Sub prime weakness, Key macro levels and Bargain Hunting

Sub prime weakness, Key macro levels and Bargain Hunting

Friday’s close displayed some market weakness and begged the question of a potential correction. Although, plenty of bullish signs with increasing Private Equity deals, A new Hedge fund IPO, and solid earnings from CSCO. Sub-prime related themes tumbled as the truth unfolded.

A Long awaited event and a negative view stated many times on this blog.
In attempt to profit in those theme: AHM and FED – are short ideas that we suggest adding to or consider adding for those introduced to the weakness earlier this week. There is further downside in this space given the optimism of “soft landing” and the lofty expectations among bullish investors. A theme of high interest and continue to see the mispricing and expecting further downside.

Similarly, noticing the homebuilder index (HGX) facing resistance around the 245 range. Following the summer recovery, I am looking for a pause. Mainly, a downward pressure awaits with rising concerns of sub-prime lending and further panic in housing related areas. The group was weak relative to other places in the market for the better part of 2006 and favor to short on any strength.

In terms of searching for quality ideas, primarily focused in Technology names and ways to manage those ideas on pending corrections. I view the broad market slowdown to buy attractive names especially in TMT. Therefore, the search for quality ideas is in full pursuit. The communication, media and other select technology themes is an area of growing interest. Earlier this week, I posted the five ideas to consider with attractive risk/reward. (SWY, LLY, CRA, GMST and TLAB). Despite overbought market corrections, we are seeking quality ideas with relatively attractive downside for the expected reward.

The CSCO theme – an industry leader in a favorite group. It might take a while to get back in, but one should slowly add to long positions. The first leg of an upside move stated in August 2006 where the stock bounced from $17 to $28. Despite the 65%+ move there is further upside ahead. Broad markets appear extended and pausing since early December 2007. Not surprising to see a pause Slowing market after a strong back half of 2006. NASDAQ 100 led the rally versus S&P 500 and might give up few gains in pending correction. The task ahead is to search for bargains and planning ahead.

Looking to add to ADM at current levels. A stock that has been of interest since Q3 2006. Large cap agriculture play that can offer correction shelter and but importantly provide solid annual capital returns.

Despite the cliché of playing ‘alternative energy’ it is worth the risk. Also, ESLR is becoming of interest in addition to other alternative energy plays. In chemical related field DOW and DD – ideas mentioned before and are of interest.

Macro Outlook: US 10year Yield – Facing resistance around 4.80% -- Positive start strong recovery in the first month. Crude – continues to stabilize around $60, any further upside move in my opinion is not worth chasing from an investment perspective. And finally, DXY – facing resistance at 85.50.

Macro edge - expecting a tame recovery in crude prices following recent peak this past summer. Looking beyond the trading upside move back to the $60 level - I view this action as a "dead cat" bounce. Furthermore, the near-term indicators suggest an extended market with a less compelling sustainability story.In addition, the supply argument is priced-in at least in the intermediate-term. Slowing growth in China also weakens the expected demand in commodity prices. At the same time the important takeaway is asking where the previous bullish crude arguments stand today.

Bottom-line - expect further correction before a stronger recovery in crude prices.This macro relief should direct attention to less neglected groups in the marketplace. An additional factor for an increasing interest in TMT -side of the business. Also, important to note the keys in stock selection especially in favored groups. On a regional basis, few European companies are worth a look for upside and growth opportunity. Therefore, in maximizing returns will look into these themes for ideas.