Weekly Results:
S&P 500 -2.7% NASDAQ -3.4% Russell 2000 -3.6% and MSCI Emerging Markets +.4%
Being an optimist demands lots of patience.
First of all, a significant technical recovery has yet to materialize. Secondly, upside catalysts and volume appear to dwindle. Finally, investors are skeptical when examining Federal Reserve actions and economic data results. This contributes to a lack of strong conviction. Naturally, confidence restoration is the primary objective of policymakers which remains a challenge in this current environment. This contributes toward uncertainty in investor behavior despite a slowing volatility. At the same time, participants are digesting various headline news with fear and ambiguity being the major driving forces. For example, General Electric's disappointing results set a negative tone for upcoming earnings season. Overall, broad markets face downside pressure from a cyclical point. Interestingly, picking skills (or luck) on event driven basis plays a vital role for those investors seeking returns.
On a positive note, the S&P 500 is above annual lows of 1256.98. In addition, sell volume did not reach extreme levels at the end of last week. For bargain hunters, credit worries and risk aversion are lowering share prices in promising areas of the marketplace. In quality areas, excessive discounting presents "value" in selective areas. The multi-month pessimism has set the stage for lower expectations in this earnings season. This week reactions to the condition of Big Cap Financials will be watched closely. Given the accumulating bad news in the sector, a less than expected shortfall can create a temporary recovery. Ultimately, most speculators will place their wagers for near-term opportunities. As for sustainability, the picture is unclear.
ACTIONABLE THEMES:
Key market themes include vulnerable banks, new cycle leaders, cash rich companies and weakening emerging markets.
Vulnerable Banks:
Ongoing credit concerns are negatively affecting smaller cap banks. According to an FDIC report, Loans overdue 90 days or more surged 32.5%. Companies in the sector, face an on-going downtrend. Most importantly, "bottom picking" from these depressed levels also has its dangers. As seen in the past year, smaller cap banks are vulnerable especially in overvalued real estate markets. Stocks in that group are bound to see more declines as fundamentals worsen. Given the oversold conditions of Financials, few larger cap names might participate in trading rallies. Nonetheless, sector resurgence will take some time to settle. Groups in real estate such as REITS are poised to decline. There are visible signs of rising delinquencies especially in the fourth quarter of 2007. This illustrates the established downtrend in Real Estate related groups which is a reflection of the credit crisis.
Short Ideas includes: DSL (
Emerging Markets:
After solid mult-year run, emerging markets are declining along with US markets. The credit risk is a global phenomenal. Since October investors betting on Chinese markets have seen volatility and sharp sell-offs. The bullish run from the last few years have created "bubble" like results. Now, an adjustment period can generate outflows from emerging markets. Short Idea: PTR (PetroChina).
Cash Rich/ New cycle leaders:
Innovation themes posses some value, but entry points are less risky (less rewarding) once the macro concerns stabilize. NASDAQ is down nearly 20%, following the global markets peak in October 2007. More so, waiting for friendly buy opportunities takes time and difficult to predict. At least for ideas in this theme, additional downside can increase conviction levels among aggressive participants.
- Technology: CSCO (Cisco), ORCL (Oracle), DTV (Direct TV), CREE (Cree Inc) and GLW (Corning).
- FLEX: (Flextronics) : Global presence in contract manufacturing area presents upside potential. Stock price is deeply oversold and attempting to bottom after being down nearly 30% since early November 2007. In the past year, stock has stayed above $9.11 support range on three occasions. Bullish case includes: Low debt, highly neglected stock price, and improvement on fundamental factors.
- Healthcare: Biotech as a group, is demonstrating relative strength. Attractive names include: GILD (
