Not As Bad As They Say

After a week of steadily sinking lower, the market managed a slight recovery today. The pessimism over inflation still persists, yet the strength of the economy remains clear and I continue to believe we’re heading into a solid winter rally.

The consumer price index rose 1.2% in September. That represents the fifth month of 0.1% gains. Put differently, the inflation rate is roughly 1%. Gas prices are lower on the declining price of oil. The inflation worry is not showing up in the numbers.

Also, remember all that talk about a post-Katrina recession? A chorus of investment pundits expected consumers to stop buying. They didn’t. Retail sales grew 1.1% in September. That’s positive news before holiday shopping gets underway.

The Fed remains fixated on inflation and has set the stage for three more rate hikes before it’s finished. That is not good for the stock market. Higher rates have three immediate dampening effects:

- They lower lending spreads and thus lower bank profits

- They make borrowing money for business more expensive and that can lead to a lack of investment which leads to a lack of growth

- They increase the payment on an adjustable-rate mortgage (ARM) which uses up money that could have been spent elsewhere

So, the market has been in sell mode for about a month now. The financial media, true to form, has overblown the extent of the selling, referring to it as “ugly” and “relentless” amid talk of a recession. Bear in mind that we saw a decline of this scope back in early March. Things have gone pretty well since then, I’d say.

Meanwhile, our portfolio is doing roughly what it should be doing. The stocks we bought in the past six weeks are mostly down along with the rest of the market. We then bought again as the market kept dropping. From here, we’ll probably be able to pick up more investments before the winter rally starts.

And it will start. As fears and pessimism have driven prices downward, the health of the economy has become clear. What’s more, companies are poised to log a solid earnings season. It actually started this week with GE meeting expectations, but the big volume begins on Monday. When investors weigh the figures objectively, as they eventually will, they’ll see a cheaper price on a better market, and they’ll buy stocks again.

Onto our investments.

Investments are shown only to KELLY LETTER subscribers. <br  />Click to try the letter for free.
Click to try the letter for free.”>
are high-risk, potentially high-return investments. The former is up 15% so far and the latter is down just 7%. We caught a glimpse of the explosive potential of these two on Monday when they rose 11% and 7% respectively. The e-commerce company has held on to those gains while the computer storage company gave them back on a J.P. Morgan downgrade to underweight from neutral.

The downgrade report said that the next stage of the company’s turnaround story may take longer and be more challenging than the initial one. The broker told clients that the critical milepost for the company is the full revamp of the company’s desktop drive cost structure. “Here, we believe that the proof lies in the mid-part of 2006, which places the company in a tough position over the interim,” J.P. Morgan said.

It places the whole computer storage sector in a tough position, but we’re betting that it will pull through and that our company, as the cheapest of the big players, stands to gain the most in the market.

The rest of our portfolio is cooking along. The recent mainstays are slightly down, led by our footwear investment at -10.1%. Our long-term investments in media and software are up a respective 56% and 10%.

To keep the slightly negative standings in perspective, remember that both the Dow 1 and Double The Dow are down 10% so far this year, and each has a superb long-term track record. Fluctuations are normal, particularly when we’re seeking cheap prices in a falling market. We can never get the exact bottom, but getting within about 10% of it is fine.

At this time last year, Double The Dow was down some 16%. It then rose 25% to finish the year at +5%.

So, do not fret. In fact, keep yourself in buy mode. It’s always better to commit money when prices are down than when they’re up. I consider all of the investments in our portfolio fair game for additional money.

Beyond that, I’m still looking for places to put our additional Japan money. Two stocks I’m watching are Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free.. We already have a leveraged position in the Nikkei 225 index. Individual stocks may be the right call for the remaining 2/3 of our Japan strategy. Stay tuned.

If you’re looking to read more about Japan’s recovery, check out the article from last week’s Economist, located at the top of the Japan country briefing page.

Two other companies that I’m researching and watching at the moment are Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free.. As always, I’ll let subscribers know with plenty of time to act if and when I decide to invest.

Enjoy the weekend.

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