soaring inflation.  The last thing he wants is to go down in history as the Chairman who caused Great Depression II.

In your last update, we argued that the subprime mortgage crisis, while serious, is unlikely to derail the economy.  Compared to the 1990 real estate crisis, today's meltdown in subprime mortgages is quite limited.  Nonetheless, Mr. Bernanke's change of policy was clearly intended to help keep liquidity high in order to ease the situation in the mortgage industry.

This is the only instance we know that a Fed Chairman has ended a bias towards tightening in the middle of a period of long-term, worldwide expansion.  (Global economic growth is now around 5% annually.)  And we feel it is an overreaction on his part.   

After all, every way we look at it, inflation is a much bigger threat than recession/depression today.  Industrial commodity prices are rising strongly.  The dollar looks weak.  Money supply is huge and expanding rapidly worldwide.  Core inflation, the most widely quoted inflation measure, is near a 10-year high.

Core inflation, as you may know, resembles the Consumer Price Index except that it leaves out energy and food costs.  If you are not a government economist, you probably think that the price you pay for energy and food matters.  So let's consider what these two factors are up to today ...

NON-CORE INFLATION ... IGNORE IT AT YOUR PERIL



Let's begin with food, since we talk about energy more often. (Well actually, food and energy are closely related today.  Here's why...)

The centerpiece of U.S. alternative energy policy today is ethanol, a fuel made from corn.  We deplore this policy, which could only have been designed by someone who wanted to discourage America from developing alternative energy.

As we have said before, meeting our nation's fuel needs with ethanol will simply take too much corn.  In a world where food and water are becoming scarce, it makes little sense to convert food into auto fuel.

Already, corn prices have doubled as a result of this policy.  Now, we have had periods before when corn prices doubled as a result of drought, which reduced supply.  But those were temporary price increases that eased when rainfall returned to normal.  This time, we have an increase in demand which is unlikely to ever lessen -- unless Americans give up their love of the automobile.  That means food prices will rise, and stay higher, which puts pressure on the CPI to rise.

Turning to energy itself, the other component left out of core inflation, clearly it is in a dramatic long-term uptrend.  Admittedly, August 2006 saw the beginning of a correction in oil prices, but that correction looks to be ending.  (Oil rose 2.7% last week to close over $62.)  If it surpasses $65, we think the correction will be definitely over.  Oil will have broken through horizontal resistance, its 200-day moving average, and similar technical indicators traders use to judge changes in trends.

We don't know exactly the situation in Saudi Arabia (no one does, apart from the Saudis themselves), but we think it is suspicious that Saudi oil production peaked in 2004 despite rising demand.  We also are concerned that oil inventories have fallen dramatically.  Worldwide growth isn't likely to slow anytime soon.  So even if oil doesn't break above $65 this time, it will next time.  And a jump in oil prices, combined with rising food prices, certainly spells higher inflation. -- especially if the Fed holds interest rates steady.

However, one thing we are not worried about to day is the stock market...

[David Randolph]

PFSW analysis:

I used to overweight the importance of the Price to Sales Ratio and the Price Earnings Ratio in my analysis, and that is part of the reason I previously owned PFSW, the stock has one of the lowest revenue multiples I've ever seen, at 0.11.

But now I see that the most important issue isn't the ratios now, but the expectations one can get, for the future, given the current fundamental information. And I can't see the future for PFSW, there's no visibility because the company continues to lose money, despite rising sales.

An investor looks for a high earnings yield, and there's no earnings yield in PFSW.

My take is PFSW needs a catalyst, a profitable quarter, to move sharply higher. I won't consider the stock for now, but I can see the potential if it gets somewhat more efficient and profitable. Results will be out on April the 2nd, I'll be watching.

I gave it a 6 out of 10 rating.

[David Randolph]

Nice article Windsurfer, thanks

I've been making an effort to design an investment strategy that, by being microeconomic and based on the business perspective, ignores the general market movements.

