Keep Your Balance. 5-10-06

Good Evening.

The Fed delivered exactly as expected and even hinted that today's rate hike may have been the last for the time being. Bernanke paid homage to the all mighty "lag effect" of monetary policy emphasizing the need to collect more data over the next several weeks. We are convinced that the Fed wants to pause at this point in time but is just as anxious as we are for further signs (any signs) of softening in the economy.

Last night CSCO delivered an excellent quarter both top and bottom line. In fact they even raised guidance for the current quarter although they left full year guidance unchanged. The market was initially overjoyed by the upbeat commentary from John Chambers. However, once it became clear that Chambers expressed worry over recent cautiousness from fellow CEO's, CSCO stock reversed its gains and continued to fall through out today's action. Essentially traders feel like they were sandbagged by John Chambers who initially spoke with rose colored glasses but failed to deliver upside guidance for the full year. All in all, the CSCO report was solid despite Chambers reluctance to extend himself a little further.

Our Bullish technology spending outlook remains intact although we are concerned for the near term trading in Technology stocks. Several technology companies have built up a little too much inventory which is causing concerns in the marketplace. Traders would have normally overlooked this minor issue especially since global demand is hot. However there is another force at work in the current environment.

The new monkey wrench that has been thrown into the equation seems to be that money is rotating into the Dow cyclical names. Many traders have been caught off guard by this phenomenon and find it difficult to capitulate by adding exposure into these traditionally boring names. Since the beginning of time these old stodgy cyclical names i.e. CAT, IR, and DE have been notorious in sucking in money only to fail miserably once valuations get a little stretched. Simply put these companies historically have not sported the growth rates to be worthy of anything other than cyclical status. The new mantra seems to be that unprecedented growth in the global arena specifically in Emerging Markets will morph these cyclical names into growth stocks that can justify multiple expansion. It also doesn't hurt that Jim Cramer is pounding the table on this thesis everyday recently which is also creating somewhat of a self fulfilling prophecy.

We acknowledge the tremendous international growth opportunities for these companies and their strong visibility into future earnings projections. They are also relatively cheap compared to technology stocks at the current time. For that reason we have been slowly building some exposure into these ugg…Dow components. However, make no mistake about it the big money over the next couple of years will be made from Large Cap Technology stocks due to the need for productivity enhancement and a plethora of new product applications to be released.

We believe that it will not take much for traders to quickly rotate into Technology as soon as they sense the slightest disappointment from their new found love of the Dow Cyclicals.

If You Held a Taser to Our Head:
In the meantime it is wise to not fight the tape and we recommend traders maintain a balanced approach of Large Cap Technology stocks as well as a proper dose of Dow. A little cash over the next couple of days wouldn't hurt either.

Hope you traded well.

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