Front-Running the Fed


"You absolutely want to front-run the Fed," said Douglas Ciocca, who helps oversee $1.7 billion as the managing director at financial services company Renaissance Financial. His comments came in an interview with Bloomberg. 
He’s referring to some anecdotal evidence that stocks rally ahead of an interest rate hike, because investors perceive a stronger economy. It might make sense – I can see how one might argue that interest rate hikes are bullish.  
But in the current environment, I think Mr. Ciocca is dead wrong.  
*****The Fed is playing an interesting game. One the one hand, rates must remain low to fight deflation, encourage borrowing and keep the economy moving slowly forward. On the other hand, rates must eventually rise, but the Fed is also terrified about a steep sell-off in the stock market. Not only would a sell-off undermine consumer confidence, lower stock prices might leave banks in a precarious position due to toxic assets still on their balance sheets.  
We’ve talked in the past about how confidence is critical for economic growth. Fed Chief Bernanke and the current administration are both well aware of this. And they are doing their level best to keep confidence high.
You might recall that it was comments by Bernanke and other Fed governors a month or so ago that started the speculation that interest rates would rise sooner rather than later. And Bernanke has been forced to reassure investors that rates would stay low for an extended period of time.  
So at this point, economic recovery and the stock market rally are dependent on those low rates. That’s why you should take comments like Mr. Ciocca’s regarding higher rates as bullish with a grain of salt. 
*****Yesterday’s rally should be viewed as confirmation that stock valuations are tied to interest rate expectations. After all, it was the G-20s assertion that it’s too soon to reverse stimulative monetary policy that ramped the Dow Industrials over 200 points.  
And today’s continuation of that move higher should reinforce the point that cheap money is vital to support current asset prices.  
The Dow is now just 250 point from my target of 10,500.  
*****I’ve mentioned China Natural Gas (Nasdaq:CHNG) several times here in Daily Profit. It’s been one of my favorite Chinese stocks, and my SmallCapInvestor PRO readers are up significantly on the stock since I recommended it at $6.13 a share back in June. 
So it was with some concern that I watched the shares get creamed for a 25% loss yesterday as its third quarter earnings were released. Here’s what Trademaster Daily Stock Alerts analyst Jason Cimpl had to say:  
"By all accounts CHNG reported a solid quarter. Shares did decline substantially ahead of the earnings announcement. The reason behind the share decline is attributed to the delay in production of the LNG facility. This new facility was scheduled to be online this year, but delays in parts have pushed back the completion of this facility to at least Q2 of next year. Although this is a set back for the company, long term the growth story remains largely intact."  
So, expected earnings from the LNG (liquefied natural gas) facility will be lower for the next year. But given the low valuation for the stock (trailing P/E is below 9) it’s not just the delay in getting the plant up and running that hurt the stock. It’s the fact that management sat on the news for as long as two weeks.  
China Natural Gas committed a cardinal sin by not announcing the delays as soon as they were known. It is the fundamental responsibility of management to let shareholders know what’s going on. In my opinion, yesterday’s drop was as much about a loss of confidence in management as it was about the delay itself.  
The stock is rebounding nicely today. Investors clearly see $10 a share as an attractive entry point. This appears to be a good time to enter or add to your position.  
I am very bullish on natural gas. It’s one of the last abundant and cheap energy sources. Natural gas stocks should be part of any investors’ portfolio.  

In addition to China Natural Gas in SmallCapInvestor PRO, I just recommend a liquefied natural gas (LNG) shipper to my Top Stock Insights readers. The stock has a forward P/E of just 10, so it’s a great value now. And there’s plenty of upside coming as rising demand for LNG boosts shipping rates. And in the meantime, the company pays a nice 9.6% dividend. You can get the details on this stock by going HERE.


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