Portable Alpha Daily

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Tuesday, February 06, 2007

Good Morning

Our long-term market model remains bearish as of December 8th. The total universe of stocks, ETF and funds which we review on a daily basis for alpha is 1,885. Of those reviewed, 357 are rated "Buy," 385 are rated "Sell" and 1143 "Neutral." Our model portfolios are currently allocated 75% long and 25% cash.

Our analytic is still reluctant to upgrade the major market or style-box derivatives we analyze for beta to “buy” status. Investors looking to construct a beta portfolio should probably start with the mid- and small-cap indexes, which have provided the greatest return over the last week and month. Once the market stabilizes and digests the data post-earnings season, we’ll hopefully get a better understanding of which investments should be selected for beta and then overlay the portfolio with alpha generating securities.

Telecommunication (IYZ) and Retail (RTH) are the only “buy” recommended sectors although Real Estate (IYR), Transports (IYT) and Energy (IYE) are clearly generating alpha. We’re continuing to get comfortable with the market, especially in light of the recent economic reports and earnings.

The major markets traded in a tight range on Monday, despite a strong sales report from Wal-mart over the weekend and more news on the M&A front. The Dow Jones Industrial Average added 13.06 points, or 0.10 percent, to finish the session at 12,666.55. The S&P 500 Index lost 0.47 points, or 0.03 percent, to end at 1,447.92 while the NASDAQ Composite Index was down 3.07 points, or 0.12 percent, at 2,472.81.

The U.S. Institute for Supply Management's services index rose to 59.0 in January from 56.7 in December. Readings above 50 typically indicate growth in the sector. However, the survey's prices-paid index slipped to 55.2 from 59.7 in December, the likely result of falling oil prices. Recent weakness in the housing and auto industries has hurt the manufacturing sector, but the ISM report indicates that other sectors have continued to grow.

Despite growth in the services sector, U.S. Treasury prices ended the session higher yesterday. The 10-year Treasury bond closed up 4/32 at 98-18/32 with a yield of 4.809%. The 30-year bond added 3/32 to 93-20/32 with a yield of 4.914% and the 2-year note gained 1/32 to 99-29/32 with a 4.921% yield.

In currency markets, the dollar traded at 120.20 yen while the euro fell to 155.38 yen. Against the euro the dollar was relatively unchanged at $1.2928. The yen, which has plummeted in January due to extremely low Japanese interest rates, will likely be the topic of discussion at this weekends G7 summit. Traders have dumped the currency in favor of higher yields and a substantial short position has developed, raising concerns among traders. At 1040 GMT Tuesday, the dollar traded at 120.35 yen, the euro traded at 155.80 yen and the euro traded at $1.2940.

European market activity was relatively benign on Monday; impressive in light of a letter bomb explosion in a London office. The major indexes rebounded from the incident nicely with the pan-European FTSEurofirst 300 Index up 0.04 percent at 1,538.3, a new six-year high. London's FTSE 100 Index closed up 7 points, or 0.11 percent, at 6,317.9 while Paris's CAC-40 rose nearly 0.1 percent and Frankfurt's DAX fell 0.2 percent. Bullish oil prices led energy shares higher, but hesitation ahead of the Bank of England’s interest rate decision quelled the momentum. So far today, the MSCI All-Country World Index hit an all-time high at 376 points, while Europe's FTSEurofirst 300 Index rose 0.5 percent.

The Asian market’s weren’t as stoic on Monday as profit-taking negated gains made in the previous two sessions. In the largest one-day fall since early-January, the Nikkei 225 lost 202.31 points to close at 17,344.80. The broader TOPIX Index lost 1.50 percent to finish at 1,716.28 while the Hang Seng Index closed down 108.06 points to end at 20,455.62. The markets rebounded overnight though, with the Nikkei Index up nearly 0.4 percent and Hong Kong's Hang Seng index up 1 percent.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8th.

Asset Allocation – AAS Model Portfolios are 75% long currently.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – No buy recommended major market investments

Top Rated Style-Box Derivative – No buy recommended style-box investments

Top Rated Sector Derivative – iShares Dow Jones U.S. Telecom (IYZ 1/26/07)

Today’s Top “Buy” Recommended Stocks

Volt Information Sciences, Inc. (VOL 11/6/06)

NBTY, Inc. (NTY 12/5/06)

CPI Corp. (CPY 1/23/07)

Navistar International Corp. (NAV 9/12/06)

Martin Marietta Materials, Inc. (MLM 11/6/06)

MEMC Electronic Materials, Inc (WFR 1/8/07)

Energizer Holdings Inc. (ENR 1/26/07)

Cummins Inc. (CMI 1/31/07)

Carpenter Technology Corp. (CRS 1/31/07)

Brown Shoe Co. Inc. (BWS 9/12/06)

Today’s Top “Sell” Recommended Stocks

Plexus Corp. (PLXS 12/29/06)

Advanced Micro Devices Inc. (AMD 9/27/06)

Brightpoint Inc. (CELL 9/19/06)

Rogers Corp. (ROG 12/6/06)

SRA International Inc. (SRA 12/27/06)



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