Market Outlook | July 26, 2010

“One of the greatest pains to human nature is the pain of a new idea.” - Walter Bagehot (1826 - 1877)

It may be hard to focus on upside gains when worries of economic stability resurface in the minds of policymakers and business decision makers. How many feel comfortable on the S&P 500 Index’s ability to revisit the highs of 1576.09 reached in 2007? The answer is, most likely, not many, which explains the lack of buy-hold mentality, combined with lackluster volume or full confidence in the anticipation of further gains. So the common mindset has been to navigate these narrow trading ranges. Plus the ever-so-frustrating downtrend to no-trend is becoming accepted as the norm. In fact, a trending market can be the surprise here and less foreseen. Investors’ short-term memory within the last 3 months (S&P 500 annual peak on April 26, 2010) has focused on risk sensitivity and a re-emphasis on fear. Now, with July winding down, some burst of optimism can be supported by positive earnings results. Perhaps, the case for a sustainable upside run can materialize with the aid of fundamental strength in key companies and minor labor improvements. In other words, a temporary change in investor sentiment can change anytime now, as the gloomy stories become overly tiresome. However, this hopeful spark should not be mistaken for longer-term revival.

As for themes, volatility is finding a way to stay calm after the spring uproar. Meanwhile, interest rates continue to dip lower and inflation is not much of a threat. In the US, some might argue that larger cap companies look favorable, at least for steadiness. Importantly, the relative attractiveness of innovation themes in Healthcare and Technology are worth a look for the second half. For example, Biotech presents opportunities for explosive upside gains as witnessed by the GENZ (Genzyme) afterhours performance of GENZ (Genzyme). On a similar note, MNTA (Momenta Pharmaceutical) rose nearly 80% in one day, based on approval from the FDA for anti-clotting drugs. In technology, a 39% jump in revenue for RVBD (Riverbed Tech) reconfirms that estimates remain too pessimistic and surprise elements are a strong possibility.

Simply, this showcases that companies, which are less linked to interest rate or commodity pricing, can entice investors to examine the company specific fundamentals. That said, finding these types of ideas are challenging when bogged down with negative macroeconomic headlines and ongoing, uncontrollable regulatory discussions. Yet, markets, as usual, reward distinct ideas, which offer above average growth. Perhaps, this serves as a fresh reminder of big picture stability and restoration in investor confidence for upcoming months.

In the last decade, China and Brazil confirmed economic strength and attracted significant capital among foreign investors. In terms of higher growth, both countries are finding new competition in the emerging market space, especially for seekers of higher risk/reward. Chile continues to demonstrate further economic strength, given the country’s solid infrastructure and reconstruction. These days, it is not easy to find a stock that’s trading at all-time highs. Clearly, even the MSCI Emerging Market index witnessed its all time highs in October 2007. Interestingly, SAN (Banco Santander-Chile) made new highs last week, given its positive momentum. Even though pullbacks might be needed for timely buy points, the market usually provides the relevant hints for new growth stories.


Levels:

S&P 500 [1102.66] is near the high range of a two-month trading pattern, which is noticeable between 1060 and 1120.

Crude [$78.98] is above $80 in the near-term can spur momentum for bullish participants. However, longer-term picture is still unclear at current price levels.

Gold [$1190] has been slowing its upward acceleration since May. However, investors appear to gain some comfort of strength around 1200.

DXY– US Dollar Index [82.46] shows that Dollar strength is taming in the past month. Perhaps, a symbol of less heightened fear experience in the spring sell-offs.

US 10 Year Treasury Yields [2.99%] A step back reminds us that rates are in decade long downtrend. In fact, there has been a 56% decline since peaking at 6.82% in January 2000.

Article Quotes:

“’China last month ordered local governments to ensure repayment and to concentrate on completing projects already under way. Financing units that fund only public projects and rely on the fiscal income of local governments to repay debt should stop spending,’ the State Council said June 13. Local governments have also been barred from guaranteeing loans taken by their financing vehicles…..Lending hasn’t slowed as much as official data suggests because Chinese banks are shifting loans off balance sheets by repackaging them into investment products that are sold to investors, the report showed.” (Bloomberg, July 23, 2010)

“Although no other country has reached the crisis point hit by Greece -- where borrowing costs skyrocketed until a joint European Union-IMF bailout provided emergency funding -- the IMF noted that European countries and the United States will be competing this year to refinance some $4 trillion in government bonds maturing in the second half of the year. …. The interest rates paid by countries such as Spain and Italy -- and even some, such as Belgium, considered at the heart of ‘core Europe’ -- have been rising again in comparison to those paid by Germany, the continent's top economic performer.” (Washington Post, July 8, 2010)
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