We Made Money This Week; Now You Can Too

Hi, Friends,

It certainly was a wild, but not unexpected week on Wall Street.

I’m pleased to be able to report that Wall Street Sector Selector was up 2.24% this week and is up 4.1% for the month compared to -5% and -3% respectively for the S@P 500.

These are difficult days for investors and, as we’ve previously discussed, we expect this volatility to continue. In fact, I think we can look for a sharply lower open on Monday based on the last few minutes of trading during the regular session, after hours trading and the way the futures looked late Friday.

The View from 35,000 Feet

In a nutshell, the world markets got bombed last week.

The Dow had its worst week in four years, down 4.2% for the week. So much for the record set just one week ago.

The S@P was down 5% and the NASDAQ - 4.6% as the sub prime contagion spread across the major indexes.

We’ve been reporting for several weeks that the sub prime meltdown would most likely spread, and now clearly that is coming to pass. And it’s coming on two fronts.

The first front is that major players are going to be writing down losses from bad sub-prime loans. In fact, watch for some major hedge fund meltdowns in the coming weeks as these bad loans come home to roost. In fact, the first whiff of smoke is already in the air as an Australian hedge fund partially owned by Dutch financial gorilla ABN reported problems from exposure to sub prime loans and rumors coming from Japanese and German funds also suffering similar losses.

All of this was summed up succinctly by Mark Zandi, chief economist for Moody’s Economy.com who said, “The problems in the U.S. sub prime mortgage market could spiral out of control into a global financial crisis,” and he goes on to say, “If there’s another major hedge fund that does stumble, that could elicit a crisis of confidence and a global shock. The potential is quite high.”

But the second and possibly bigger problem for the general markets comes from the swift and significant drying up of capital on the global credit markets. Much of the recent run up in stock prices has been fueled by private equity deals, leveraged buyouts, and stock buybacks. In just a matter of weeks, the easy credit that fuels those deals seems to have almost instantly evaporated.

Deals involving Daimler Chrysler, Allison Transmission, Home Depot, Tyco and Cadbury Schweppes have been delayed, pulled or revised due to the rapidly changing credit markets. Strategist Barry Ritholtz writes, “The credit window is now closed,” and this will no doubt be bad news for a stock market used to the adrenalin of easy money.

And finally, on the currency markets, the dollar had a mixed week, up 1.4% against the euro but losing 2.1% to the yen. And a correction from last week when I wrote that I could remember a 1 to 2 exchange rate between the U.S. Dollar and the British Pound. A careful reader gently corrected me that I might remember a 1.50 to 1 but never a 2 to l, and his statistics are much superior to my memory. My apologies.

Sector Spotlight

There were virtually no winners on the long side this week except for the Rydex Strengthening Dollar Index. Notable losers included Real Estate down 8,9%, Oil and Gas down 8.4%, and the bottom feeder, Home Construction down 11.1%.

This weekend, I’m in Portland for Oregon State Swimming Championships with my young son. So far, so good with three Top 5 finishes. Next week it’s on to U.S. Nationals in Indianapolis with my older son. Going to swim meets is what I seem to be doing right now instead of normal summer pursuits like fishing, water skiing or travel.

Next week promises to be exciting. We will rebalance the portfolio after market close on the 31st so watch you email for the Portfolio Update. Enjoy your weekend and the fleeting days of summer.

Your Partner in Prosperity,

John Nyaradi
Publisher
Wall Street Sector Selector