The Bull is back again!

WHAT a difference a week makes! Not only was the Nasdaq up a respectable 5 per cent for the week, some of the hardest hit technology stocks of 2000 have roared back to life and the buying has now trickled down to small cap techs, an asset class that benefits most when the Fed goes into easy money mode. Take, for instances the British optical component vendor Bookham Technologies (BKHM), recommended here last week at 16. Bookham has risen almost 40 per cent for the week to 22-50. I would book profits at 25-26 as this is no cheap stocks, trading at twelve times its enterprise value to forward revenue estimates - and the market is not going to ignore valuation, no matter how attractive a company's technology platform, or how huge its growth rate and addressable market.

Microsoft has been a beauty of an investment since mid-December, up from 41 to 61 even though its earnings report did not really shake the world. I would also buy Cisco at 37. At 1.5 times its projected rate of earnings growth, it is cheaper than slower growth companies such as Coca Cola. Long distance phone companies, are up 50 per cent in 2001, led by World com (WCOM). The market, a classic discounting mechanism, is now projecting that the Fed's easy credit stance will reaccelerate the economy and therefore lead to a rebound in corporate profits. This is nowhere more true than in "value" or "cyclical" technology, where doom and gloom was excessively priced in. Last week's price action only reiterates my belief that we are in the early stages of a liquidity driven bull market on Nasdaq and the SP500.

More than the rise in the indices, it is interesting to note that the breadth of the stock market continues to improve quite dramatically.

Moreover the decline in corporate credit spreads suggests that the fall in financing costs could be ballest for telecom stocks. Besides, T- bonds are losing their "flight to quality" anchor and yields are creeping up, not because inflation is back or the economy is growing but purely because the stability in the equity markets means that the hot money does not need to run to Mommy (i.e. Uncle Sam's full faith and credit!). Technicals are also looking a lot more solid. Momentum indicators and the positive. Both the CBOE put-call ratio and sentiment indicators suggest that the intermediate trend for the market is higher. The economic slowdown is definitely for real. Manufacturing is contracting. Consumer confidence has plummeted. The Fed funds rate is far too high at 6 per cent. The Fed will need to ease money more than once in 2001 in order to avert recession risk. Another rate cut at the 31 January FOMC is thus inevitable. If so, the market has all the ingredients it needs to move higher. The market has priced in a quarter point. I think Chairman Greenspan will surprise us with a 50 basis point cut.

Nortel's numbers were beautiful. Optical revenues were $10 billion, more than double last year. Margins were a fabulous 45 per cent. This company is definitely not overpriced at 30 times its forward earnings multiple. Its price to book ratio is only 4X. Its secular growth rate is 25 per cent.

This is not at all an expensive valuation metric for one of the world most unique and high growth technology stocks with an increasing focus on the next generation optical systems and data transmission future. It is axiomatic that bank shares do well during periods of Fed monetary easing.

What is not axiomatic is the fact that nothing can mess up a bank's bottom line more than a economic recession and credit crunch. Hence I would avoid regional US bank stocks even now, despite their low multiples and a easy money Fed. I think Citicorp is cheap because the market simply has not priced in the value of its global franchise in diminishing earnings concentration risk. Bankers talk wistfully about consistent earnings growth and asset diversification.

Well, Citi has gone ahead and created a global money machine based on these principles. Just took at the 4Q numbers. They met earnings growth and return on equity target of 20 per cent in a negative global financial milieu, Citicorp deserves to trade at a forward multiple of only 15. I believe its shares will head higher to 65-70 by year end 2001.

It is clear that the technology shares rally that began with the Fed rate cut on January 3 is now in earnest. However, fundamentals and valuations matter. There cannot be a disconnect between stock prices and valuations (let alone reality and gravity!), as happened in 1999-2000. After Intel's report, it might be time to nibble in chip equipment stocks, though I still prefer communication chip vendors like ANCC. Optics and software giants remain the anchor of my technology portfolio.

The opinions expressed by the writer are his own and not endorsed by Press Release Network.

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