Market Thoughts - November 11, 2008

Weekly Results:

S&P 500 930.99 -3.90%
DJIA 8,943.81 -4.1%
NASDAQ 1,647.40 -4.27%
Russell 2000 505.79 -5.90%
MSCI Emerging Markets 24.38 -2.84%

A historical year given election results, credit collapse and increasing global interventions. At this junction, there is a convergence between the business and political cycle.

In terms of the business cycle, contraction and deleveraging are th domeinant subjects. Of course, economic declines are becoming the norm as most readjust expectations. Last week, additional data points from Institute for Supply Chain Management and Non-Farm payroll confirmed the cycle downturn. A new political environment shapes the long-term outlook, mainly based on budget spending and job creation. On the other hand, investors continue to speculate on emergence of new sector and cycles. Now, this transition in leadership creates a challenging trading arena. Especially, with near-term turbulence for those betting on themes. In due time, increased intra-day swings should stabilize. At this point it is too early to call.

In looking ahead, the cycle fallout has expanded from intervention to collaboration. Perhaps, G20 meetings can restore some confidence. In some cases, markets have priced in worst case scenarios. Similarly, Fed Funds futures imply a 97% chance of 50 bps rate cut for December 16th. That said, inflow among equity funds increase by $2,186 million last week, which showcases some signs of optimism (Trimtabs).

There are two key components of long-term equity returns: dividend (or profits) growth and valuation changes. In the second half of the 20th century, equity returns were given an enormous boost by higher valuations. In the past eight years, they have taken a savage hit, despite the growth in economic output and corporate profits, as valuations have returned to normal. (The Economist –November 6, 2008)

The next few months might not provide clear trends as desired by most investors. Through these macro inflection points, equity managers are reshuffling portfolio's. Recent behaviors also remind investors the importance of cutting losses. The lack of clarity lead to turbulence and disruption of flow. Again, VIX is forming a new trading range above 50. In fact, the combination of near-term uncertainty and bargain hunting create a puzzle. Analysts will most likely lower their earnings expectations and an additional downside move can provide optimal entry points.

The past few years Technology, Media Telecom and Healthcare have been neglected sectors and are poised to lead on a relative basis.

Stock Specific Ideas:

Healthcare:
KG (King Pharma), TECH (Techne), BLUD (Immucor) and GENZ (Genzyme)

Technology:
ORCL (Oracle), ATVI (Activision) and CREE (Cree Inc)

Macro Indicators:

Crude [$61.04] Holding slightly above yearly lows of $59.97. Major support around $60, which marked a key level in 2007.

Gold [$735.25] Established downtrend since mid spring highs. Attempting to bottom with $700 serving as a support level.

US 10 Year Yield [3.79%] Early indication of an uptrend in yields. Since, September 16th yields have jumped from 3.24% to 3.79%.

US Dollar –DXY [85.90] Multi-month momentum remains positive as confirmed by upside move from $76 to $85.

S&P 500 [930.99] New range developing between 839-100. Overall, volume has declined since October. Nonetheless, heavy resistance around 1000.

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