Market Thoughts and Ideas | September 14, 2009

Market Thoughts and Ideas September 14, 2009

Weekly Results:
S&P 500 1,042.73 +3.94%, DJIA 9,605.41 +2.79%, NASDAQ 2,080.90 +4.93% , Russell 2000 593.59 +5.53% and MSCI Emerging Markets 37.86 +6.15%

The one year anniversary of a historic credit collapse provides a moment to reflect. At this stage, we’re in a rebuilding regulatory and market cycle. Not to mention, the first year of an elected administration and unfamiliar policies by global central bankers. Importantly, identifying new trends is too early at this phase. That said, risk-takers enjoy the prospects of attractive risk/reward of the unknown. Now, the challenge is distinguishing day-to-day news flow versus long-term trends. Perhaps, the bigger reward is in understanding and gauging investor sentiment. The AAII weekly sentiment data suggests that retail investors are becoming slightly less optimistic. Perhaps, an overly bearish sentiment may present a contrarian bounce. That said, selecting spots in stock specific picks can be a cautious way to navigate these conditions. Volatility remains lows but more volume is needed to draw substantial conclusions. Finally, a bullish bias remains intact as illustrated by consecutive up days and managers looking to chase performance.

Plenty of worries over government spending, failing banks and lack of stability. Participants are anxious given a disconnect between economic data and stock market movements. Frankly, even short-term traders find these patterns frustrating. Clearly, finding comfort is dangerous especially for those that enjoyed the uptrend this past spring and summer. Demand for commodities is growing at a rapid pace. At the same time, credit related areas face further declines. Gold strength and Dollar weakness continues to be a dominate market force. Also, interest rates are not rising as anticipated with the US 10 Year Yields trading near 3.30%. Leaders attempt to restore further confidence but investors will have a chance to vote via participation. Several data points such as Retail Sales and Consumer Price Index can set the market tone this week.

Innovation based ideas in Technology offer attractive stock selection. For example, leading groups for the week included Disk Drives and Networking stocks which rose over 10%. Again, areas with less macroeconomic risk are appealing to value investors. Secondly, the Semiconductor Index (SOX) is trading at annual highs and showcasing relative outperformance. Any pullbacks enable investors to seek buying opportunities in quality Technology stocks.

Stock Specific Ideas:

PWR (Quanta Services) : Strong balance sheet for the leader of electric infrastructure provider. A play on infrastructure and alternative energy for long-term investors. Specifically, demand for natural gas bodes well for the company as well. Evident strength in the past 7 years and recent acquisitions sets the stage for further growth.

SNPS (Synopsys): Healthy cash balance, no debt and relatively undervalued. These reasons present attractive entry points especially as the stock stabilizes around $20. Trends in software are improving slowly and positive sales figures can surprise investors.

ADM (Archer-Daniels Midland): Record number of rainy days bodes well for oilseed producers. Also, an era of growing strength in soft commodities can increase buying momentum. Technicals suggest an entry point around $28 range

Article Quotes:

· The cultural gap between U.S. and Chinese financial firms is enormous. Goldman Sachs and other large Western firms originated as partnerships, an ownership structure that instills a culture of care and commitment in employees. Many Chinese banks, especially the largest ones, have evolved under state ownership. Their employees, therefore, do not feel the same loyalty as their counterparts at Western investment banks and have less incentive to be innovative and competitive. (Institutional Investor -September 2009)

· Businesses trying to sell products and services feel they are pushing on a string and are adjusting their behavior accordingly. To maintain sales volumes and clear inventories in the face of weakened demand, they are cutting prices. In the fourth quarter of last year, we began to see an upward shift in the number of items falling, rather than rising, in price. In the July data recently released, almost 50 percent of the items in the PCE basket—weighted either by simple count or expenditure—were falling in price. Small wonder that headline inflation was negative over the year ended in June. (Federal Reserve of Dallas, Richard W. Fisher – September 9, 2009)

Levels:

S&P 500 [1042.73] Since crossing 1000 in early August, the index is slowly rising despite awaited pullbacks. 950 serves as a key technical point and marks the 50 day moving average.

Crude [$69.29] Trading in a tight range between $65-75 in the last two weeks. 3+ month sideway behavior questions is beginning to test the bullish outlook.

Gold [$1008.25] A 7% rally after bottoming on August 26. A strong breakout led to additional buying momentum.

DXY– US Dollar Index [76.85] Breaking down to new annual lows. A series of downturns that began in early March. The Dollar index is down nearly 37% since peaking in July 2001.

US 10 Year Treasury Yields [3.32%] Peaked at 4% in mid June as rates continue to decline. Interestingly, the 200 day moving average stands at 3.07%


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