Market Outlook – August 4th 2008.

Market Outlook – August 4^th 2008.

Weekly Results:

S&P 500 1,260.31 +.20%
NASDAQ 2,310.96 +.02%
Russell 2000 716.14 +.82%
MSCI Emerging Markets 42.57 +.29%

Taking a step back :

Since mid-July, markets have witnessed a sharp upside move despite an established downtrend. Mixed earnings, unclear economic data and undefined trends continue to confuse investors. In weeks ahead, investors' challenge is to sort out noise and look for developing themes. Meanwhile, some participants are attempting to identify leadership groups for the second half of 2008. On one hand, a bottom appears close based on mean reversion. That being said, fundamentals of credit markets remain weak from various angles. Given this enigma, most await for clues in pending elections and actions by the Federal Reserve.

Macro Relationships:

Yet again, the behavior in Crude prices and Financials sector are topics of high interest for participants. July showcased an early glimpse of reversal patterns in exiting macro trends. After multi-year run of higher oil and lower financials, last month showcased a different story. Crude declined from highs of $147 to $124. At the same time, (XLF) Financial index rose nearly 5%. Importantly, global markets are slowing which partially contributes to declining demand for commodities.

"The LME index tracking the six main metals traded on the bourse dropped 4.8 percent in July, led by declines in copper and aluminum, the most-traded contracts on the exchange. Industrial- metals demand tracks global manufacturing activity." ((Chanyaporn Chanjaroen Bloomberg –Aug 1, 2008).

Steel Producers: (Short)

SID (CIA Siderurgicia), GGB (Gerdau SA) and TS (Tenaris)

Residues of credit crisis:

In the past few days, headlines in Financial publications remind us of the one year anniversary in the credit crisis. Of course, the results of deteriorating fundamentals are reflected in real estate, failing banks and stock market performance. Weakness persists in Financials, as REITS remain vulnerable along with European Banks. Finally, rising inflation in global economies contributes to this ongoing cycle slowdown.

"In the Eurozone, inflation accelerated to the fastest pace in more than 16 years, with the 15-nation number rising to 4.1% in July. Furthermore, economic sentiment declined to its lowest level in five years." (Northern Trust -Paul Kasriel)

European Banks (Short)

STD(Banco Santander SA), AIB (Allied Irish Bank) and DB (Deutsche Bank)

Readjustment Period:

Results of slowing global demand signal to a slowing consumer environment, lower risk appetite and negative investor sentiments. Further selling in commodities related areas presents opportunities for rotation into neglected areas. This current market cycle is a readjustment period, as major asset classes retrace from escalated levels. In this landscape, odds seem favorable for investors to narrowly isolate market exposure. Investment ideas in this "fear driven" period can spark volatility at a rapid pace.

Healthcare/ Technology:

These sectors are mostly mixed as seen during earnings season. So far, making a turnaround bet in these groups has not been easy. In terms of sectors, current cycle suggests that a recovery is favorable on a relative basis. Nonetheless, to enhance exiting risk/reward, more evidence or a turnaround seems necessary.

On the long side, select Biotech is attractive within US markets.

Healthcare Ideas: BLUD (Immucor), GENZ (Genzyme) and JNJ (Johnson & Johnson) and TECH (Techne).

KEY MACRO LEVELS:

Crude [$125.10] Oversold in the near-term. Holding above $120.75 key June lows. 50 day moving average at $133. Longer-term view, suggests a potential peak with further evidence needed for downtrend.

Gold [$912.50] Consolidating between $900-920. There are no signs of positive momentum since peak in March of $1011. Several attempted recoveries in the past few months. Buyers are seeking catalysts to drive accumulate around $900.

US 10 Year Yield [3.93%] after peaking in June 2007 at 5.32%, yields are attempting to recover in 2008. Basically, range bound near 4% yet above annual lows of 3.28%. Overall, poised to trade sideways between 3.80-4%.

DXY – US Dollar [$73.43] Positive bottoming process developing. The currency index has not made new lows since March 17^th.

S&P 500 [1260] : Holding above key support of 1200 which marks annual lows reached on June 15th. The last time index traded below 1200 was in November 2005.

Dear Readers

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