Market Update - May 5th, 2008

Weekly Results:

S&P 500 +1.14%
DJIA +1.29%
NASDAQ +2.23%
MSCI Emerging Markets +1.87%

Relief optimism:

Rate cuts, less than expected job declines, lower volatility and weakness in commodity prices combined for a positive market. Of course, a relief rally is inevitable. Similarly, The S&P 500 is up 12% since the annual lows reached in Mid March. And the VIX (volatility index) has declined by nearly 50% since topping on March 17^th. On the surface, both indicators (higher stock market/ lower volatility) suggest a confirmation of a bottoming process. On the other hand, broad markets have stayed positive in the past few weeks and are nearing overbought levels.

Macro Relationships:

Last week, market observers focused on the potential peak in Crude and a recovering Dollar. Clearly, this is an inverse relationship reaching extremes in the past few years. In addition, betting on trend reversal turned out to be extremely difficult for speculators. Once again, at this junction the rowing curiosity arises. In revisiting the key themes of Credit, China and Crude, the odds of a correction in Crude seem next in line. In other words, credit risk started to materialize in mid 2007 and Chinese markets sold-off aggressively in Fall 2007. One catalyst for a peak in Oil is a recovering Dollar. For example, here is one view: "Fed needs the $USD to stay as strong as possible while they buy time (time is their enemy) while they feed short-term money to commercial and investment bankers, hoping to stave a major recession/depression while long-term credit market excesses are corrected." (Bill Cara -5-4-2008). Another force for positive Dollar is weakness in Gold. Since March 17^th DXY (Dollar Index) is up over 3%, while Gold is down over 15%. Although a temporary trend, plenty of observers wait for further signals given the implication on global financial markets.

Portfolio Approach:

Trading around the "latest and loudest" events is a difficult way to make money. Meanwhile, long-term investing requires patience and costs time. These are basic investor issues and are reflected in this market. Economic discussions create plenty of headline materials and mixed signals. At this point, investor sentiment after earnings season should provide a better indication. Participants are anxious given the late stages of the Federal Reserves rate cuts and election coming up in the fall. From a cycle perspective, purchasing neglected value and trimming previous winners might be prudent.

Following a period of risk-aversion in the past year, there are opportunities for those seeking risk and value. Policy-makers continue to restore confidence as most investors remain pessimistic. Again, targeting niche ideas is critical as the financial markets attempt to stabilize. The challenge, once again, is to isolate noise and scale into sustainable themes.

Stock Specific Ideas:

Long:

Use weakness as buying opportunity in innovation related themes. Large Cap Technology remains attractive from a cycle perspective. Similarly, select Biotech is appealing on a relative basis.

• Technology: CSCO (Cisco), LSI (LSI Corp), ORCL (Oracle), CREE (Cree Inc) and FLEX: (Flextronics)
• Healthcare: GENZ (Genzyme) and STJ (St Jude)

Short:

Use recent market strength as opportunity to add to short positions.

Financials: FED (First Federal) and DSL (Downey Fin)