The Raging Bull That Is Ocobter

For as bad a month as September was, October is turning out to be even better. With a huge rally hitting the market on Thursday on news of a comprehensive financial package for the Euro zone, stocks logged their 4th consecutive winning week and lifted 2011 to the best October in the history of the market. For the week, the S&P 500, Dow Jones and NASDAQ all finished in the green.

It’s been no secret that the Euro zone has been the key to the market for the last few months, with stocks trading wildly on every new headline hitting the wire. So this week’s announcement from the European Union (EU) and the European Financial Stability Facility (EFSF) of a $1.4 trillion bailout fund and that Greek bondholders had agreed to a 50% principal reduction gave the market a huge boost of confidence and sent stocks soaring.

The market was also comforted by a surprisingly healthy read on Q3 GDP of 2.5% and more positive results on the earnings front, with the S&P500 returning to peak earnings from 2007, both suggesting that the dreaded economic contraction will be avoided.

But in spite of the upbeat news, challenges remain.

Looking forward, with the EU situation looking mostly contained in the short term, the market’s attention will now shift to our domestic financial problems, where the Congressional supercommittee has been tasked with the impossible task of finding a way to gut a few trillion Dollars out of the Federal budget.

But for the time being the bulls clearly rule the market, pushing the averages above the trading range of the last three months and stirring optimism that stocks will rally into the end of the year and move back into the green.

Updates:

With the economy showing signs of strength, rail-shipper Kansas City Southern (KSU) added 9%. Shares also continue to gain support from last week’s excellent Q3 results, where the company reported a record quarter and its fourth consecutive earnings surprise. As one of the few mid-cap players in the rail shipping space, keep your eye on KSU as a takeover target.

Bunge, Ltd. (BG) managed to crank out a very solid 8% gain in spite of fairly disappointing Q3 results Thursday before the bell. The agri-business giant reported earnings of 86 cents, well short of the $1.65 the Street was looking for and down from $1.37 last year. The culprit was the company’s agri-business segment, where margin compression and extreme market volatility weighed on results. Although it would have been great to see a blowout number, BG’s performance doesn’t look much different from its peers, with industry cohort Cargill also seeing weakness and reporting a 66% decrease in Q1 net income.So the soft quarter doesn’t look like a Bunge specific issue.

Longer term, the agriculture industry is in a long-term growth cycle on an exploding global population, and BG looks very attractively priced, trading at just $62 while analysts look for full-year earnings of $7. So we’ll be looking for the attractive valuation and long-term industry trend to support our position.

CF Industry Holdings (CF), an agriculture company with a specially in fertilizers, was also on the move, adding 11% on the week for a strong outperformance. This stock has been fairly volatile, topping off above $192 in August, then falling to $115 in early October before rebounding to $171. Ya, that’s a pretty wild ride, no doubt about it. But through it all, the only thing that happened on the fundamental side of the business was analysts getting more bullish and raising earnings projections, now calling for full-year earnings of more than $21. That makes CF a huge value play, trading at just 8X forward earnings and a steep discount to its peers. We’ll get an update on the company’s business on Monday with Q3 results, so let’s look for a strong performance to push shares into the $200 range.

With the Euro (currency) gaining strength on the EU bailout package, the Dollar was on its back. That pushed both Double Gold (DGP) and Market Vector Junior Miners (GDXJ) to 13% gains. Gold was taking a bit of a breather in October after hitting a new all-time high in early September. But with the long-term trend and fundamental story still very much in play, prices are once again turning the corner and heading higher. It’s not stretch to think we could see $2,000 by the end of the year as the United States is forced to make some tough decisions on its budget.

We also saw some nice movement from our growth stocks in the good market, with both energy services conglomerate Baker Hughes (BHI) and the Brazilian ETF (EWZ) gaining 12% while VeriFone Systems (PAY) tacked on an outsized 11%.

Overall it was a great week for the portfolio, with the market and positive sentiment providing plenty of support for our stocks.

Until next time here is a good article on recent inflows into commodity investments. Commodities have taken a beating over the last few months as the market fretted about an economic contraction. But now that a recession is looking less likely, commodities are raging higher as investors position their portfolios for global economic growth and inflation. Enjoy.

Funds Adding to Bullish Bets Fuels Commodities

Your Investment Partner,

 

Mike

ABOUT THE AUTHOR

Michael Vodicka

Michael Vodicka is the president and founder of the Vodicka Group Inc., a licensed investment advisor (Series 65) and a financial journalist.