The Spear Report newsletter, Executive Summary

It seems crass and insensitive to discuss the stock market when faced with a national tragedy of the scope now estimated to have occurred in New Orleans. It is likely to be the worst natural disaster in the US since the San Francisco earthquake and fire in 1906, and the nation's deadliest hurricane since 1900, when more than 6,000 people perished in the area around Galveston, Texas. About 80% of the city dedicated to “les bon temps” is now underwater, while a state whose motto is "Union, Justice, Confidence" struggles to grasp the dimensions of the disaster. Last year, Hurricane Ivan caused mudslides on the Gulf floor that destroyed pipelines and ultimately reduced US output by 25 million barrels over the next 6 months. Currently, nine refineries are shut down, energy distribution and transportation have been disrupted over a wide area in the South and Southeast, and the total damage to rigs and pipelines is still unknown. Yet, for all this doom and gloom, the S&P 500 rallied strongly on Wednesday to the highest closing levels in 11 days. The S&P MidCap 400, Gregory Spear and his team’s bellwether index, closed yesterday just 2% below its all-time high. There is talk about an “energy crisis” in the media, but if we are in the midst of a bona fide energy crisis of the magnitude of the 1970’s, which produced runaway inflation and recessions, then why is the market trying to rally? If the stock market is a discounting mechanism that sees 6-9 months into the future, and we are headed for the typical economic slowdown that always follows skyrocketing energy prices, why is Wall Street so darn sanguine? The Big Easy Is it because the Energy Department will release some supplies from the Strategic Petroleum Reserves, or the fact that seasonal energy demand is winding down, or the approach of the end of the hurricane season, or an increase in energy imports? While these may all be factors on the plus side of the damage equation, in Spear and his team’s the market is sanguine because it has an historical perspective on all this and history tells us that all is not lost. In fact, while we have a right to mourn the end of the era of cheap energy, oil and gas prices as a percent of disposable income are well within the long-term historical norms. The US consumer may be complaining, but he/she is not crying “Uncle!” Instead, consumers are heading out in droves to buy new cars that get better mileage. Is that the sign of an economy in serious trouble? Hardly. The truth of the matter is that the US consumer and the global consumer are awash in a sea of easy credit, decent employment opportunities and double-digit home equity appreciation. This is happening in the US, in Europe, in South America, in Bulgaria and in the Far East. Apparently, the number of British investors in Bulgarian property has increased tenfold since 2003. In many quaint, unspoiled French and Spanish villages, British, German and Scandinavian speculators account for over half of all home ownership, on credit. In the US, earning better than 10% annually on a hundred thousand dollars is sweet medicine for $3 gasoline that might add $600 a year to one’s transportation expenses. Such simple math is not lost on Wall Street, which is why many equities have managed to rise right along with the momentum-driven energy stocks. In addition, the market believes it has found a silver lining inside the storm cloud in a recent weaker-than-expected Chicago Purchasing Manager’s survey. A weaker economy means fewer rate increases from the Fed and the end of rate increases is something the market desperately wants to celebrate. A weaker economy also means lower interest rates and the 10-year rates have dropped sharply for two days in a row. A stealth performer from the Consensus Buy List Cummins (NYSE: CMI) Why is the Buy List focusing on transportation-related stocks when oil is $70 a barrel? Because engines still matter. In fact, due to a global boom in productivity driven by the unprecedented, simultaneous, sustained emergence of two new nations (China and India) that together account for one-third of the planet's population, demand for power is surging regardless of the cost of fuel. But Cummins supplies one of the most efficient types of engines, namely diesel, which handle the heavy-duty transportation and electrical generation needs for the global economy. Headquartered in Columbus, Indiana, Cummins serves customers in more than 160 countries through its network of 550 distribution facilities and more than 5,000 dealer locations. Its 28,000 employees generated sales of $8.4 billion in 2004. In the most recent quarter, earnings grew 72% year-over-year to $141 million, or $2.83 per share. CEO Tim Solso was most proud of the cost structure improvements that enabled so much cash to flow to the bottomline. Specifically, the company's joint venture operations in China and India produced $35 million of those earnings. Gross margin improved by 2% and achieved a multi-year high. Revenue totaled $2.49 billion, up 17%. While shipments of diesel engines for the Dodge Ram truck have declined, medium and heavy duty markets such as mining and marine are more than making up for the shortfall. Moreover, with cleaner diesel technology on the way from Corning (NYSE: GLW), light duty trucks and cars are likely to get a second look from consumers, especially with $3 gasoline. The company has lifted its forecast for annual earnings above $10 a share, which puts CMI in the value-on-the move category bigtime. No wonder Standard & Poor's has raised Cummins debt rating to investment grade, citing an improved operating performance and strengthened financial profile. So far, the company has reduced its debt by $258 million in 2005. Other stocks from the Consensus Buy List include: Flextronic International (NASDAQ: FLEX) is a leading provider of advanced electronics manufacturing services to OEMs primarily in the telecommunications and networking, consumer electronics and computer industries. The company's strategy is to provide customers with the ability to outsource, on a global basis, a complete product where the company's take responsibility for engineering, supply chain management, assembly, integration, test and logistics management. The company provides complete product design services, including electrical and mechanical, circuit and layout. Oregon Steel (NYSE: OS) operates steel minimills and finishing facilities in the western United States and Canada. The company manufactures and markets one of the broadest lines of specialty and commodity steel products of any domestic minimill company. The company emphasizes the cost efficient production of higher margin specialty steel products targeted at a diverse customer base. The company's manufacturing flexibility allows it to manage actively its product mix in response to changes in customer demand and individual product cycles. This article highlights the commentary of Gregory R. Spear for the Zacks.com audience. Gregory R. Spear provides insightful analysis, market commentary, and favorite recommendations on a timely basis in "The Spear Report" newsletter. Try it free for 30 days and see if you can improve your investment performance. Learn more about "The Spear Report" and 30-Day Free Trial. And get immediate access to current issues and special reports. Click here now. --> Here’s How You Can Profit from the Pros Find out what other leading experts are saying about the market. And what stocks they are recommending. For free. 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