DAVE HARRIS: Welcome to another Dave On Stocks podcast. This is show #40. It's Friday February 16^th 2007. I'm Dave Harris. I'm a long term investor with a diversified portfolio of stocks.

Latest economic data says housing starts fell significantly and lower energy prices resulted in a decline in wholesale prices. This .6% decline in the PPI was expected. But it seems more attention was on Fed Chairman Ben Bernanke's testimony to the senate banking committee. He mentioned that price pressures are still a concern, but also expressed that lower oil is helping control inflation. Although housing is slow, we should still expect moderate economic growth. So I think it's clear that the Federal Reserve intends to keep rates the same for a while as the economy pulls off a soft landing. That means slow but steady growth that keeps inflation under control and avoids a recession. But because our economy is slower, the unemployment rate keeps creeping up. Last month, unemployment was at 4.6%. I think that rate will increase into the year until the Fed starts cutting rates to jump start the economy again. But until then, I expect a slow but steady increase in unemployment figures. The amount of newly laid off workers rose last week. The colder weather conditions in the Midwest forced companies to lay off construction workers and builders. Factory output slowed last month by 0.5% according to the Fed. This reflects some weakness in the autos, oil and mining sectors. In the Philadelphia region, manufacturing activity was weaker. I think all this data makes it very unlikely the Fed would raise rates.

It looks like poor car sales were a drag on the retail sales report for January. Sales were almost flat and below analyst expectations, but it's mainly the underperformance in autos and gas stations that hurt results. Department store sales look good and went up 1.3% The Commerce Department also reported a weaker reading in business inventories. But that's o.k. in my view. I think this makes for a slower economy and that's a good way to fight off inflation pressures.

The December U.S. trade gap widened by 5.3% which was more than expected. According to the commerce department, civilian aircraft exports decreased and petroleum imports increased. It's important to watch international trade because it influences views on GDP-gross domestic product. Because of this wider than expected trade deficit, economists have lowered their 4^th quarter economic growth forecast to a rate of 2.2% from a previous 2.5%. But I think the data looks good here, further supporting the notion that the economy is moving along at a steady, but slower pace.

But the market paid less attention to most of these reports and focused on Ben Bernanke's statements to the Senate panel, which I think were encouraging and what Wall Street likes to hear.

I believe that in this environment (slower economic growth for a soft landing) you should buy cyclical stocks now while they are cheap. Then hold on to these stocks because the economy is going to kick back into high gear once the Fed cut rates, which I expect will occur by mid-year. Look at Deere (DE), the farm equipment maker, which just reported a better than expected 1^st quarter profit and raised full year guidance. International equipment sales outpaced slower results in Canada and the U.S. I still prefer Caterpillar (CAT) over Deere (DE). CAT just announced a $7.5 billion dollar stock buyback program. But if you buy either of these now, you'll see big gains in the stocks once the Fed cuts rates. When we have an economic upturn, these stocks will benefit. CAT is at $67.72 per share. DE is $112.56. I suggest you buy CAT.

Another great cyclical stock I recommend is 3M (MMM). The maker of Scotch tape and Post-it notes said early this week they plan to buy back $7 billion worth of their own shares over a 2 year period. That shows confidence in a business. I see profitability and growth for 3M in the years ahead, especially once the Fed cuts rates. I think 3M is a buy for a long term investment. MMM is at $77.21 per share.

Although Coca-Cola (KO) beat expectations in the quarter, the company's net profit was lower. Coke had strong growth in emerging markets like China and India, but business is weak in North America. Pepsi (PEP) faces some of the same issues, but I like Pepsi better. PEP raised their full year 2007 guidance and a $3 billion dollar buyback plan. They also have a snack division, Coke only deals with beverages. I suggest you sell KO and buy PEP. PEP stock is $64.79 per share.

That's all for this podcast of Dave On Stocks. I'm Dave Harris. I'll talk to you again soon with another show. Write me with any questions or suggestions about the podcast use the "contact us" link on the web page. My website is www.daveonstocks.com. This is Dave On Stocks.