Watch for the Post-Election Bounce


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It is a pretty reliable trend to see the stock market consolidate after earnings announcement season winds down. But serious consolidation is less likely this November as the mid-term election cycle will put investors in a bullish mood. I don't want to sound too political here, but things are on the verge of changing in the House of Representatives and in the Senate. Don't take my word for it; just listen to what most political analysts are saying. As of the time of this writing, the odds of the House turning Republican are 87.1%. The odds of the Democrats retaining the Senate are just 58%. As you can see, people are expecting a big shakeup in both chambers.

So, if predictions are correct, we'll likely see a split in the control of power in Washington as the legislative branch goes to the Republicans. This is welcome news for Wall Street. You see, when one party controls both the White House and Congress, it's much easier for the government to pass new legislation and change the regulatory environment, as it has done in the last two years. This makes it harder for companies to expand their businesses and spend money because they have no guarantee that the rules won't change in the near future.

When control is split between two parties, legislation piles up and little change is accomplished. This gives companies the all-clear signal that they've been waiting for and unleashes a wave of corporate spending. Corporate America has raised almost $500 billion in new bond debt and the cash in corporate cookie jars is fast approaching $2 trillion (approximately 13% of the value of the stock market). This cash is burning a hole in corporate pockets and is hurting businesses that are sitting on it. That's why businesses are impatient to unleash their money on the U.S. economy via capital spending after the elections, accompanied by even more dividend increases, stock buybacks and mergers and acquisitions. This puts a firm foundation under the stock market and helps boost our tech holdings. The tech sector is always the first to benefit from corporate spending because upgrading equipment and adding technology are the first things companies spend money on.

Not all of the market tailwinds are coming from politics. We're also getting a nice boost from the falling dollar. While many observers worry about the decline in the dollar, it is in fact great news for our stocks.

The decline allows companies with more foreign sales to receive a greater amount of dollars when they exchange them from foreign currencies.

This is why a lower dollar is helping boost corporate profits.  Unlike the S&P 500, where approximately 40% of sales are derived outside the U.S. from large multinational companies, my stocks derive more than 60% of their sales from outside the U.S. As a result, the further the U.S. dollar falls, the more windfall profits my stocks pile up. In short, a weaker dollar is great news for my Buy List stocks!

Deere & Company (NYSE: DE ) is the world's largest farm equipment manufacturer and a leading producer of construction, forestry and commercial and residential lawn care equipment. If you have ever seen a tractor, you probably recognize the signature John Deere green color or know the company's "Nothing Runs like a Deer" slogan.  Unlike in Eastern Europe where wheat production has slowed, U.S. crops have surged in the past several months. Currently, the country is producing a record number of crop exports. The higher demand for crops is leading to a greater need for farm equipment.

Although agriculture only accounts for about 1% of the U.S. economy, the actual impact of surging prices could be 10 times greater once spending on equipment, seeds, grain handling and food processing is calculated. This is why Deere & Co. stands to capitalize on high agricultural commodity prices.

I see this as a great way to play the overall trend in higher food prices that is developing with the decline in the dollar.

The analyst community is expecting that Deere's quarterly sales will rise +31%, and its earnings will rise a whopping +300%!  The company has a strong earnings surprise history and should continue to benefit from high food and crop prices, as well as a weak U.S. dollar. This stock will report earnings at the end of November. Add shares of this conservative stock to your portfolio under $84 before that time.

Magna International Inc. (NYSE: MGA ) is a global supplier of automotive systems, components and modules. The company is a survivor, seeing as several of its competitors have been dragged down by the bankruptcies of automotive giants GM and Chrysler. The company provides services ranging from vehicle engineering and assembly to production of exterior trim and building interior door panels.

Magna is on the brink of several important advances in the automotive industry. In September, the Magna E-Car division opened its newest hybrid and electric vehicle development center in Michigan. As far as cars go there's nothing faster than the race to build truly efficient hybrid and electric cars and Magna is set on crossing the finish line first. The past year has been good to Magna, with the opening of several new locations and new assembly contracts with major car brands like Aston Martin. The company's forecast continues to look sunny with continued deals with GM and Ford and a stronger presence in the auto-hungry countries of South America on the way.

In the second quarter, the company's sales rose +63.1% to $6.05 billion, compared with $3.71 billion in the same quarter a year earlier. During the same period, its earnings rose to $293 million, or $2.59 per share, from a loss of $205 million, or $1.83 per share, a year earlier. When the company reports earnings on November 5, the analyst community is expecting the company to post a sales increase of +13.7% and an earnings increase of +220%! In the past three months, the analyst community has revised its consensus earnings estimate +27.9% higher so these results could very well come in above current estimates. This is a great conservative buy under $95.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
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Louis Navellier

Louis Navellier

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