Like a hawk waiting to zoom in on a field mouse, a Wall Street Journal article attacked Mr. Robert Nardelli, former head of Home Depot, the day after HD reported a 28% drop in fiscal fourth quarter profits. The article, entitled "Nardelli's Flawed Strategy Hits Home Depot Profits," said "The quarter offered further evidence that the house that former chief Robert Nardelli remodeled during his six years in charge has some deep seated flaws." It then went on to say what the alleged flaws were. What the article says may or may not be true, but I'm willing to bet that if Mr. Nardelli were still CEO, Home Depot would not have posted that big a drop in profits.

Nardelli was a numbers guy and he learned the CEO game from the best: Mr. Jack Welch of General Electric. Chapters one and two of the game plan are that you always squirrel away some profits for a rainy day and you always bury some expenses to be taken when the sun shines brightly. It's all done legally of course, but every CEO knows that the way to get analysts to love you is to make the numbers quarter after quarter after quarter.

In Mr. Nardelli's case, however, something went wrong. He made his numbers alright, but the analysts still disliked him. I don't know exactly why, but the shareholders hated him and, apparently, the employees weren't too fond of him either. HD's board ousted Mr. Nardelli in January, allegedly over a reduction in his compensation package of $450 million for six years work. Maybe people didn't like him because he was making so much money. Maybe it was because HD's stock price went essentially nowhere while rival Lowes' stock price more than doubled. Not that HD's earnings performance was that bad, it was just less than Lowes'. So much for Mr. Nardelli. What about the new guy, Chairman and CEO Mr. Frank Blake? What did he do when he got his new job?

Why he turned to chapter three of the CEO's game plan where he was instructed on how to look good even when you're not. So he squirreled away every penny of profit he could report at a later date and then he dug up every chargeable expense his predecessor left behind. The bigger the loss was, the better. Mr. Nardelli was going to get blamed for it, and Mr. Blake would get the credit for clearing up "the mess" Mr. Nardelli left behind.

So what's the moral of this essay? When you read a company's earnings report, it may not be what it appears to be or what the papers say it is. So you need to know what's going on in the corner office and a few things about the Games CEOs Play.

P.S. Make sure you see this week's "Strategy of the Week" on the VectorVest University. There's more there than meets the eye.

I've received a lot of questions regarding ETF's lately, so I decided to study them a bit. By looking at the graphs, I found that many of these stocks have performed very well over the last few years. So I decided to examine the 20 ETF's with the biggest percentage gains over the last 52 weeks. I did this by running a 52 week Delta on Price - (Split Adjusted) on the stocks in the Market (ETFs) Industry Group. The biggest gainer, as of last night, was iShrFTSE/China, FXI, with a 48.03% gain. The 20th biggest gainer was iShr MSSwi, EWL, with a 28.02% gain. The average gain for these 20 stocks was 35.64%. How could I have found these stocks one year ago?

To look for clues, I put the 20 top gainers into a WatchList. Then I opened the WatchList and set the date calendar to 02/15/06. The stocks appeared as sorted by VST-Vector. At this point, I should make it clear that VST-Vector does not have the same significance with ETF's that it does with common stocks because RV and RS have been set to 1.00. Therefore, the only variant in VST is RT. So sorting ETF's by VST is essentially the same as sorting by RT. Nevertheless, it was interesting to note that the stock in this WatchList with the highest VST and highest RT as of 02/15/06 was the biggest gainer, FXI. So all I needed to do to find these big winners was sort by VST or RT, right?

Wrong! When I accessed the Market (ETFs) Industry Group and set the calendar to 02/15/06, I found that FXI ranked third from the top by VST and third from the top by RT. Quick Test showed that the top 20 stocks sorted by VST gained "only" 16.87% over the one-year period with 15 winners and 5 losers, a far cry from the performance of the 20 biggest gainers. Sorting by RT gave slightly better results of a 17.18% gain with 16 winners and 4 losers. So I had work to do.

I sorted the stocks by my next favorite indicator, the Comfort Index, CI. Oh, oh. FXI didn't even make the top 100. I ran Quick Test anyway. Bingo, it showed a much better gain of 19.35% with 19 winners and 1 loser. Maybe I was on to something. I then tried sorting by RT*CI. FXI made it back to the top ten. Quick Test showed a one-year gain of 21.28% with 19 winners and 1 loser. This result is still a long way from the performance of the top 20 gainers, but it was the best I could do. I tried a variety of other sorts and even created some searches to try to get better results. So I'm going to live with RT*CI as my best sort for right now.

Incidentally, if you look at the graphs of the top ETF's sorted by RT*CI, you will see some very impressive patterns. RT is a short-term indicator of Price direction and CI is a long-term indicator of Price stability. What a combination! Please try it when looking at Market Indices, Industry Groups and Business Sectors. You'll get a new perspective when Sorting by RT*CI.

