What a Week: Tech in Back Seat

Despite the outsized press coverage of Intel's ( INTC) midquarter update and furious brow-furrowing over the five-year anniversary of the bubble's peak, tech was a sidebar this week as "other markets" and other sectors remained on center stage.

The Treasury market, most notably, fell sharply amid rising worries about inflation; for the week, the yield of the benchmark 10-year note rose 23 basis points to 4.54%, its highest level since July and the worst week since last May, according to Bloomberg.

The Treasury market was roiled by fears of central bank rate hikes in the U.S. and Europe, evidence of creeping price pressures in the Fed's beige book report and by rising commodity prices, which were partially fueled by the dollar's continued weakness. The greenback, in turn, was hit by a record monthly budget deficit, along with evidence the dollar's weakness has done nothing to stem the expansion of the trade deficit, which was reported Friday at a larger-than-expected $58.3 billion for January.

The dollar was also kept on its heels by ongoing concerns about foreigners diversifying their holdings after Japanese Prime Minster Junichiro Koizumi dropped a direct comment on the subject, which was later deemed a "misunderstanding." Fed Chairman Alan Greenspan, conversely, did not hedge: "Foreign investors will at some point cut dollar asset holdings," the chairman said in a speech Thursday at the Council on Foreign Relations in which he again warned about the "unsustainable federal budget deficit paradigm."

The dollar's decline circled back to weigh on Treasuries, which in turn kept downward pressure on stocks. For the week, the Dow Jones Industrial Average fell 1.5%, the S&P 500 lost 1.8%, and the Nasdaq Composite declined 1.4%.

Assuming the dollar's trickle-down effect on Treasuries and stocks continues, next week could bring more of the same.

"Just as the dollar this week was under pressure ahead of Friday's trade figures, next week the dollar should get a double dose of concerns," noted Ashraf Laidi, chief currency strategist at MG Financial Group.

"Most ominously, matters should get worse in the trade picture, as the 11% jump in January oil prices will be reflected in February's import bill," due out next Friday, he wrote.

As if that weren't ominous enough, "there is a very high chance that the capital flows report" -- i.e. the Treasury's TIC report on Wednesday -- "will show a figure short of the $58 billion trade deficit, in which case traders have a fundamental reason to accumulate further dollar selling," Laidi added.

Bubble This

In a week filled with reflections of the Nasdaq's all-time peak, talk of bubbles fittingly filled the air -- and airwaves. But rather than tech, the bubble-talk among traders revolved around energy and other commodity-related stocks.

After flirting with its 22-year closing high of $55.17 midweek, crude prices faltered and ended the week at $54.43 per barrel. That represented at 1.2% rise for the week, but oil's forward momentum was stalled by higher-than-expected U.S. crude inventories and news that shipments to China fell 13% in January-February. China was also the focal point for a midweek slide in steel and related stocks after the chairman of U.S. Steel ( X) expressed concern about the rising supply of Chinese production. But steel stocks staged a furious comeback on Friday after Nucor ( NUE) dramatically raised its earnings guidance.

Oil's stumble was accompanied by weakness in a number of formerly red hot energy stocks, including Exxon Mobil ( XOM) and Valero Energy ( VLO). For the week, the Amex Oil and Gas Index fell 3.5% while the Philadelphia Stock Exchange Oil Service Index dropped 5.4%.

Despite speculation to the contrary elsewhere, Fadel Gheit, energy analyst at Oppenheimer, said there's no evidence this week marked the end of energy's rally. "As long as the economy is still growing and inflation is still modest, I don't think we'll see precipitous decline in oil prices in the foreseeable future," he said as the commodity and the sector rebounded Friday.

If the price of the underlying commodity remains firm, then "oil stocks are not expensive by any measure," Gheit argued, suggesting consensus estimates for an average price of $40 oil this year will likely prove conservative.

"This is a good break. Oil stocks have been on torrid pace," Gheit said. "They are cooling off, but nevertheless I can't think of any other sector that is more vibrant and I truly believe capital will seek the highest return, no matter what color, shape or form."

Lest that sound like a rationalization for momentum to beget momentum, Gheit went on to say the fundamentals of "even the sickest of the companies" have improved in the past 18 months because of the huge profits. Companies have improved their balance sheets and financial flexibility to the point energy stocks are "cheaper today then when oil was at $25," he said.

Gheit mentioned Ashland ( ASH) as a favorite pick, citing its potential breakup value. He has no position in the stock, and Oppenheimer does not have an investment-banking relationship with the company.

Bubble Wrap

Overall, it was a disappointing week for those hoping last Friday's multiyear highs would spur more buyers. It was particularly disappointing for those hoping for a rotation out of "new mo" (energy stocks) and into "old mo" (tech), as discussed here.

Intel's failure to rally Friday -- much less inspire the broader sector -- was a particularly discouraging development for tech's long-suffering bulls. It's the kind of thing that happens when sentiment has become so negative on a group that a turnaround is in the offing.

On a less optimistic note, it's also the kind of thing that happens to a stock or a group that's fallen and, like the old lady in the medical alarm commercial, can't get up.

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