Market Review – June 9, 2008

Market Review – June 9, 2008

Weekly Results:

S&P 500 -2.84%
NASDAQ -1.91%
Russell 2000 -1.06%
MSCI Emerging Markets -3.02%

Macro Reactions:

Just a week ago, Crude traded below $130, US 10 Year yield closed above 4%, S&P 500 finished above 1400 and VIX (volatility index) held-in below 20. Nonetheless, these five key indicators reversed their near-term direction and resumed back to their multi-year trends. Reoccurring big picture topics include weakening economy, sideway markets, historic rise in Crude and lower Financials. A furious back and fourth action which showcases that, turnarounds are sharp, information is abundant and yet macro themes are intact. Clearly, these are not new trends in the marketplace, but rather a reiteration of ongoing cycle.

Looking ahead, deciphering numerous headline noises and maintaining a long-term focus are primary concerns for investors in the upcoming weeks. The current environment should test various strategies and conviction levels. In addition, the summer months present other catalysts such as the upcoming elections, Federal Reserve decisions and developing geopolitical events.

Certainly, it is difficult to ignore the price action of Crude prices especially last Friday. At this point, "peak oil" theory appears as popular as those arguing "supply shortage". Either way, these discussions do not distort the ongoing bullish run. At the same time, Financials offer shorting opportunities as global fundamentals continue to deteriorate. On the other hand, innovation based US themes are worth a closer look. In the past 6 months, it's evident that making a sector and directional bets has been difficult. Importantly, fighting existing trends does not pay out as much as looking ahead.

Key Macro Levels:

Crude: [$138.80]: Closed at all-time highs. Intra-day highs stood at $138.80 which is nearly a 4% upside move from previous peak.

Gold: [$890.50): Signs of stabilization between $850-900. Interestingly, 50 day and 15 day moving averages stand at $898.

DXY US Dollar [72.39]: Since March, index is attempting to bottom. Currently, far removed from 200 day moving average and trend reversal remains questionable.

US 10 Year Yield: [3.90%] : Consolidating after a 90 day upside move. Trading in a narrow range between 3.80-4%.

S&P 500 : [1360.68]: Nearly 6% removed from annual highs reached on May 19^th (1440).

Weakening Financials:

The downtrend in US Financials is clearly defined and highly publicized. In fact, the most frequentlyshorted name in the NYSE last month included the California lender FED (First Federal). Others Financials Top 10 heavily shorted stock list includes DSL (Downey Savings) and GHL (Green Hill & Co). This reflects how investors have recognized the impact of the credit crisis in US banks. Perhaps, optimists can argue that negative sentiment has reached extreme levels. NYSE Short interest continues to reach new highs :"At current levels, short interest represents 4.3% of all shares outstanding and has now risen by more than 40% from its levels in October when the S&P 500 peaked." – (Bespoke Investment Group).Nonetheless, a sustainable trend reversal in Financials requires additional time. Before last week, BKX (Bank Index) held above $75 range four times in 2008. Recent breakdown demonstrates a technical weakness and compounding impact in the psychology of investors. In addition, underestimated weakness in commercial real estate can have an inverse impact on REITS.

In terms of portfolio management, one can rotate short positions from US banks into vulnerable European Banks. Select areas present additional downside opportunities overseas especially from a risk/reward perspective. Of the $387bn in credit losses that global banks have reported since the start of 2007, $200bn was suffered by European groups and $166bn by US banks, according to data from the Institute of International Finance, a Washington-based banking group." (Financial Times – 6-05-3008).

• European Banks Shorts: AIB (Allied Irish Bank), BCS (Barclays) and DB (Deutsche Bank).

Neglected Innovative Groups:

Despite a nearly 3% decline in broad markets, groups in technology held in and showcased relative leadership for the week. For example, leading groups included Computer Hardware +1.24% and Disk Drives +1.12%. There are plenty of choices for those willing to make a turnaround bet in Technology. Especially as odds for a sector rotation become more favorable. Fundamentals across the sector are poised to recover after stagnant performance for the most part of this decade.

Technology:

SWKS (Skyworks Solutions): Attractive relative strength as Company plans to expand its market share. Growth in wireless communication creates demand for 3G broadband technology. Use pullbacks as buying opportunity near $10 per share. Momentum is positive in the past two quarters.

PLCM (Polycom): Continues to benefit from growth in video conferencing. Stabilizing around $24 with a positive long-term outlook.

Media/Telco: AMT (Amer Tower) and DTV (Direct TV)

Healthcare: CBST (Cubist Pharama), JNJ (Johnson & Johnson), and EYE (Advanced Medical Optics)

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.