Portable Alpha Daily

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Thursday, September 07, 2006

Telecom Stocks

Stocks and bonds fell Wednesday as reports of higher U.S. labor costs rekindled fears that the Federal Reserve may again raise interest rates. Growing by 5 percent in the second quarter as compared with the same period one year ago, an increase in U.S. labor costs forces economists and investors to question if these higher costs will be passed on to consumers. If so, the Fed may have to combat inflation by raising rates within a slowing economy, dashing hopes of the elusive “soft-landing.”

However, the Fed’s Beige Book and the Institute for Supply Management's U.S. services sector gauge indicated growth within the U.S. service sector for August and that inflationary pressures were indeed waning. The Beige Book indicated that businesses would be unable to pass on higher costs in future months as long as consumer spending continues to decelerate. Investors will pay close attention today to the traditionally dovish Federal Reserve Bank of San Francisco President Janet Yellen for clues on both future monetary policy and the inflationary divide within the Fed.

Short-Term Technical Indicators
Seven of the eight short-term, technical indicators weakened overnight with the 9-Day Moving Average of the Dow Jones Industrial Average’s MACD the only indicator strengthening. Four are higher than last week’s levels, six are higher than last month’s reading and seven are stronger than that of one year ago. I’m getting a “sell” signal from the DJIA 15-Day Stochastic Indicator.

Long-Term Market Model
Bullish since August 23rd, remains positive yet is no longer strengthening by the same increments as it had over the last few days.

Investor Sentiment
In terms of volatility and investor sentiment, I’m seeing significant increases in the Market Volatility Index (VIX), the NASDAQ Volatility Index (VXN) and all three Put / Call ratios. Yesterday’s disappointing economic reports served to support the Bears, at least temporarily, and it looks like today will be the same.

Asset Allocation
I continue to recommend between 75% and 85% equities for the alpha generating portion of the investment portfolio, although that allocation may change in response to market activity throughout the week and into next week.

Beta Exposure

Market Derivatives
Both the Russell 2000 (IWM) and Fidelity NASDAQ Composite (ONEQ) derivatives shifted to “neutral / hold” recommendations as a result of yesterday’s broad-based decline. There are no “sell” recommended indexes today, but we do have four “buy” recommended indexes, with the top two being the Dow Jones Industrials Diamond Trust (DIA) and the S&P 100 (OEF). I’d sit tight and wait for the markets to settle down before adjusting for beta exposure.

Portable Alpha Generation

The analytics still like Large Caps, with both Value (JKF) and Core (JKD) “buy” recommended. Small Cap Core (JKJ) weakened to a “neutral / hold” recommendation overnight in response to poor performance from the tech sector yesterday.

Semiconductors (IGW) shifted to a “neutral / hold” recommendation overnight but Real Estate (IYR) remains a “buy.” Energy (IYE), Natural Resources (IGE) and Transports (IYT) are all “sells.”

Today’s Highlighted Investments

The top rated Telecommunication investments with initial “Buy” recommendation dates:
  1. Belden CDC Inc. (BDC) – 9/1/2006
  2. Synaptics Inc. (SYNA) – 8/16/2006
  3. AT&T Inc. (T) – 6/19/2006
  4. UTStarcom Inc. (UTSI) – 8/14/2006
  5. ADTRAN Inc. (ADTN) – 8/31/2006


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