Friday, January 27, 2006

GDP Slowdown Welcomed by the Market

Morning News of Note:
  • PG: Procter & Gamble's Net Rises 29% Procter & Gamble Co. said its net income rose 29% in the fiscal second quarter, amid strength in its P&G and Gillette businesses The consumer-products giant, whose products include Tide laundry detergent and Crest toothpaste, also raised the midpoint of its fiscal full-year earnings outlook, due to strength in its P&G and Gillette businesses. (Full Story) WSJ
  • GS AXP AZ: Goldman, Allianz, AmEx to Buy 10% Stake in Biggest China Bank Goldman Sachs Group Inc., Allianz AG and American Express Co. will sign agreements today to buy 10% of China's biggest bank for $3.78 billion, people familiar with the matter said, as Beijing's drive to overhaul its banking system shows no sign of ebbing. Goldman Sachs and its private-equity funds will invest $2.58 billion for about 7% of state-owned Industrial & Commercial Bank of China, Allianz will buy a stake of about 2.5% for $1 billion, and American Express will invest $200 million, according to two people with knowledge of the plans. (Full Story) WSJ
  • UNP BNI CSX NSC: Boom times for railroads-FT. The US rail industry has been performing very strongly over the past two years as stable growth in the economy has given rise to increased demand for freight transportation. Despite higher fuel costs rail operators have been able to pass on those increased expenses to customers as well as maintain pricing power. Jim Young, CEO of Union Pacific (UNP), was optimistic about the prospects for 2006, after the company more than tripled its net profits in the fourth quarter. “We expect demand will continue to be strong."
  • Fund Flows: equity funds rptd outflows ($4.2bln), ex-ETF funds rptd inflows $2.2bln; ETFs rptd outflows ($6.455bln) from all sectors but intl and utilities; ETF flows: QQQQ $690m, XLU $284m, XLP $137m, EEM $131m, EWJ $121m, SPY ($2.139bln), MDY ($1.526bln), DIA ($1.225bln); taxable bond funds rptd outflows ($244m), HY funds rptd outflows ($270m); money mkt funds rptd outflows ($7.635bln) -- AMG Data
  • Mad Money Summary: Cramer believes it is time to enter drugstore stocks. He says to look at CVS (CVS), even though it is not best of breed like Walgreen (WAG), because the stock looks cheap. He says he would not sell Walgreen to get into CVS, however, because Walgreen is "a winner." Discussing the recent headlines on Teflon, Cramer said the best way to play the chemical's link to cancer is to find the chemical's replacement and buy it. According to Scientific American, Omnova Solutions (OMN) is making a chemical for nonstick coating that it less problematic than Teflon's Perfluorooctanoic Acid. Cramer said that the earnings for Lyondell (LYO) did not bother him, and lead him to believe the stock may be cheap because the price of natural gas is rising slightly. Cramer then discussed bankruptcies and the erosion of the middle class, saying this creates an opportunity in the form of First Cash Financial Services (FCFS), a pawnshop. The stock will do well, he said, because people have such bad credit that they are unable to get bank loans. Cramer then welcomed Steven Rowley, the CEO of Eagle Materials (EXP), to his show. In November, Cramer highlighted the stock. It has risen 50 points since that time. Rowley said that shareholders were positive on Eagle's earnings and that there was still plenty of upside. In the lightning Round, Cramer was bullish on BMD, UNH, KLAC, CDIS, GLW, URBN, DYN, MIR, SHLD, OXPS, MRVL, NBIX, ABB, ET and GW. He was bearish on PIR, PKS, LTXX, BEBE, PGN, SNDK and CREE

Market Comments: 4Q GDP came in at a much slower than expected +1.1%, the slowest pace in three years. But the market rallies huge on the news. I think this is the market saying that now the Fed has to stop raising rates soon or risk causing economic contraction.

There were also some very strong earnings reports that helped get things going. BRCM crushed estimates and guidance; MSFT was a very positive surprise; PLAY reported a good quarter; and PG beat and raised guidance this morning. The only real letdown was SNDK, who said that next quarter would be "seasonally soft" as they instituted significant price cuts.

This is a lot of strength at the open, especially for a Friday. Let's see how much profit taking sets in ahead of the weekend, or if short covering keeps the market at these levels.

long MSFT, PG


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