Blue Penguin Report

By Matthew Storey

Ah, October. 4th Quarter drama.

The Stock Market roars into Fall after two successive winning Quarters, opening to October trading with the same mixture of uncertainty it has climbed since March. Jobs continue to be shed, spending remains slight, congress is hurtling towards nowhere, the Supreme Court session and first post-Obama election loom in a tinder-box electorate...stocks were cheap. Now? They are not.

Any climb loses momentum as the weight of stock prices increases and the wind of low valuations stops blowing.

The market was oversold - on legitimate pessimism.

Sources of optimism like the new President, an adroit stimulus reassurance in the critical first two months and the availability of economic bedrock companies with stock prices battered by circumstances irrelevant to them offered a natural recovery.

But...

That has occurred. The DOW is littered with fatty, high Price/Earnings, Price/Book Value behemoths who've had nice runs on the rebound. The natural flight to quality that occurs when Blue Chips can be had for penny stock prices is a self-fulfilling one. When Markets move from undervalued to fairly valued, the party stops floating all boats and becomes about price. In such markets, like this one - slow growth, stimulus supported, bounceback - the expensive stocks are the ones that get whacked.

Throw in the lurking One Hump Camel (Drama Day) and October is a time to get safe and wait for the fun. The political theatre behind Health Care, the 'Rogue', regulation and tea-party freakdom creates a little storm of opportunity to wreak a little October Market Havoc. 3rd Quarters often coast home on the fumes of early year run-ups and when those high valuation stocks meet October.

Well, you know.

Market players align with the rabble rousers and want to protect their tax rates, their regulatory free reign, their '09 profits/bonuses AND their underlying economy. The best way to do that, with 3Q money in the bank and three months until December fattening, is to have a little pre-election blowup - make political hay and then savor a nice run-up to the year end. Something about a cake you can gobble up.

A Day of Drama (or half-week) almost certainly lurks and, just as certainly, has no real world implications. Get lean, watch the show, then pick up the better priced opportunities.

October planning:

* Prune your winners and sell those with high Price/Earnings valuations. Take PROFIT.
* Grab at Blue Chip Value.
* Give away your Yield, that haul has been mined.
* BUY long-term strategic plays in infrastructure, new energy, transportation...
* SELL your US Dollar and hold something like a 48/32/20 ratio of Yen/Euro/Dollar in cash accounts.
* OWN Brazil, China, Spain, Canada stocks.

Some things to think on during October.

Here are some Stocks that you should BUY and some others that you should SELL.

BUY
General Electric GE/NYSE $16.42 12.2PE/2.39%Y

The rule? when GE is cheap on a valuation basis - you buy it. Very good, Birdies.
There are a thousand horror stories about American industrials who once stood astride the globe and now have outdated products with out of control ad budgets and out of touch executives. GE was a powerhouse, will be an even bigger powerhouse and gets things right, across the board. The turbines, propulsion systems, environmental engineering equipment that will become societal imperatives and market drivers, will largely be made by GE. At these levels, the stock would be a BUY, even if that one slice of GE's business wasn't factored in.

BUY
American SuperConductor Corporation AMSC/NASDAQ $33.54 NMPE

AMSC is another perfectly positioned player for 2010 onward, they will see infrastructure expenditures in their balance sheets and have the right product/services mix.

BUY
International Business Machines IBM/NYSE $119.50 12.8PE

Plug in the basic sentiments of the GE comment line and it applies here. IBM was a computer leader, IBM IS a computer leader. They moved to services, took a hit, made it work, got better and better and can be had cheap. You can buy GE and IBM at these levels and take that multi-year retreat you've dreamed of. When you get back, you'll have a pile.

SELL
Wynn Resorts WYNN/NASDAQ $70.89

This puppy barked its way from $20 per share in March up above $70 today. It holds the definitive profile for an October wipeout.

SELL
Dupont Chemicals DD/NYSE $32.64 and Dow Chemicals DOW/NYSE $26.18

The Chemicals have been major portfolio staples in the Blue Penguin Fund since we began buying last October. But those April shares of Dupont at 16 have doubled and the 10 dollar Dow is 25. Both are overpriced and will be trimmed here and the Yield can be improved on the pullback. Let them take the October/November haircut and we shall see about the year end.