Market Update: December 31, 2007

Weekly Results:

S&P 500 +1.26% NASDAQ +1.27% Russell 2000 +.55% MSCI Emerging Markets +2.28%

Although not many actionable ideas, it is a good time to ask the following questions:

Do your portfolio holdings contain sustainable ideas for 3-5 years ?

If not, ask yourself what is your upside expectations?

Finally, what areas are worth exploring for emerging ideas?

Does your portfolio match your goals and reflect your market views?

Perhaps, answering these questions can springboard a fruitful New Year.

Looking ahead:

The status of the US economy will take center stage in the mainstream media as we head into an election year. That seems to be one of the few high conviction ideas for 2008. Perhaps, increase in volatility ranks second. Also, heavy sell-offs can mark a period of trend shift. In general, excessive pessimism creates "bottoms" for new cycle themes. Finally, it would be a wise move for investors to leave a category titled "unfathomable". Although, not actionable, it's important to recognize and react to least expected events.

Econ Talk:

Actions from Federal Reserve, slowing economy, concerns of housing and stabilization of financial services can dictate market directions. Expect plenty of opinions, prognoses and data focus. Nonetheless, the basic takeaway is that we are transitioning away from a period of "easy" money. At this point, policymakers will attempt to manage consequences of this cycle rotation. The interesting (relevant) part is watching investors react to ongoing economic data.

Investor Sentiment:

Volatility increased significantly in 2008. VIX remains above 20, which indicates investor anxiety. Fear is caused as investors anticipate a trend shift. Currently, the bearish sentiment (according to AAII) is elevated and reaching depressed levels. Therefore, an upside move or relief rally in the near-term should not be surprising.

Chart attached below.

Sell Offs/ New Opportunities:

There are opportunities to profit from sell-offs assuming significant declines in the first part of 2008. The S&P 500 is up 92% since 2002 as the bullish run is intact. That said, it is not surprising to see near-term corrections. For less aggressive investors, mid 2008 can offer early entry points to beaten up stocks. Again, areas of interests are in innovative related themes. Groups include Technology, Media, communications and select Healthcare.

Financials:

Once again the upcoming year, can be a difficult period for Financial Services. Certainly, not a pleasant way to starts a New Year but several factors lead to this assumption. Fundamentals of large financial institutions remain weak, credit card defaults are rising (26% last month), foreclosures are increasing and more unraveling of existing credit risk.

Now, a turnaround bet is too early at this point. Aggressive investors can claim to see "value" at these levels, but the Macro environment is not favorable. In fact, until volatility shows stabilization the risks can outweigh rewards. In addition, attempted bail outs, outside intervention and dependency on Federal Reserve policy create short-term optimism. Therefore, investors have to assess short-term catalysts versus long-term recoveries.

Stock Specific Ideas:

Media:

DTV (Direct TV): Attempting to bottom around $23. Growth in HD TV bodes well for overall fundamentals.

CBS (CBS Corp): Nearing key support level at $26. Oversold, following a disappointing 3^rd quarter. Stock is cheaper relative to its group, fundamentals are not as negative as price suggests. As investors adjust their expectation, expect an upside move.

Telecommunications:

VZ (Verizon): Long-term recovery is intact. Wireless results are promising, remains at a buy point ($44-40 range).

Healthcare:

GENZ (Genzyme): Stock price demonstrating leadership. Although, slightly stretched in the near-term, product remains as a positive outlook.

BLUD (Immucor): Fundamentals are solid. Risk/reward for an upside move is attractive for the maker of blood bank systems.

Technology:

CREE (Cree Inc): Recovering from oversold levels. Recently, innovative technology is giving investors some confidence. That can be a catalyst for an upside move from the $25 range.

ORCL (Oracle): Strength continues to develop as the stock price is finishing the year on a strong note. A rotation into technology and larger cap names leads to a favorable outlook for ORCL. Technical pattern and fundamental outlook remains solid. Accumulate between $20-22 ranges.

HTCH (Hutchinson Tech): Attempting to break-out from multi-year trading range. Company continues to efficiently control its cost while improving gross margins.

HAPPY NEW YEAR!!!!

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the future investment performance of any securities or strategies discussed.