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.

2007 Stock Picks
Schlumberger
AIG
Hewlett Packard
Microsoft

Google
Johnson & Johnson
Goldman Sachs
Bank of America
Lehman Brothers
Toyota Motor Co
New York Stock Exchange
Boeing

Bear Stearns (BUY 3/15 @ 148.50)
Fremont McMoram Copper & Gold (BUY 3/29 @ 65.35)
InterContinental Exchange (BUY 4/18 @ 131.18)
Caterpillar (BUY 4/23 @ 71.82)
Cisco (BUY 5/21 @ 26.21)
Global Santa Fe (BUY 7/11 @ 73.83)
Aecom Technology (BUY 7/19 @ 27.25)
Nabors Industries (BUY 7/19 @ 32.09)

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Capital One Financial (SELL 4/23 @ 72.80)
Nokia (SELL 3/29 @ 22.90)
3M (SELL 4/18 @ 77.28)
Qualcomm (SELL 2/25 @ 43.36)
Verizon Communications (SELL 5/21 @ 42.59)
FedEx (SELL 7/11 @ 112.81)
Allstate (SELL 7/19 @ 60.56)
General Electric (SELL 7/19 @ 40.45)

***Conflicts of Interest*** (updated 4/17)
The author of this report presently holds positions in Microsoft, General Electric, and Goldman Sachs, NYSE, ICE, AIG, and Bank of America.

2007 Portfolio Adjustments

2/25 SELL QUALCOMM @ $46.36 (+14.74%)
Qualcomm led strength in the chip sector over the past two weeks. At this point gains in Qualcomm appear to be overextended. We expect to see Qualcomm move higher this year, but believe better opportunities lie elsewhere at this price. Further, optimism over resolving patents disputes with Nokia appear to be overdone. We expect to legal disputes weight heavily on Qualcomm in coming months.

3/15 BUY BEAR STEARNS @ $148.50
Goldman Sachs remains the best, but the tremendous sell off in response to problems in the subprime industry opens up opportunities across the investment banking industry. Goldman Sachs, Lehman Brothers, and Bear Stearns all show the potential to move significantly higher on the balance of 2007. The rule on the street is to shoot first and ask questions later. With all three brokers reporting quality results this week it answers some of the questions out there right now after the subprime meltdown. It is our expectation at Financial Watch that all three brokers are too sofisticated to get dragged down by mortgages that should have never been made.

3/29 SELL NOKIA @ $22.90 (+12.7%)

Nokia has had a nice run since the start of the year. With no strong catalyst to drive its shares higher we think it is a good time to move out of it. Motorola is clearly struggling and its future strategy is unclear. Financial Watch believes it is best to hedge its bets by not going against a firm that could resort to pricing discounts to move product.

3/29 BUY FREMONT – MCMORAM COPPER & GOLD
China is back after selling off earlier this month. In response, commodity prices are soaring. Fremont is highly leveraged to our belief that the U.S. will not enter a recession and that the growth story in China has room to run. Should the U.S. fall off a cliff, this stock will retreat dramatically. Trading a very reasonable price multiple and offers some limited protection with a 2% dividend.

4/17 SELL 3M @ $77.28 (-0.8%)
In looking at 3M’s business it should be a stronger performer. Its problems stem from a management team that does an extremely poor job of communicating its business to Wall Street investors. The big brokerage houses find it tough to purchase into a company that consistently has erratic earnings growth. 3M is fairly valued at its current level and will move higher on the year. Due to poor management we believe upside in this stock is limited to market performance.

4/17 BUY INTERCONTINENTAL EXCHANGE
Rapidly growing electronic derivatives exchange is known by ICE on Wall Street. Based out of Hot Atlanta the exchange has been on fire since going public in late ‘05. Despite the sell off in late February and warnings from Warren Buffett risk is a rapidly growing market. Last year the derivatives market grew by 50% and it is on pace to grow substantially again this year. At 54 times currently earnings it appears expensive, however we believe estimates for this year are way too low. ICE pulled back in February and is just again starting to move higher.

4/23 SELL CAPITAL ONE FINANCIAL @ $72.8 (-5.2%)

Capital One on Friday announced a disasterous quarter in which the credit card firm took down 2007 guidance to $7. Capital One lowered guidances as it stated that its recent acquisition of North Folk mortgage is not working out. Financial Watch believes it is time to cut our losses. This quarter shows that top executives at Capital One have no clue about what is working within the financial markets. We went into the year feeling this is a good run company with an attractive valuation. At this point, Capital One has neither a good management team or an attractive valuation. Expect 2007 earnings to be even worse than what was put out there yesterday.

