Last week, the market moved a tad lower on indications that economic growth is slowing.
For the week:
Dow ……………. 11,986 -0.9%
Nasdaq …………. 2,331 -0.9%
Nasdaq 100 ……… 1,704 -0.8%
S&P; 500 ………… 1,364 -0.9%
S&P; Midcap 400 ….. 776 -1.4%
S&P; Smallcap 600 … 384 -1.8%
October ended up sharply:
Dow ……………. 12,081 +3.4%
Nasdaq …………. 2,367 +4.8%
Nasdaq 100 ……… 1,733 +4.8%
S&P; 500 ………… 1,378 +3.1%
S&P; Midcap 400 ….. 785 +4.1%
S&P; Smallcap 600 … 390 +4.8%
Last Monday saw a relatively flat market as investors began wrapping up a good October with a few sales and a few purchases.
KLA Tencor (KLAC) received an upgrade that sent a spark through the semiconductor sector. Oil fell 4% to $58.36 per barrel.
Wal-Mart (WMT) said that same-store sales in October would be up only 0.5%, its lowest in six years and much lower than the 2% to 4% forecasted. That set the tone for this week’s concern over economic growth.
The Commerce Dept. reported that the core-PCE deflator ticked up 0.2%, right on projected target and keeping the year-over-year change at 2.4%. The Fed wants to see it below 2% to know that inflation is under control, but the fact that it wasn’t above forecasts kept fears out of sight.
Our portfolio movers: Debt Collector +2.2%…Computer Maker +1.1%…Oil Services -2.7%…Computer Security +2.4%…Online Media +2.4%
The Dow ended flat while the Nasdaq rose 0.6%.
On Tuesday, buyers showed up a little tired after such a great October. As you read above, the Dow ended the month up some 3.4% and the Nasdaq up 4.8%.
The Chicago PMI fell to 54.1%, the lowest it’s been in more than a year. It was strong last month, so the letdown disappointed some and led to a questioning of the Fed’s soft landing scenario. Could a recession still be in the cards?
On top of that, oil rose back above $58.
Dell (DELL) received an upgrade to Neutral at UBS with a price target of $25. The next day, Dell would be upgraded twice more, this time by Prudential with a $28 price target and Bank of America with a $24 price target.
Our portfolio movers: Jewelry -1.8%…Computer Maker +4.1%…Media -1.3%…Student Loans +2.8%…Pharma -2.1%…Online Media +1.5%
The Dow slipped a tiny 0.1% and the Nasdaq rose 0.1%.
Wednesday brought November and a falling market, courtesy of more sour economic news. Earnings season is definitely coming to a close and the focus has returned to the economy.
The ISM index fell to 51.2% for October, well below the forecasted 53% and the lowest it’s been since June 2003. More evidence of a hard landing? Perhaps. However, the flip side is that it’s less evidence of inflation. The prices paid part of the ISM plunged to 47% from 61%. That’s the lowest it’s been since February 2002.
The market came fresh off of its great October, decided that it was time for a little fretting, and the report provided fuel for it.
Our portfolio movers: Debt Collector -3.5%…Computer Maker -1.3%…Oil Services -2.3%…Semiconductors -1.5%…Online Media -1.3%
The Dow fell 0.4% and the Nasdaq 1.4%.
Thursday continued the economic hand-wringing with a report from the Labor Dept. showing that productivity hadn’t budged since June. The concern there is that companies could attempt to balance low output with higher wages. Indeed, that showed up as a 3.8% rise in unit labor costs. Year-over-year, that computes to a 5.3% growth rate in the third quarter, the highest it’s been since 1982 and a glaring sign of inflation.
Yes, the familiar concerns are back after a nice stay at Strong Earnings Resort. We’re back to the office, and it’s stacked high with economic reports.
Wal-Mart made good on its forecast of a mere 0.5% same-store sales growth in October, then went a step further by warning that November growth would also be close to zero.
Intel (INTC) was downgraded by Merrill Lynch, but then Bank of America said recent price weakness in the stock was reason to pick up more shares.
The Dow edged down 0.1% and the Nasdaq ended flat, not exactly catastrophic for a day of bad economic reports.
Friday saw another gentle downslope but mixed performance among our holdings.
The big report came from the Labor Dept. It showed that October non-farm payrolls rose 92,000 compared to expectations of 125,000. That looked bad at first, but in hindsight we saw both the August figure and the September figure raised considerably later. So, that left hope that October would be increased later as well. The headline figure, though, was that unemployment came in at 4.4%, the lowest it’s been in five years. Coupled with an hourly wage that crept higher, that figure makes continued consumer spending look all but assured. That’s the good part. The bad? You guessed it: inflation risks.
Just when the economy didn’t need it, oil rose 2.2% to $59.13 per barrel. Notice that with all the fluctuations, it’s hardly worth paying attention to oil until it moves outside of the $55 to $60 range. That’s enough range to make headlines without making a meaningful impact on the economic outlook. A move from $55 to $60 is 9%. Going back down is a move of -8%. So, while the price of oil moves a lot and is reported each time as a point of great concern or benefit, it generally doesn’t matter as much as the media would have you believe.
Our portfolio movers: Debt Collector -1.7%…Jewelry +2.1%…Computer Maker -2.3%…Student Loans +1%…Oil Services +2.3%…Computer Security +1.7%…Online Media -1.3%
The Dow faded 0.3% and the Nasdaq a slim 0.1%.
