Market Outlook| November 1, 2010

“The recipe for perpetual ignorance is: be satisfied with your opinions and content with your knowledge.” - Elbert Hubbard (1856 - 1915)

Simply looking at the past two months, one can observe higher markets, strengthening Gold prices, and lower interest rates. In a few days, the much anticipated US mid-term election cycle is poised to resolve an unknown. The feel out there argues for change to be viewed as a positive, although optimists are known to find excuses to spark enthusiasm. Meanwhile, the impact of quantitative easing appears mostly misunderstood by participants. It is still questionable whether the Federal Reserve plans serve as a political posturing or a practical stimulus. Importantly, for all dots to connect, confidence restoration among business decision makers and investors should contribute heavily to overall sentiment. At that point, the fruits of capital injection can serve a greater purpose than recently felt.

As usual, currency uncertainty finds a way to resurface, as it has in the past decade. Both US and China policymakers have intervened to adjust levels in their respective currency. Meanwhile, the inter-linked world eagerly waits for impact on international trade, currency price movements, and impact on key asset classes. In addition, investors are faced with the greater unknown of pending changes in results of further policies. Despite these ‘currency wars’, there is an ongoing demand for risky assets. This imbalance is puzzling as fear and volatility have recently calmed. Therefore, how these two contradictory issues play out will be impactful on existing trends.

As stated here, on average, investors seem to get two chances per year to hit home runs. So, maybe, yet again, this unscientific saying proves to be witty. To understand where we’ve come from, we'll need to break 2010 into two segments. First, there is that run that began in early February 2010 that then peaked in spring 2010. Now, we’re in the cycle that bottomed in late summer and is still holding up. In looking ahead, it is vital not to forget the past 6-9 months, especially in regards to the credit worries in Europe, combined with bubble-like patterns in emerging markets that sparked the spring sell-offs. In days ahead, short-term emphasis and distractions are most likely to cause reactions based on election results and new economic data. However, for market participants, following and tracking changes in these points below can help formulate a clearer intermediate-term thesis.

Market Driving Forces:

• Record inflow into fixed income products as investors seek higher yields
• Low borrowing rates continue to benefit US Large Cap companies
• Stronger investment appetite for Gold, given ongoing momentum
• Increasing commodities prices as seen in food and agriculture strongly tied to emerging markets
• Advanced electronic trading methodologies, resulting in skepticism among long-term investors
• Unknown perception of regulatory solutions or pending reforms
• Lingering credit worries in Europe, combined with unproven economic strength in Western countries

Specific Ideas

Biotech offers ideas with big upside potential. However, picking the right company into a portfolio remains very challenging. That said, Life Technologies (LIFE) is demonstrating strong fundamentals, led by products related to innovative life science solutions. This is a stock worth watching for those expecting general market recovery. Continuing on the healthcare theme, Omnicell, Inc. (OMCL) provides software products related to hospital information systems. So far, the market appreciates the combination of healthcare and technology as the stock is up over 109% since March 2009. Despite the strong run, any short-term weakness can offer a buying opportunity, as Omnicell expands its market share in a growing industry while showcasing positive sales growth. Finally, Jabil (JBL), the circuit board manufacturer, appears to stabilize around $14 per share. Positive factors include a strong balance sheet and a takeover candidate and offer a high risk/high reward for the months ahead.

Article Quotes:

”’The suspension of government rice sales may raise supply concerns and strengthen prices,’ said Kiattisak Kanlayasirivat, a director at Novel Commodities SA’s Thai office, which trades about $600 million of rice a year. ‘The Thai benchmark rice price may rise to $550 a ton in November or December, when the Philippines, the world’s largest buyer, returns to the market to meet a shortfall widened by damage to crops from Typhoon Megi,’ he said. ‘Pakistan’s deadliest floods last month ruined crops worth 281.6 billion rupees ($3.27 billion), destroying 2.39 million tons of rice,’ Farm Minister Nazar Muhammad Gondal said, Sept. 28. Pakistan was the world’s third-biggest exporter last year.” ( Bloomberg, October 27, 2010)


“Yet, my soundings among those who actually do the work of creating sustainable jobs and making productive capital investments―private businesses, big and small―indicate that few are willing to commit to expanding U.S. payrolls or to undertaking significant commitments to expand capital expenditures in the U.S. other than in areas that enhance the productivity of the current workforce. Without exception, all the business leaders I interview cite nonmonetary issues―fiscal policy and regulatory constraints or, worse, uncertainty going forward―and better opportunities for earning a return on investment elsewhere as factors inhibiting their willingness to commit to expansion in the U.S.” (Federal Reserve Bank of Dallas, October 19, 2010)


Levels:

S&P 500 Index [1183.26] – Maintaining strength as the index is up 6.1% year-to-date. The recent run is facing minor pause here as digest news flow, and managing risk will be on the radar this week.

Crude [$81.43] – Getting the $82-83 per barrel continues to be a hurdle in the past 5 weeks. Interestingly, Crude failed to get above $83 during Augusts peaks. so that range is intensely watched.

Gold [$1346.75] – Slightly removed from its annual highs, yet attracting buyers, while preserving upside momentum.

DXY – US Dollar Index [77.26] – For the moment, there seems to be a bottom forming around 77, especially in the past two weeks. As a reference, last November, DXY Index recovered at 74 before making a nearly 20% run that ended in June 2010.

US 10 Year Treasury Yields [2.59%] – Like the Dollar recovery, interest rates stopped the deceleration and recovered sharply. However, holding above 2.60% appears like a near-term hurdle based on technical indicators.

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