4/23 BUY CATERPILLAR
Wall Street pulled Caterpillar up four percent following an upbeat earnings report on Friday. Financial Watch is still somewhat divided on whether Caterpillar belongs among our recommended stocks for the year. However, based on forward momentum we’re going to recommend it for now. Caterpillar is benefitting from strong global growth and potentially could see further upside surprise should the U.S. economy rebound as expected later this year. Further, the dollar will trend lower through the rest of the year boosting earnings from overseas. On the downside, CAT came out stating that it is expecting two rate cuts this year. By building interest rate cuts into forecasts now, it sets up the potential for an earnings shortfall should the Fed fail to move as expected.

5/21 SELL VERIZON @ $42.59 (+14.4%)
Analyst upgrade on Friday provides room to sell out of position in Verizon with a nice profit year to date. Apple will begin selling its iPhone this summer will increase competition within the cell phone space. AT&T will benefit from partnership with Apple on iPhone. Few have focused on risk that Verizon may lose marketshare to AT&T following launch of iPhone particularly among most desirable affluent customers.

5/21 BUY CISCO
Right now its too risky to stay out of the market. Cisco recently reported a disappointing quarter, however numbers were still in line with analyst expectations. Technology usually does not come alive until August and Cisco may be no different in that respect. Patient investors may be able to wait until Cisco slips below to pick up shares. Financial Watch is willing to take the risk it moves lower in the near term consider the company’s strong upside potential on the back end of ‘07. Cisco is seeing strong growth from customers seeking to build out their Internet capabilities to meet demand for video.

7/11 SELL FEDEX @ $112.81 (+3.9%)

Buyout rumors surrounding FedEx has helped propel the stock higher in recent days. In our opinion, the rumors do not hold much credibility despite the flurry of activity we’ve seen this year. Going into the year Financial Watch expected to see Federal Express benefit from a strong global economy and decent demand at home in the United States. Global demand has held up, but the U.S. economy is struggling horribly at the moment and gas prices are only expected to continue higher. Based on revised profit estimates, Financial Watch no longer sees FedEx reaching our previous price targets. Our outlook for the stock is mixed. Much will depend on how quickly the Fed acts to reduce rates.

7/11 BUY GLOBAL SANTA FE
Financial Watch typically stays away from stocks that have had strong runs. To date, shares of Global Santa Fe are up by a third this year and four-fold this economic cycle. For those not familiar with GSF, it is a deep water oil driller. In this sector where Transocean (RIG) is most often mentioned by Analysts, Global Santa Fe has remained under the radar despite its run. Should oil prices retreat this will provide investors a buffer against a rapid pullback. Financial Watch’s belief that gas prices will surpass $4 this summer are expected to give GSF a catalyst to continue higher. Further based on historical valuations for the company it is currently trading at a significant disocunt.

7/19 SELL ALLSTATE @ $60.56 (-7.0%)
In our midyear evaluation of where Financial Watch’s portfolio stands most of our stocks have either significantly outperformed the market or substantially underperformed. Many of the laggards are in the financial services sector that we believe have unfairly been beat up by concerns about subprime mortgages. Allstate has been hurt along with the financials, but in reevaluating the company Financial Watch no longer believes it will move much higher this year. Allstate is in the process of reducing its risks and this is adversely hurting its profitability in the near-term.

7/19 SELL GENERAL ELECTRIC @ $40.45 (+8.7%)
Financial Watch expects General Electric’s stock to continue to move higher following strong second quarter results. In our view other stocks offer stronger upside potential as a pure play in the red hot energy and infrastructure industries. Financial Watch is concerned that GE’s peg ratio, which approaches 2, is considered rich for the present market environment. We’re looking for the stock to move up another $2-3 before running into resistance.

7/19 BUY AECOM TECHNOLOGY
Investors with a low risk tolerance should be careful about moving into Aecom. It only went public in March of this year and has yet to publish a financial report as a public company. Further its market cap is only $2.5 billion. On the positive side, Aecom is a growing global player in the booming infrastructure industry. Analysts expect it to earn about $1.15 this year and grow at a 20% clip for the foreseeable future. Should these numbers hold up or move higher Financial Watch expects to see Aecom Technologies be one of the strongest performing IPOs of 2007.

7/19 BUY NABORS INDUSTRIES
Emerging markets continue to grow at a rapid clip despite the struggles we are seeing in the United States. Barring major technological advances, energy resources are going to become much tougher to pull from the Earth. Nabors Industries should benefit greatly from the secular trends occuring in the energy markets. In the past two quarters the company has struggled operationally missing Analyst expectations both times. At its present levels, Financial Watch finds it stock price appealing. It is trading at 6x next year earnings and see room for those estimates to increase.