Strong US Economic Data

It looks like the US economy is not doing as bad as economists had feared.
Consumer spending numbers for August were strong, jobless claims continue to drift lower, and construction spending and manufacturing data also look strong.

Strong areas of economy: technology, healthcare, energy, agriculture
Weak areas of economy: home construction, autos, finance, consumer discretionary

Will the Federal Reserve lower interest rates again in October? The market is betting "Yes". I am beginning to not be so sure. If the economic numbers look good, the Fed may pause here.

Stay tuned...

Time to Bargain Hunt!

As it is the end of the year for mutual funds, many funds have been dumping their losers to take tax loses and loading up on the big movers to "window dress" and make their portfolios look better. This has created a situation where there are many bargains in the market.

This morning I purchased additional shares in Cemex SA (CX). The stock was recently trading at one-year lows on concern over the US housing market. In reality this company is a global cement play that is doing very well in emerging markets outside of the US. This company has very strong cash flow that will be only slightly affected by the weakness in US housing.

Other good sales are in domestic and foreign banks and brokerage firms that have been trashed by the subprime concerns. Two of my holdings that are down over 20%, but look very attractive and are up today include E*Trade Financial (ETFC) and Allied Irish Banks (AIB).

Real Estate Investment Trusts (REITs) also are looking more attractive with the Federal Reserve having lowered the Fed Funds rate over a week ago, making REIT yields more attractive relative to cash. With construction costs up, those companies with real estate in urban locations on the east coast and west coast where land is in short supply should continue to do well.

Three ideas for today.

Subprime exposure update

A lot has happened in the financial markets since April when I predicted the subprime mortgage market to explode. I was correct that the effects would ripple through the stock market, but incorrect about the exposure of some leading banks. Lehman Brothers and Bear Stearns exposure to the subprime mortgage market is greater than I had anticipated, creating a deeper decline in these stocks. These stocks are currently trading at less than 10x 2007 and 2008 earnings which would normally be considered cheap. Unfortunately earnings estimates are declining which does not bode well for their stock prices. In addition liquidity in the financial markets is drying up rapidly which will ultimately create much lower earnings for these companies.

I currently recommend one underweight the investment banking sector due to declining earning estimates, declining financial liquidity, and the major unknowns regarding the effect of the subprime market, debt unable to be sold for hedge fund buyouts, and potentially declining investment banking deal flow.

Gold over $700 and Oil above $76

Today gold closed at $704.60 oz., a level not seen since mid-May.
In addition light sweet crude closed at $76.30 per barrel, a level not seen in over a month.

Precious metals and energy are in high demand in the developing world.
US supplies of crude oil and gasoline are significantly lower than normal.
People are also buying commodities in anticipation of a rate cut by the Federal Reserve this month which traders are predicting will create more growth and drive up demand for these commodities and overall inflation.

Overall the story is very strong for both precious metals and energy in a diversified portfolio.
In the energy sector, some of my favorite names are: ConocoPhillips (COP), Devon Energy (DVN), and Sasol Ltd. (SSL).
In precious metals, two of my favorite names are: Freeport McMoran Copper & Gold (FCX) and Yamana Gold (AUY).