Will HP Save The Day?

This morning Hewlett Packard beat Wall Street estimates for the third quarter and raised guidance for the first quarter of next year as well as for the full year. This is the first technology company in recent months that has not only displayed some visibility into the future but also had a positive outlook for next year. Perhaps they are gaining market share and keeping costs down but in either case the market will like the news.

Yesterday was another volatile day in the market and the broad indices closed down at their lows. Today, PPI came out with a record drop which was driven by the large decline in oil prices. This should bode well for the cost side of corporate income statements and raise the specter of deflation. We still believe deflation is a short-term issue and the bigger problem will be inflation in a few years.

The market will continue to be volatile and we expect another big drop at some point. We have recently been excited about the bargains developing in the market for cyclical stocks. Many great companies with minimal debt requirements and plenty of liquidity are trading below$10 and have declined 60%-80% this year. We believe these companies if bought today will result in returns of 3-10x one's money over a five year period.

The market continues its bottoming process and we will continue to add to our portfolio. Our focus is on technology companies, Internet stocks, closed-end loan funds, energy stocks, gold, and deep cyclicals. A rebound in the market will likely start with the technology sector first and deep cyclicals last. We encourage the diversification by industry so you can broadly participate in the next bull market. Optimism is far away but opportunity is greatest when times are bleak.