Weekly Results:
S&P 500 -5.41% NASDAQ -4.09% Russell 2000 -4.47% MSCI Emerging Markets -7.46%
Big Picture:
An indecisive Federal Reserve, confused investor community, peaking market, investor panic and unraveling of credit risk resulted in a negative week. In short, markets don't like uncertainty.
In regards to the Federal Reserve actions here is one view below:
"Why would anyone borrow money if they know rates are going to be lower in the future. If you're going to cut rates, do it. If you're not, let the market know that you're not." Bespoke Investment Group.
Earnings and Broad Markets:
As usual, earnings season provides a reaction to company specific stories. Much of trader responses are based on results of the actual vs. expectations. At this junction, downside estimates and pessimistic outlook set the market tone. There is a growing agreement of a bleak outlook and less confidence about the future. Nonetheless, Wall Street analyst estimates appear too high entering earnings season. "At year end the consensus estimate [for S&P 500] was approaching $105. A more likely expectation is $90 to $95 for 2008" (1/14/2008 -Analytic Services). This is not surprising given the positive market response in the past few years.
Along with earnings, the Macroeconomic conditions remain the cornerstone of participants concerns. At this point of the cycle, the bullish run since 2003 is being severely tested. As the unraveling process continues, most value investors are gearing up for buying opportunities. Meanwhile, recent breakdowns signal a confirmation of bear market declines. On that note, current sell-offs begs the question of key technical ranges. The next major support levels are near lows reached in summer 2006(S&P 1260 NASDAQ 2000).
Sensitive issues:
Once again, investor sentiment is lopsided with fear. Even for bears the uneven sentiment makes it questionable to add to short positions. Talks of stimulus package might create near-term optimism but for the most part investors are skeptical. The credit crisis continues to plague both fixed and equity markets. Despite being deeply oversold, earnings for financial companies appear far removed from a bottom. For example, the Bank Index (BKX) is down 37% from highs reached on May 7, 2007. During that period, several recovery attempts have failed sharply including last week. In short, there is a desperate need for an outside catalyst but overall impact is uncertain.
Rotational opportunities:
There are actionable ideas and themes to consider in a period of sharp declines. Generally, there is an inclination to take a defensive stance at times of negative market returns. Nonetheless, Innovation based themes such as Healthcare and select Technology are demonstrating relative strength. These are two themes that were not cycle leaders from 2003-2007. As turbulence lessens, few areas are worth a closer look for bargains.
Rotation opportunity lies ahead as global participants trim exposure in emerging markets, commodities and energy related groups. For example, FXI (China 25 Index) is down nearly 34% since October 2007. Following a tremendous upside explosion from, "bubble-like" levels, Global indexes continue to retrace.
Short:
Emerging Markets (10%), Crude/Energy (15%), and Financials (20%).
Long:
Technology (35%) and Healthcare (25%)
Chart attached below.
Stock Specific Ideas:
Staples:
WMT (Wal-Mart): Outperforming on a relative basis in the past 4+ months. Attempting to break out from multi-year range $44-48.
Technology:
AMAT (Applied Materials): After setting lows on January 11, early signs of a recovery. Management continues to make changes and positive order flow can spark a turnaround. Major support at $16.
EMC (EMC Corp): Approaching key support level at $16. Attractive entry point despite mixed earnings expectations. Overall, growth from VMWare , established customer base, and barrier to entry in its core business contributes to a positive outlook.
BRCM (Broadcom): Despite a heavy broad market sell offs, long-term outlook remains positive. Growth in the cellular market and upcoming product cycle bodes well for sales. Finally, stock is deeply oversold and valuations are relatively cheap.
CREE (Cree Inc): Trading within a range between $24-26. Fundamentals are positive driven by Light-Emitting Diode [LED] technology. Despite near-term speculation, long-term outlook is promising.
Healthcare:
GENZ (Genzyme): Prospects of growth looks very promising. Solid product pipeline and increasing revenues contribute for a sustainable run. Add on pullbacks closer to $75.
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