Welcome to the MONEYLETTER Hotline for February 6, 2008

The stock market has been shocked twice over the past week and the tough losses of this week are the result. The first shock came last Friday as employment actually fell in January. The second shock occurred yesterday in the form of the nonmanufacturing monthly activity report. The report showed activity suffered a surprising drop over the month. This virtually never happens. Taking the reports together they say the economy fell back in January. Call it recession, if you like.

Turning to the markets, the U.S. market is clearly in a downtrend that began in mid-December. The question is what to do? As we have pointed out before, we took defensive action in November, cutting back our exposure to the domestic market. As we look at the markets now, it is obvious that not only the domestic market, but global markets as well, have fallen all through this year because of fears of a U.S. recession. Nothing says that they have finished discounting a recessionary U.S. economy.

What they do not appear to be discounting is the stimulus that has been (and will be) applied to counter the recession. The stimulus takes time to work, and some of it is still moving through the Senate. We believe the stimulus will limit the effect of the downward forces that are acting on the economy. In our opinion we are going through the worst now. We continue to believe that patience will be rewarded as we go through this year.

There is no change in our recommended allocations.

New Fund Ratings – For domestic stock funds, Vanguard Convertible Securities is now rated Buy. Five funds are now rated Hold: Powershares Dynamic Mid Cap Growth (ETF), Marsico Focus, American Century Select, Vanguard Growth Equity and Laudus Rosenberg Value L/S. Two funds are now rated Sell: Fidelity OTC Portfolio and Powershares QQQ (ETF). For international stock funds, Harding Loevner Emerging Markets is now rated Buy. Four funds are now rated Hold: U.S. Global Investors China Region Opportunity, Matthews China, T. Rowe Price Emerging Markets Stock, and T. Rowe Price Emerging Europe & Mediterranean. Three funds are now rated Sell: American Century Emerging Markets, Quant Emerging Markets, and US Global Investors Emerging Markets.

Quant Emerging Markets is in the MONEYLETTER Venturesome and Moderate portfolios. In the Venturesome portfolio we will switch the fund into S&P Latin America 40 (ETF). In the Moderate portfolio, we will switch the fund into Emerging Markets 50 ADR (ETF).

The Economy – There is some question bout the accuracy of the nonmanufacturing report. We need more data to get a better fix on the economy. The sooner the stimulus checks are sent the better. We look for a very weak economy this quarter, with a pickup as we go through the year.

The Stock Market – Despite this week's rout we continue to favor equities in the context of extremely low interest rates.

The Bond Market --

The Select Portfolio – There are no changes for this portfolio.

More articles...