In the U.S. equity markets, the technology sector has the greatest exposure to foreign revenue. Consequently, is it any wonder technology stocks have been strong? We think “style cycles” last years, not months, and that select technology names should remain a primary focus. One such name is Strong Buy-rated Avnet (NYSE:AVT), which is being valued as if there is going to be a 35% reduction in earnings that we don’t think will happen. Another favored name would be Motorola (MOT), which appears to be just too cheap selling at one times revenues and one times enterprise value to sales with a product array that will be refreshed over the next 12 months.
As for the overall equity markets, for whatever reason the indices seem to “think” things are going to get better as the dutiful Dow gained 111 points (+0.83%) last week, yet was totally eclipsed by the Russell 2000’s surge of 4.20%. This strength is consistent with our “call,” since the end of November, that the Santa Claus rally has begun. Sure, there are a number of things wrong with the rally:
1) Lowry’s Buying Power Index fell to a new 11-month low last week indicating the rally is more about a lack of “sellers” rather than earnest buying; 2) the Operating Company Only [OCO] advance/decline is flirting with new 11-month lows; and 3) our Exchange Traded Funds [ETF] analysis is showing increasing signs of weakness. However, as often repeated in these missives, “We have learned the hard way NOT to be bearish in the ebullient month of December!”
The call for this week: Economist Hy Minsky stated, “All panics, manias and crises of a financial nature, have their roots in an abuse of credit.” To which we would add, “True in the 1600s with Tulip Mania. True in the Dotcom bubble. And, true in today’s housing/mortgage mess.”
Still, we remain positive on select stocks/sectors, as we have been at the August 2007 “lows,” yet cautious at the September/October “throwback” highs, and again aggressively bullish at the subsequent late-November downside retest of the mid-August “lows.” Indeed, we are positive on stocks into year-end, emboldened by the “too big to fail” mantra and Canada’s over the holiday solution to its Asset Backed Commercial Paper woes.