Big picture:
Changing dynamics in Global themes continue to influence international economies, commodity prices, currency valuations and credit risks.
In these evolving markets, investors are adjusting to long-term trends while reassessing risk exposure. Growing demand for natural resources and speculation among investors are dominate themes. Clearly, these factors play a part in Crude reaching all-time highs. Multi-year trends appear elevated but calling tops is not as rewarding. As for equities, charts suggest a sideway pattern. An improving market recovery led to a positive week. Again, deciphering other apparent trends has not been easy. Similarly, long ideas are favorable on a stock specific basis. The past three quarters have shown that making directional bets and seeking undervalue assets alone is not enough to generate desired results.
Macro issues are receiving more attention from mainstream observes. This makes sense with upcoming US elections, rising food prices and impacts of globalization. In addition, mixed economic data and anticipation of Federal Reserve policies present more suspense. An optimist views recent rally as a glimpse of hope. In fact, the S&P 500 is above its annual lows reached in mid March. (1256) and slightly above its 200 day moving average (1427). Capital outflow away from Emerging markets and Crude related groups can boost a recovery in US Equities. Volatility is near annual lows but trading volume is not impressive. In addition, the first quarter witnessed a $100 billion outflow from domestic mutual funds. Further conviction and increasing volume are needed as broad markets trade near key technical levels.
Credit Risk:
Housing related themes and small cap banks remain vulnerable. Long-term cycle points to an established downtrend in Financials.
“Credit growth followed the pattern of the economic slowdown. Moreover, the typical Big Five recession was accompanied by a five-year slowdown in credit growth, with a trough three years after the onset of the crisis. US recessions typically tended to have this trough about a year-and-a-half earlier.” (Financial Times 5-14-2008)
On the other hand, investors seek bottoms in deeply oversold banks. Generally, the stock market provides clues for a recovery but at this point a sustainable rally appears pre-mature. At this point, building a bearish argument is not a fresh idea. Of course, many pundits continue to discuss various gloom and doom scenarios in the credit cycle. Nonetheless, financial markets teach us that all plans do not work out as expected. That said, on going upside move in Financials, can provide near-term shorting opportunity. In other words, a sector rebound requires additional time to absorb weakening fundamentals.
Short: FED (First Federal) and DSL (Downey Savings).
Technology:
Large Cap Technology is attractive on a relative basis. “According to a new survey by NPD Group, U.S. consumers will cut spending on home furnishings, clothing, and restaurants before they'll stop buying consumer electronics like videogames.” (Fortune 5-16-2008)
Improving fundamentals and expanding global presents creates a promising outlook. That said, patience is needed as long-term trends begins to materialize.
Long: LSI (LSI Corp), ORCL (Oracle), CREE (Cree Inc) and FLEX: (Flextronics)
Materials:
CCK (Crown Holding Inc): Positive fundamentals in place for the leading manufacturer of beverage and food cans. Stock is making new highs and relative strength is attractive. Use pullbacks as buying opportunity near $26-28 range.
Consumer Staples:
Long: WMT (WalMart) and HSY (Hershey).
Healthcare:
Long: GENZ (Genzyme) and TECH (Techne).
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