FilthyRich weekly communication 2/25/07

Dear members,

We are having a very interesting month of November for the stock market. I had expected some kind of market correction in the early part of this month. Although there were some signs of market choppiness and sector correction, broad market sell-off did not materialize. This is in parts due to Fed that continues to assure the market that the economy is slowing but growing and the inflation pressure is easing. The bulls see this as a great support for the market.

We could have a correction that the market has been expecting any time. Catalysts can be anything from higher energy price, Iran nuclear threats, North Korea political debacle, as well as political uncertainties in Latin countries, African Nations, and Russia. Also, we could see market sway back and forth as the economic indicators come out mixed with some signaling slowdown in the economy (housing, auto, sub-prime mortgage foreclosure, etc) and others suggesting more pick-up that may be worrisome for inflation-watching Fed (higher consumer confidence, elevated energy and commodity prices, higher wage trends, etc). Consequently, I continue to recommend keeping cash at a certain level so you may buy quality name stocks at lower prices if there is indeed a market correction. However, I do feel that 07 will be a nice year for the market once again and with Fed sounding more favorable for the market, you should definitely invested in the market.

Let us walk through individual names. First with the biotech sector, the biotechs have remained relatively weak as the investors are once again concerned with the Medicare reform acts in the Congress that can impact the earning of the large biotech cap names. Also a few well-known biotech names (AMGN and DNA) have reported disappointing pipeline trial results and have suppressed the sector enthusiasm. Finally, there is lack of FDA approval and medical conference news which are typically loaded in the second half of the year. So this sector may stay a little weak in Q1 and Q2. However, I continue to recommend your investment in this area. AMGN has reported negative news regarding its blockbuster drug Aranesp in several cancer applications. The stock is now trading at the valuation that is really cheap (~13X based on 08 estimates). I think you should continue to buy the stock. GENZ also reported the stellar earning in the middle of Feb, but saw the same fate as AMGN (concern over Medicare reimbursement issue and lack of the pipeline catalysts). GENZ is an also great buy. CELG is also nice buy here. It is waiting for European approval of Revlimid by end of March. We could see a near term rally with CELG upon approval. I like the chance of the approval and the stock should be bought at this level. PDLI reported earning last week. I also like this stock and its royalty revenue continues to be strong and I believe that the management's approach to partner with large biotech company to develop next generation drug makes a lot of sense. It is a good buy here. I would put “hold” rating on ISIS and ALNY. Given the nervous state of the market, it is not the time to speculate too aggressively. I think we should stick with mid to large cap names where the fundamentals are more solid, should there be a nasty market correction.

Let us talk about the financial sector. If Fed is really right about the state of the economy, I love this sector. Many bad news continues to take premium out of the stocks in the sector. Lately concerns of sub-prime mortgage affecting earnings of the small banks and loan institutions have depressed the multiple of the solid financial names. It is true mortgage specialists and small banks with high exposure to sub prime loan is in trouble. But do not mistake these names with solid brokerage and integrated bank names. Investors are throwing out the baby with the water. GS is a great buy here. Look at all these M&A and private equity activities. Energy and commodity market remains strong. The stock market is doing great. This is a great environment for GS and the stock deserves higher multiple. JPM is an outstanding buy. The earning power is by far the best of all integrated banks. This bank reminds me of LRCX in the semiconductor equipment play as a turnaround play. I love JPM although people tell me not to fall in love with the stock.

Moving onto the transportation names, both AMR and LUV has been weak as the energy price has been climbing back up above $60 level. Oil inventory has been climbing due to warm weather not only in the US but strangely in Asia nations as well (could it be global warming). Rising energy price is thus primarily contributed to nervousness related to Iran nuclear uncertainties. Once this concern abates, I expect the price to stabilize once again to level below $60. In fact, I continue to believe that oil will trade somewhere between $45 and $55. As such, I continue to believe in the airline companies to show robust earning growth this year. I like both AMR and LUV. They are solid buy at the current level.

Now with the tech names, Techs typically do less well in the first half of the year. Money managers love this sector. NSADAQ has underperformed the market for a while and they think that this will be the year NSADAQ will outperform the overall market. But I really don't see the huge catalysts other than the high hope among investors for this sector in the first half. Semi stocks are rallying in face of the poor fundamentals. I don't like this sector at this juncture. If there is a dip, you could buy for second half year rally but I would not chase stocks in this sector. In this spirit, OPWV and AVID is a HOLD at best. I am really studying the fundamentals of these two companies. Should they continue to underperform the market, I will declare loss and take these two names off our core list. IBM is a hold but good buy upon pullback. I continue to recommend short position on RIMM. PE exceeding 30X for an email company seems just too rich. TIVO will report earning in early March but has seen a great rally from $5 level to mid $6. I would not add at this point. I will preview the earning ahead of the earning date.

With specialty retail names, I am thinking about adding more names in this space to become more diversified in the core holding names. I will address this in the mod term review time in June. PEET is an accumulate. I love Peet's coffee. The franchise is continuing to expand its store network and earning growth has been limited to less than 10% due to increased cost. But once they throttle back on the expansion in a few years, I believe that the company earning growth will reaccelerate. Use this period of stagnation to add. But do not expect huge stock movement to the upside.

Finally with China names, I love this sector for a long haul. But the sector is still in the midst of market correction in China so it may be wise to buy on a dip. CTRP has corrected after the earning conference call as I have predicted. The stock is at a fair value but it is not a great bargain. I would only nimble at the stock below $60. Long term, the stock is risky but should reward you for taking the chance. FMCN will report earning on tomorrow night so stay tuned. I will provide with you with the earning synopsis.


The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)

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