Weekly Results:
S&P 500 -1.58%
NASDAQ -3.27%
Russell 2000 -4.67%
MSCI Emerging Markets -4.18%
As we start the second half of 2008, optimists and bottom pickers are struggling to find many signs of a turnaround. Also, investors who profited from growth in emerging markets are reexamining their bullish views. Overall, attention is shifting to concerns in global inflations as policymakers look to take action. Meanwhile, the months ahead offer election results and pending rate hikes by the Federal Reserve. Perhaps, US investors await a further catalyst for change in recent trends.
Despite the holiday shortened week, the S&P 500 barley closed above its annual lows (1251). On the other hand, Crude is at record highs while investor sentiment is overly pessimistic.
On February 19th Crude broke above $100 – a key psychological level. Since that period, the S&P 500 has fallen nearly 7%. The rise in Crude prices is a result of positive momentum which remains a powerful force especially in the past two quarters. Popular reasoning for rising oil includes: supply/demand factors, booming global growth and increasing speculation. Nonetheless, the key takeaway is a positive cycle which has intensified by increasing bias in investor psychologically. That said, there is a growing trend among politicians to blame speculators. On that note, The Economist offers a different perspective:
"neither index funds nor other speculators ever buy any physical oil. Instead, they buy futures and options which they settle with a cash payment when they fall due. In essence, these are bets on which way the oil price will move. Since the real currency of such contracts is cash, rather than barrels of crude, there is no limit to the number of bets that can be made. And since no oil is ever held back from the market, these bets do not affect the price of oil any more than bets on a football match affect the result." ("Don't Blame the Speculators"- Jul 3rd 2008 -Economist)
Last week, the European Central Bank raised interest rates. This signals early indications that inflation is impacting global economies. Similarly, steel producers declined last week. Perhaps, these are early stages of visible weakness in emerging market companies related to commodities. In addition, credit weakness results in tighter lending which severely impacts fundamentals of banks.
Regarding European Banks:
"Goldman Sachs believes regulatory pressures and a sharp turn in the European credit cycle are the two main causes for concern for bank investors. As a result, it estimates European banks would need to raise EUR60 billion-EUR90 billion. Banks would have to consider the upper end of its estimate if the turn in the credit cycle triggers loses in line with those seen in the early 1990s." (DowJones Newswire—7/04/2008)
Portfolio Management:
Ongoing global concerns can present opportunity for betting against European banks and steel producers across various countries. In terms of timing, recent sell-offs can produce a near-term recovery. As the start of this quarter, managers might have an increased appetite for risk.
European Banks (Short)
STD(Banco Santander SA), AIB (Allied Irish Bank) and DB (Deutsche Bank)
Steel Producers: (Short)
SID (CIA Siderurgicia), GGB (Gerdau SA) and TS (Tenaris)
On the long side, few Technology and Healthcare ideas are worth a closer look. A rotation out of emerging markets benefits US markets.
Technology: (Long)
SWKS (Skyworks), AMAT (Applied Materials) and ORCL (Oracle)
OVTI (Omnivision): Attractive technicals with bottom pattern near $11. Improving fundamentals for the company in the camera phone market.
Dear Readers:
