News and the Investment Process

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Includes: CAT, HON
by: Keith Lenger

Part of the investment decision-making process is just absorbing information. It is our belief that this creates a type of reservoir of information and facts, which from time to time connect to form a potential investment thesis. Obviously, further investigation is required to vet the potential idea, but it is a starting point. We looked at a few headlines to add a bit of framework.

A few ideas jumped to mind as we read the headlines yesterday; “Dollar Near Record Low Against Euro on Contrasting Rate View” (Bloomberg Article) and “ U.S. Stocks Advance After Manufacturing Growth Accelerates” (Bloomberg Article). These would seem to be, potentially, two separate unrelated items. However, a cheaper dollar spurs foreign counterparts to purchase cheaper U.S. goods and stops domestic consumers from importing expensive foreign goods. It reminds us of substitute goods in economic theory. We did a quick search for ”Trade Gap 2007″ and found this article “Trade deficit falls sharply: Rise in exports in April helps overcome higher oil prices, bringing in trade gap well below forecasts.” (Cnnmoney Article).

That is the basic framework. So who might benefit from this? Possibly, large international firms often found in large cap stocks. What about industrials, which sell capital goods. Caterpillar (NYSE:CAT) sure did move yesterday with a 2.75% jump. Honeywell (NYSE:HON) added 1.42%. Obviously, further research should be carried out, like comparing stocks in the industry and the value proposition an equity might make to your portfolio.

A few other facts seemed to escape the market yesterday. Oil is now trading at $71 and the volume was a bit light. It seems like the perfect world for the Fed. A cheap dollar helps keep the economy moving, despite the slump in home prices. Inflation could potentially be moderating. Let’s keep an eye on that 10 year treasury.

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