Friday, June 22, 2007

Stocks Lower into Final Hour on Weakness in Asia and Profit-taking

BOTTOM LINE: The Portfolio is about even into the final hour as losses in my Networking longs and Biotech longs are offsetting gains in my Commodity shorts and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is negative and volume is about average. Despite the losses in the major averages, tech shares are displaying substantial relative strength. The Morgan Stanley Tech Index is now 10.7% higher ytd versus 7.6% for the S&P 500. I continue to believe it can rise at least 20% by year-end as the cyclical tech laggards join the growth tech leaders in the second half. Moreover, Google (GOOG) is up 1.7% today as Bernstein initiated the stock with an outperform rating and said it expects 50% profit growth this year. As well, comScore data for May released yesterday showed Google with 50.7% of the U.S. search market vs. 26.4% share for Yahoo! (YHOO), its lowest since 2003. Given Google's fundamentals, the stock remains cheap relative to the broad market and especially vs. its Internet peers. I continue to believe that the company can grow at relatively high levels for much longer than analysts expect. The stock remains my single largest equity long position. Natural gas continues to weaken on little new news and is breaking down through its 200-day moving average for the first time in five months. Inventories are poised to hit all-time record highs again this year, while industrial demand continues to weaken. In my opinion, prices anywhere near current levels are absurd and purely a function of the mania for commodities by investment funds, not fundamentals. Despite the massive infusion of capital into commodity funds over the last few years, I see technical weakness in many commodities. I expect US stocks to trade modestly higher into the close from current levels on stabilizing long-term rates, buyout speculation, short-covering and bargain-hunting.

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