Newsletter Archives

• Newsletter #3 (January 2009)
• Newsletter #2 (November 2008)
• Newsletter #1 (August 2008)
  
  

Newsletter #3, January 2009

Dear friends,

Later today, new U.S. President Barack Obama will take office. As we said before, we expect the world will see some changes coming and confidence injected into the system during his administration. Here is our new newsletter:

Regression to the Mean

Broadly, we think this year will be dictated by the finalization of the various financial stimulus packages and how effectively they work. Additionally, many government work programs will be enacted to spur the rebuilding and repair of infrastructure throughout the country. Finally, while certain technologies and product categories have grabbed a strong foothold, others are in the last phase of their life cycle. The poor economy will exacerbate this. In the USA, these are some of the trends:

1. President Obama's policies will essentially remove many of the policies and decisions that were put in place over the last few years, the reversal of which will be critical to restoring health to many sectors and the equity markets in general. The uptick rule is reinstated within the first half of the year and serves to solidify an emerging breakout in the market.

2. The US Administration already has approved a $45 to $50 billion government broadband and security infrastructure package that's ready to roll over the next few years. Networking, security and strong ERP and data storage firms will benefit most.

3. Oil won't see 2007 prices as long as Obama's in the White House due to SPR (strategic petroleum reserve) purchase activity, as we believe the new president would stop SPR purchases if crude were to rise much above $90 again. This may not prevent oil from trading above $100, but it would likely keep it well off former highs.

4. Many technology stocks that probably should have died during the post-2000 period - but stayed alive due to well-timed secondary offerings - will say their last goodbyes during the cleansing period that's currently in process.

5. From a sector perspective, technology stocks still have the best balance sheets; many of the large-cap names will exhibit a level of dominance we haven't seen since the 1970s.

6. The IPO market isn't dead, but will stay nearly so for at least another year. Only the very best deals - the ones that produce prodigious cash flow or exhibit insane raw growth - will get done for any premium. This is noteworthy in that, if you can receive an allocation, it will be well worth the trouble. This is exactly the same type of environment in which Google (GOOG) emerged just years ago.

7. In the technology sub-sectors, the same question always seems to persist: Software or Hardware? So, which will outperform in the coming year? It may be more mixed as tougher conditions create opportunities for certain individual products, processes and even management teams to shine. Really strong inventory control, quality control and an innovative product or 2 may mean the difference between a big comeback and stale or declining performance. Technologies with the greatest cost saving and scalability (such as virtualization, infiniband, Wimax and telepresence) should lead the sector. Names such as EMC Corporation (EMC), VMware (VMW), Cisco (CSCO), Rightnow Technologies (RNOW), Minex Resources (MINX), Alvarion Ltd. (ALVR), Ceragon Networks (CRNT) and QLogic Corp. (QLGC) come to mind.

8. We think there will be at least a couple of really strong surges (50% or greater) out of the collective of Google, Apple (AAPL), Research In Motion (RIMM), Baidu (BIDU) and Intuitive Surgical (ISRG).

9. While many will look at 2009 as the year of the smartphone, we actually think 2008 was - and it will just become accepted that in 2009 and beyond, it's smartphones or nothing. This is one of the reasons we think we'll see Google, Apple and Research In Motion collectively perform well in volatile bursts next year.

10. Regression to the mean: This may be the most profound theme, and if it comes to fruition to any degree, then 2009-2010 should produce materially higher returns than expected. We're currently at record levels for the worst rolling 10-year period in the stock market and worst calendar year by a long shot. Simply said, we need earth-shattering returns to completely close the gap and get back to the S&P's 9% plus long-term average.

11. Despite some popular contrary opinions on the demise of Yahoo (YHOO) - and Internet search advertising in general -, we think there will be a stunning buyout or comeback. Content is still king, and will be rewarded as such in even a slightly better economy. In short, traditional media gets weaker and online media stronger. This bodes well for Google, ValueClick (VCLK), Omniture (OMTR) and, yes, Yahoo as it finally finds a way to monetize traffic. Meanwhile, expect Google to keep improving its search algorithms and Omniture to reap rewards from all the great deals signed in 2008.

12. The solar space, which has been tortured, sees stimulus support and fulfills its promise as a large job creator. This has a materially positive impact on SunPower Corporation (SPWRA), MEMC Electronic Materials (WFR), Corning Inc. (GLW) and LDK Solar (LDK), and further reduce the valuation gap between SunPower and First Solar (FSLR).

13. The US stock market rises by close to 25% as measured by the S&P 500, and the NASDAQ does even better. The financial stocks - particularly the surviving, best capitalized banks - perform well as a refinancing boom, dominant market share and the best interest rate margins in decades help produce substantial profits. Smaller write downs could occur because of the newer, less stringent rules related to mark- to-market accounting. FAS 157 accounting rules will also be reevaluated under the Obama administration. Furthermore, the resurgence in the financial space adds confidence to the rest of the market and Big Beta comes back to the fore.

Currency News and More

The United States unemployment rate jumped 0.4% to 7.2% in December. In February of last year the rate was 4.8%. In eleven months, the percentage of the work force seeking but unable to find work has increased by 50%. American job rolls shed 524,000 paychecks in December with an additional 154,000 jobs lost in October and November according to the revised statistics. Employment in all categories except health care and government declined. Bad as the December numbers were they will probably worsen in the next three months as revisions and late reporting add to the total. The US economy shed 2.6 million jobs in 2008. This was the worst one year total since 1945, when 2.75 million jobs were eliminated as war production ended with victory in World War Two.

Yet in the face of these miserable statistics, or maybe because of them, the Dollar scored. The Euro lost 2.2% against the US currency, the British Pound 1.3%, the New Zealand Dollar 1.0%, the Australian Dollar 1.3%. On the principle trading side the Dollar gained 2.25% against the Swiss Franc and 0.7% against the Canadian Dollar. Only the Yen moved higher against the US currency appreciating 1.5%.

If the US economy is headed for a deep recession the rest of the world will not escape. If the world financial system is suffering a prolonged credit drought the US has the greatest resources to overcome it. In this view, it is the US with the largest, most productive and most innovative economy, the world’s reserve currency and the most stable political system that has the best chance of avoiding disaster.

The last rationale is more optimistic. The American Government recognized the severity of the financial crisis before any other. It has done more and is planning to do more than any other advanced economy. The economy is the first task for the new Obama administration. The Federal Reserve has been more active in gauging and surmounting the financial turmoil than any other central bank. Recessions, even depressions do not last forever. When the world economy finally turns around it will be led by the United States. When the US economic numbers turn positive, even if only slightly, the Dollar will probably commence a powerful rally. This rationale is a vote for the economic flexibility and potential of the United States.

And finally…. some interesting charts on what’s happening in Europe:

 

Conclusion

It is possible that it will get still worse in Europe while the US is pulling out of this economic situation first. Hence moving Euros to Dollars make sense more than ever now, waiting could hurt both on currency cross rates as well as valuation opportunities which will disappear more rapidly in the US as time goes on and credit/loans becomes available.