Looking ahead

 

While many market commentators believe that the third quarter will mark the peak for this year as the prospects of higher interest rates and potentially even higher oil prices will choke any would-be market advance, we think that the opposite is true. While fears of higher interest rates are valid, it is important to note that inflation is still in check while interest rates are still at relatively low levels from a historical perspective. It is true that higher energy prices have been inflationary thus far; we believe that this is only a transitory affect as we continue to believe that we are likely to see lower energy prices in the near future. Although hurricanes Katrina and Rita wreaked havoc on a great deal of refining and oil exploration and production infrastructure in the gulf coast, the damage was much lower than expected. We further believe that these two hurricanes marked the peak for the energy rally. The lifting of stringent environmental restrictions on refined fuel imports, the tapping of the Strategic Petroleum Reserve (SPR), and curtailed demand because of high prices are all factors that will lead energy prices lower. Of the three preceding reasons, we believe that the possibility of the continued tapping of the SPR will be the largest factor in driving down the price of crude. While the Bush administration was adamant not to use the SPR to manipulate crude supplies (and prices) because of strategic, political, and ideological reasons; the 2 hurricanes have just gave them the perfect strategic opportunity to tap the reserves to replenish and compensate for any lost production and then some more; probably a lot more. The last time the White House extensively tapped the SPR was during the Clinton administration and oil prices witnessed a dramatic decline afterwards.

 

Going forward we expect the momentum we witnessed in the third quarter to continue upwards buoyed by strong results in Technology stocks, Financials, and lower oil price. In technology, we continue to witness a structural shift in the way we work or go about our day. Be it advertising, telecommunications, digital video, digital audio and wireless media to name a few areas. We believe that those companies that are providing the infrastructure solutions and those companies who are the enablers of this shift are the ones poised to gain the most. Hence, we are not only bullish on technology for the fourth quarter, but we are positioning ourselves for an impressive rally in 2006.

 

After turning in solid earning results, we continue to believe that the performance of stocks in the financial sector, down 3.5% so far for the year, will match their earnings growth as the Fed tightening cycle comes ever closer to an end, thus slowly eliminating the uncertainty and bringing the stability needed for higher stock prices.

 

In line with our view on oil prices, we are bullish on stocks in the Materials sector, particularly those most sensitive to oil prices. We believe that the increased efficiency, price hikes, and cost cutting that was undertook in the face of rising oil prices will poise these companies to benefit when oil prices decrease. Our preference is for market leaders in the sector who have pricing power as we believe that price hikes implemented will prove to be more permanent.