Market Update – March 31, 2008

Market Update – March 31, 2008

The results of the credit crisis are dominating investor behavior and corporate outlook. A confusing period for market observers as policy intervention is playing a larger role. Of course, the challenge for policymakers is to restore trust in the overall financial system. Important to note, that “credit” stems from a Latin word credere which means “to entrust”. This primarily explains the growing pessimism of participants and the rush to risk-averse investments. “For households, the demand for absolute safety of Treasuries is so intense that money-market funds like Vanguard have refused additional deposits into their Treasury-only accounts” (John H. Makin AEI). This reflects the desperate rush for yields, on-going skepticism and higher volatility. Although, fear in the marketplace is justifiable, there is a growing possibility for excessive worry which should play itself out in the weeks ahead.

Meanwhile, the S&P 500 is attempting to bottom despite well documented economic slowdown. As we approach quarter-end, there are visible signs of window -dressing among money managers. In addition, investors look ahead to economic data, regulatory decisions and upcoming corporate earnings. Beyond key headline news, global markets are nearing an inflection point. For example, on March 17^th VIX (Volatility Index) peaked at 35.60, Gold stalled at $1011, US 10 Year Yield bottomed at 3.30%, US Dollar (DXY) reached spike lows at $71.28, and S&P marked its annual lows at 1256. Few days earlier on March 13, Crude peaked at $111 along with Commodity (RJ/CRB) Index. Interestingly, this can be a turning point for recovery of “paper assets” and declines in commodities. Certainly, this a long awaited turning point for trend followers, fund mangers and those seeking rotational trades. In one hand, commodities are too speculative and trading at extreme levels. At the same time, a recovery in “paper assets” requires for stabilization of credit risks. Overall, further evidence is needed to confirm a trend shift.

The first quarter witnessed excessive selling and growing fear. In this landscape, it is easy to overlook areas with upside potential. For many weeks, trend following tools, valuations measures and technical indicators have indicated buy points. Nonetheless, most investors have not subscribed to the idea that markets are “cheap”. For that reason, there is great tendency to neglect value due to lack of patience and mainstream worries. For example, performance chasing in commodity related areas produced speculative moves which are rather risky. Similarly, buying Financials because of steep declines has not been rewarding. In taking a step back, the long-term picture is appealing for Technology, Media, Telecom, cash rich and innovative based companies.

From a cycle perspective, higher risks in quality areas can produce promising returns. Recent earnings results in Technology continue to display turbulent results. Nonetheless, Large Cap Technology is attractive despite the difficulty of calling “bottoms”. Decline in earning expectations creates an entry point ahead of analyst optimism. At the same time, the Technology sector contains a range of socks across different industry groups. Therefore, performance and correlation remains spotty when evaluating sector performance. Importantly, idea selection is more vital than ever and is required when sifting through various market noises.

Specific Ideas:

Telecom:

In telecom, sector specific funds present a better strategy given that stock selection is tricky while the stocks trade uniformly. VZ (Verizon) and T (AT&T) are oversold and setting up for a recovery. Also, election speculation can play a major factor in the months ahead. Nonetheless, the sector is favorable. In fact so far in March, Telecommunication Services is the best performing sector (+3.12%) in the S&P 500.

Technology:

ORCL (Oracle): Despite last weeks sharp declines after earnings announcement. The stock is trading near long-term support of $19. As selling settles down, long-term investors can accumulate in the weeks ahead. ORCL is reaching oversold levels and offers favorable fundamentals versus its peers.

GLW (Corning): Early signs of recovery. Stock is attempting to breakout from current trading range ($23-24). Growth remains solid while demand for silicon products is higher than consensus expectations. (According to Matrix Group).

Consumer Staples:

WMT (Wal-Mart): Strength continues as the stock is up nearly 25% since January 14, 2008. In the near-time, declines in shares present buying opportunities. Positive fundamentals in the past 5-10 years and rewarding dividends should create higher investor demand.

Biotech:

GENZ(Genzyme): Fundamentals remain solid. Next resistance level is annual highs of $82.08 reached on January 17^th. Plus, relative strength is positive and profitability appears slightly underestimated among analysts.