As is often the case, Econoday provided a gem of a recap:
The economy is slowing and it is not doing so evenly. This unevenness should not come as a surprise but markets seem to have forgotten this. When the economy is in transition, it is common for different sectors to be experiencing different levels of weakness and strength. Currently, construction and manufacturing are weakest and this is very typical for an economy that has seen a recent runup in interest rates. We can continue to expect some weakness in these sectors while services remain moderately healthy. As before, the critical issue is the lagging in core inflation and related inflation measures. Commodity prices are down but they are known for giving false signals of change in overall inflation. It is the lagging costs of services and labor that are the hold ups for core inflation to ease sufficiently. Basically, the economy is still in soft landing mode but core inflation is taking its time to come down. And the Fed remains on hold.
If you’ve been waiting for a pullback to put more money to work, now’s your chance. We may get a little more short-term downside, but in general we’re in an upward-moving market and you should be buying. Even if you don’t buy something, though, at least remain firmly invested. Do not get scared out of the market by talk of recession. Use dips to add to positions or buy new positions at bargain prices.
Don’t have a list of what to buy should lower prices present themselves? Fork over a penny and I’ll give you a month to look over all of my Kelly Letter research complete with target prices. Interested? Learn more here.
After reading the market telescope, we’ll take a look at a tantalizing semiconductor company.
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Market Telescope
BULLISH
From Barron’s:
More than a third of the institutional investors responding to the la
test Big Money poll expect the [Dow] average to reach or surpass that big, round number [of 13,000] by the middle of 2007. What’s more, they’re among the same folks who said six months ago the Dow would top 12,000 by the end of this year, another prediction that seemed preposterous at the time.
SHORT-TERM BEARISH
From McClellan Market Report:
Stock prices at long last appear to be responding to the overbought condition that had built up in the uptrend since July. The 40-week cycle which was due to bottom now should still make an appearance, fashionably late this time with a bottom in early December. Post-election shock is the likely spark to get the correction rolling. Expect an end to the correction around Dec. 6, then more upside heading into 2007.
MEDIUM-TERM BEARISH
From Thomas McManus, Chief Investment Strategist, Banc of America Securities:
Valuation is no where near cheap enough to protect you if a deceleration of earnings is to come. We think the market is vulnerable to a 5% to 10% correction in the next six to 12 months.
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Semiconductor Manufacturer
Mon +2.2% | Wed -2.5%
We’ve been buying a certain semiconductor maker for nearly a year, during which time I’ve given kudos to this rival for its masterful job of leapfrogging the competition and taking market share. My thesis for buying the leader was that the tide was about to turn, that the dominant company’s new chips would once again command the lead, and that the giant had learned from its mistakes and would not prove so easily disrupted again.
That thesis has been proven correct. On May 28, I wrote:
What jumped out at me in [Caris & Company analyst Rick] Whittington’s report was his conviction that [the giant] won’t make the same mistakes again. He said that the “organizational disconnect” between process and design, in addition to [the giant]’s underestimation of [this company]’s capabilities, led to poor execution. This is “not likely to be repeated in the period ahead.”
Indeed, this company’s shares peaked on Mar. 3 at $42.70, then tumbled 60% to $16.90 on July 24. They rebounded to $27 in mid-September, and now they’re getting close to $20 again, still less than half of what they were in March.
Are this company’s shares a bargain now, primed and ready to be bought for the firm’s eventual comeback against its dominant rival? One of the directors thinks so. Last Wednesday, he bought 100,000 shares at $20.85. That’s a $2.1 million bet on the company’s future by an insider who knows the company and stock very well.
This insider has a good record of calling this company’s price bottoms. Catherine Shu wrote last Friday at Barron’s Online:
[He] bought 100,000 shares for an average price of $18.22 on July 28, right before the stock started on a brief rally, climbing as high as $26.98 on Sept. 21 before falling again on the company’s third-quarter earnings report. His three earlier purchases were also made during dips in [the company]’s share prices. Including his first purchase of [the company’s] shares on the open-market in February 2005, [he] has spent a total of about $4.8 million on 250,000 shares, paying from $14.30 to $20.85 each.
[This] is a good company. It managed to make the giant’s shares the bargains that we bought and will one day profit from. Now, the giant is back at the front of the pack, but this company didn’t disappear. It’s working on its own next generation of chips, market-share grabbing plans, and capacity growth. This company has managed to assert itself as one of only two companies that can power your computer.
Just ask Dell. It started selling laptops with this company’s chips on Wednesday. This week marks the first time in Dell history that the company has sold a computer with a chip not made by the giant. The Wall Street Journal wrote on Thursday: “Analyst Samir Bhavnani at Current Analysis says that, ‘For [the giant], it’s like your longtime girlfriend telling you she wants to see other people.'”
Is it a coincidence that the director timed his purchase with Dell’s laptop rollout? Probably not. Prior to this week, something could have gone wrong with Dell’s plans. Now, the machines are going out the door. It’s happening. Dell is selling this company’s chips, shares of the chipmaker are half what they were earlier this year, their P/E is 17, their profit margin is 12%, their quarterly earnings growth is 77%, and analysts are warming up to the now-fallen challenger.
Analyst cheerfulness is important in getting institutional buyers onboard. Money managers for banks and other large organizations need to justify their actions in the event of a mistake. Being able to point to an analyst report as the reason for buying shifts the responsibility a bit. Therefore, stocks with lots of positive analyst comments are on more big money radar screens than stocks with few positive analyst comments, or negative comments.
On Tuesday, AmTech said that it’s time to add to positions in this company’s stock. They specifically mentioned the company’s ramping of new relationships with top-tier PC makers such as Dell, Hewlett-Packard (HPQ), and Lenovo. They believe that this company will once again gain share in commercial PCs in 2007.
Owning shares of this company along with our carefully-built position in the giant’s stock would give us the entire semiconductor industry, with both leaders purchased at reasonable prices.
I’ve set a target buy price of 
for shares of this company. This is not a firm order yet, but just a watch price. As always, I’ll let Kelly Letter subscribers know if and when I place an active order.
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