Financial Watch

Financial Watch has compiled a list of 20 stocks we expect to outperform the market during the upcoming year. Our projected growth for the S&P 500 and Dow Jones Industrial Average are fairly modest at 5-10%, but every year presents opportunities to beat the market. This is the first year this list has been put together, so this is no record of solid performance or any guarentees as to the quality of our picks. Our firm is setting a goal of beating the market averages by 10% over the upcoming year including dividends. The portfolio was developed by using fundamental analysis and historical trends to predict future returns. The portfolio is entirely composed of large cap stocks with strong histories of delivering solid returns to investors. This is to minimize the risk of realizing large losses, but should also reduce the possibility of great returns.

It’s a time to take a lesson from the dot-com bubble during the 1990′s and learn where to profit from the next bubble. Even before the air is entirely lifted from the housing bubble investors are rushing to find a place for their money. It is being lead by a flood of money that went into alternative investments following the collapse of the stock markets earlier this decade. Hedge funds and private equity firms benefited most from the shift into alternative investments. Hedge funds may have peaked last year when easy money started to dry up as the Fed was raising interest rates. We are also seeing a rapid shift out of commodities that accounted for a disproportionate amount of the new money moving into hedge funds the last few years. Amaranth’s collapse earlier this summer when natural gas prices plunged from year ago levels raised concerns among investors about the safety of investing in hedge funds. This new level of scrutiny will surely cause some of the less stellar funds to close up shop. However as hedge funds pass their peak, private equity is running wild. Even most in the private equity markets believe that there is just too much money floating around.

It appears the Fed is finally out of the picture. In the last couple weeks leading up to the decision to leave interest rates at 5.25% consensus developed that we would finally be in the clear for the averages to move higher. Stocks have substantially lagged earnings growth during this expansion and if past history holds true we would expect to find some relief now that we know the direction of interest rates. Although interest rates do not appear to be heading any higher right now, concerns have immediately shifted to whether the slowdown may be more severe than we currently expect.

Ever since the Federal Reserve started to raise interest rates in 2004, Financial Watch has cautioned that our massive trade deficit puts the U.S. economy in a position unique to any prior period in our nation’s history. Our nation’s reliance upon imports puts downward pressures on economic growth. Much of the United State’s economic growth in recent years has been fueled by low interest rates. June’s employment report combined with other economic gauges released over the past week confirms the U.S. economy has slowed to a level below its non-inflationary output capacity. Employment growth of 121,000 marks the third consecutive month job growth falls short of the normal level of labor force growth. It is particularly concerning considering that it often takes up to six months for the job market to respond to changes in the economy.

At the start of 2006, Financial-Watch put together a portfolio of stocks we believe would significantly outperform the overall market during the course of the upcoming year. We expected cyclical stocks that had seen their values remain stagnant over the last couple years despite improving business conditions would finally fully realize their value once the Federal Reserve completed their interest rate hikes. Financial-Watch underestimated incoming FOMC Chairman Ben Bernanke’s concern about rising inflationary pressures. We firmly believed the Fed would stop raising rates during the first quarter of this year to fully evaluate the future course of the U.S. economy prior to tightening further. Much to our dismay we continue to be in a cycle of rising interest rates midway through the year.

In a week that saw Enron executives Kenneth Lay and Jeffrey Skilling found guilty for their roles in the collapse of the energy conglomerate, it is surprising to see a new scandal emerge in the press. It is becoming more apparent the growing controversy over excessive executive pay and more rigorous disclosure requirements brought forth following Sarbanes-Oxley did little to change the behavior in some corporate boardrooms. The latest scandal to hit Wall Street is executives backdating options. Although this practice is not outright illegal, it still raises strong ethical concerns. In an era of heightened disclosure for executive pay, regulators are examining whether some companies may have violated federal security laws by hiding the true value of options granted to executives.