Your December 5 Market View

Right on schedule, November brought the November-December rally we’ve been preparing for since the end of summer. Some of our purchases were early and we suffered short-term setbacks because of that. Already, however, my initial outlook has proven correct and the profits are mounting.

I’m pleased with results at Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free.. We bought at $23 in early October then watched the stock drop some 27% by the end of the month amid dire headlines, poor results, and analyst downgrades. My favorite report on the stock suggested waiting to buy at $5 a share. We did not succumb to the negativity but stuck to our thesis that this is a great footwear company on the rebound. Note the “rebound” part of that. There’s nothing to rebound from unless bad news abounds. Thus, none of what transpired in October was shocking to me. It would have been nice to have waited a couple of weeks on the initial buy to get the lower price, but that’s a complaint I could have made nearly every week of my investing life to now and one that I expect to nag me until the day I place my last sell order. In other words, one never gets the price exactly right. That’s why I so often rely on gradual buys and sells. They take the pressure off, and they came to our rescue in this case. We doubled down at $17 at the end of October, which reduced our average buy price to $20 even. The stock rose 34% in November and put us up 22% so far. Good work.

We also can’t complain about Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free.. We barely saw any red ink around this purchase. It went up within a few days of buying it and just kept going up — to the tune of 10.5% last month and 46% so far. I have one 65%-75% gainer each winter and that happy designation appears intended for this stock this year. Last year it was Maxtor (+65%), the year before it was Sun Microsystems (+66%), and the year before that it was also Sun (+72%).

Then there’s Japan, the country that can’t stop getting things right lately. On Monday, its key stock index rose for the eighth straight trading day to set a new five-year closing high as export-oriented high-tech and automaker issues attracted buying on the dollar’s rise to near the 120 yen line.

Every Japanese bank reported excellent results last month. The economy looks stronger week by week. The postal reform is moving ahead. Even the children are gearing up to participate in the global economy: it was reported that 20% of five-year-olds study English. Our market investment was early. Blame that on a bad technical read by yours truly. It turned around quickly, though, and rose 16.8% in November, putting us up 24.5% so far. I expect far more before we’re done.

Last month’s purchases of Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. ended the week at +6%, +10%, and -0.2% respectively. All fine.

Regarding our computer maker, Amtech issued a report saying that it was the one to own for the next 6-12 months. The firm got it right calling to own Hewlett Packard a year ago. I’m pleased that we’re slightly ahead of the game on this call from a firm with an impressive history of calling it right.

Regarding our semiconductor maker, Citigroup reiterated a Buy recommendation and a $32 target. Getting there would put us up 28%.

Our permanent portfolios also gave thanks in November. Double The Dow rose 8% and Maximum Midcap rose 9%. That remarkable midcap portfolio is on track to post its third year in a row over 20%. You can see the results here. While I consider the superiority of this simple long-term approach to beating the market to be one of the best little secrets off Wall Street, feel free to tell your friends and family about it. Before long, expect a fresh book highlighting it from the same fingers that typed this to you.

Sad to say, not everything is going so swimmingly. We’re still waiting for last month’s investment in Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. to bear fruit. It’s down 7% despite reporting excellent results. We’ll double down if it reaches $12.

Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. looks to be doing everything right, but eked out a mere 3% gain last month and is still down 9% from our purchase. It announced interesting holiday promotions and began selling the hot Apple iPod. This is definitely the season to be holding a well-positioned retailer and I’m keeping the faith.

I’m watching several positions for possible buys, but will mention just two here. Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. looks ripe for a strong rebound and has already begun rising. The reason is the semiconductor cycle, which has many companies in need of new equipment made by the company. The stock broke through $18 last month and looks headed to $19. I’d like to pick up shares below $18.50, but might end up buying higher if a pullback appears unlikely.

While chip sales are up, prices are down, yet the semiconductor index has risen 17% since November 1. That’s a lot of rising on a net profit change of zero. That prompted Goldman Sachs analyst James Covello to write, “Our main takeaway is that the recent semi rally is not justified by any significant fundamental improvement [in the chip market]. Average sale prices remain weak, and we expect continued weakness into 2006 due to excess (factory) capacity and tough (year-over-year) comparisons.” It’s hard to make a call on this one yet, particularly in light of Citigroup’s countervailing opinion shown above, so we’ll keep an eye on prices for a while. I feel good holding our semiconductor maker. I’m not sure about this one yet.

We bought CBOT Holdings on October 21 for $108, watched it explode to $134 and then deflate back down in a matter of days, and sold on October 31 for a 1% profit. It then shot back up to $121, making me look like a crusty old worrywart, before promptly crashing a second time to restore my youth. It’s now around $95 and not nearly the girl of the ball that it appeared to be after its IPO. The problem is that its crosstown rival, the Chicago Mercantile Exchange, is up tenfold since its IPO three years ago. Everybody hopes that CBOT is the next CME, but it’s not quite the broad business that the Merc is. At a P/E of 137, CBOT looks pricey even below $100. However, it’s a key player in the fast-growing securities trading business sector and could pull a Google by throwing all reason to the wind and rising several hundred percent on nothing more than technical momentum. “It’s hot and getting hotter!” hardly makes for compelling analysis, but has proven time and again to make money in the market. Could this be such an issue? Maybe. It bears watching, so that’s what I’m doing. If you’d like to know if and when we buy, please join us. The first month is free.

Let’s take a moment to look at the big picture.

In calling for this winter rally, I pointed out several reasons that the economy probably wasn’t headed for a recession. Back in September, feelings sagged in light of two Category 5 hurricanes, a high-priced war in Iraq with a cloudy outlook, a Fed that continued raising
rates, and expensive oil.

The good news was that energy prices were coming down, real estate was still climbing, corporate earnings were up, and the impact from the hurricanes appeared to be far less than feared by some (though not by me).

So far, the good news is winning.

The last two weeks of November found strength reported in every economic sector. Retail store sales, durable goods orders, consumer confidence, third quarter GDP, and even new home sales were all healthy. With November nonfarm payroll growth at 215,000 and above the average 185,000 monthly gain in the two years before Katrina, almost every part of the economy is looking solid.

Higher interest rates are not dousing the fire.

Consumers are still spending as evidenced by the ringing of holiday registers. The National Retail Federation reported a 22% surge in Thanksgiving weekend sales. Wal-Mart said that November same-store sales will rise 4.3% this year. Shoppers navigated through the crowds taking advantage of early store openings and special deals. The NRF called last weekend’s tally, which included Black Friday, a “blockbuster.” This season is shaping up to be the second-biggest selling season since 1999, according to the NRF.

Heating bills may be a bit higher this winter, but maybe not. This past Monday the price of crude dropped 2.4%, thereby extending its 19% decline from its August high, while heating oil hit a four month low. Even if prices rise a tad they will nip just a little from the retail environment.

All in all, good job, America. Hurricanes, wars, asset price bubbles, rate-raising Feds all be damned. The resilience of the American economy never ceases to satisfy.

The key component to watch is the Fed. The minutes of its November 1 meeting made clear that it is monitoring energy prices closely as a signal for what to do next with interest rates. If it appears that high energy prices are pushing all prices higher (inflation), then it will continue raising rates. If not, it might hold steady. The former would put the brakes on the stock market. The latter would push the accelerator.

As always, I’ll keep watching and let you know how to best position your money.

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