Financial Watch

Last month we warned our viewers about problems in the subprime sector spreading into the stock market. Only a week after putting out our warning, stocks had their biggest one-day loss in several years. Brokerage stocks were particularly hit hard by the sell off. Goldman Sachs, Bear Stearns, and Lehman Brothers are all down 10% from their highs earlier this year. This coming week will give us a great glimpse into whether blow ups in the subprime industry are impacting profits at Wall Street firms. Bears will try to bounce on any small opening into mortgage troubles hurting profits.

Headline data rarely tells the whole picture about what is happening. This is true of employment data for April that came roughly in line with consensus estimates. Over the last year the U.S. economy has chugged along at an unimpressive 2% growth rate. Job growth has remained fairly robust despite the slow down. Several factors help to explain why employment data has remained stronger than the economy would usually indicate. We’ve seen a slow down in the rapid growth of productivity that characterized the early parts of the expansion. Immigrant laborers that are bearing a significant brunt from the housing slowdown are unlikely to show up in employment data. Finally, we are seeing robust activity in so-called non-productive economic activity. Lawyers, Accountants, Consultants, and Investment Bankers are in heavy demand yet they do not produce activities that contribute to the output of our nation.

It is important to remember back a few weeks ago how poor things looked on the horizon in the stock market. Only a month later we are at record highs for the Dow and even more importantly approaching an all-time high for the S&P 500. It has been a long time coming, but we’re finally at the critical moment that propels the averages to unthinkable levels. It should be no surprise to our readers that Financial Watch is once again proclaiming that the Dow will surpass 20,000 this economic cycle. Many believe the market is only capable of moving up 10% per year. Ridiculously low expectations are a key ingredient as to why we believe the first truly global expansion is going to force investors to significantly revise upward what the markets are capable of. As important as it is to believe that the economy is never what it seems on Wall Street it is also necessary to remember what can happen during bull markets.

No nation dominates the global economy like the United States. Both developing and developed nations view the U.S. consumer as the one marketplace that can lift fortunes at home. For a long time it has been fact that when the U.S. catches a cold, the rest of the world catches the flu. Right now our economy is definitely in the midst of a mild cold. Over the past year economic growth the hangover from the housing boom has dragged growth to levels unseen at home since our last recession. At the same time there are very few signs that our sluggishness is spreading. In late February stock markets across the global sold off steeply as signs of problems in the subprime mortgage sector emerged. However, the U.S. stock markets are among only a handful of markets that have failed to rebound to new record-breaking highs.

It is only a matter of time before troubles occurring in the subprime mortgage market spill over into the stock market. Most economists believe more than $1 billion worth of adjustable mortgages are scheduled to reset higher this coming year. In the early parts of 2007 we are already seeing the impact of so called exploding arms in the housing market. Foreclosures rates are skyrocketing higher as homeowners have been unable to keep up with their mortgages. At the present time foreclosure rates are still running in the upper range of historical averages, but should more significantly higher in coming months. Banks profiting from risky lending in recent years are rewriting lending standards to push out marginal buyers and selling off risky loans to anyone willing to buy them.

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.