Financial Watch

Last year Financial Watch put togethers its first ever list of recommended stocks to invest in during 2006. In looking at last years mixed performance we have fundamentally overhauled our method of picking stocks to help our readers outperform the market. Last year we focused on developing a broad portfolio that offered attractive fundamentals for the year ahead. Our picks netted a 13% return excluding dividends which was roughly in line with the S&P 500. In overhauling of evaluation methods, Financial Watch is taking a stronger look at sectors facing favorable fundamentals for the year ahead and additionally we are focusing more on companies experiencing rapid growth. Our 2007 portfolio offers riskier picks than Financial Watch put forth last year. It is our expectation this will lead to our picks outperforming the indices in the coming year.

To some investors Monday presented a great opportunity to pick up stocks following a steep sell-off last week. That is why we saw a decent rally yesterday. Early today more bargain hunters started to pick up stocks. Late in the day, we had another sell-off. Both groups were burnt badly this afternoon. For investors still looking to pick up more stocks at bargain prices, Financial Watch has one recommendation for you – wait. Fundamentals do not matter at this moment. Everything is going lower.

In the past couple years whenever Financial Watch has discussed the state of the housing market, we’ve always focused our discussions around a collapsing bubble. We’re not going to completely move away from that here, but will also include our thoughts on where opportunities exist for above trend appreciation in the long run. First off, before housing resumes appreciating on a nationwide basis the market is going to move significantly to the downside. At the present a record number of homes are for sale. Lots has been made about problems in the subprime market, however its impact has not arrived. Based on the statistics we will see the first true wave of foreclosures this coming winter. By many accounts $500 billion of mortgages will reset to higher rates in the back half of 2007. With even tighter lending standards arriving next year, it will take at least another couple years to work off the excesses in the housing market. By our predictions, Financial Watch expects to see the “housing recession” last until 2011.

To the growing number of bears calling for a pullback the saying sell in May and go away has been taken to heart. Today we learned short interest hit a level not seen in more than 70 years. In examining the fundamentals of the market it is clear barring some unseen event we are moving much higher. To many out there the greatest risks are that either inflation will elevate beyond comfortable levels or the Chinese stock market bubble will melt down. Financial Watch discounts these risks as being greatly overblown. First of all the bull market we’re having in commodities will level out to more sustainable gains in the second half of the year. Most of these gains seen so far this year are in the volatile food and energy groups. The second major risk out there is a severe correction in Chinese stocks. In taking a cue from Alan Greenspan’s famous 1996 irrational exuberance speech, we believe he is just as early in calling a top in Chinese stocks. With the Olympics coming up next year the most we’ll see this year is a correction similar to the one we say earlier this year.

Based on our forecast for the stock market to move much higher in the second half of this year, today’s sell-off is a great opportunity for anyone with cash to move into the markets aggressively. Today’s contraction was based on a better than expected housing number that prompted bears to argue that a Fed rate cut was off of the table. As of right now the futures are projecting a less than 50% chance for a rate cut this year. Whether market participants see a rate cut coming this year or not, the market has significant upside.

Politicians are once again ratcheting up the pressure on oil company executives in the hope of alleviating some of the pain occurring at the pump. In the past the mere mention of Congressional hearings was enough to push speculators out of the oil markets and drive prices lower. This time is much different. The run up in gas prices we’ve seen past times since 2003 have been driven by rumors and wild predictions of supply problems. Financial Watch is going to take a look at the reasons behind the most recent run up in gas prices and put forth a few unexpected, but possible events that could take prices well above where they are now.