Welcome to the February 11, 2009 issue

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          Last week we tagged the financial sector as the stumbling block to a significant market rally. With a twist we can say the same thing in spades this week. As we came into this week, the market’s action last Friday – when it rose briskly despite a terrible employment report – suggested that investors were finally looking beyond the immediate. But then yesterday, Treasury Secretary Geithner presented what was advertised as the Administration’s plan for rescuing the financial sector. Alas, the plan was not yet ready for prime time, and a very disappointed market reacted with a sharp sell off, aborting what looked like a promising rally in the making.

Our own reaction was that yesterday’s selling would not have much, if any, follow-through. The reason is that the fundamentals of the outlook were not changed by Geithner’s disappointing presentation. For us, at the moment, the important issue for the economy (and the markets) is the stimulus package. It appears the package will become reality some time next week. It is the stimulus package that will begin to be felt in the economic numbers over the next 3-4 months.
The financial rescue plan is, of course, important, and the sooner one is in place the better. But for immediate effect it is the stimulus that matters. Looking ahead, this quarter’s numbers are going to be grim, as we already know from January’s employment numbers. Keep in mind though that the employment numbers lag activity. We believe the market was acting better because the more forward-looking numbers lately were also acting better. We believe that the market will shortly once again be concentrating on the better numbers we expect over the next few months. We believe that by next quarter a stock market recovery will be evident.

There is no change in our recommended allocations

New Fund Ratings – For domestic stock funds, two funds are now rated Hold: FBR Focus and Fairholme Fund. Three funds are now rated Sell: Vanguard Equity-Income, Fidelity Spartan 500 (ETF) and Powershares High Yield Dividend Achievers (ETF). For international stock funds, Wintergreen Fund is now rated Hold.

Vanguard Equity-Income is in all three Vanguard family portfolios. In the Vanguard Venturesome and Conservative portfolios, we will switch the fund into Vanguard Convertible Securities. In the Moderate portfolio, we will switch into Vanguard U.S. Growth. Fidelity Spartan 500 is in the Fidelity family Venturesome and Moderate portfolios. We will switch the fund into Fidelity Contrafund. 

The Stock Market – Tuesday’s 4% drops were a setback. We expect to see a slow recovery over the immediate days ahead.  

The Bond Market –

The Select Portfolio – There is no change for this portfolio.

The next Hotline is scheduled for Wednesday, February 18.