After the latest round of economic data and earnings from several financials, we wanted to share our outlook and also discuss two stocks that we are adding to our Watch List in the Stocks Under $10 model portfolio.
We cover stocks that are trading below $10 a share for TheStreet.com. We released much of this article yesterday to our subscribers of Stocks Under $10. (Click here for a free trial.)
Yesterday, the Federal Open Market Committee lowered the fed funds rate by 75 basis points to 2.25% -- which was 25 basis points fewer than what Wall Street was expecting. Earlier in the day, we saw Goldman Sachs (GS - Get Report) and Lehman (LEH) report better-than-expected earnings and today Morgan Stanley (MS - Get Report) followed suit.
The news resulted in the Dow Jones Index surging to its largest one-day gain since 2002 as strong earnings results by brokerages reassured investor confidence that our liquidity crisis is contained. Despite the surge in equities, some pundits in the media believed that a 75 basis point cut was not enough and the FOMC should have eased by the expected 100 basis points. We couldn't disagree more.Before getting into the Fed's decision, it's important to note that in three days, the landscape of our credit crisis has changed dramatically. In the beginning of the week, Bear Stearns (BSC) was nearly bankrupt and received a $2 offer from JPMorgan (JPM - Get Report) and today the Fed has opened its discount window to the world. This move has eased the liquidity crisis - which was the Fed's primary concern - and based on the recent results from several brokerages, it seems that the chance of another huge blow-up in the industry is minimal. So with the liquidity crisis contained, we believe the Fed's next concern should be inflation and not recession. Listening to the talking heads in the media, recession is being viewed as the plague and now it seems everyone is on the new Fed kick to buy mortgage backed securities. This was a move designed to increase liquidity - and should not be used to avoid recession. With that said, the Fed's 75 basis point cut was a smart move and a 50 basis point cut would have been even better. Our dollar continues to weaken and while the Fed's initial stance on inflation was that it would take care of itself; this does not seem to be the case as the dollar continues to hit new record lows against a basket of other currencies. If the economic climate becomes dire - which it is clearly not the case based on low unemployment and strong balance sheets for most large-caps- the Fed could always ease rates between meetings which would soothe all the short-term momentum investors that seem to think they know more than the Fed. Turning to the portfolio, we added two companies to the Watch list: Ituran Location and Control (ITRN - Get Report) and AMR (AMR). Ituran -- a competitor to Lo Jack (LOJN - Get Report) and a provider or services for stolen vehicle recovery -- has solid fundamentals and has been buying its stock back. Shares are trading near a 52-week low but could offer a favorable risk/reward long-term.