Low Rates, Lower Dollar, 8 Great Plays

05/25/2011 10:59 am EST

Focus: STOCKS

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

For the Federal Reserve, hamstrung by the size of its debt and continued underperformance in housing and financials, 1% might as well be a glass ceiling...but there are several ways to play this weakness, says Louis Navellier of Blue Chip Growth in this exclusive interview with MoneyShow.com.

Louis, please tell us about what's going on with the dollar, the Fed, and interest rates.

Well, the Fed is the only central bank that's not going to raise rates. They've already said they are going to keep rates low for an extended period.

As other countries raise rates and we undermine the dollar, the Fed is essentially in a box. Their job is to keep the banking industry afloat. We appear to be having a double dip in housing all of a sudden, so that's tormenting them.

The other thing that's tormenting them is they have to keep the government afloat. We do finance the bulk of our $14 trillion-plus deficit under 1%. Most of it is in bills and notes. Very little is in treasury bonds.

What's happened is, if they raise rates significantly, the interest on the deficit could hit $900 billion a year. In fact, Peter Orszag, who is President Obama's former White House budget director, has been out saying that.

The Fed can't raise rates. It blows up the government. It blows up the bank industry. That's why they're not going to raise rates.

I'm not the only person saying that. James Bullard, the St. Louis Fed chairman, has said that. He's pointed out that maybe [the Fed Funds rate] is going to be 50 basis points in two or three years, or 75 in four or five years, but they can't break a 1% rate threshold. It just blows too many things up.

That has very good long-term consequences for the stock market, because people get so frustrated with low yields—but it does undermine the dollar, and that causes commodity inflation.

On the other hand, we know how to profit on a weak dollar. The last time the dollar dropped 37%, from 2002 to 2008, our blue-chip letter was up 132%, so we know where to go so it doesn't scare us. Of course, you can also buy commodity-related stocks and things like that.

Well, first of all, won't the private sector raise rates as the economy heats up? Don't you get higher rates because people are expecting inflation to move higher?

Well, speaking of inflation, if we measure inflation like we did in 1980, we'd be at 9.6% now, but of course then they throw out food and energy.

The personal consumption expenditure index is running 3.8%—that's Greenspan's favorite indicator. Right now, the CPI is running 2.7, but 40% of the CPI is real estate, which puts downward pressure on it.

So the Fed is like an ostrich with its head in the sand, denying there's any inflation, but we know there's inflation. You can see it at the grocery store and at the gas pump. Again, they're in a box, and they have to try to talk their way out of it. It's kind of sad.

What are the investment implications of Fed Funds staying so low for so long?

Well, as the dollar gets weaker and weaker, it causes our economy to boom—because if you look at the United States, what do we have that other countries don't have?

  • We have the cheapest electricity.
  • We have the best infrastructure, with freight rail, the highways.
  • We have the biggest consumer market in the world.
  • Of 50 states, 30 are pro-business, and trying to get more business to move there.

So, if I'm a big multinational, I might want to move more business to the United States. We've seen manufacturing turn up for the first time in 13 years. We have big manufacturers like Cummins, the Caterpillars, the BorgWarners, John Deere, are all examples of companies prospering from a weak dollar.

The weak dollar will help us recover. We just have inflation in the interim.

NEXT: The Picks

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Which stocks do you like? Do you still like BorgWarner (BWA)?

Yeah, very much so. They've a huge automotive supplier, and they export a lot more than they sell in the United States.

So, they're exporting to all these manufacturers?

Absolutely. China…Four-wheel drive systems to Asia. Dual-clutch transmissions to Germany, things like that.

Any other names?

Sure…TRW Automotive Holdings (TRW) we like quite a bit. They're a big automotive supplier. Again, much bigger sales outside of the US than in the US

Autoliv (ALV) is a Swedish one. They make air bags and things like that.

How about the big names in automotive...do you like the big manufacturers themselves?

Well, I’d say Ford (F). It's well run. They control their inventories.

Unfortunately, General Motors (GM) is going to have to do a second stock offering—and the push to the Volt and everything has been a disaster.

Although, we do have a company, Polypore (PPO), which is in battery technology, and it’s doing well.

You still like that?

Yeah. But they can barely sell 300 Chevy Volts a month.

The most controversial vehicle is the Fisker, which is like a $100,000 Chevy Volt. They were supposed to build them at the old GM plant in Delaware, but because they can't sell many they are making them in Finland, where they've gotten $520 million from the government.

What effect does the weaker dollar and the low-rate Fed policy have on technology companies?

Oh, it helps them, because the average tech has 60% of its sales beyond our borders. It helps them. They profit from it.

So, you like a lot of those still?

Oh, we like networkers, we like anybody involved in upgrading everything to 4G. We like fiber-optic companies. They're trying to make the networks more efficient.

We have the Cloud computing companies like VMWare (VMW). We have networkers like F5 Networks (FFIV). Even 60% of Apple (AAPL) sales are international.

Tech had huge surprises last quarter. You know, in the first quarter, every sector of the S&P surprised. I've never seen that before.

Any sectors you don't like?

No. Well, I don't buy financials because of the banking problem. Don't go there.

Utilities?

Yeah, we like the Brazilian utility. It's CPFL Energia (CPL). Nice dividend yield, and you get the currency kicker from the Brazilian real.

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