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Hotline Sample Report

This report is a sample for information purposes only. These recommendations are closed.
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2/10/2010 1:53:53 PM Eastern Time

Ben Bernanke's Grand Exit Plan
By Charles Payne, CEO & Principal Analyst

I have to say that I'm a little confused by the market, which I also suspect is a little confused, because some must believe the Fed is going to raise rates sooner rather than later while others see accommodation for a long time, perhaps the entire year. I don't see any breaking news in the statement released by the Federal Reserve today. It's clear that certain emergency measures will be wrapped up, and then the fun stuff happens. What's also clear is that the Fed will not sell assets until after it has begun its rate hiking cycle and things look much better. I understand raising rates on bank reserves will trigger higher rates on long-term instruments. But how will that persuade banks to lend money?

The first step in the grand exit plan will be to hike the discount rate, which was one of the first moves taken during the height of the crisis. This move will not impact Fed Fund rates, or at least this is the message the Fed is conveying. In fact, the Fed is still saying the funds rate will remain low for an "extended period" of time. Yet, the gist of today's communiqué is that a normalization process could be underway at some point this year.

Excerpts from Bernanke Testimony

"One possible sequence would involve the Federal Reserve continuing to test its tools for draining reserves on a limited basis, in order to further ensure preparedness and to give market participants a period of time to become familiar with their operation. As the time for the removal of policy accommodation draws near, those operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates."

"The actual firming of policy would then be implemented through an increase in the interest rate paid on reserves. If economic and financial developments were to require a more rapid exit from the current highly accommodative policy, however, the Federal Reserve could increase the interest rate paid on reserves at about the same time it commences significant draining operations."

"I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery."

Trade Data

U.S. trade balance was -$40.2 billion, the Street was looking for -$35.7 billion. Both imports and exports increased, a positive sign for the U.S. and global recovery.

For exports the standout item…nuts, which increased to $497.0 million from $369.0 million.

For imports it was oil as usual, which saw an increase of $3.1 billion month over month.

President Obama indicated in his State of the Union Address that he wants to double exports over the next five years. That means he wants to see the United States export more than $3 trillion worth of goods to the year.

The market is jittery and the weather isn't helping, but it's also oversold. Like I've written over the last couple of weeks, oversold doesn't mean it can't move even lower though. Everyone should be taking smaller than normal positions and should be holding more cash than normal, more than 10%. If you have any questions, contact your representative and we will see how we can fix your portfolio.

Long Idea: China Automotive Systems, Inc. (CAAS) @ $16.69
Click here to view the trading alerts that followed this recommendation

Trading Parameters

Entry Price Entry Limit Stop Loss Trading Target Target Long-term Target Options

$16.69 see comments $14.50 N/A $21 N/A N/A

BACKGROUND: China Automotive Systems, Inc., through its interests in Sino-foreign joint ventures, engages in the manufacture and sale of automotive systems and components for the automobile industry in the People's Republic of China. The company offers automotive parts, power steering gears, automotive steering gears, steering pumps, sensor modular, and electric power steering. It also offers integral power steering gear and pinion power steering gear for light and heavy-duty vehicles and cars. The company was founded in 2003 and is headquartered in Jing Zhou City, the People's Republic of China.

SKINNY: Shares of the Chinese auto parts supplier have a much higher beta than a stock we normally recommend on the Hotline service (more geared towards our Swing Strategies philosophy), but this idea has the makings of a homerun. The company has signed two potentially lucrative contracts over the past month, first with Chrysler Trucks of North America (for the Jeep Wrangler) and the second with Beijing Automotive to design, develop, and manufacture power steering components. The Chinese automotive industry surpassed the U.S. as the largest in the world during 2009, and strong growth is expected to continue through 2010. The company has surpassed the Street's earnings per share estimates in two of the past three quarters (the third coming in line), and by an increasing margin. From a technical standpoint, the stock is bouncing off support at $15.00 with the next resistance level at $18.00 (its 20 and 50-day moving average). Once through there, it has room to $21.00. We would use $14.50 as a mental stop- loss.

Analyst Coverage

Merriman Downgraded to Neutral Global Hunter Securities Downgraded to Neutral