Two More Successes

NOTE: This will be the last article posted until mid-January as I’m off on vacation. I hope you enjoy the holidays!

Like last week, we moved slightly ahead this week just before Christmas. We also received two excellent pre-holiday presents. First, we closed our position in Decker’s Outdoor (DECK) at $28 for a 40% profit in two months. Second, we placed a stop-limit order to sell our computer storage company at $6.80 to lock in a 60% profit in three months.

Let’s look back at this week.

MONDAY

Japan may finally emerge from seven years of deflation in fiscal 2006 as two major price gauges are expected to rise from the previous year’s levels, according to a government report. The Nikkei rose 1.4%.

Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free., our electronics retailer, was downgraded by Banc of America to “Sell” from “Neutral”. Goldman Sachs analyst Matthew Fassler maintained the stock at “in-line” following the company’s fourth-quarter earnings pre-announcement. According to Fassler in a report issued today, the company needs to “alter its assortment, consumer message, and cost structure as growth in its traditional profit centers – supplies for analog technology and wireless – begins to fade.” Fassler cited “declining wireless revenue and profit” as the “most important factor” behind the company’s shortfall, describing the company as being “in the cross-hairs of the wireless sector’s demons.” The company is also lacking “the high-margin product to replace wireless,” he said. By the end of the week, our position was down nearly 15%. I’ve placed an order to double down at $20, should it get there. The stock closed Friday at $21.29.

Our big pharma shares surged after several analysts made positive comments about the stock following the drugmaker’s recent legal victory.

TUESDAY

Stocks fell for the fourth straight day, extending the market’s longest losing streak since October, as investors became concerned that ongoing strength in the housing market could spur further Fed tightening. Even though a smaller than expected 0.1% rise in core-PPI shows that higher energy prices have not led to inflation, better than expected housing starts and building permits caught everybody’s attention. November housing starts came in above the 2 million annual rate for a seventh straight month while strong permits suggested that builders still expect starts to stay at a strong rate in the months ahead – one of the Fed’s chief concerns. This issue was re-visited again on Friday but in a positive light.

Our Japan investment gained 4.1%. The value of Japan’s recovery was further highlighted when insurance giant American International Group (AIG) reported that it will purchase $3.5 billion worth of property in Japan. Those insurance guys generally know what they’re doing when it comes to money. This largely unnoticed bit of news bolsters my faith in Japan’s continued recovery.

WEDNESDAY

Our big computer storage day! The stock gained 53.3%.

The largest drive maker bid $1.9 billion for our stock – a move that will unite two of the largest disk-drive makers. This is consistent with my investment thesis that ours was not the best company in the field, but that it was the cheapest and therefore stood to appreciate the most. I didn’t see this acquisition in the offing per se, but it goes to prove that you often do better owning the cheapest rather than the best. Valuation is vitally important when it comes to stock investing.

Just to be sure, I set a stop-limit order to sell the stock at $6.80 for a gain of 60%. I hope it just keeps rising from here, and so far it has. The stock closed Friday at $7.10 for a gain of 67%. In case something goes wrong, keep that stop-limit order active.

Third quarter real GDP was marginally revised to show a 4.1% annual rate of increase from a previously reported 4.3%. This is fantastic growth, particularly in light of all the fears around Hurricane Katrina. I hasten to remind you that around here we were never afraid of Katrina’s effect on the economy. As I wrote in my article on market timing for the CXO Advisory Group, weather almost never matters to the stock market.

Good ol’ Japan just keeps cooking along. The Nikkei index jumped 316 points, or 2%, to 15,958 after briefly topping 16,000 – the Nikkei’s highest intraday level since October 2000. Our investment gained another 4%.

THURSDAY

We placed a stop-limit sell order on Decker’s at $28, and it filled within hours.

Japan is hot again. The Nikkei index has now climbed more than 31 percent this year on renewed optimism for the country’s economic recovery, with the stronger dollar also helping support exporters.

Economics Minister Kaoru Yosano said today that Japan is entering a period of self-sustained recovery and is close to escaping deflation due to increasing consumer demand. Consumer prices here have generally been falling for years, eroding corporate profits and paychecks.

By the end of the week, our Japan market investment was up almost 34% since we invested on September 4.

FRIDAY

Japanese financial markets were closed Friday for the emperor’s birthday, a national holiday.

The week closed in America with a yawn before the holiday weekend. This was supposed to be the first day in the traditional Santa Claus rally. According to the Trader’s Almanac, since 1969 the S&P; 500 has been up an average 1.7% over the final five trading days of the year and the first two of the new year. We’ll see if that holds true this year. On Friday, the S&P; and Nasdaq moved just a tad higher while the Dow slipped just a tad lower. Basically flat.

Durable goods orders jumped a higher than expected 4.4% in November, showing strong business investment that has kept real GDP above its long-term trends. Another positive for the economy.

November new home sales sank 11.3% to a 1.25 million rate. That was bullish for those wanting signs that the Fed might stop raising interest rates. If the pace of home sales is declining, then prices might retreat or at least level-off, making it less necessary for the Fed to keep ratcheting rates higher to contain inflation.

But enough of all this business and market stuff. It’s Christmas! We’ve had a great year and we’re sitting pretty for the holiday season. The door for us to enjoy a relaxing holiday vacation is wide open, and I say we walk through it.

On that note, The Kelly Letter is taking a holiday break. I won’t be responding quickly to notes, as I usually strive to do. There won’t be an update next week and the January issue will be sent the middle of next month instead of the beginning. No notes from me means that you do nothing during this time. With our good-til-cancelled orders to buy more Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. at $20 and sell Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. at $6.80 on the books, we’re even prepared to react wisely to price moves while we’re enjoying some down time. That’s how I’ve always approached the market and it continues to serve me well. There are very few split-second actions to be taken around here.

So, a very Merry Christmas to you and yours wherever you may be. If you celebrate something else, then enjoy that. I’ll be back to you in the new year with lots of opportunities as the great game continues.

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