DAVE HARRIS: And welcome to Dave On Stocks Podcast # 28. I'm Dave Harris. I manage my own diversified portfolio of stocks. Welcome to the New Year. It's January 5th 2007. In this podcast I'll go over some things I see for this year. Then I'll review some economic data and I have a listener email.

It's been a great 2006 for stocks. For the Dow we saw an increase of over 16%. The S&P went up over 13 and a half %.The NASDAQ demonstrated a 9 and a half percent gain for the year! What a great year!

The big question most ask is when, and if the fed will be cutting rates this year. Currently the federal funds rate is at 5.25% I do see the fed cutting by the first half of this year 2007. I think the important thing now is for the economic data to show the economy is slowing down at a nice, steady pace. And that's what we've been seeing so far. That way the fed will be succeeding in what they want to do-provide a soft landing for the economy. We don't want any data indicating growth that's too slow. That would involve the threat of a recession. Growth that's too fast could encourage the fed to hike rates to fight inflation. Last month the committee felt that inflation risks remain. But also the economy is expected to expand at a moderate pace. I think this economy is going to eventually show that conditions call for a cut in rates. But again, not right away. I think the fed needs to see if what they've done is working. That's exactly why they've paused the last 4 times on rates. Then the economy's going to need a boost and the fed will cut rates.

I've said it before and I'll say it again. I think housing has NOT bottomed yet. It will probably be a tough year on residential construction in 2007. Home Builder Lennar (symbol LEN) just forecast a huge upcoming loss and even the CEO said there were no signs of a recovery in the home construction business. So, I would continue to avoid stocks involved in the housing sector for now. But I don't think the situation will be a BIG negative impact on consumer spending. Remember though, that many people who work in the housing sector are expected to loose their jobs. I still see STRONG consumer spending this year.

There's economic data to go over now. News from the labor department on an unexpected increase in new jobs and higher wages is causing some market weakness on concerns it may cause the Fed to raise rates. Unemployment stayed the same at 4.5%. That's pretty low. There was expansion as indicated by the ISM Manufacturing index for December. It came in stronger than expected at 51.4. That's after a 49.5 reading in November. Analysts expected the number to be unchanged for December with a reading of 50. Over 50 means expansion, and under 50 means contraction. So we have an increase in orders which added to the strength here. Construction spending declined less than expected. This type of data suggests we are in store for a soft landing in the economy.

We did have some mixed same store sales number for the important December period from the likes of Limit Brands (ticker LTD) and The Gap (GPS) forecast a poor 4^th quarter. On the other hand, Wal-Mart (WMT) said same store sales were up 1.6% which beat expectations during the biggest shopping time of the year. I still like Wal-Mart here at $47.44 per share and still think you should buy the stock. Wholesaler Costco also had some good growth numbers which beat views. The symbol is COST.

I got an email asking why NYSE Group, symbol NYX, have such a high P/E ratio. Is it the business they are in? Should more shares be bought right now?

The NYSE Group runs multiple securities market centers including the New York Stock Exchange. The stock just started trading last March. Drawing some attention to the stock is the move to go global with the plan to merge with Euronext, which deals with cash markets in France, the Netherlands and elsewhere.

Now to the question about the high P/E ratio. The price to earnings ratio is good for comparing a company with others in the industry. It's the way to tell if a stock is priced correctly. It's the stocks price per share divided by it's after tax earnings per share. Now this stock is in the financial sector in Diversified investments. The average P/E ratio for that industry is about 20. The P/E ratio for NYX is around 108! Clearly it's way above the industry average. Then you have to ask yourself why it's so high. Could it be the industry? I don’t think that's why. Sometimes a P/E skyrockets because the market thinks there will be big jump in earnings in the future. Or it could be that the business has an advantage that assures continued growth with very little risk. But I think the earnings multiple is so high because the stock has been hyped up. It's a bubble.

The forward price to earnings ratio for NYX is almost 60. But for the industry, it's close to around 19. This takes into account earnings estimates for the NEXT 4 quarters. Generally a high P/E ratio, as in the case of NYX, makes it a riskier investment because it reflects high expectations.

So, I think NYSE group is over priced. I would sell some of your holdings if you bought shares in March or June. If you bought them recently, HOLD the stock and don't buy more right now. The shares have about doubled in price this year. There's plenty of time to maybe buy more NYX shares AFTER you see how the merger works out. Other financial stocks I DO like are Bank of America for financial services symbol BAC. I think the stock is going to the mid 60's. I also like insurer Hartford Financial Group, symbol HIG. I talked about that company in podcast 25. Check that out if you haven't heard it. Thanks for the email. If you have any questions, or comments for me send me an email the "contact us" link on this page.

That's all for this podcast of Dave On Stocks. I'm Dave Harris. I'll talk to you again soon with another show. My website is www.daveonstocks.com. This is Dave On Stocks.