Market Outlook | June 14, 2010

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“Imagination is more important than knowledge” Albert Einstein (1879 - 1955)

Investors realized that market anxiety was becoming overdone in the near-term. In addition, previous weekly numbers suggested that participants were overloading to protect against downside moves. At the same time, betting against global markets and risky assets is less timely than early May 2010. Summing up these issues mostly explains the weekly gains in broad indexes (S&P 500 +2.51% and Russell 2000 +2.19%). Perhaps, that’s not much of a surprise, for those tracking key technical indicators which suggested favorable odds of a recovery. A simple chart pattern showcased that the S&P 500 was poised for a short-term rally around 1040-1060. In other words, it argued for risk taking and going against excessive negative headlines. This upturn is too early to judge and a sustainability recovery will greatly depend on economic and earnings conditions. With options expiring this Friday June 18th, participants will look to adjust their positions while reexamining overall market outlook.

Early summer days have witnessed lower volume and lesser volatility. Also, emerging trends and investor biases are not easily identifiable. Plus, the natural digestion after a volatile period is followed by a lackluster trading environment. Yet, in looking ahead, it’s very hard to dismiss buying opportunities. A casual gauge of market sentiment remains mostly negative. In fact, some pundits are gearing up for a second wave of a credit crisis caused by government debt bubble and non-improving economic conditions. Clearly, a weakening Euro and sovereign debt angst are heavily documented. As a result, seekers of differentiated ideas might have a limited profitable potential in these themes and might have to dig deeper somewhere else.

At this vulnerable and sensitive point, policymakers are challenged in attempting to of avoid further scares. Currently, observers are pondering the convenient and cautious strategies rather than committing capital for surprises. Specifically, Gold and US Dollar have benefited from significant inflow in recent months. These ideas are compelling for momentum driven investors. However, for aggressive speculators taking an imaginative approach is worth examining in various sectors that suffered in the past seven weeks. Few early turnaround opportunities are presented in cheap international companies, innovative stories in Biotechnology and other growth areas in consumer discretionary. On a relative basis, Biotech companies such as ENZN (Enzon Pharmaceutical) and BRLI (Bio Reference Labs) continue to demonstrate fundamental strength and offer promising entry points.

Levels:

S&P 500 [1091.60] held in around 1060 and attracted buyers as it approaching its 200 day moving average of 1107 and showcasing an early form of a recovery from deeply oversold levels.

Crude [$73.78] is in a tight range between $70-75. A tough read for a directional call but stabilizing at current levels.

Gold [$1220] showcased an explosive run since February’s lows of 1058. Gold prices are few points removed from all-time highs reached early last week.

DXY– US Dollar Index [88.23] A noticeably strength since Mid-April as the Dollar index is trading near annual highs.

US 10 Year Treasury Yields [3.23%] attempting to bottom at current levels. Interestingly, 3.20% marked a bottom in early December. Similarly, investors will closely watch for a trend shift.

Article Quotes:

“Every loan bears some risk that it will not be repaid. In making a loan, a lender has two considerations: First, it must be able to price the risk of the loan accurately or, second, it must reduce its risk exposure by reducing the number of loans it makes, the amount it lends or the risk profile of those to whom it lends. Regulations that interfere with the ability to price risk accurately thus inevitably produce efforts to reduce risk exposure by curtailing lending. ….. But the inability to accurately price risk goes beyond macroeconomic-level uncertainty: Congress' meddling in credit markets has directly interfered with the ability of lenders to price the risk of lending accurately. Proposals for still more interventions provide still greater threats of uncertainty, further undermining confidence and predictability. (Washington times June 8, 2010)

“Since the global financial crisis, the venture capital industry has been tarred with the same brush as private equity, yet its returns are driven by equity-financed R&D, rather than the layering of debt finance. While private equity has struggled with the decreased availability of cheap debt capital, the leading specialist investment managers in the biotechnology venture space have quietly been building the value of highly innovative early-stage life science companies….. In 2009, the average transaction size for venture-backed biotechnology companies was $278m, up from $199m in 2008, according to research by Credit Suisse. In 2009 deal values ranged from $255m to $850m, so these are significant transactions, and the multiples on invested capital earned by the early backers of these companies have been significant as well.” (Fund Strategy, June 7, 2010)



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