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Wednesday, April 30, 2008
Editor's Corner 
Is it Time for Tech?
Ron Rowland
The Fed lowered interest rates to 2.0% at the conclusion of the two-day FOMC meeting today. It also signaled that further rate reductions are unlikely at this time. During the next few days, you are likely to hear many interpretations as to what this means for the economy, the markets, and inflation. Although the new Fed stance was widely anticipated, there is likely to be some short-term volatility as markets adjust. If there was any surprise today, it was that the Fed still does not seem very concerned about inflation.
Many analysts are suggesting that the Fed adjustment will put a floor under the US dollar and a ceiling on commodity prices. Much of the market action over the past week was in anticipation of this new scenario, producing some short-term aberrations in commodities and commodity-related equity markets. The immediate post-FOMC market reaction was for the US dollar to decline slightly, crude oil prices to pull back, and bonds to rally. However, we have seen numerous occasions where short-term market action reverses itself a time or two after a Fed rate change, and there is no reason to assume that this time will be any different.
The 10-Year Treasury yield was at 3.82% early this afternoon and jumped to 3.85% on the Fed announcement. By the close, the yield dropped to 3.76% due to a late afternoon bond rally. This action is nothing dramatic and well within the range of the past week. There is growing consensus that the low in yields for this cycle is now behind us. High-yield bonds continue to improve. It will be interesting to see how they react to the new environment.
Sectors
Energy and Materials lost some steam this week as investors began to believe that the recent run-up in commodity prices had gone too far. It's true that the commodity markets have been a little frothy. The long-term fundamentals remain quite strong for commodities, but speculative trading has caused prices to get a little ahead of themselves. We expect prices to make little headway for the next few months as the market digests the advances of the past few months. It appears we are in the early stages of a classic sector rotation with capital flowing out of commodity-oriented sectors and into sectors offering relative value. New leadership is currently forming in the Technology and Telecommunications sectors. It has been more than eight years since these sectors have enjoyed more than a brief stint at providing the upside market leadership. Perhaps their time has arrived once again.
Styles
Not much changed in our style rankings this week, and the Mid-Cap segments remain the strongest. There is not much dispersion between the various styles with the exception of Micro-Caps. Style segments normally tend to ebb and flow as a cluster. Much like a school of fish, there are new leaders and laggards nearly every time the school changes direction, but they typically continue to move as a single entity. However, the Micro-Caps seem to be charting their own course. They are following the school, only reluctantly. It is possible for a segment to break away, but the Micro-Caps haven't quite reached that stage yet. For now they are just stragglers to be avoided.
International
China made a giant leap from the bottom of our global rankings to the top in just one week. Such a large move has probably happened before, but we can't remember when. The Chinese government reduced the stamp tax associated with stock transactions, which had an immediate psychological impact on the market. The Shanghai index jumped 4% last Wednesday and followed up on Thursday with a 9% surge. Gains for U.S. holders of China-based ETFs were not as dramatic, but they still managed to tack on nearly 8% in a two-day span. Japan continues to climb and jumped to third in our rankings. The UK now occupies the bottom rung, a position we thought the USA might have been destined to hold.
Note:
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
"I have not failed. I've just found 10,000 ways that won't work."
Thomas Edison (1847-1931) Inventor, Businessman
Pick-of-the-Week
Ride Technology Up With UTX
Brandon Clay
Anyone half-awake in high school economics class may remember hearing about the stock market. One of the first lessons I learned from my teacher is still a basic tenet I can't escape when discussing investments: buy low/sell high. This lesson is particularly important for today's Pick-of-the-Week.
Technology has been hit hard. During the last Bear Market (2000-2002), the Nasdaq fell from tremendous heights. Getting slammed when the Tech bubble burst, it lost -76% of its value. Though the Nasdaq gained some traction in the past few years, the once-enviable tech index is worth half its January 2000 value. In addition, Tech stocks have taken a beating over the past few months. Since January 1, S&P's Technology SPDR (XLK) lost -8.7%. The only other sector doing worse is Health Care. Tech is low.
Still, there are signs of life in Technology. This past month Tech rose +8.7%. Not only that, but it appears to be heading to the top of our proprietary rankings. As the rest of the market struggles to find its footing between Fed announcements, technology is attracting value investors.
One prominent technology company you should consider buying is United Technologies (UTX). A diversified tech company, UTX owns several businesses involved in air conditioning (Carrier), aerospace and industrial products (Hamilton Sunstrand/Pratt & Whitney), elevators (Otis), helicopters (Sikorsky), clean energy and insurance (Chubb). The conglomerate's diversity makes it an attractive place in an uncertain market.
The UTX culture is great for long-term investors. Recently elected CEO, Louis Chenêvert, took over the helm after a gradual two-year transition. Demonstrating a commitment to deliberate improvement, UTX is not your typical tech company from the late 90s. Instead, their dedication to long-term, managed growth can be seen in their carefully crafted recent bid for ATM-maker Diebold (DBD). Their strategy seems to be paying off in the short term as well.
United Technology continues to grab business in a tough global economy. Sikorsky recently won a bid to build Bahrain some helicopters. Otis plans to install elevators in Guangzhou, Chin, and in Trump's new Toronto hotel. One Deutsche Bank analyst sees UTX as well-positioned in for the foreseeable future. Because of its exposure to emerging market business, UTX shows particular adeptness in international markets. It's no surprise their earnings beat estimates two weeks ago.
Taking a look at the chart, UTX shows a very solid uptrend in progress. This trend points to a great technology stock whose sector is enjoying a much needed bounce right now. If UTX breaks above $74, no telling where this stock may head. It could happen any day now. Following the old adage, of buying low -- technology is the place to look. Following the adage of "the trend is your friend", UTX is a perfect pick.
All the best.
Note:
Keep in mind, the Pick of the Week is usually intended for aggressive investors. Don't risk money you can't afford to lose. You will need to decide when (and if) it is time to sell.
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© 2008 AllStarInvestor.com All Rights Reserved. Protected by copyright laws of the United States and international treaties. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. All Star Investor employees, its affiliates, and clients may hold positions in the recommended securities.
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