Navellier Growth: your source for market-beating growth stocks

Let me give you an idea of what life has been like on Wall Street this week. On Tuesday, a story come out that Apple (AAPL) was struggling with sales of its iPhone.

According to Miller Tabak, Apple was going to slash its iPhone production in half. Oh no! Panic strikes! Of course, it didn't take long for the stock to take a plunge.

Well, there's one slight problem with this story—it's not true! Miller Tabak doesn't cover Apple. In fact, they don't even have a tech analyst. Remember the old saying that a rumor can circle the globe before the truth can get its pants on? Well, Wall Street is just about the about best place you can find if you ever want to start a rumor. Trust me, the crazier, the better. Fortunately for Apple, it recovered most of its lost ground yesterday.

The weird thing is that this isn't the first time that the rumor mill has adversely affected Apple. Two months ago, Apple's stock got rocked on rumors that the iPhone was going to be delayed. Again, not true. So, has Wall Street finally learned its lesson that it shouldn't listen to rumors?

That would be "no." Yesterday, shares of Beazer Homes (BZH) dropped 42% on news that it was going bankrupt. Well, there's one slight problem with that story. (Wait, don't get ahead of me.) You guessed it—not true at all. The company publicly denounced the rumors as "scurrilous and unfounded." It's disgraceful that a company should even have to respond to this nonsense. In the middle of the day the plunge stopped and the shares soared 40% off its low, and the stock is up again today.

Rupert Murdoch just spent $5 billion to buy The Wall Street Journal. Sheesh, if he wants to reach Wall Street, perhaps he should have bought the National Enquirer!

The thing about these rumors is that they involve two big ingredients: the propaganda and of course, the ever-important public that's willing to believe it. I've been on Wall Street for nearly 30 years, and these kinds of rumors have always been floating around. The difference nowadays is that traders are far more willing to believe them.

When you take a good, hard look at earnings, and how stocks like Apple bounced back after earnings seasons, you'll know that the rumor mill is no place to pick up fact-filled news. Actually, my Blue Chip Growth service has Apple on their buy list and all of those subscribers can happily tell you that when the rest of the market saw their stocks dip down, Apple was one of the few stocks that saw its profit rise!

Unfortunately, another good example of reckless speculation is being shown by Fed watchers right now. With the Fed meeting next week, many on Wall Street think a Fed rate cut is off the table. That's probably true for next week, but I still think a rate cut is on its way. In fact, I haven't changed my basic outlook on this view since last spring.

Let's ignore whatever someone thought they heard from Ben Barnanke's, barber's, brother-in-law and instead focus on the facts. The Fed's favorite inflation indicator, the core Personal Consumption Expenditure (PCE) index, has climbed only 1.9% in the past 12 months and is now running at its lowest rate in over three years. That's very good news. The core PCE rose just 0.1% in June, which was the lowest monthly inflation since last November.

Under Ben Bernanke, the Fed unofficially targets inflation within a range of 1% to 2%. So as the core PCE falls, it sets up the Fed for an interest rate cut sometime this fall.

There's also been a dramatic decline in long-term bond yields. The 10-year T-bond is now going less than 4.8%, and it was over 5.2% not too long ago. This was obviously caused by a "flight to quality" during the sell-off in late July. Short-term yields have also declined and are now well below the Federal Funds rate.

That's very important. The Fed doesn't like to fight market rates, and the fact that core inflation continues to fall is very bullish. The real reason why the Fed wants to cut rates is to shore up consumer spending and help the battered housing market, which could cause economic growth to struggle. Just ask Beazer Homes.

The Wall Street Journal had an excellent article in it today on the Fed's game plan. You must have a paid subscription (or look on pg. A2), in order to read the whole story, but here's a sample:

When officials meet Tuesday, they are likely to keep the short-term interest-rate target at 5.25%, as expected. Despite the recently increased risks to economic growth, there appears to be little sentiment for shifting from their assessment that the risk of higher inflation poses a greater concern. That judgment would imply little support for a near-term rate cut. However, developments in markets and key data, including tomorrow's July employment report, could shift officials' inclinations in coming days.

William Poole, president of the Federal Reserve Bank of St. Louis, said Tuesday, "Most of these [market] upsets stabilize on their own, but some do not. I'm not saying that the Fed should ignore what happened last week; we need to understand what is happening."

Exactly! In the meantime, the corporate earnings environment continues to be excellent. After the closing bell yesterday, one of my favorite tech stocks in my Emerging Growth service reported outstanding second-quarter earnings. Excluding charges, Smith Micro Software (SMSI) netted 16 cents a share, which was two cents more than the consensus of Wall Street analysts. The company makes wireless communication software. Shares of SMSI soared over 15% today.

This is the kind of news that Wall Street should be paying attention to. The earnings parade isn't over yet. There are two things to look out for next week. The first will be the post-meeting statement from the Federal Reserve. I'm not expecting any major changes. I still think the Fed will continue to emphasize its focus on fighting inflation.

The other event is the earnings report from Holly Corp. (HOC). This is due one week from today, and I think it could be very good. Holly has been a gigantic winner for us in Emerging Growth. Since I first recommended HOC nearly three years ago, the stock is up over five-fold. That's why I call it Emerging Growth! And don't think you're too late to join the party. Shares of HOC are currently going for less than 13 times its earnings.

That's all for this week. I'll have more for you in next week's "What's Working on Wall Street Now."

Sincerely,

Louis Navellier