But it is curious to note (between others), the following sentence:

«In your last update, we argued that the subprime mortgage crisis, while serious, is unlikely to derail the economy.  Compared to the 1990 real estate crisis, today's meltdown in subprime mortgages is quite limited.  Nonetheless, Mr. Bernanke's change of policy was clearly intended to help keep liquidity high in order to ease the situation in the mortgage industry.»

It says that the 1990's real estate crisis was worst than now (at least for now). And what did the stock market do in 1990? It had a correction, and then the long term bull market continued to new highs.

I believe this will also be the outcome now, even though I don't care about the market being a bull or a bear when I'm picking individual stocks.

[Se7en]

David, can you please take a quick look at CECE's earnings of last week, the CC is today after the market close! Before you said you liked the stock, maybe now is a good opportunity to buy it after it's recent drop.

CECE is having a correction, which is great ! If it goes down to the $13 area I'll probably buy it to the Main Portfolio, I need something in the environment space and CECE looks like an astounding pick in that sector.

[Windsurfer]

David:

While the subprime mortgages have been about 20% plus of the market for the past two years they are only about 1% of all outstanding mortgages.

This is from a news paper report:

Greenspan said that if home prices "would go up 10 percent, the subprime mortgage problem would disappear."  (Cut interest rates and the problem is solved)

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson also have said they don't expect the problems of the subprime mortgage market to spread through the financial system and hurt the economy.

What Bernanke is really saying is that he will cut interest rates if they see a real problem.  Just try to find a cheap foreclosure today.  To many investors are ready to snatch them up.  The people that will really be hurt are the people that were talked into the subprime mortgages.

[BigSully1]

David, how about putting medifast MED on you poll for tommorrow, or you could take a quick look today if you have time. THNX

http://stockcharts.com/h-sc/ui?s=MED&p=DAILY&b=5&g=0&id=p

[buddjas1]

CIMT looks to be breaking out of an intraday symmetrical triangle.

3.30

[mooney]

Hi David could u put VA on your poll.
thks

[David Randolph]

DLSL.OB analysis:

From what I was able to see, this OTCBB stock has sound fundamentals and seems attractive, but I didn't look under the carpet and you know how OTCBB traded stocks can be tricky.

Even though long term fundamental trends are positive, with my long term estimates showing a 30% average annual gain, usually penny stocks (here "penny" being OTCBB traded) don't behave in a smooth manner, look how DLSL.OB is up 300% in just about 5 weeks.

What this type of stocks usually does is run up a lot and then go down by a lot, they don't move slowly, also because liquidity is scarce.

I gave it an 8 rating but I'll pass the investment, I'm not looking to invest in risky stocks from the OTCBB, I don't need extra risk to beat the market by a wide margin.

[David Randolph]

The poll is on with today's candidates. Tomorrow I'll be covering just one stock, because with three analysis per day I can't make that "10 page course in Fundamental Analysis" that I need/want to do.

See you tomorrow

[BigSully1]

David, how about putting medifast MED on you poll for tommorrow, or you could take a quick look today if you have time. THNX

http://stockcharts.com/h-sc/ui?s=MED&p=DAILY&b=5&g=0&id=p

MED (a profitable DIET competitor) closed just one penny off it's HOD at $7.00. I think it looks good to go tommorrow. Maybe some minor resistance at $7? What do you chartists think? I already bottom fished/ value hunted it around $6.40, as it looks to me to be a great value. I'm still learning to interpret the charts. How bout some help here? THNX

[Dracull]

Hi David,

Can you see tomorow about COGN? I'm quite curious and I believe they work in a field that can grown quite well.

[David Randolph]

Hi David,

Can you see tomorow about COGN? I'm quite curious and I believe they work in a field that can grown quite well.

Ah, I forgot it for today Dracull, sorry, will put it for tomorrow.

Today's winner was CECE.