The Zacks Analyst Blog Highlights: AK Steel, Caterpillar, Cummins, Dow Chemical, Un...

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The Zacks Analyst Blog Highlights: AK Steel, Caterpillar, Cummins, Dow

Chemical, United Health and Valero

On Tuesday May 17, 2011, 7:16 am

For Immediate Release

Chicago, IL – May 17, 2011 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news
and events impacting stocks and the financial markets. Stocks recently featured in the blog include: AK Steel (NYSE: AKS - News), Caterpillar (NYSE: CAT - News),
Cummins (NYSE: CMI - News), Dow Chemical (NYSE: DOW - News), United Health (NYSE: UNH - News) and Valero (NYSE: VLO - News).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Monday’s Analyst Blog:

Earnings vs. Macro Factors

Earnings are, and are going to remain, the single most important thing for the stock market. Interest rates are an important -- but distant -- second.

That does not mean that all is smooth sailing ahead. We are now at the softest part of the year (historically). There is a fair amount of truth to the old adage “Sell in May, but
remember to return by November.

The fight over raising the debt ceiling is now underway. If it looks like it will not happen, watch out. The Government of the United States defaulting on its debt is likely to have
a somewhat larger impact on the markets and the economy than the impact of Lehman Brothers defaulting on its debts.

However, when push comes to shove, I find it hard to believe that Congress would let that happen. While not the most likely case, the chance of no increase by the time the
ceiling is hit is a very real possibility. Given the disastrous potential consequences, taking out some insurance in the form of deep out-of-the-money puts would make a lot of
sense at this point.

We are already feeling the impact from lower government spending. First quarter GDP growth came in at just 1.8%, down from 3.1% in the fourth quarter. Total government
spending was a drag of 1.09 points, up from being a 0.34 point drag in the fourth quarter. In other words, 75 of the total 130 basis point growth slowdown (57.8%) was due to
increased austerity in Government spending.

Job creation remains sluggish, but had been starting to show signs of picking up. We created 268,000 jobs in the private sector in April, up from 231,000 in March, and
260,000 in February, but that is after a big upward revision to the February numbers. However, governments laid off a total of 24,000 people for the month, on top of 10,000
pink slips the month before.

Recently, though, the trend in Initial Claims for Unemployment has taken a nasty turn for the worse, with the four-week moving average moving back above the 400,000 level.
While we got some relief this week, with a drop of 43,000 new claims, we need to see that number continue to decline. Those numbers were not reflected in the April jobs
report, but they are not a good omen for the May report.

Unemployment Rate

The unemployment rate bounced back up to 9.0%. This was not due to, as many assume, people coming back into the labor force. It was due to the fact that the
unemployment rate is derived from a separate survey from the one that measures the number of jobs gained or lost. The civilian participation rate has been stuck at the same
low 64.2% level since January.

Given that the unemployment rate has been higher than that in just 6.17% of the months since 1960, one might expect that bringing down unemployment would be top of the
agenda at both the Fed and on Capitol Hill. However, at Bernanke’s recent press conference, the focus was mostly on inflation. The rate of headline inflation has been
moving higher, but it is only up 3.2% over the last year. That is lower than what we have experienced for most of the last 40 years.

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Furthermore, commodity prices have just fallen sharply, so we might start to see some relief very soon. Core inflation remains very low, up just 1.3% over the last year. This
fear of phantom inflation is keeping further monetary easing off the table for bringing down unemployment.

International Concerns Remain

The international situation clearly has the potential to abort the recovery as well. The disaster in Japan will clearly slow its economy dramatically in the first quarter, although
much of that growth will be made up later in the year as the reconstruction process gets underway. Many U.S.-made products have parts which are made in Japan, and that
is likely to disrupt production here.

Still, there appeared to be no impact on Industrial Production in March as manufacturing output climbed 0.7%. The turmoil in the Middle East is not going away, and that is
likely to keep oil prices both high and volatile. High oil prices will also act as a depressing force on the economy.

The debt crisis in Europe is not going away with Portugal now also getting bailed out, even as the ECB makes life tougher on the PIIGS by raising rates. Rates for the Greek,
Irish and Portuguese debt are substantially higher than when the crisis first started. The austerity campaigns have weakened those economies and undermined tax revenues,
and so the bailouts have not made the situation much better.

Here at home, the housing situation has not been showing many signs of improvement, and I doubt we will see much in the housing-related numbers due out this week. Note
that the Construction sector is the weakest in terms of both surprises and estimate revisions.

Remaining Bullish Overhead

On balance I remain bullish, and I think we will end the year with the S&P 500 north of 1400, but that does not mean we will have a smooth ride between here and there.
Strong earnings are trumping a dicey international situation, and the drama in DC. However, be prepared to move to the exits (or have some put protection in place) if it looks
like the debt ceiling will not be raised.

As far as individual stock picks are concerned, look for the combination of a Zacks #1 Rank, with moderate P/Es and a reasonable dividend yield. The current issue of
Earnings Trends has a list of the firms with the largest positive revisions for this year.

The best hunting ground for such firms seems to be in the Industrial, Materials and Energy sectors, but things are not limited to them. Some of the names to consider among
the S&P 500 include AK Steel (NYSE: AKS - News), Caterpillar (NYSE: CAT - News), Cummins (NYSE: CMI - News), Dow Chemical (NYSE: DOW - News), United
Health (NYSE: UNH - News) and Valero (NYSE: VLO - News).

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