Correction nearing its end: redeploy your cash before April

The market had a fantastic rally after the Fed policy statement that was released 2:15 PM EST. The Fed continues to state that inflation is its primary concern but the tone had much more neutral bias. Fed further acknowledges the slowdown in the housing market.

Financial stocks performed terrific this afternoon. Both filthyrich financial ideas (JP Morgan and Goldman) saw significant buying interest. Both JPM and GS sold off in recent times amid general market correction, brought on by collapse of the China stock market and concern of sub-prime mortgage crisis. In my opinion, investors have unjustifiably thrown the baby out along with the bath water. Although sub-prime market is in trouble, its impact is relatively well-contained within the sub-prime segment. In fact, earning calls from GS, Morgan Stanley, Bear Stern as well as UBS reveals that given the right price, many well-run banks want to increase its exposure to sub-prime as they see additional opportunities within this segment.

GS had a fantastic earning this month. It continues to blow away the consensus earning estimate. It generates the piles of cash, which the company is using to buy back shares. While share counts decreases, the revenue continues to climb higher as the trading and other investment banking revenue remain strong. China exposure has been a concern for some investors but after the deep correction, China stock market has roared back to its old highs. The fact of the matter is that there are too much liquidity out there to depress the financial market worldwide. Real estate market is in doldrums and bond yield is shrinking. Where else the money would flow but into the stock market worldwide? I believe that GS earning story is not over and the firm is poised to generate EPS well above $24 a share in 07 and possibly higher in 08. The stock is grossly undervalued. I maintain my target price of $250 and would suggest that you take position in GS before April.

JPM also saw a lot of selling pressure due to sub-prime mortgage concern. JPM is the best positioned to show one of the best earning growth performance among integrated banking names. I expect in 07, the stock market will be driven by those select names with solid earning performance. The company also continues to buy back shares. Profit margin still has a room to improve and ROE metrics have improved significantly. The bank has the lowest sub-prime loan market exposure. Also look what has happened to the yield curve today. It is no longer inverted. As investors anticipate Fed rate cut sometime in the second half of this year, finally yield curve has become consistent with the market rate outlook. I expect the yield spread to become more favorable for banks over next several months. With this, JPM earning will likely to accelerate in 08. EPS in 08 could eclipse $5 and I believe the stock is headed higher above $60 by the end of 07. During this market correction, I have substantially increased my leap (call $50 08) position and if I am right about JPM earning story, JPM should make me mucho dinero.

I would start buying back china names aggressively. CTRP has weathered this correction exceptionally well. It is crushing its competitions such as elong and is likely to rule the Chinese online travel market. I am revising my target of CTRP to $85 from $70. I would be an aggressive buyer of CTRP once again. I will write a separate article on CTRP to justify my TP.

I would also start buying FMCN. I am upping my target of FMCN to $100 from $80. FMCN recent announced another acquisition of Allyes to get into internet ad area. This dominant company is becoming more dominant in China. It commands considerable market shares in all display and display related ads in first Tier and second Tier cities. Its valuation is attractive, trading at 18X 08 earning estimate. I believe that the market correction in the US and China is largely over. Although it may continue to consolidate for a while, I believe the market is likely to establish uptrend once again. I will also work on writing a separate article for FMCN to justify the TP adjustment to $100.

I would also consider looking into biotech names. I especially like CELG here. Celgene is waiting for European approval of Revlimid by the end of April. I see CELG’s Revlimid getting the approval in Europe for both MM and MDS applications. Many analysts see MM approval but have not reflected MDS approval in the earning estimate yet. This approval could serve as upside catalyst for the stock.

Finally, AMR and LUV have seen a lot of selling pressure. I also like them here. Temporary slowdown of the traffic has been weather related. As the economy cools, oil price is likely to moderate. Many expect the oil to head considerably higher towards summer driving season; I continue to believe that oil remains in the trading range between $45 to $55. The economy will grow but the growth rate will slowdown. This is truly bullish case for bulls. Inflation will remain under control. Fed will sit on the sideline and the earning will continue to head higher, although at slower rate.

In conclusion, I love where the market stands now. With correction largely behind us, I would be an aggressive buyer of our favorite names. Good luck to you all.

The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)

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