The Market Edge Market Summary [Site]
A sharp decline in oil prices to $52 a barrel helped lift stocks across the board as the first full week of trading for 2007 came to a close. The big news was the action in the blue chips as the DJIA posted record highs on Thursday and again on Friday (DJIA - 12556), closing above 12500 for the first time since 12/27/06 (DJIA 12510.57). Leading the charge for the blue chips was the tech stocks which haven't been in the forefront for some time. For the period, the DJIA gained 158 points (+1.27%) and closed at 12556.

The NASDAQ woke up last week as it vastly out performed the DJIA on a percentage basis as traders apparently rolled out of oil stocks and into technology. Thursday's action saw a gap opening which was followed by a 25.52 point gain (+1.02%) as the index closed at a six year high (NASDAQ – 2484.85). For the week, the NASDAQ gained 68 points (+2.82%), and closed at 2502.

Navarro's Big Economic Picture: Virtuous Cycle

As the Market Edge summary indicates, Old Man Market just keeps rolling along. The prime movers appear to be falling oil prices which lower manufacturing costs and put more money in consumer pockets and low long term interest rates, which are giving a third (or fourth or fifth) wind to the refi-home as ATM market and providing a bit of a soft landing for the housing sector.

Two truths are emerging. First, there is no apparent spillover from the debacle in Iraq into the broader global financial market system. War may be hell but the old saw of it being good for the economy seems to have some legs.

Second, the yield curve is, at this point in time, not a reliable signal of economic conditions. Rather, any such signals are being overwhelmed by a flood of Asian capital into the U.S. bond market, as China, Japan, Taiwan, and South Korea all try to keep their currencies undervalued relative to the dollar.

This Week's Market Movers

The big market mover candidates for the week include the PPI on Wednesday and the CPI on Thursday.  The big question is whether the Fed will cut or hike rates and with growth higher than expected recently, the risk here is of a big inflation number bringing the markets down.   (The bond market is already signaling such a possibility.) 

The International Scene - Technical Take

This year, we will try to track by relevant exchange traded fund the key countries and regions of the world. Each ETF is rated according to its technical rating in Market Edge. Ratings go from 0 best to -2 worst before a category change. (Fundamentals are discussed in Navarro’s Big Picture.)

The underlying idea is that there is an signaling interdependence between these regions and countries that should serve as an early warning system of changing market condition and help tell us whether the bull or bear is in ascendance. 

The picture that emerging this week is of a global bull market undergoing some technical deterioration. Almost all regions and countries are rated buys but the ratings are weakening.

*Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

Vaino's Biotech Corner: Stem Cell Roundup

I’ve resisted recommending stem cell stocks. While I’m still not a huge fan of them, I think it might be worth owning at least one as part of a diversified biotech portfolio. With all the media hype surrounding stem cells, I have no doubt everyone is aware that they are cells that have yet to acquire specific characteristics.  Theoretically, stem cells could be used to regenerate any tissue. That would be pretty powerful.

I think there are some parallels between stem cell companies and companies engaging in RNAi drug discovery.  That is, the idea is great, but implementation still remains elusive. I wrote in September I though RNAi discovery company Alnylam Pharmaceuticals (ALNY) was trading too high, and that the price was being buoyed by hype.  The Market, however, disagreed, and has pushed the stock up over 50% since then (I did recommend waiting until ALNY’s technicals degraded, which they haven’t, before shorting). I remain convinced I’ll be right on ALNY this year. In the meantime, buying into some stem cell hype is probably is a smart move.

In my opinion, the best stem cell company right now is Osiris Therapeutics (OSIR). They went public just last year, and the stock price has doubled since. They are looking at three different products in clinical trials, and have a product, Osteocel, on the market to aid in bone regeneration.  As I mentioned, I think this is the best of the stem cell companies, but would not recommend buying until the price retraces a bit.

Other stem cell companies include Viacell (VIAC), StemCells (STEM), and Aastrom (ASTM). While none of these companies is going to the profitable any time soon, they are likely to trade higher based on hype.

Of the smaller stem cell stocks I think Aastrom has the best pipeline. They will soon announce results of a one year follow up on a Phase 1/2 clinical trial for bone regeneration, have an ongoing Phase 1/2 study underway for spinal fusion, and completed a small trial in Spain for patients required bone regeneration prior to dental implantation.

