Volcano Could Erupt at Any Moment

08/31/2009 11:00 am EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Forecasts and Strategies, recommends income plays and one high-growth health care name to soak up the Fed's easy money.

The US economy is still shrinking, industrial production is falling, California is headed for bankruptcy, and unemployment is rising (raising the minimum wage last month to $7.15 didn’t help, especially for teenagers and minorities). But evidence is growing that we have emerged from the worst financial crisis in a generation, and we might see economic growth and a housing recovery by the end of this year.

We are still far from a return to normalcy, as evidenced by the fact that short-term interest rates are near 0%—way below their natural rate, and the federal government is running deficits exceeding $1 trillion a year. While we wait for recovery, the best strategy is to keep most of your portfolio in high-income stocks and funds that can sustain their dividends—and keep some gold just in case trouble arises again, or inflation makes a comeback.

Last month, the Obama administration reported that only 10% of the stimulus package had been spent. The fact is that public works and other spending plans are not an effective short-term stimulus to the economy. It takes months, if not years, for federal agencies to budget and carry out spending programs. In the end, the real cost is unsustainable levels of national debt. The only truly effective fiscal policy is permanent tax cuts (not tax rebates) that individuals and businesses can take advantage of immediately.

For Obamanomics to work, it must rely on the Federal Reserve and its easy money policies, which have a faster impact on the economy and the stock market. At its regular meeting in Washington during August, the Federal Reserve Board reemphasized its aggressive Keynesian policies of easy money to keep the economy from collapsing. It announced:

  1. It will keep short-term interest rates near zero.
  2. To keep mortgage rates from rising, the Fed plans to buy $1.25 billion in mortgage-backed securities, and $200 billion of debt issued by Fannie Mae and Freddie Mac.

Such policies are likely to keep the economy going and encourage higher stock prices on Wall Street.

The only stock that we hold that isn’t paying a dividend is Volcano (Nasdaq: VOLC), the San Diego-based company that sells a non-invasive medical device that treats heart disease. Several Wall Street firms have upgraded Volcano to “outperform” the market. It recently completed a deal that will allow Volcano to sell its products directly in Japan. Sales of intravascular ultrasound products, which are used to diagnose and treat vascular and heart conditions, should continue to grow.
Volcano has beaten Wall Street expectations for 11 straight quarters, and revenues are growing at a 40% rate. The company’s heart-disease treatment reduces the cost of patient care. Volcano also is a potential takeover target. Keep buying this undervalued stock.

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