Econ, Healthcare and CRA

Market View:

Plenty of economic data and earnings swamped the street this past week. Overall results were positive. The economy state can be generalized as “good” and that view is shared with many. Mainly, the highlight of optimism showcased a visit from the President at the New York stock combined with strong GDP #. Strength in the economy is not new news but interpretation of reaction is what makes news.

Impact on equity markets: US 10 year yield attempting to hold near-term support of 4.80%. Noticeably, supply should remain the same on the next auction. Therefore, downside pressure awaits but I will continue to hold the view of a recovering 10 year yield for the first quarter. Declines in the near-term are possible but overall trend should depend on fed action/tone during the next meeting. Once again, rates in my view are the key macro factor serving as a catalyst for pending a corrections. Regardless, a quick price monitor does not hurt especially in financials and consumer related space.

Crude: Back to the 60 level, facing heavy resistance. Looking for further strength as opportunity to short especially in the first half of 2007. That is another macro theme of interest that points to short-term trades as opportunity to sell.

Basic Econ takeaway.

Job Market Still Healthy, Wages Outpacing Inflation, Factory Orders Surge, Consumer Confidence Hits 2-year High

Sounds good on the surface.

Overall, positive sentiment and a higher trending market beg the question: Are markets too expensive? First month completed with an uptrend continuation. Turbulance remains steady, violotolty and complacey appreas the same and no major change in sentiment.

A strong recovery by homebuilders and few retailers has me asking on the duration and sustainability. On the mortgage lending side we are seeing decay in NEW (previously mentioned and stock of concern) and NFI have offered a great shorting opportunity.

The New York Times reported last week that “about 2.2 million borrowers that took out sub-prime loans from 1998 to 2006 are likely to lose their homes”. That translates into about 10 million people! But that, of course, is just the beginning of the bloodbath. The real fun begins when the whole, ugly ball-o-corruption starts to unwind and we get an insider's-view of a system that is rotten to the marrow. The housing industry is saturated with fraud; the banks, the mortgage lenders, the Fed and the homeowners themselves have all played a major role in this sordid confidence game.

Investment thesis remains the same and on a weekly basis. Healthcare and Technology along with select consumer remains an area of high interest. While energy (crude) related and financials are least favored. Mortgage related themes continue to be in a downward cycle and seeking opportunity to short. The premise of the thesis relies heavily on sector rotation and a cycle shift that I feel will be reflected in the market place.

Healthcare:

Exploring stock specific names in all groups mainly pharma, med tech and biotech.

CRA: Trading between a range of $10-16 and setting up for a longer-term recovery. Several analyst upgrades recently contributing to further upside move. Long-term data suggest an attractive reward from deeply oversold levels. Stock has lose. Although, recent run up closer to $16 appears extended, I see a structural shift that should benefit the sector. Given the improving fundamentals and attractiveness of healthcare themes, CRA stands out as an attractive investment.

Other names include :BMY, LLY and KG.

These are just few names for a sector recovery bet. The S&P healthcare index has underperformed the market since mid 2003. Despite gains on an absolute basis, the overall sector has been a laggard. Most of the underperformance can be attributed to weak pharmaceuticals especially in Large Cap. There is plenty of litigation risk for the sector but the cycle shift and relative weakness should continue to turn positive.