FilthyRich hive communication - 06/07/06

Last three days saw the market retreating as the fears of the higher interest rate is pressuring many traders to lock in their huge gain. Given the huge run-up that most of the major indices were able to achieve year to date, this selling is not surprising. Recent spike in the put to call ratio also point to the fact that traders are getting very nervous about the recent market advance and willing to protect against possible market fall.

Despite temporary weakness that may last until the next earning season, I remain bullish about the market outlook in 07. I believe that although the rate cut is now being kicked out of most investor' expectation and the market premium associated with the rate cut could evaporate, forcing the market consolidate for next a few weeks, long term fundamentals continue to remain solid for the US economy. Earning picture for many US companies will remain rosy due to moderately growing US economy and hot economies in the emerging market. As such, I continue to feel that this selling will be short-lived and investors should use this as a buying opportunity, not an event to liquidate their position.
US economy outlined by benign unemployment picture, reasonable wage growth, as well as decent ISM service number is showing no signs of entering into recession. Although the consumers are pinched with higher energy prices, they are not drastically curbing their spending habits. If the housing and a few other sectors such as auto are not in doldrums, the growth of the economy could be too hot, forcing Fed to adopt more aggressive rate tightening measures. However, these lagging sectors are offsetting the growth in the other sectors and keeping the inflationary pressure largely in check. This continues to support bullish scenario and although there will be no rate cut for a while, I believe Fed will stay on the sideline for the remaining of this year.

In the first half of this year, the market was led by energy, commodity, industrial, as well as defense industries. Although the indices advances a lot, if you were in the sectors like airline, financials, housing, auto, as well as healthcare that lagged the market, your gain may have been limited as these sector lagged the market. Due to uncertainty in the direction of the interest rate and economy, investors are hesitant on placing their bets on the interest sensitive sectors such as financials and housing. Rather, they are putting their bets on what has been working in the past: energy, industrials, commodity, and emerging market. Direction of the consumer sentiment is largely in debate. As such, the retail names and tech names with consumer exposure has been relatively weak overall.

I believe when the market resumes advances after a brief period of consolidation, the leadership group may change. Second half of the year is usually great times for tech in the economy that is expanding. While techs have been weak upto this point, they may come alive in the second half. Energy stocks have done great due to record level crack spread between the crude and refined oil. They also account for many of the political and weather related uncertainties. Heading into summer driving season and hurricane season, energy traders are betting the oil to shoot higher. As we exit summer driving season and hurricane period, I see oil price trading lower from current level in high 60's.

Also interest rate is continuing to rise in the emerging and many of the European nations, this will control economic expansion, keeping a lid on the oil demand. Also because the market is now adjusting to the higher rate scenario, mortgage rate will go even higher and home sales in the US will remain anemic. Housing downturn is here to stay for a while. These factors could ultimately weigh on the oil demand and after the season where the gasoline demand is the highest during this summer, the oil price could head lower. The money could rotate of energy and may find places in battered down techs, biotechs as well as some financial names. Also should the oil price fall, airline could once again see some buying interest.

I continue to see the market is a good shape to make a further gain and I think current volatility in the market is a good opportunity to add to holdings.

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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