What You Need to Know (7/10)

Earnings season starts this week as Alcoa and GE will report. Likely, we’ll have 17 consecutive double digit EPS growth quarters in a row by the time it’s over. The major markets retreated last week and are now back to the technically critical 200dma. Watch to see if investors begin to bid stocks higher ahead of EPS. We continue to view summer doldrums as 2nd half out-performance and expect stocks within our sector themes to post the highest levels of EPS growth. Relative will increasingly be important so focus on the highest scoring (our best and worst list) to see where the greatest upside is likely. Long term labor trends continue to point toward tighter labor supply - bullish for staffing firms (MAN, RHI, KFRC). Productivity software and business services firms will benefit as corp budgets expand and money is invested in efficiency programs (ORCL, INTU). Energy service insider activity is pointing toward another great quarter for service plays (OII, TDW, SII). Q3 is typically bullish for basics. Our gold target remains $750 by 07 (NEM, AAUK, SA). Asset relocation is likely to continue to propel brokerage EPS (GS, MER, MS). Banks in retirement states will benefit from consolidation and account growth (ZION, FBTX). Trucking, logistics and rail continue to operate in a sweet spot – benefiting from rising demand for services and passing along higher energy costs through surcharges (EXPD, UPS, FDX). We are starting to get more favorable on healthcare stocks. While healthcare remains stock by stock we are seeing medical equipment and HMO’s showing signs of leadership (MNKD, CONR, LMNX, SIE, MOH). Also, while healthcare typically sells off ahead of elections, our 2004 study showed they generate solid excess to the SPX in the following 18 months after the election. Buy our highest scoring names in the group. Semi’s still haven’t found a bottom, despite being markedly oversold. We continue to believe these PE levels will create a spring board but advocate tempering expectations until Q4 seasonality improves.