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Your Daily Profit

September 10, 2009

*****Oil, China and Cash for Clunker Stocks

*****A Solid Stock

*****My Book!

Fellow Investor,

As if right on cue, the International Energy Agency (IEA) raised its forecast for oil demand again yesterday.

“Oil demand in U.S., China and other Asia [countries] appears to be running stronger than preliminary estimates suggested,” the IEA said in its report.

The IEA’s new estimate increases daily use by 450,000 barrels. Of course, that means demand growth estimates for 2010 are lower, but that’s because we now have a higher baseline.

*****At the same time, China said that it’s too early to reel in its stimulus plans. That likely throws a bit of a monkey wrench into the bears’ plans for an imminent meltdown in China. It should be clear that so long as governments are intent on supporting their economies that there will be no implosions.

It’s when governments start to remove support that danger exists. And that appears to be a ways off.

On that note, one of the Chinese stocks in the SmallCapInvestor Pro portfolio made a 22% move higher last Thursday. The move was accompanied by a massive surge in volume that marked a new 52-week high. There’s no doubt in my mind that this is mutual fund buying.

It’s likely that the price will back off a bit while the buyer takes a breather. But there’s little doubt the buyer will be back once the price dips a little. For more on the Chinese stocks we’re holding click HERE.

*****China pumped $1.1 trillion in new loans into its economy in the first half of 2009. That’s prompted Bank of China vice president Zhu Min to say “The potential risk is that a lot of liquidity goes to the asset market…o you see asset bubbles in commodities, stocks and real estate, not only in China, but everywhere.”

And Chinese Academy of Social Science economist Liu Yuhui adds that “There’s no way for the real economy to absorb so much liquidity…[p]olicymakers in China and around the world are well aware of the harm that could do, but they are unwilling to sacrifice short-term growth and wean the economy from addiction to the stimulus policies.”

Of course, this is exactly the point. Corporate balance sheets had to be improved to get credit flowing, businesses spending and lending and financial markets stabilized. The easiest way, perhaps the only way, to do that quickly is by pumping liquidity and raising stock prices.

Insurance companies are in better shape and are able to meet annuity payments, for instance, because their investments are worth more. Bank of America (NYSE:BAC) and Citigroup (NYSE:C) have been able to pay back some TARP money because they could sell stock at higher prices. 

Liquidity is the life-blood of the Cash for Clunker Stocks Rally. Don’t expect an end to either anytime soon.

*****Of course, not all stocks that are rallying are Clunkers. Glass-maker Corning (NYSE:GLW) just raised its revenue estimates for the current quarter. Of course, this comes after Corning had lowered revenue forecasts due to earthquake-related delays at its manufacturing facility in Japan.

But don’t ignore the fact that Corning was one of the small number of companies that significantly beat revenue estimates for the second quarter.

Corning looks like it has built a nice base around $15 a share. It’s a cash cow, throwing off $1.78 billion in cash flow on $5 billion in revenues. With a forward P/E of 10 and PEG ratio just over 1, I’d say its come some upside coming.

*****Monday is almost here! That’s the day my first book The Small Cap Investor: Secrets to Winning Big with Small Cap Stocks. Of course, I wouldn’t let this momentous event pass without a Special Offer to my loyal Daily Profit readers. I’ll fill you in on the details Monday…

*****As always, please send your questions and comments to [email protected]

Until tomorrow,

Ian Wyatt

Editor

Daily Profit