The Guest Blog

Farrell: Happy Anniversary Mr. President

Wednesday was the first anniversary of President Obama's Presidency.

The gleeful Republicans are celebrating what they declare to be a repudiation of the President's agenda making for a tough anniversary. Maybe the vote was a repudiation, but I think my pal, Doug Kass (yes - he is Lola Jane Farrell's honorary uncle), has an interesting thought. I have mentioned this populist surge before but let me recap with Doug's Wednesday piece. Doug wrote that "the Massachusetts Senatorial race was not necessarily a referendum against the administration's policies (health care being one of them); it's broader than that. The populist uproar is geared toward the incumbent, toward anyone in power. It does not run on party lines, nor is it focused on health care. It is the zeitgeist of dissatisfaction, a sign of the times...This dissatisfaction was expressed in the Democratic tsunami that brought Obama the Presidency, and it was the Massachusetts is being reflected in a very negative view toward those who have not suffered from high unemployment or from wayward derivative bets (and still got paid)." I believe Dougie has the direction correct and Republicans would be wise to tread carefully on what they think is an open playing field.

Getting a health plan through is going to be very difficult. Remember, the House plan barely passed and if it was a tough sell then imagine how the wavering Congressmen feel now. Some of the original support will be out the window. There is a school of thought the Senate can take the "budget reconciliation" route to get a bill passed with 51 votes. But legislative technicalities limit this process to issues that impact only taxes and revenues. New programs, like an insurance exchange, would be difficult if not impossible to address. Forget about a cap and trade bill and even financial regulation is up in the air despite being directed at the hated Wall Street crowd. Did someone say "gridlock"? Happy Anniversary!

Housing starts fell 4% in December to 557,000 from the prior month. The drop in starts was due to the fall in single family construction. Anna Torma of Soleil noted that total housing starts are down 75% from the peak, whereas in previous recessions starts declined by 46% (1981) and 60% (1986-1991.) It makes some sense since homes started today would be finished when the new home buyer tax break will have ended. Permits were up nicely, but having a permit doesn't obligate you to build. High unemployment and ongoing foreclosures continue to weigh on the housing market.

The Producer Price Index rose a modest .2% (down from a worrisome 1.8% in November) but the annual rate of headline PPI inflation shot up to 4.4%., and is up at a 5% rate the last six months. The sharp drop in energy prices a year ago make today's comparisons somewhat skewed, however. The core rate of PPI was unchanged and the annual rate of core inflation is only +.9%. That is down from the recent peak of annual core inflation of +4.7% in October, 2008.

Paul Leming, Soleil's solar analyst, reiterated his caution on the solar industry.

The German Ministry of Energy is proposing changes to the feed-in tariff for photovolactic systems in order to slow the introduction of more systems in Germany. Germany is the world leader in solar systems. The government had agreed some time ago to a 20 year subsidy for PV systems not realizing how rapid the growth would be. They wound up subsidizing power at twice the going rate and for 20 years at that. The costs are passed along and German industry is understandably upset at the cost of their power. There were no limits put on the number of installations. Reductions in the feed in tariffs do not cap volumes, but it will force down prices throughout the value chain. Paul feels there is still significant downside to these stocks and has sell recommendations on First Solar - FSLR- and LDK Solar LTD.- LDK. The only buy he has in the industry is MEMC Electronics - WFR- which is a sum of the parts value idea.

Big Lots (BIG; buy rated; recent price $32) is a company that Jeff Stein has commented on favorably, and often. A competitor downgraded the stock Wednesday and Jeff would differ. Jeff believes BIG is entering a period of accelerating earnings growth driven by a stronger rate of top line (revenue) growth. While the company has for a few years consistently beat forecasts the better numbers were due to aggressive cost cutting. He now sees more of a top line story. Value seeking customers are trading down and the "discretionary" portion of BIG's business ( furniture, home, seasonal, and electronics for example)- about 70% of sales- is accelerating. The company opened 20 new stores in fiscal 2010 and has indicated it will step up the pace this year.

The company has no debt, should end the fiscal year with $180 million in cash and will probably repurchase $150 million in stock. Free cash flow is likely to top $220 million (market cap is about $2.4 billion). Estimates for FY 2010 and 2011 are $2.28 and $2.55 so the company is trading at roughly 12 times 2011 fiscal. Jeff has a target of $42.

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Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.