vaughnwoods

Market volatility has been so very calm this summer. Is this the calm before the storm? I don’t think so. The S&P 500 as of this writing sits at 976.80. In March, Credit Suisse set a year end S&P 500 target price of 920. They have since increased their price target on the S&P 500 to 1050. Bottom line, bullish sentiment is growing, for now at least, despite the potential double bottom doomsday on everyone’s mind.

Historically, markets make most of their gains from November to April. Summer months are known for week volume trading. Meanwhile, our portfolio strategy is on track. As of this writing, we are looking to the technology sector to help us take advantage of our upside opportunities. A Credit Suisse report out on July 13th argues that technology companies are better able to grow in the present deflationary environment. An overweight in the technology sector is being argued for the below detailed reasons.

Technology companies are considered defensive against deflation because they design, manufacture and sell short life-cycle products, such as cell phones and computer chips. Technology companies also sport low-leveraged balance sheets and they control inventories very well as a group. Furthermore, U.S. corporations are currently 10% under-invested in technology in terms of tech investment relative to GDP. As a result, as new efficiency technologies become available, companies can be expected to raise their capital spending in technology.

Analysts who keep up with the metrics of corporate spending point to the fact that corporate technology spending is improving: Corporate free cash flow is at an all-time high. Corporate leverage is half its norm and the investment share of GDP is at an all-time low. Moreover, capital expenditures for technologies tend to grow at a rate 2.6 times the rate of economic growth in a recovery.

Most technology spending comes from the corporate sector. Corporations account for 95% of IT services spending, 79% of software purchases, 66% of PC purchases, and 68% of semiconductors purchases. Because product replacement cycles have turned, the technology sector is improving. The average product replacement cycle has expanded. However with new innovations and costs down, it is cheaper to replace an old product than to repair it. In addition, many products are now entering the growth phase of their life cycle. Examples include, smart phones, flat screen TVs, netbooks and mobile broadband.

Finally, the technology sector is also a play on Non-Japan Asia (NJA). 29% of PCs and 42% of mobile units will be sold to NJA in 2010, according to Credit Suisse estimates. The current PC penetration rate in China is just 12% and as GDP per capita income rises, so should PC penetration. Good progress has been made in recovering portfolio values since mid March. But I want more. We have access to great fundamental research. Great technical research and we are motivated. We are also on top of every strategic nuance the market throws. For these reasons I am confident your trust is being well served.

Contact us to learn more about working with Vaughn Woods Financial Group.

Best Regards,

Vaughn L. Woods, CFP®, M.B.A.

*Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views off Delta Equity Services Corp. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0049a

**Marketedge.com, Pershing , NetExchange Pro, Bloomberg, Credit Suisse Global Equity Strategy (July 13th, 2009)