THE FED CUT BY A QUARTER-PERCENTAGE POINT-WHAT TO BUY AND SELL IN THE RETAIL SECTOR-A FRESH LOOK AT WALGREENS

12/11/2007 4:48pm CT Tuesday

By Dave Harris

As predicted in my last article here over the weekend, the Central Bank cut both the fed funds and discount rates by a quarter-percentage point today. A key interest rate now stands at 4.25 percent. The discount rate is at 4.75. In my view, the November job growth looked too good for a more aggressive cut. After all was said and done today, Wall Street didn't like it. The street really wanted a half-percentage point cut, so the Dow Jones industrials fell over 294 points lower at 14,432.77.

In recent weeks, whenever a Fed official hinted that a cut is likely, stocks generally rallied. I used to think that inflation was no longer as much a concern as economic stability. In their statement, the central bank said economic growth was slowing and that inflation may face "upward pressure" due to higher energy and commodity prices. I believe last week's employment report, which also indicated rising inflation pressure, made it more likely the Fed was going to cut by 25 basis points. Hourly earnings were up by .5 percent and above views. But overall, it was good news on November job growth. Unemployment was even at 4.7 percent and 94,000 payrolls were added. Consumer strength is the key here. If the employment numbers were lower, than I would have expected a 50 basis point cut today.

This Thursday, data on November retail sales will come out. Last week, individual retailers proved that sales were mixed. Target (TGT) had some disappointing apparel sales and warned that December will need to show improvement. I think they're going to surprise us. Look at the latest November job growth. Target should be bought here. The stock closed down 6 cents at 55.51. I think its way too cheap and going over 60.

J.C. Penney (JCP) said same-store sales rose 2.6 percent, but analysts expected better. The Gap (GPS) had flat results. But the stock has been going up because they beat the analyst's dismal projections. If you already own the stock, I believe now is a great time to sell it. The Gap closed at 20.43 per share today.

On the plus side, Macy's (M) beat expectations with sales well over 13 percent. Wal-Mart (WMT) also beat the street, with sales up nearly 2 percent. The company also forecast a solid December, with sales in the states to be up 2-3 percent. Wal-Mart is a buy here at 49.03.

Drug store Walgreens (WAG) took a major beating since their disappointing earnings results a few months back. This stock was typically trading well into the 40’s, but has since been in the $36-$38 dollar range. Early last week, the company said sales rose 4.4 percent last month on the strength of electronic, pharmaceutical and food sales. The chain did experience some weakness due to a mild flu season and cheaper pricing on digital prints. But I think the stock has hit bottom and will surprise to the upside. Walgreens will once again benefit from its solid management and demonstrate real profitability in the coming quarters. Now is the time to pick up the stock here at $36 per share.

The international trade report is due from the Commerce Department Wednesday. Thursday, it's retail sales, initial jobless claims and a reading on wholesale inflation (the PPI). Then Friday, it's another inflationary indicator, this time from the consumer side (the CPI). All of which have the potential to move the market one way or another.