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18 Themes for 2008


Tech, oil, the Fed and bandwidth providers are part of possible themes for 2008.


1. Do subprime and credit crunch end up being the scariest stories ever sold? If so, where can money be made on the big unwind of the fear trade? I will be watching selected homies like Toll Brothers (TOL), maintain and add to names like Citigroup (C) and Morgan Stanley (MS) (and others), as well as looking into regional banks. Also in this environment Tech could still be a leading sector, though other sectors have the potential for large rebounds off lows. While not sanguine on the broad market, I question the prospect that we will have a hard landing or even an "official" recession.

My theme has been one of bifurcated market conditions where some sectors have rotated through their own bear market recessions and other sectors have maintained strength. Much like what happened when the tech bubble unwound, but commodity, hard assets and real estate markets emerged into strong bull trends.

2. Two of the Fed's key themes could possibly go by the wayside, and if so, the impact to the markets would be positive. First, this whole flawed concept of being "data dependent" needs to go away. Second, the whole concept of the "inflation comfort zone" needs to change as well.

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3. I still think many of my Tech predictions are still in play. Here's the themes that I think will either continue or have yet to develop...

4. M&A activity is led by the tech-rich Nasdaq stocks, which have the best balance sheets, loads of cash, strong free cash flow and strong EPS growth. A large private equity deal gets announced in the tech sector and smaller deal flow accelerates. Note Cisco's (CSCO) key man going to Silver Lake partners.

5. Tech sector EPS growth will either lead or be one of the top three performing sectors over the next few quarters. Furthermore, the tech sector will have positive EPS growth in a market where a greater number of firms will experience decelerating earnings growth. Retail sales for consumer related tech will remain fairly strong, especially in the hot gadget sectors.

6. The bandwidth constrained world feels more of a pinch: Verizon (VZ) and AT&T (T) both experience solid or increasing rates for their wireline business services. Global Tier 1s also benefit. This also funnels down into more specialized high-bandwidth providers and fuels additional but more rational capex spending in fiber, core/edge networking, long haul, storage and commercial based server/computing sales. AT&T, meanwhile, has announced capex increases and as I thought they are going to push their IPTV initiative much harder over the next couple years. BT (BT) and BSNL are also undergoing major upgrades to their networks.

7. Google's (GOOG) will maintain its star status for at least a couple more quarters, possibly challenging that mythical $1000 price level. However, I think it will fail to reach that level this year and possibly run into increased competitive and pricing pressure. This, combined with the ever increasing cost load, could set them up for EPS challenges later in the year.

8. Microsoft (MSFT) keeps on chugging along. It conjures up more strong M&A, Virtualization is strong for it and its core software business gains more strength in 2008. Additionally, Halo 3 is more successful than even bullish predictions and the Xbox platform starts generate additional sales channels for them.

9. Speaking of Virtualization, it drives many names in the storage space higher. Cheap computing solutions that combine storage, hardware, lower latency and faster throughput speeds gain a lot of traction in 2008. Infiniband continues to gain prominence as one example of this move to faster more efficient hardware solutions.

10. I still think OIL will pull back and do so meaningfully, though my target of $55 may be too optimistic. Commodity based inflation may still be a concern in early 2008, but I think a combination of greatly reduced US housing(and commercial) construction, the Summer games in China and the global slowdown will make the risk of deflation much more worrisome than the risk of inflation.

11. Because of the above factors, commodity based stocks will become increasingly volatile. These stocks could continue to be quite strong as many pundits will offer many reasons why China's purchases of commodities will not decline much after the Olympic games. These reasons give way to reality later in the year and a major correction in commodity based stocks will cause pressure on the broad market later in the year. The one savior of this effect could be an unexpected resurgence in the US/Euro construction markets but I would assign a low probability to this recovery happening in 2008.

12. The Fed cuts rates 75-125 bps over the next year... Alright, we got 100 bps and I think all we need is another 50 bps. In fact, we probably only need another 50 bps at the discount window. But I think the Fed will lower Fed funds at least another 25-50 bps as well.

13. I still think Cisco ( CSCO) will trade in the $35-40 range in the next 6-12 months and it is one of my favorite large cap Tech names. Recent concerns have been overblown and the next phase of internet and bandwidth growth will be much more pronounced than current estimates. Video over IP is still in its very early days. Gaming over IP is maybe in inning 3 or 4 at most. Virtualization will be another huge driver of IP bandwidth and I'm sure I could list many more factors to drive the growth of CSCO's core business.

14. Valuations started to expand this year, and then retrenched notably in the last few weeks of the year. I still think we see valuation expansion in the tech sector after more than half a decade of valuation compression.

15. A major upgrade cycle in wireless infrastructure gets underway in 2008. This is driven in part by the surge in Smartphone technology as the Apple (AAPL) iPhone (and Research in Motion (RIMM) products), spur on the next wave in wireless computing and the need or want for these devices maintains a very strong growth curve.

16. Growth stocks have their second strong year in a row of out performance over value. I also see some segments of small cap growth performing well above levels of the last couple years as valuations have been compressed to multi-year lows.

17. Former growth leaders like Starbucks (SBUX), Dell (DELL), Home Depot (HD), SanDisk (SNDK) etc... perform better than currently depressed prices would indicate.

18. Advanced medical technology will find more winners. Intuitive Surgical (ISRG) will not be the only star in the field of robotic surgery. Names like Accuray (ARAY), TomoTherapy (TTPY) and Varian Medical Systems (VAR) could be strong performers.


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Position in C, MS, CSCO, ARAY, DELL and various bandwidth and data storage gear makers.

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