Market Ignores the Skeptics


	Wednesday, May 14, 2008 *Editor's Corner* Market Ignores the Skeptics Ron Rowland The U.S. stock market continues to ignore the skeptics and marches higher. The economic news has not been good. People are losing their jobs to a weak economy and their homes to foreclosure. There is still no end in sight for the decline in housing prices. Crude oil jumped to nearly $127, food and grain prices are soaring, and health care costs continue their endless climb. Every U.S. citizen is facing inflation, yet the latest government CPI report says that core inflation is running at an annual rate of just 2.3% (3.9% if the volatile food and energy components are included). Given the economic backdrop, it is easy to see why there are skeptics and bearish attitudes about the stock market. We are the first to admit that the stock market can undergo a -15% decline at any time for whatever reason it chooses to do so. For now, the market wants to go higher. Perhaps it is because things are not as bad as investors expected just a few months ago. Perhaps it is because investors are looking across the "valley of recession" to the inevitable economic rebound. Or perhaps it is going higher for completely unknown reasons. Whatever the case, it will appear obvious in the rear-view mirror of history. For now, the weight of the evidence is pointing higher. Bond investors are justifiably nervous. Inflation is running at 2.3%, or 3.9%, or some higher figure. Short-term interest rates are less than 2%, the 5-year Treasury is yielding 3.2%, and the 10-year Treasury is yielding 3.9%. If you subtract the inflation rate from any of these yields, it is easy to see that "real" interest rates and yields are either extremely small or negative, depending on which inflation figure you choose to use. Locking in yields at these levels could easily produce a loss of purchasing power at the time of maturity. Sectors Energy leads our sector rankings, and no one should be surprised with crude oil trading north of $124. Materials got another boost as quarterly earnings and corporate guidance continue to produce upside surprises. Merger and acquisition (M&A) activity is picking up in the Technology sector. Microsoft's (MSFT) attempt to acquire Yahoo (YHOO) came to an apparent end in early May when Microsoft pulled its improved $33 bid off the table. Yesterday, reports surfaced that Carl Icahn is aggressively buying Yahoo shares and may initiate a proxy fight, forcing the board to make a deal with Microsoft. Yahoo is still in play. Elsewhere in the Technology sector, Hewlett-Packard (HPQ) reached a deal to acquire Electronic Data Systems (EDS), a giant in the global IT services industry. The Financial sector continues to struggle, joining Health Care at the bottom of our rankings. Styles It's a mid-cap market. It's a growth market. It's both. Mid-Cap stocks continue to dominate our style rankings, and growth is performing better than value in all capitalization ranges. Aggressive large cap growth stocks, such as those in Nasdaq-100 index, are performing exceptionally well. International The Russian stock market enjoyed a strong surge this past week with Market Vectors Russia ETF (RSX) jumping more than 9%. The election results have been known for months, but the inauguration of President Medvedev and the nomination of Putin as prime minister was greeted with enthusiasm by investors. Today, the new government also moved to cut taxes for oil firms developing new supplies, pushing Russia's leading stock index to a new all-time high. The death toll has risen to an estimated 15,000 from the massive 7.9-magnitude earthquake in the Sichuan province of China. The impact to China's economy will not be known for a long time. However, Chinese stocks were already weak on fears of credit tightening in the wake of reports showing inflation running above 8%. China fell dramatically in our rankings but is already showing signs of a fresh rebound. 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. "My formula for success is rise early, work late, and strike oil." J. Paul Getty (1892-1976) American Oil Tycoon Pick-of-the-Week Play Solar Energy with TAN Brandon Clay ETFs are a big improvement over mutual funds or individually managed stock portfolios. Similar to mutual funds, they're baskets of stocks designed to track an index or sector. Over time, ETFs have become more specialized. This can be seen in the explosion of ETF products over the last few years. A recent iShares report showed only 32 ETFs in 1999. At the end of April 2008, there were 739 such products -- and the numbers are still growing. One such ETF that sprang to life in recent weeks was Claymore/MAC Global Solar Energy Index ETF (TAN). This new offering from Claymore bills itself as the first solar ETF. If you've been perusing the web, you may have noticed some targeted ads for this particular fund. Looking closer at TAN, it's not all hype or marketing spin. There's something else behind this one. Global demand for alternative energy sources have risen in the past year. Solar sales are going through the roof. Dr. Robert Wilder, founder of the Wilderhill Clean Energy Index explains why: "A couple of fairly different, conflicting factors are impacting solar power right now: in Europe the ongoing demand from Germany plus more recent entrants like Spain are helping push sales globally. On the other hand looking at the domestic picture, a key Federal tax credit for wind and solar that probably should have been passed in the U.S. some months ago has continued to be held up. Here the Bush Administration has opposed allowing the subsidies now given to oil, to instead be switched to renewables. So companies exporting solar panels from low-cost regions like China, to high demand Europe are faring rather well. By contrast the U.S., which once was the global leader in solar power continues to face headwinds with our domestic manufacturers finding better growth in technological innovation areas like thin films. There is some hope however that more favorable State policies, such as in California will begin to be embraced next year in a faster-evolving Federal solar policy at the national level." A passive fund, TAN seeks to mirror the Global Solar Energy Index. TAN is composed of 25 global solar stocks. The expense ratio is 0.65%, and guaranteed to stay there until the end of 2010. TAN is an attractive pick for someone who wants laser-focused stocks in the solar energy space. Check out their prospectus here. As always, we like looking at the chart to confirm the fundamentals. We're partial to breakouts since they display an underlying momentum in the security. TAN's breakout today was especially impressive since it was the first time the ETF closed above $27.50. We expect TAN to move even higher in the coming weeks and months. In case you're wondering, we do not receive any remuneration from Claymore, or any other company whose funds we highlight in Invest With An Edge. This is unbiased information about stocks and funds we believe are the best place to put your money each week. 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. If you received this newsletter from a friend, get your own subscription HERE. Get this valuable resource delivered to your inbox every week at no charge. You can cancel your subscription anytime. All Star Investor \| About Us \| Contact Us \| Archives DISCLOSURE © 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. 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