A 2H08 MARKET REBOUND ?

OK, upon careful contemplation this week, I now believe the market has a solid chance of bottoming and turning around during the 2nd half of 2008 based on the following assumptions/catalysts (please note, I still expect 2008 to be a net up/down single digit return year...as of today, 3/21/08, the S+P 500 index is down 10% year to date):


1.) SYSTEMIC RISK IS OFF THE TABLE --> Because of recent aggressive efforts by The U.S. Federal Reserve and U.S. Treasury department (including the Fed now allowing the investment banks to stave off short-term capital issues by borrowing at the discount rate), the issue of crisis/collapse for the financial markets is now finally OFF the table. In other words, fears of a DEPRESSION are no longer valid. Earlier this week, the U.S. government also finally 'unleashed' their government-sponsored entities (GSE's), Fannie Mae (FNM) and Freddie Mac (FRE), to expand their purchase of U.S. mortgages and related securities. According to OFHEO director, James Lockhart, the initiatives should immediately pump about $200 Billion into the mortgage-backed securities market. In fact, according to OFHEO, combined with a lifting of portfolio caps on March 1st, Fannie Mae and Freddie Mac should now be able to purchase or guarantee up to $2 TRILLION in mortgages this year.


2.) THE LAGGING EFFECT of RATE CUTS --> It has been historically observed that the U.S. Federal Reserve's interest rate cuts usually have a 6 month lagging effect in terms of stimulating the economy. The Fed cut rates by 125 basis points in January...this should not be felt by the economy until about July. Also, the Fed's recent cuts in March to 2.25% should provide further stimulus to the U.S economy + banking industry (those who benefit from borrowing at a cheaper rate + also by paying less interest to depositors) beginning roughly in September.


3.) $160 BILLION U.S. ECONOMIC STIMULUS PACKAGE --> While the economic benefits are largely psychological, the checks will officially be sent to U.S. households in May 2008. This should be a positive catalyst for RETAILERS + other Consumer Discretionary investments and will help them outperform against their pathetic 3Q07 sales figures. It's also important to remember that the stimulus package was designed with the purpose of improving the liquidity positions of the homebuilders + banks via its inclusion of significant tax-breaks to both beaten-up businesses.


4.) 2008 CHINESE SUMMER OLYMPICS (EMERGING MARKET CATALYST) --> The 2008 Summer Olympics begin in Beijing on August 8th, 2008. This should be a sizable catalyst for investing in China and other emerging markets in general AHEAD of August. The assumed success of the Olympics in China should serve as a GREAT reminder to worldwide investors about the REAL power + momentum of the B.R.I.C. story.


5.) U.S. FINANCIAL STOCK EARNING COMPARISONS --> U.S. financial stock earning comparisons should get easier beginning 3Q08 since 3Q07 was basically when the sub-prime mortgage sparked 'write-down' game began. If 3Q08 write-downs do not exceed the massive write-downs from 3Q07 then expect major U.S. financial stocks to stabilize. The keys will lie in the earnings + conference call stories delivered by the major institutions like Citigroup (C), Merrill Lynch (MER), Washington Mutual (WM) and Bank of America (BAC).


6.) TECH SECTOR SEASONALITY --> The technology stock sector historically underperforms the rest of the market in the spring and summer and typically bottoms in July-August. In other words, tech will become an investable sector again beginning mid 3Q08.


7.) PRESIDENTIAL ELECTION YEAR CALENDAR EFFECT --> Maybe I'm grabbing onto strings here but history shows that the average S+P 500 stock market return in the last year of a presidential term is about 10% (analyzed data is from 1950-2007). The data also determines that the 'best political quarter' is by far, November-January with avg S+P 500 returns of 4.8%. One important caveat to note though (that may make you immediately dismiss this data considering the context), is that the 'election year calendar effect' did not matter in 2007 (when the U.S. undoubtedly began its recession). According to the data from CXO Advisory, we should expect average returns of 18% in the 3rd year of a President's term...the S+P only gained 5.5% in 2007.