Weekly Results:
S&P 500 +1.4% NASDAQ +.73% Russell 2000 +.37% MSCI Emerging Markets +4.27%
As investors focus their attention on upcoming Federal Reserve decisions, many should not be surprised by pending "rate cuts". Similarly, discussions of a slowing economy and need for an economic boost is becoming a consensus view. Overall, a period of rate cuts and government interventions are not uncommon and have worked in previous cycles. For example, the current environment mirrors the 1990-1992 easing cycle which led to a bail out of banks and commercial real estate loans. Of course, history can repeat itself but not in the exact pattern. That said, there is additional credit risk which plagues the financial markets. Also, growing fear and uncertainty during a cycle shift present a challenging trading atmosphere. Nevertheless, in controlling the controllable investors can manage risks and maximize odds by selecting trending themes.
Managing Risk:
Credit risks concerns continue to resurface in different forms and shapes. For example, short-term debt witnessed failed auctions last week. A concern that stems from "financial engineering" in a cycle where the macro climate is less favorable. Financials appear too early to bet on a recovery. As lending tightens up and fundamentals deteriorate the uncertainty levels continues to grow. This showcases that investors are not convinced that the risk of further fundamental weakness is greater than purchasing value at a cheaper cost. For near-term traders, Financials might present a short-lived recovery from oversold levels. The AMEX Financial Services index is down 37% since peaking on June 1st and 27% removed from 200 day average. At this point, its difficult to state that we are in the early innings of a downtrend. Unfortunately, it is even more challenging to declare a bottom when the cycle is coming out of a "bubble-like" run in the past few years.
Developing Themes.
Innovation based themes are worth a closer look. Especially, in some areas with less exposure to credit risk. The long-term cycle suggests rotational opportunities out of Financials, commodities and emerging markets. Again, groups of interest include developed markets, Large Cap Growth, Healthcare, Media, Telecom and Technology. On a stock selective basis, investors can seek relative out performance. As for "absolute" returns in groups, sectors and broad markets there is too much noise. Volatility is trading towards the higher range despite a weekly 10% decline. A signal for broad market buy point is when volatility calms down with less daily swings. The risk of panic, media watching and impulse trading are all contributors for a trend-less market.
Stock Specific Ideas:
HEALTHCARE:
STJ (St. Jude): Early signs of stabilization near the $42-40 range. Company's growth prospect looks attractive given promising revenue estimates into 2008.
TECHNOLOGY:
CTXS (Citrix Systems): Last quarterly results demonstrated strength and a higher than expected results. An upside catalyst in the near-term includes re-branding of products and implementation of new strategy. In addition, stock is pausing and remains oversold at current levels. From an investment perspective, stock is attractive.
CREE (Cree Inc): Strong surge in stock price so far this year. This is a play on efficient lighting which falls under the macro theme of alternative energy. Performance chasing should cause more volatility in the near-term. Nonetheless, solid fundamentals create long-term opportunities as uptrend is intact.
NOK (Nokia): After bottoming near $32 levels stock price displays signs of improvement. Expansion to US market, strategic partnerships (i.e. Google), and managements defined game plan bode well for further upside move. As the global leader of cell phone markets the company's stock price is still far removed from all-time highs. (Price of $62.50 in June 2000).
MEDIA:
DTV (Direct TV): An explosive recovery in the past few days, as earnings were very positive. Despite recent run up, stock remains at a buy point between $24-22. Add on pullbacks. Quality earnings are attributed to credit worthy clients. In other words, consumer worries did not cause significant weakness to fundamentals.
