Market Thoughts | 7/14/2008

Weekly Results:

S&P 500 1,239.49 -1.85%
NASDAQ 2,239.08 -.28%
Russell 2000 674.95 +1.38%
MSCI Emerging Markets 129.92 +.32%

An eventful week highlighted by an on-going credit crisis. It is evident that weakness in Financials and deteriorating fundamentals in housing are among the key drivers of a market downtrend. Charts do remind us, that Financials peaked in February 2007. Since that period, the Bank index (BKX) is down 55%. Recently, there are growing speculations and looming rumors of takeovers . The net effect has yet to change the macro relationship of higher oil/low stock market. Perhaps there is room for further fear as VIX (Volatility Index) is 36% from annual peaks reached in January. History has shown that markets tend to overreact at the extreme ends of cycles. Therefore, a sharp downside move can create opportunities for buyers. That said, an interesting week ahead with earnings, option expatriation, Federal Reserve testimony and policymakers deliberations.

A colorful second quarter after a poor broad market performance in the first half of 2008. Year to date, S&P 500 is down 15% . Unsurprisingly, inflow into money markets has increased. According to Invesco Co Inst, Money market funds have risen by 24.3% annualized. Clearly, this is a reiteration of declining sentiment, growing fear and less risk tolerance. Nonetheless, there are catalysts for optimism, including the fall elections. Odds makers do realize that technicals indicators are oversold. Similarly, short-sellers recognize that taking some profits at these levels might make sense. Both can create an upward bias especially with policymaker intervention.

Many observers point out that we are reaching an inflection point. In recent days, there is an early indication of a disconnect between Crude prices and Energy stocks. In other words, the commodity continues to make new highs while energy shares underperform. This relationship might be short-lived or possibly indicate a change in current dynamics.

In case of a trend shift, Technology and Healthcare set the stage for a market "recovery" . Now with earnings season upon us, stock specific news should drive majority of market behavior. Those seeking value will pay close attention to groups related to Media, Technology, Communication and Biotech. Perhaps, leaders of a new cycle reside in sectors that are oversold from long-term perspective. For those willing to tolerate risk, there are opportunities to position into innovative themes.

STOCK SPECIFIC:

Long:

Technology :

· SWKS (Skyworks), PLCM (Polycom), and LSI (LSI Corp)

Media/Telco:

· AMT (Amer Tower) and DTV (Direct TV)

Healthcare:
Biotech: On a realtive basis, group remains strong especially since the end of 2007.

· TECH (Techne), CBST (Cubist Pharma) and GENZ (Genzyme)

Global weakness / European Banks:
Combined with emerging markets peak, recent worries of global inflation can inversely affect European Financials and Basic Materials.

SHORT IDEAS:

European Banks remain vulnerable and investors have reasonable fundamental concerns.

· STD (Banco Santander SA), AIB (Allied Irish Bank) and DB (Deutsche Bank).

Similarly, as global demand slowdown, global companies such as steel producers remain vulnerable.

· Brazil: SID (CIA Siderurgicia) and GGB (Gerdau SA)

· Argentina: TS (Tenaris SA)