Energy & Tech Lead The Way


	Wednesday, May 7, 2008 *Editor's Corner* Energy & Tech Lead the Way Ron Rowland Global markets seem a little confused since last week's FOMC meeting. Of course, we expected a period of adjustment while traders and analysts debated the Fed's action. But did the Fed really do anything? They lowered rates again and hinted that further cuts are not guaranteed. Yet with almost two months to go until the next FOMC meeting on June 25, there is plenty of time for new data to change the picture. For now, most equity styles and sectors seem to be happy with the Fed action. Today's sell-off was concentrated in financials and was sparked by an SEC plan to impose additional capital disclosure requirements on investment banks. The news came as a surprise and the knee-jerk reaction was to sell. Unless there is more to the story, we suspect this move will reverse itself shortly. Treasury yields rose in the last week, suggesting that the Fed's apparent lack of concern about inflation may be causing some concern for fixed-income investors. It is also notable that the normally-collegial FOMC now has two dissenting votes from inflation hawks. The 10-Year Treasury yield jumped from 3.76% last Wednesday to 3.87% today. On the bright side, credit markets appear to have moved past the instability we saw earlier this year. The assorted Fed lending facilities and liquidity injections seem to have succeeded in this regard, at least for now. The bond markets are functional if not entirely friendly. The dollar continued to strengthen against most currencies but may be losing momentum. Sectors Last week we talked about sector rotation causing capital to flow out of commodity-related sectors. Crude oil promptly jumped to new highs above $123, and the energy sector is up nicely in the last five days. Yet this does not seem to have harmed the competing growth sectors like technology and telecom, which have also posted gains. Sector rotation is not always an "either-or" proposition. It is entirely possible for both energy and technology to move up at the same time. On a relative basis, energy, materials and technology remain the top three sectors in our momentum rankings. Telecom and financials moved up the rankings while utilities and consumer staples moved down. This action is consistent with a return to economic growth, though obviously it is very short-term at this point. Styles While the top three styles are unchanged from last week, Mega Caps jumped higher. We suspect this has a lot to do with the recovery in the mammoth multinational energy stocks that dominate many cap-weighted indexes. Micro caps continue to lag, while Mid-Caps are still outperforming. There is a growing tilt toward growth and away from value, which like the sector action is suggestive of economic recovery in the U.S. International Latin America overtook China to lead our international rankings, but in absolute terms both picked up significant momentum. Brazilian markets leaped this week when S&P gave the country an investment-grade debt rating. The US and UK remain the weakest global markets in relative terms, though both gained in absolute terms. Canada had a particularly significant jump, not surprising given its high weighting in energy and materials stocks. 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. "Egotism is the anesthetic that dulls the pain of stupidity." Frank Leahy (1908-1973) Notre Dame Football Coach Pick-of-the-Week Yahoo! An Opportunity Pick: YHOO Brandon Clay Every once in a while, an opportunity comes along that makes us take a second look. Sometimes these opportunities are hidden, micro-cap stocks. Those stocks carry with them huge potential, but require a risk-tolerance unsuitable for most investors. Other opportunities are more visible, sometimes gracing the home pages of prominent financial websites or cable news teleprompters. We think we've found one of those opportunities in plain sight. Let me explain. On February 1, Microsoft (MSFT) made an unsolicited offer to buy Yahoo (YHOO) for $44.6 billion in cash and stock. The market expected the deal to go through. The stock shot up from $19.18 on January 30 to $28.38 at the 2/1 close -- a +47.9% bounce! What was a beat-down tech company suddenly sprang to life again. Evidently, MSFT's offer gave renewed hope to Yahoo management. They soon decided $31/share was not a good price. Yahoo wanted closer to $37. In order to make their company more desirable, or perhaps to make Microsoft jealous, they did the unthinkable. Yahoo ran to the arms of Google. Yahoo's ad revenue has been languishing for several years. A distant 2nd to Google in terms of search, Yahoo has consistently lost market share. Even more important is the fact that Yahoo has not been able to match Google's results from their cash cow -- paid search. Since Google mastered the black arts of contextual advertising, and Yahoo couldn't compete with Google in the space, they adopted a "can't beat 'em, join 'em" mantra. This move should infuse Yahoo with increased cash flow. Though it's an uncomfortable admission of search defeat, it bought valuable time for the company. Pending government action and angry shareholders aside, Yahoo's independence was preserved. Microsoft withdrew their offer. Still, with these problems, why entertain a YHOO pick? Though most pundits will imply CEO Jerry Yang is delusional, expecting way more than his company is worth, we should remember some things. Yahoo is still the #1 internet portal in the world. In an age where consumer attention is scarce and traditional media outlets are struggling, Yahoo has captured the interest of web users and is the most popular site on the planet. Its history should not be discounted either. Yahoo survived a perilous dot-com crash. Eight years later they're still around. Yang is a veteran. He's getting advice from the smartest minds in technology. It's not over yet, and the market won't give up either. The stock isn't moving away from $25 -- in January the stock traded at $19. This is a good sign. We believe Yahoo is in a unique position. Though Bill Gates confirmed Microsoft's rescinded offer this morning, Gates is not the only buyer out there. Hedge funds and activist shareholders are now on the hunt. Last week, MSFT was willing to pay a bolstered bid of $33/share. This week the market thinks it's worth $25. The only thing keeping it below $30 is the absence of other visible offers on the table. Deep pocket investors are busy discussing Yahoo buyout prospects. You should consider jumping into the conversation. Yahoo is a buy at $25 and change. Microsoft did you a favor by showing you what it's worth. Their deal may be over, but don't expect it to be the last. It will be a ride, but it should turn out well. If it happens, take the bounce and call it a trade. 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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