Spend more than ten minutes watching CNBC or Bloomberg these days and it’s hard to not hear arguments about why the stock market has hit bottom. Trillions in cash has remained on the sidelines all throughout this credit crisis and bulls are getting itchy trigger fingers. We believe the stock market will move higher in the coming months, in large part on the back of improving psychology and the impact of liquidity brought forth by central banks and periodic bail-outs sourced from sovereign wealth funds.
For better or worse, the institutional money community has concluded that the Bear Stearns skewering marked a likely bottom in the stock market. They see financial services shares already having discounted sufficient carnage to cover remaining write-offs and vastly lower operating earnings going forward. While we sympathize with the former point, we still believe the share performance of financial services companies will continue to struggle for well over another six months given significant underestimation of lower operating earnings in 2008 and 2009. The stocks will continue to move higher for at least another month, but we believe the financials will not have a sustained “V” shaped recovery even while the rest of the stock market moves higher, well after the bounce in financials.
Inflation will be a big story in the second half of this year, and how the Fed deals with that problem will directly impact the direction of financial service company stock performance in the latter part of 2008. We suspect the Fed will attempt to blast rates higher near the tail end of this year, taking back cuts in a quicker than anticipated fashion. Call it one big game of monetary policy chicken. It’s unclear if the Fed will even have the wiggle room to perform such acrobatics, what with another huge wave of adjustable rate mortgage resets careening through the realestate market over the autumn and winter months. But we have seen Fed governors float “trial balloons” about the idea of raising rates quickly at the end of the year or in early 2009. Please note, this is not our forecast and we ultimately believe the Fed will remain hamstrung. But it’s important to underscore that a few months from now we will not be surprised to here arguments along these lines as but the latest and greatest excuse to declare the death of the commodities bull market. Don’t fall for it.
Shopping Time: Quality semiconductor exposure and more fertilizer
On the open, we will establish the following positions:
- Alliance Grain Traders Income Fund (AGT-UN): Buy 1,500 shares, C$10 limit price, good until canceled
- Migao Corporation (MGO-To): Buy 2,000 shares on opening price
- ANADIGICS (ANAD: NASDAQ): Buy 1,500 shares on the opening price
- Broadcom (BRCM: NASDAQ): Buy 500 shares on the opening price
We profiled Alliance Grain Traders Income fund in a stand-alone post. Click here to pull it up.
Miago Corporation is one of China’s largest suppliers of specialty potash based fertilizers. The stock cratered when the credit crunch took down many commodities companies last January. It has yet to recover, although we believe that is going to change starting this week. The stock is profoundly undervalued relative to its peers and could very well double from current prices within the next 18 months. We will profile the company in more detail in the future.
Last fall, technology was seen as a safe haven, a place one could hide from credit crisis turmoil. This false perception went through one major corrective cycle (remember the period when Apple and other high momentum stocks crashed?) and an echo before all was said and done. But today, we believe it’s appropriate to add exposure. We truly are at a stage where forward discounting of stronger business is justified.
Significant carnage has dented the shares of wireless semiconductor stocks. We feel confident in selecting ANADIGICS as a primary player in this market, and we also like Broadcom's growing wireless market design wins. Both stocks should bounce strongly in the weeks and months ahead. ANADIGICS is supremely positioned as a power amplifier supplier for the entire wireless market and they have strong design wins with the cable set top box market. Broadcom’s push into wireless has been fantastic thus far. The company is a leader in broadband semiconductor development but their wireless design wins – particularly with Nokia – greatly strengthen the company. We will cover both companies in more detail going forward, along with the rest of the technology industry.