P.S. Make sure to visit the VectorVest University to see this week's brilliant presentation on finding the Best Performing ETF's.

You can say what you want about Cisco Systems, but I have to take off my hat to Chairman, CEO and President, Mr. John Chambers. He's done a heck of a job.

While flying home about 15 years ago, I met a young man who said that Cisco Systems, CSCO, was the best in the business at what they did. Well I didn't know or understand very much about that, but I did know their sales and earnings were growing at a triple digit clip and their stock was hot, hot, hot. No company can grow that fast forever, and in my book, Stocks, Strategies & Common Sense, I questioned what would happen to CSCO's stock price when its growth tapered off and what would its sustainable growth level become.

Although its growth slowed from triple digits rates, CSCO continued to grow at a blistering pace throughout the 1990's. It became a tech giant, its stock price soared and it became a bellwether for tech stocks. Mr. John Chambers became a celebrity and the darling of CNBC. Unfortunately, CSCO was hit by the tech wreck of 2000 just like the other tech giants, and Mr. Chambers failed to see it coming. He continued to forecast 30-50% growth rates long after his customer's business had crashed. He lost credibility with me. See my essays of May 10, 2002 and July 19, 2002.

When Mr. Chambers finally saw the light, he immediately went into action, dramatically cutting costs. He wrote down billions of dollars of inventory, reduced staff by the thousands, shutdown facilities and cut his own salary to one dollar a year. Of course, CSCO's sales, earnings and stock price plunged, but he saved the company and ultimately returned it to profitability. Nevertheless, analysts wrote off CSCO as a growth company. VectorVest did not.

An all-weekly graph displays the rise and fall of CSCO's price since June 1995. By clearing the lower portion of the graph and displaying EPS in its place, you could see how CSCO's earnings hit a low point of minus four cents per share in February 2002 and have been rising ever since. A display of GRT shows how its forecasted earnings growth rate fell from its former lofty levels to negative territory in the Summer of 2001; then returned to 20%/yr. within a year. CSCO reported its most recent financial results last Tuesday. In the quarter ending December 31st, y-o-y sales were up 27% to $8.44 billion and earnings rose 41% to $1.92 billion or $0.31 per share. Although, these are not the super growth rates of the glory days, they're not bad for a multi-billion dollar company.

Mr. Chambers always was a visionary and strategic thinker: looking for new technologies, buying small, innovative companies and seeking ways to grow his businesses. He bought Scientific Atlanta, his largest acquisition, for $6.9 billion last year, and on January 4th CSCO announced the purchase of IronPort Systems, Inc., a leading provider of internet security appliances. Just today, CSCO said it plans to acquire Five Across Inc., a social networking company. Now Mr. Chambers is his old ebullient self again, speaking of new opportunities and an upbeat outlook. Cisco Rides Again.

January didn't start off very well for the stock market this year. After a blah December, investors began taking profits gained from the Fall rally and were losing confidence in the market's outlook. The Percentage of Bullish Advisors, shown in the Investment Climate section of these Views, had fallen from 59.80 on December 8th to 56.50 on January 5th. It continued to go lower as the month progressed, falling to 52.70 by January 26th. So what was the problem?

Some investors thought fourth quarter earnings reports would not be hot enough to move the market higher. Others felt that inflation was too hot to please the Fed. Still others believed that interest rates were signaling a cooler economy. Nothing seemed to be just right, and worst of all, our Market Timing Indicators were moving lower. The Price of the VectorVest Composite moved 32 cents per share lower in the first three days of trading, sending our Buy/Sell Ratio, BSR, to its lowest level in four months. This indicator, which we call the "Canary," was gasping for air. Then the December economic data began rolling in.

A strong December jobs report and a jump in average hourly earnings provided good news to Main Street, but essentially wiped out any chance that the Fed would lower interest rates soon. Good news for consumers came in the form of falling oil prices and December retail sales were the best in five months. Other signs of an improving economy also began to appear. Fourth quarter earnings reports were pretty much as expected, causing no widespread problems. The PPI and CPI inflation reports were also in line with modest expectations. Finally, fourth quarter GDP came in at a robust 3.5% with no implications of rising inflation. So chances of the Fed raising interest rates at their January 30-31 meeting became virtually nil. The only thing investors had to fear was The Fed itself. What would it do? What would it say?

Nobody was surprised that The Fed held the overnight federal funds rate steady at 5.25%. But they were plenty pleased at what it had to say, i.e., "Indicators have suggested somewhat firmer economic growth. That could boost inflation risks and more rate hikes may be needed." But, they also said inflation is easing and should continue to do so. Stock and bond prices soared. The Fed had literally acknowledged the soft landing.

A growing economy would keep earnings on the rise. Inflation was tame and interest rates weren't rising. Everything now seems just right. At 2.60, the Canary is now singing a happy tune. It was Goldilocks to the Rescue.