Rising Portfolio In A Tepid Market

It was a relatively flat week that saw our portfolio make steady progress.

Our Dow 1 strategy is up 13%, Double The Dow is up 6%, and Maximum Midcap is up 11%. I’ll send a reminder note next week that Tuesday is the last day of the month and that you should make your monthly buys on that day.

Ariba hit our stop-limit order to sell at $9.60 last Tuesday. We gained 60% since buying at $6 on Sept. 14. The stock continued rising throughout the week, however, and closed at $10.33 on Friday. It’s always frustrating to see that. With the company’s own outlook for a few flat quarters, I hope that the stock settles back and that we have a chance to buy in again at a lower price to participate in the company’s long-term changeover to a subscription-based business model. Even if we don’t get that chance, though, a 5-month, 60% gain is nothing to sneeze at. As my grandfather used to say, if I could make that mistake over and over again, I’d be a happy man.

Our longtime buy target, Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free., closed the week at $18.80. I’m bullish on the semiconductor capital equipment sector and this company leads the list of participants. I’ve moved the stock from our watch list to an open limit order to buy at $18.

Remember last week’s falling oil prices? They turned up again this week. Oil rose from $61 a barrel at the end of last week to almost $63 at the close of this week. We have the nutcases to blame again. There was an attempted suicide bomber attack on a Saudi oil facility on Friday, and oil production in Nigeria was threatened by insurgents. Saudi Arabia is OPEC’s biggest producer and more than half of its output comes from the area in which the attack took place. That sent crude up nearly 4% on Friday. Of course, high energy prices fan fears of inflation, the monster nobody wants to appear because it’ll bring out the Fed’s higher interest rates.

Speaking of inflation indicators, we received the Consumer Price Index (CPI) data on Wednesday. The core rate rose 0.2% last month, a tame figure that was widely expected. Compared to last week’s surprisingly strong rise in the Producer Price Index (PPI), this week’s report came as a relief.

One modest reading doesn’t leave me sanguine, though. We cannot lose focus on the Fed’s intent to curb inflation. The tightening rates to this point have been just getting back to neutral from the very accommodative low rates following the Sept. 11 attacks. Now, though, we’re at the edge of neutral and heading into restrictive.

Restrictive on what, you ask. Earnings. You’ll recall from my writings at the end of last year and earlier this year that I expect earnings to slow down in 2006. I’m not alone in that forecast. The problem is that street estimates for the second half of the year, while lower than late last year, are still not low enough. That leaves the market ripe for downside earnings surprises, and sinking stock prices. We’re not there, yet, and nothing terrible is imminent. I want to be clear that I’m not forecasting a crash next month.

Nonetheless, events are unfolding to support my thesis that we’re going to see a buying opportunity in late summer or early fall before a rally through year-end and into early 2007. Late summer is about the time that the realization that second-half earnings will slow to single digits will kick in. If we continue down this path, you can be sure that The Kelly Letter will raise cash before that time and prepare to take advantage of buying opportunities.

Let’s take a closer look at Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free..

Brean Murray upgraded the company from Hold to Accumulate, sending the stock up 7.6% on Thursday and another 2.4% on Friday.

On Thursday, the company reported that fourth-quarter profit tumbled due to charges related to investments in several large wireless telecom portfolios last year. This was already known from an earlier update and was already priced into the stock. Profit fell to $6.1 million, or 16 cents per share, compared to $12.6 million, or 34 cents per share a year ago. The decline was blamed on impairment charges of $15.3 million, which cut profit by 24 cents per share.

Revenue fell to $53.8 million from $57.5 million a year earlier. Analysts, on average, projected profit of 16 cents per share on revenue of $56.7 million.

This turnaround story is progressing as planned.

We initiated our position on Feb. 10 at $18.45. After dropping immediately following our investment, the stock is now up 3.5% for us after this week’s 9.5% gain.

If you’d like to read reports on Anheuser-Busch (BUD), Dell (DELL), Intel (INTC), and RadioShack (RSH), please sign up for a free one-month trial. Your welcome notes will contain the reports.

We sold half of our position in the Japanese market on Feb. 16 at $64.55, a 37% gain. The fund dropped after that, but then rebounded this week and is now sitting at a 37% gain for the remaining half as well. Our Japan bank also had a strong week but is up just 3% for us so far. I’m still looking to pare back our Japan investment for the short term. The bank has been fluctuating around the unchanged mark for us since we first invested on Nov. 3. With the whole Japanese market looking ripe for a short-term setback as fickle foreign money leaves, I’m itching to get out and get back in when the Nikkei 225 drops below 14,500. It closed this week at 16,102. Subscribers, keep checking email.

If you’ve been watching the Olympics, you know that Japan had won zero medals until women’s figure skating on Thursday. Suddenly, out of nowhere, Japan’s Shizuka Arakawa skated her way to a gold medal when the top contenders from Russia and the United States each fell during their routines. It’s a moment in history as Japan’s first-ever Winter Olympics figure skating gold medal. The unexpected triumph set a festive mood on Friday that’s still lighting the air over the weekend as I write.

As an American living in Japan, I take pride in the accomplishments of both countries. So far in the Olympics, Germany is in first place and the U.S. is in second. Japan is nowhere near the top. Yet, there’s something charming about an entire country turning out to celebrate its one victor, a lovely woman who was not considered a possibility. Even Prime Minister Koizumi, the man whose reforms have led the economic recovery from which we’ve benefited so handsomely, celebrated by calling to congratulate Miss Arakawa over the phone.

As a global investor, I noticed something little mentioned in the fanfare. Yes, Miss Arakawa is Japanese, but she trains at a rink in the United States and her coach is Russian. Even in the Olympics, the world is shrinking. Interconnectedness is everywhere. The only abiding trait to which we can attach value is quality. We’ll seek it wherever it’s available.

I hope you’re enjoying the weekend in your part of the world.

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