Market Update

Consensus here is that the rally of late is not a bottom and to look for a pull back especially in financials near term. We're selling into these rallies or doing things like writing covered calls to protect against near term downside. We think the writedowns in the financials are not done, and I'm looking for weakness in Fannie & Freddie to drag that sector down until after they've figured out how much capital they will need.

That said, there are great buys in the financials right now, but don't buy the sector funds yet--I'd actually be a buyer of the short ETFs like DUG & SKF today if you're aggressive.

Oil's slide to below $115 is welcome news, and we do expect the downward trend to continue. We'll likely see about a 10 cent drop in gas prices and much lower heating oil costs over the next several months, which is good news for the consumer.

Commodities after their meteoric rise in 1H08 just finished their worst July in 35 years, and the news from the housing market is actually somewhat encouraging. But labor & inflation data and weakness in the financials will continue to hold the market back until credit fears abate and consumer confidence rebounds.

Bottom line:

We're still in a bear market, but there are great opportunities out there if you're able to be disciplined. It's bargain shopping out there right now.

Interesting fact:

We estimate that every 1 cent/gal increase in gasoline prices subtracts around $4 million per day from consumer spending. We would have to see an 80 cent/gal decline in the gasoline price to add the equivalent of the tax rebate checks that we were all so excited about.

Investment Ideas:

Preferreds: Right now, it's all about yield, and to that end we really like some of the preferreds. A handful of them got absolutely crushed last month, and there are several like BOA that are yielding 8% right now--that's a buying opportunity.

In equities: I do like a lot of the big banks just on valuation, but you have to be picky if you're gonna bottom fish. Resist the temptation to buy stocks like JPM or MER until more dust clears. If you're patient, you can start to look at some of the homebuilders like KBH. Right now, sector rotation is the name of the game--right now it's sectors like consumer cyclicals with a rising dollar, but you have buy the dips & sell the rallies until market sentiment improves.

In ETFs: With the global economy in such poor shape, I personally really love EFZ right now. It's a short emerging markets fund, meaning that when emerging market indexes go down, you make money. It's not for everybody, though.