Market Commentary - 4.27.2008

April 27, 2008

Bear market rally or time for the running of the bulls? The market has already priced in a first-half recession, with the expectation of improving economic/earnings data in the 2nd half of the year. We don’t believe that rosy story, and are of the belief that expectations are still way too high, but perception is reality. The market seemed to breathe a sigh of relief this past week as non-financial earnings were relatively strong in the context of lowered guidance, with exports offsetting weak domestic demand. The S&P 500 just peaked above the February 1st high of 1396.02, and if it can push above the 1400 level, it will be important from both a technical and psychological perspective.

Based on market action and recent speeches by the Fed, it looks like we are at an important turning point in the bond market, the dollar, and most commodities. After hitting all-time lows against the Euro, the dollar snapped back strong and short-term treasuries had their worst week in about 7 years, as precious metals failed to hold support levels. On the other hand, oil and agricultural commodities continued trading at or near record highs, with stories every day of major US retailers limiting the amount rice purchases as major exporters begin hoarding supplies for their own citizens.

Everyone will be watching what the Fed does on Wednesday, but more importantly what they say. The market is pricing in a 25 bps cut with the expectation of a pause after that, both because they believe the 300 bps cut to date has steadied the credit markets and because inflation data has started to show uncomfortably high prints. It’s hard to believe these guys (CEO’s, administration officials, talking heads) who have continued to try and say “the worst is over” every month since last August, especially as banks continue to report larger and larger write-downs; it’s also confusing as to why those stocks jump when they need to raise even more billions just to keep their minimum capital requirements intact.

However, that’s been the theme of this market – what you would to hold up expect in a weak economy – for example healthcare, utilities, and consumer staples, have of late underperformed financials, homebuilders and consumer discretionary. Even if, as we believe, things will not be nearly as good as expected on the economic/earnings front in the 2nd half, people are willing to buy equities because treasuries and money markets, or any “flight-to-safety” instruments, are trading at negative real yields, and investors are willing to bet the worst is behind us – they don’t want to miss the bottom.

Earnings

Although not as action-packed as last week, still a lot of important earnings dates this week:

Monday – FPL Group (FPL), Loews Corp (LTR), Manitowoc (MTW), MasterCard (MA), RadioShack (RSH), SOHU, Southern Copper (PCU), Tyson Foods (TSN), Verizon (VZ), Visa (V)

Tuesday – Archer Daniels Midland (ADM), Buffalo Wild Wings (BWLD), Corning (GLW), Deutsche Bank (DB), Office Depot (ODP), US Steel (X), Waste Management (WMI)

Wednesday – Akamai (AKAM), Allegheny Energy (AYE), Cabot Oil & Gas (COG), Colgate Palmolive (CL), Cummins (CMI), First Solar (FSLR), Garmin (GRMN), General Motors (GM), Kellogg (K), Kraft Foods (KFT), OfficeMax (OMX), Proctor & Gamble (PG), Prudential Financial (PRU), Sanofi-Aventis (SNY), Southern Co (SO), Starbucks (SBUX), Time Warner (TWX)

Thursday – Aon Corp (AOC), BankRate (RATE), Cardinal Health (CAH), Chesapeake Energy (CHK), Comcast (CMCSA), CVS Caremark (CVS), Dominion Resources (D), Exxon Mobil (XOM), Marathon Oil (MRO), Metlife (MET), Noble Energy (NBL), Sun Micro (JAVA), Tyco (TYC)

Friday – Agrium (AGU), Chevron (CVX), Duke Energy (DUK), EOG Resources (EOG), IntercontinentalExchange (ICE), Nortel (NT), PPL Corp (PPL), Sempra Energy (SRE), Washington Post (WPO), Weyerhaeuser (WY)

Economic Data

A lot on the economic front this week, in addition to the FOMC meeting:

Tuesday – Consumer Confidence, S&P/CaseShiller Home Price Index

Wednesday – ADP Employment, 1st Q GDP, Chicago PMI, Crude Inventories, FOMC statement

Thursday – Auto/Truck Sales, Initial Unemployment Claims, Personal Income & Spending, and Consumption, Construction Spending, & ISM Manufacturing Index

Friday – Average Workweek, Hourly Earnings, Nonfarm Payrolls, Monthly Unemployment, and Factory Orders

Strategy/Outlook

Depending on who you listen to, now is either the best time to buy equities in 20 years, or we are at a near term top and the next leg down is on the horizon. We are staying away from indexes at this point until we get some confirmation – some indexes such as the Dow and Nasdaq have broken out of their trading range, while the broader indexes such as the S&P and Russell are sitting right at resistance, while volume in this rally has been weak at best – there is still a lot of cash on the sidelines. Because of the continued choppy action, we are looking to position ourselves for longer term trades to try and take advantage of overall sector trends we are seeing.