STOCKS DRAMATICALLY UNDERVALUED

Nothing is new about stocks in the new year, they are still cheap. The prevailing psychology continues to be pushing stocks low valuations. The fear of recession is doing what it does, holding stocks down.

WHAT RECESSION?

Theoretically the big drag on the economy has been in the construction spending area but the November data shows an increase of .1%. The annualized increase of better than 1% is a small increase but this "worst part of the economy" is still positive. Private resident construction is making the news and was down 2.5% but it was offset by a 1.7% increase in business construction and a 2.5% increase in public construction. Brian Wesbury, Chief Economist at First Advisors, says recent numbers are consistent with 2.5% economic growth. The average Manhattan Condo went up 34% in 2007!


Continuing unemployment claims have risen slightly. These types of indicators are coincidental, which means they show where the economy is, not where the economy is going. Even so, coincidental indicators and even lagging indicators are starting to show lower inflation and stronger real growth ahead. A very revealing number is the falling level of import prices in Canada. Another is the diffusion price index in the UK. Prices are falling! As always, some things go up in price and some things go down but the recent numbers show that more than 50% of things are going down. The core CPI rate in Canada is down to 1.5%.

AIRLINE YIELDS

One of the things going up in price is airline tickets. Continental increased its yield by about 6% in the month of December and ended the month with 2.8 Billion Dollars in unrestricted cash. Traffic growth from China is running at 15% and is projected to double in less than 4 years. In March of 2008, Continental and 4 other US carriers will add additional flights to China.

The strong are getting stronger. Maxjet just suspended service and filed bankruptcy. Maxjet was a business class international experiment. It is no longer true that a low cost carrier can start up and take enough share to stay in business. Indeed, the low cost business model is fading away quickly. Southwest, JetBlue, Midwest and others are changing their strips. Cheap flights are being matched by contract carriers. Business travelers are bidding up the price of the prime seats at the prime times. The trend for the next several years will be toward fewer but bigger, flatter, and more comfortable seats. The price of the best seats will go to surprisingly high price levels.

FORD

Ford continues to look for a buyer or buyers for Land Rover and Jaguar. Ford is working hard at becoming lean and mean. The 35 mile per gallon mandate will be difficult to reach without disruptive pricing schemes. The Ford Hybrid SUV meets the test but will Americas overpay so much for fuel economy? Technology will be key.

Innovations are streaming forward. A new lithium battery is in the works that developers claim will increase storage capacity by 10 times! Nano-technology improvements to fuel cells imply more power with less weight. Still, the easy and cheap way to double you gasoline mileage is to trade the SUV for the small crossover. With the dollar at current levels, US production growth is strong. Recessions do not occur when production growth is strong. Capital goods exports from the USA grew by 27% last year!

STOCKS ARE UNDERVALUED:

The average stock is selling at a low price. Indeed, many sectors have been clobbered. The average includes a lot of stocks such as APPLE and Google that are selling at super high valuations, more than 50 times trailing earnings. Companies such as Ford, that have struggled through the worst of their cycle, are ready to make money. Biotechnology stocks sell at high multiples but not nearly as high as they once did. Biotech is going to prove to be exciting in the years ahead. Companies like Ford will grind forward with gradual but steady progress toward big profits.