Thursday, January 13, 2011


Constructive on the Macro Picture

From where I sit, it looks like the economy will continue to gradually improve.

Unemployment remains stubbornly high, but this is not a good data point to wait for when investing -- it lags.

The ECRI weekly growth rate continues to improve. Last week, it moved further into positive territory at 3.3% (a 33-week high), and we get another update tomorrow.

Interest rates are poised to move higher, but I don't think they will do so dramatically. Moreover, the reason they are moving higher is as a reflection of an improving economy. Over the summer when the double-dip crowd grew vocal, interest rates fell to levels that appeared unsustainable. So upon an improving economy, one should expect rates to drift higher to a more normalized level. Also, inflation remains low. I know there is some food and energy inflation, but the biggest component of inflation in the economy is labor costs, and those appear well anchored. Additionally, there remains considerable slack in the economy, so inflation is unlikely to be broad-based in the near future.

MERU is a provider of virtualized wireless LAN solutions, a space that is heating up and garnering a lot of attention. It has a $300 million market cap and very high growth rates. The stock has been publicly traded for less than a year, so is under most people's radar. It broke out on high volume the other day and is now on my radar.

MIPS Tech is a chip maker for home entertainment, telecom, networking and multimedia. It has a market cap of $800 million and very high earnings growth. This is another stock that has been moving higher on big volume increases, and that could bode well for further gains this year. The stock also ranks well on measures of profitability, relative strength, fund sponsorship, etc.

Radware is a $700 million market cap, Israeli provider of network security solutions. This is another hot space, and there have been many rumors of a suitor looking to buy RDWR. On its own merit, the stock ranks well on all of the measures of growth and profitability that we look for. But the kicker is that I believe that eventually it will get an offer high enough to accept, and that could be the cherry for investors.

Positive Signs From the Eurozone

Is it possible that the euro crisis won't be the calamitous market event everyone is expecting?

The euro is bouncing for a third day after another bout of solid demand for bond auctions. Earlier this week, it was Portugal, and today Italy's auctions were met with solid demand. More notable is the action in the credit default swaps (CDS) market, where CDS prices for Greece are down 5%, Italy has fallen 8%, and Spain is down 9%. This is a good sign, and hopefully it will continue.

ECB President Trichet has urged eurozone governments to "get ahead of the curve" in dealing with their debt issues. He also wants to improve the "quality and quantity" of the European Stability Fund. So is it possible that the euro crisis won't be the calamitous market event everyone is expecting?

Look, the sovereign debt issues in Western Europe are serious matters, and as such they are not being taken lightly by the markets. But it is possible that they will be dealt with without a huge amount of fallout in the other parts of the global financial markets. Not every crisis leads to a market crash. It might just be that the market will price in these events, yields will move higher for those affected nations, and in the end, we will look back on it as just another stone in the wall of worry that bull markets like to climb.

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