Sharing markets thoughts --4/19/2007

Sharing markets thoughts --4/19/2007

As the earnings season is upon us ....very difficult to make broad market statements. It is critical to have an understanding of Macro and Cycle trends. In the current environment, it is highly worthwhile to seek quality ideas in equities, (Top 5 names revisited from earlier this year) given the uncertain economic and credit picture. Also, one should look beyond earnings and decomposing macro themes into relevant actions.

Recovery in Dollar?: USD – is deeply oversold and plenty of headlines outline the weakness of the dollar relative to other currencies. Charts suggest to me, that a recovery bet is fairly attractive. In the near-term, I like a USD recovery corresponding with market and commodity correction. Chart attached below.

Weak/Neutral Gold: Long-term trend in tact but near-term breather needed. Commodities overall are extended.

Near-term extended Equity Market:

Continuing to focus on the macro’s as a guide for equity trading. Higher beta names have soared in recent recoveries. A weak dollar has driven equity markets higher. At this point, I am looking at reversion of the mean. (short equities/long dollar - A near-term trading idea).

Markets for the most part remain overbought in the near-term. Although, the positive trend is intact, don’t offer attractive entry points. From a cycle perspective, markets do need a breather following the bullish environment since 2003. But also, we have recovered and surpassed May 2006 highs. Certainly, bullish trend is in tact and next resistance is 2000 highs. That said, it is not an attractive entry point in broad market entry point.

Put/Call Ratio: Despite the environment that feels too bearish post housing slowdown, market participants are not too bearish according to this indicator. Pessimism is not at an extreme. This showcases that not an ideal entry point. Especially for a market that continues to edge higher.

Favorable Groups: Defensive themes that continue to produce cash flow. Importantly, from a cycle view – previous underperformance such as US technology, Pharma and Media are poised for recovery. As an example check out these five ideas that touch on attractive groups and via a stock specific play.

Five favorite stocks in 2007: GMST, SWY, LLY, TLAB and CRA. (Deatail Wirte up below)

http://markettakers.blogspot.com/2007_02_04_archive.html

Vulnerable Groups:

The weak part of the market is clearly in financials where credit risk is very difficult to ignore. Watching strength in those areas as opportunity to short. There is a takeout risk in many lender names. At times, rumors are just noise but a buyout risk is on the table.

XLF: ( AMEX Financial Index) Major upside ceiling at 37/38 range. Around those levels, looking to add short positions. Clearly, XLF since 2003 demonstrates a huge run up in a low rate environment.

Further Wisdom:

The risks for U.S. financial markets are not limited to the aftershocks of the mortgage earthquake. The massive foreign currency mismatch evident in the carry trade loans remains an overhanging danger to financial markets. Borrowing in one currency to invest in risky assets denominated in another currency is a sure way to ultimately destroy wealth. Gold is perhaps the only insurance against the financial agony to come from unwinding of the carry trade loans, and two decades of monetary mismanagement. (Safeheaven.com).

Managing controllable Risks: Inflation, Entry points in Biotech and Media.

FACTORS TRIGGRING MARKET DIRECTIONS:

Last summer markets anticipated a rate cut by the Federal reserve. At that time, the equity markets were oversold and 10 yr yield peaked on June 28, 2006 (5.75%). Of course, SPX rallied and began a strong uptrend on the back half of 2006. Today, markets are stretched and the 10 year yield stands at 4.76%.

It is becoming evident that previous interest rate assumptions are incorrect. It was a consensus view to anticipate rate cuts for the first half in of 2007. Clearly, that is not the case and there is a growing confusion in the interpretation of Fed’s message. Now that the equity markets are extended this macro uncertainty can highly contribute towards further fear. Inflation expectation is one key macro uncertainly which can ignite a downside panic. The possibility of a Fed rate hike is not out of the equation. As that fact becomes accepted by consensus that can have a troubling downside surprise.

Bottom-line: Inflation is a concern despite the calming language of the Federal Reserve. Consensus is underestimating inflation fears. The tone of the federal reserve illustrates the disconnect between expectations and reality.

Levels: SPX approaching resistance at 1461. I would use the 50 day mva as first support at 1426. Downside pressure on overbought momentum and its far removed from 200 day mva. Overall, looking for one more downside view.

Currency factor – recently there is a strong correlation between US Equity markets and Japanese currency behavior. In May 2006 – the market peaked driven by liquidity factors including rising rates in Japan. The peak caused sharp declines in the broad markets. Especially in the following areas: emerging markets, commodity and housing related.

Credit Risk: The self/defeating financial concerns:

Plenty of focus on econ data and upcoming earnings. Finally, the street is recognizing that the real estate concerns have not fully materialized. Again, lenders such as FED, CFC and BKUNA are few names that are at fundamental risk while currently offer a timely entry point.

Broad markets are overbought in the near-term, and financials appear to be the most vulnerable area. I rather trim profits or enter into ‘fresh’ shorts. (Especially in Financials). Brokers (XBD), Banks (BKX) and Insurance (KIX) indexes are overbought and remain fundamentally vulnerable. For several weeks, REITS appear extended as well. Maybe 1-2 quarters early but richly priced. Again, I sense one more downside to shakeout pessimists. This further illustrates credit risk which also seen in growing private equity and other sheer optimism of current environment.

Biotech: Attactive theme. Check out BBH index as a group indicator. AMGN- damage at the start of the year caused on an overall drag to the index. At the same time, the group underperformed since October.

Long Ideas: ABI, TECH, DNA and AMGN.

Media Review: Again continue to like the group as stated many times before. Last week focus on CMCSA- worked out triggered by positive news. Recent breakouts by TWX, DTV, VCLK and MCCC suggest early signs of strength and technical breakouts.

Long Ideas: CBS, IPG and CMCSA.

CBS: Facing near-term resistance around $32 but attractive on additional pullbacks. I am a buyer closer to the $28 range.

IPG: Multi-year trading range between $10-16 ranges. Poised for a recovery after the 4 year cycle of underperformance. Certainly, a value bet. A long-term chart illustrates the attractiveness – and looks beyond the 3% + gain on Friday’s close.

CMCSA: A longer –term play as demonstrated by recent strength. There is risk of overcrowded growth buyers but rewarding at current conditions.