Market Thoughts – August 6, 2007

BIG PICTURE:

From a cycle and macro perspective, recent downturns are to be expected. This week, investors reacted to an inevitable period of profit taking/ market consolidation. Signs of fear and panic are visible as seen by rising volatility. This is demonstrated by a 75% + spike in the VIX (CBOE Volatility Index) since July 13^th 2007 as it reached 4 year highs. In times of uncertainty, macro conditions suggest that we are entering a period of risk aversion. Credit risk is the dominant theme that continues to trigger additional sell-offs. In looking ahead, recoveries in credit related themes can create additional shorting opportunity. For example, Lenders, Homebuilders and REITS should continue to show further weakness. Therefore, short-term traders should allocate aggressive capital to short any strength in the next 4-6 weeks. Expect further declines in Financial Services as analysts lower price targets and investors adjust overall expectations.

China and Crude related themes are extended as well and poised for near-term declines. After a strong first half of 2007, both themes are relatively overbought. Early signs of peak as Crude stalled at $78.70, while FXI (China 25 Index) is down 9%+ since July 23^rd. That said, not a timely buying opportunity for those seeking long-term entry points.

In search of Bargains:

On the other hand, sectors with least exposure to credit risk are poised to benefit from sector rotation. Despite looming broad market concerns the primary challenge is to seek bargains. Also, as equity markets remain in correction phase, there are few long opportunities in select areas such as Healthcare, Media, Telecommunication and Technology. Also, attractiveness in Large Cap Growth should benefit technology and healthcare groups in the long-term. Important to note, that stock specific bets are due to face higher risks at turbulent periods. Nevertheless, the rewards at cycle lows are much more worthwhile in picking emerging themes.

Emerging Themes:

Airliners are oversold and poised for recovery as crude retreats from overbought levels. Water related themes can benefit as investors look for alternatives to Crude. For those seeking ideas outside of Far East; Turkey, as an emerging country, presents timely entry points. Stock specific ideas below.

MACRO INDICATORS:

Crude: After reaching all time highs at $78, index declined 4% closing at $75.48. Currently, nearing overbought levels and further consolidation ahead.

US 10 Year Yield: Deeply oversold between 4.60-4.80%. Expect near-term recovery but sustainability remains unclear.

Japanese Yen: Holding in and showing early signs of bottoming on July 17.

Gold: Attempting to bottom around $660. Next resistance level is closer to $690. Favorable odds for upside move in the near-term.

US Dollar: Once again deeply oversold as it nears historic lows (September 1992 $78.19) around $80 level.

S&P 500: Near-term oversold as index closed below 200 day moving average. Currently, 5 % removed from March 14^th lows. Look for stabilization, between the 1440-1400 ranges.

FXI (FTSE/China 20 Index): Overbought from an intermediate-term perspective. Look for further consolidation closer to $120 range.

OSX (Oil Service Index): Extended and 14% removed from 200 day moving avg. ($222).

STOCK SPECIFIC:

Water:

WTR (Aqua America): Stabilizing and timely as it bottoms around $22. An idea offering exposure to investing in water as a commodity. Given its low beta and fundamental strength current conditions signal an appealing risk/ reward. Finally, stock can benefit from capital rotation out of oil names in the near-term.

Telecom:

VZ (Verizon) : On a relative basis, strength remains solid. Poised for further upside moves. Add on pullbacks closer to $40 level.

Healthcare:

MCK (McKesson): Timely entry point between $56-58 levels.

JNJ (Johnson & Johnson): Attempting to bottom, as it approaches key support levels around $59-60.Actionable both from a near and long-term view.

Technology:

SNDK (Sandisk): Accumulate closer to $50 level. Add on pullbacks.

TLAB (Tellabs): Approaching key support levels around $10. Attempting to bottom around 200 day moving average ($10.66).

FDRY (Foundry Networks): Although extended in the near-term, relative strength remains in tact.

LWSN: (Lawson Software): In addition to positive fundamentals as an enterprise vendor, technical set up looks appealing.

Airlines:

CAL (Continental Airlines): Deeply oversold as Crude continues to make new highs. At current levels ($31/30), attractive risk/reward and an inverse play on Crude.

Energy:

PTR: (Petrochina): For those looking to short both Crude and China this might be one way. Recent peak at $160. Consolidating from overbought conditions. Any strength, can offer attractive entry points for shorts.

ETF:

TKF: (Turkish Fund): As the Far East reach elevated levels; Turkey can offer an attractive rotation in emerging markets. Buy zone between $20-18 range.