So, I think OSIR is the best of breed stem cell company, but am a bit concerned it’s trading too high. At less than $1.50 I think ASTM (which is looking to close the week off 10%) is a good, highly speculative, stem cell play. This is certainly not a long term investment, and I would look to cash out when the stock takes an inevitable bump on hype in the next couple of months.

Portfolio Update

I wrote in December that I would try and do a better job of tracking the specific stocks I recommended as buys, so here’s a quick update. Transactions are noted either here or in the daily Blog. For thinly traded options the “Last Close” price is the midpoint between bid and ask.

Closed positions

Current open positions

*  AMLN Jan 08 40 calls

Even though ELN has been on a slide lately I’m still bullish on Tysabri. I’ll look to expunge IDEV if it doesn’t start to move up. IMCL is up this week on news that Erbitux performed well in a Phase 3 study against colon cancer:  I still think problems with competition with Amgen and IP troubles are leading Imclone into a world of pain and am not worried. Amylin reports earnings on January 30.

Guest Column: Greg Autry
Lecturer on business strategy and entrepreneurship at the Merage School of Business, U.C. Irvine

I've been looking for some short plays since I haven't been drinking the bull market cool-aid. It is time to consider Sony. The company is coming up a 52 week high (closing at 47.68 Friday). Pundits (Goldman recommended a buy on Tuesday) have been predicting a turn around following the huge debacle with Li-Ion battery fires (company had to replace millions of units for Dell, Apple, HP and just about everyone else. While the dropping Yen has helped in recent days, Sony's fortunes and its 45 P/E are firmly based on the success of their new Blu-Ray DVD format and the Play Station 3 game system. The two are inextricably intertwined by design. The game console was delayed for months and production severely limited by production problems with the Blu-Ray drive due to shortages of the blue LED laser it requires. Sony's failure to deliver those units has been a problem for partners supporting Blu-Ray as well. With the PS3 deliveries so constrained expectations were that the units would fly off store shelves and on to ebay as quick as they come into the loading dock at Wal-Mart or Game Stop for months to come.

In the real world, sell thru for their critical PS3 game unit is not what is expected. I heard rumor at CES that stores are brimming with the unit despite highly publicized production limitations. On the return trip from Vegas I visited a number of Best Buy,s, Targets, and EBGames/Game Stops to see what was really up on the street. I discovered that while the competing Nintendo Wii is impossible to find (it actualy does fly off the shelf at $249), the Sony unit is stacked up waiting to go for $599. Several sales staff told me people rush in, find the PS3 is, to their surprise, readily available and don't buy one because of the steep price. Last night I did a phone survey of 20 stores tonight and discovered that 100% had PS3s (plenty said some) and not a single Wii. Store manager suggested to me that Sony would need to make a $200 cut (to $399) to move the beasties. To avoid an overstock they may be canceling existing orders for units in the next few weeks.

Sony is already losing around $200 per PS3 sold (to buy market share for future software sales profits), if they are forced to either reduce prices or increase marketing to move units out of stores they may be forced to jettison the games division to survive. There has been talk of that.

The PS3 is critical to Sony's Blu-Ray DVD product success since it is the number one Blu-Ray play back device. Prior to the PS3 launch, the competing Toshiba led HD-DVD product was ahead by several fold in unit sales. Sony’s 1million PS3 deliveries supposedly brought them to parity if not a bit ahead. That’s assuming half those 1million units aren’t sitting on the shelf at your local target (go see and ask the staff about the sell through).

To add insult to injury the Adult Entertainment Industry has standardized on HD-DVD. It sound crazy, but porn has been a leader in the success of improved media products since the printing press (earlier actually). Photography and Internet are more recent examples. Many say Sony’s first major format loss, Betamax, was KO’d by the adoption of VHS as the X-rated movie standard. http://slashdot.org/articles/07/01/11/213258.shtml.

Anyway I think the PS3 retail inventory will “hit the fan” well before Q2 and the drop will be a lot more than 10%.So I picked up the 40 July Puts (  SNESH.X at 75 cents).

“Any trader or investor who ignores the power of macroeconomics over the world’s
financial markets will, sooner or later, lose more than they should—and if they are
trading on margin, perhaps more than they have.”
 -- If It's Raining in Brazil, Buy Starbucks

The Market Edge Market Summary from www.marketedge.com 

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Peter Navarro
Irvine, California USA
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DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.