Macro, Sectors and Stocks Review 7-23-2007

Macro, Sectors and Stocks Review

Earnings season continue to dominate stock specific performances. At this point, it is rather early and difficult to make broad market conclusions based solely on net earning results. At the same time, macro catalysts can spark directional shifts. For those keeping score, S&P 500 closed negative on the week and 10 year yield broke below 5%. Interestingly, both indicators appreciated and were strongly correlated from March to early July 2007. Recently, 10 year yield declined after peaking at 5.32%. Perhaps, equity markets are poised for profit taking in the near-term.

To add another perspective, both Crude and S&P 500 are at or near all time highs. It is remarkable that’s where we stand at close of Friday. This sets the stage for a turning point driven by various factors. Without further theatrics of “crash” and “depression,” overall market status remains overbought with pending corrections ahead. Once again, lingering macro fears or speculations do not diminish profitable opportunities. Similarly, pending outcomes should not dramatically change overall portfolio strategy and market thesis.

Revisiting key themes: US technology offers selective buying opportunities. Credit risks as further downtrend ahead for financials. Finally, crude related themes are vulnerable at current elevated levels.

• US 10 Year Yield: Broke below 5% after consolidating in a tight range 5.00-5-25%. Next major support level 4.80%.

• Crude: Approaching highs from July 14, 2006 of $77.95. Once again crude made annual highs by reaching $76.27 on Friday (July 20). Now, if history repeats itself we should be nearing peak levels.

• Gold: Recovery intact following a bounce from $640. Approaching April 20^th highs of $691.40. Near-term momentum becoming extended.

• US Dollar: Weakness persists, as the index nears all time lows reached in 1995 at $80.05. Clearly, deeply oversold and the downtrend intact since 2002 peak.

• SPX: Recent peak at 1555 reached on July 16. Overbought, as the index is 6% removed from its 200 day moving average.

Technology as a sector continues to work. Despite a negative broad market performance, four of the top five leading groups this past week resided in the technology sector. (Disk Drives +4.05% , Computer Services +3.6%, Computer hardware +2.76 and Semi’s 2.22%) Morgan Stanley Technology index is up close to 15% on the year. (vs. 8%+ for S&P 500) This is yet another illustration of broad participation across various groups. Also, a favorable outlook in Large Cap Growth presents a positive impact on the sector. In the Russell 1000 Growth index, technology is the top weight and accounts for 22% of overall holdings. A rotation in to Large Cap technology can be a rewarding area in the marketplace especially in the second half of 2007.

Now, the challenge ahead is to distinguish sustainable ideas while increasing positions on working ideas. In any market correction use weakness as opportunity to accumulate.

Continue to favor AMD (Advanced Micro), MOT (Motorola) and TLAB (Tellabs).

Financials: Weakness continues as Lenders, REITS, Brokers and Banks continue to lag behind the rest of the market. At this point, a negative outlook in financials should result in decreasing exposure in Russell 2000 Value index, since financial stocks account for almost 33% of the index. This past week was an illustration of the weakness in Small Cap Value as it underperformed other styles and was down 2.71%.

In the upcoming weeks expect few bargain hunters to seek buying opportunities especially at these oversold levels. It is important to acknowledge that it is not a timely entry point to short homebuilders and REITS. That said, from a long-term prespective the risk/reward and sustainability remain relatively unfavorable.

XBD: (AMEX Broker/Dealer Index): Attempting to stabilize following an 8%+ decline since June 1^st.

BKX: (Bank Index): Downtrend intact since February highs. It appears attractive to buy in the near-term, but expect bounces to be short lived.

KIX: (KBW Insurance Index): Index is down more than 7% since May 2007. Use strength as opportunity to trim.

Finally, two IPO’s in the sector tell the 2007 story pretty well. FIG (Fortress) after peaking on February 9, the stock is down close to 40%. Similarly, BX (Blackstone) is down 32% after peaking on June 22. Although hedge funds and private equity receive plenty of headlines, in this case bears are winning this battle.