Bumpy First Quarter Ends Green

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Bumpy First Quarter Ends Green

Good things rarely come easy, and that’s exactly what just happened in the first quarter of 2011.

Stocks were hot out of the gate in January and early February as momentum from late 2010 carried over into the New Year. But just as the market and investors were starting to feel really good, a number of cataclysmic events came falling from the sky to interrupt the party.

We all know exactly what I’m talking about.

1.) Political tension in the Middle East

2.) Crude surging past $100 a barrel

3.) Japan suffering an unprecedented natural disaster and nuclear fallout

4.) Further weakness in the Euro Zone

These are the songs that the market danced to, and much like your drunken Uncle with two left feet, it wasn’t pretty.

After gaining more than 7% in just six weeks, the averages coughed the whole thing up and traded back to the breakeven point.

But remember what we talked about early in the year? We said that this is a battle-tested market, a market that has lived through the financial crisis of 2008 and 2009 when there was widespread concern that the entire global financial and economic system was about to collapse.

Those harsh lessons don’t just go away, they resonate. So when you’re talking about a market that has been kicked around a little bit and lived to tell about it, it doesn’t back down from a challenge very easily. In fact, it cherishes an opportunity to flex some muscle in the face of adversity. In this case, it meant “buy the dip.”

How else can you explain the incredible reversal that saw stocks rebound from a death roll to move back into the green for their best first quarter since 1998? That is pure conviction.

But this isn’t merely a sentimental victory; it’s also a play on the most recent wave of economic data that continues to support the recovery. That list includes two months of strong jobs creation, the unemployment rate dipping to 8.8% after topping off at 10.1% in February of 2009 and a sharp uptick in M&A activity (Mergers and Acquisitions) that showcases growing confidence from the private sector.

Those are all powerful signals from the economy, and the Street was obviously listening.

Looking forward, stocks and the averages have their work cut out for them; it’s not going to be easy to scale the next leg of the mountain that is Q2 of 2011. But with a strong rebound and upward momentum in hand, optimism is once again running high that stocks will find a way to grind higher for another solid quarterly performance.

And with a fully loaded portfolio of awesome stocks in our favorite sectors, we will most definitely be looking to capitalize.

Game on.

What’s Up with Our Stocks?

The big rebound in the averages definitely showed up in the portfolio. Let’s go ahead and take a closer look.

Baker Hughes, Inc. (BHI) was looking strong early in the week, hitting a new 52-week high at $75.10 before pulling back a bit for a weekly gain of 1.87%. The big breakout came on some very interesting news out of Saudi Arabia, with the world’s leading oil producer announcing plans to intensify its drilling efforts to compensate for production disruptions in other OPEC countries. That has Aramco (the Saudi national oil company) boosting its rig count by a sizeable 30%, jumping from 92 to 118.

On a longer-term basis, Aramco is also investing heavily ($11 billion) in one of its pet projects, Manifa, calling for 31 artificial drilling islands and 13 offshore platforms. That’s pretty much like wrapping Christmas, your birthday, New Years Eve and Fourth of July into one event. It’s a big deal, and it’s also exactly why we are heavily invested in energy and energy services companies, because the already powerful long-term trend is doing nothing but accelerating.

The Ags were definitely back in play this week, fueled by a bullish USDA (for prices) crop report that supported the trend of falling inventories and demand outpacing production. The report sent corn prices jumping back to the recent high, and when corn rallies, so does CF Industries, Inc. (CF), lifting our favorite fertilizer stock to a weekly gain of 5.5% and helping it secure the comeback player of the month award. With analysts looking for earnings of almost $15 a share this year, CF just looked flat out over sold and undervalued trading at $120. And with a discounted forward P/E off less than 10X against its peers 19X, a normalized valuation suggests plenty of upside.

The bullish USDA crop report also fueled Deere & Co. (DE) and Bunge Ltd (BG) , with the tractor maker gaining 5% and Ag wholesaler up 4.24%, both good enough for new 52-week highs.

We also definitely need to discuss what is happening with our Latin American stocks, CPFL Energia SA (CPL) and iShares MSCI Brazil (EWZ). Both of these names posted big gains this week, with CPL hitting a new 52-week high and EWZ moving into position to do the same. The gains were triggered by sentiment that Brazil is near the top end of its recent interest rate cycle, where the country has been forced to raise rates to cool its intense growth and quell inflation. That has weighed heavily on Latin American stocks for the last 5 months while most other global equity markets have been charging higher.

And keep in mind, these Brazilian companies have seen earnings and earnings estimates climbing while shares prices fell. That is an absolutely potent combination for a short-term correction and long-term gains. So now it looks like the market is playing a little game of catch up as new capital flows into Latin America on Brazil signaling that it could be on the tail end of raising interest rates.

And finally, we have the Intercontinental Exchange, Inc. (ICE), which took a bit of a beating this week after announcing it had partnered with the NASDAQ (NDAQ) in a takeover bid of the New York Stock Exchange (NYSE). In the short run, the market will almost always punish a company involved in an acquisition because of the extra debt and uncertainty surrounding deal execution.

But on a longer term basis, what you have is synergies between two companies with an overlapping business and additional market share. Beyond that, the fact that ICE is confident enough to go out and bid for a competitor means that the company is feeling good about its prospects. Weak companies don’t buy competitors. So even though shares took a hit on the news, the long-term picture is most definitely strong with this all-electronic futures exchange.

That’s all for this week, but until next time, here are two articles for everyone to take a look at. The first covers tax credits ahead of tax day and the second discusses the Street’s growing concern about the Federal government’s balance sheet and unfunded liabilities. Anyone who thinks owning US Treasuries is “safe” needs to take a look at this one. Enjoy.

Tax Credits You Don’t Want to Miss

Gross and Buffet say Treasuries Have Little Value

Your Investment Partner,

Mike

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