Issue 8 - 3/12/08

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"I don't mind going back to daylight saving time.
With inflation, the hour will be the only thing I've saved all year."
Victor Borge (1909-2000) Danish-American Humorist

Volume I: Issue #8

See Note below for chart explanation.

Editor's Corner
This Ain't Your Father's Fed
Ron Rowland - Editor

This is not a typical economic cycle and the Bernanke Fed is not using typical weapons in its war against the credit crisis. We got our first hint that Bernanke was willing to try unconventional approaches last August. In addition to lowering the Fed Funds rate, he took steps to make the long-forgotten Discount Window an option. He has not abandoned the traditional tools of the Fed, employing both FOMC meeting interest rate reductions as well as "emergency" inter-meeting cuts. Fed Funds have been reduced by 2.25% to 3.0%, and the discount rate has been cut by 2.75% to 3.5%.

But the Fed didn't stop there. They have also initiated many alternative approaches. They announced a Term Auction Facility last December. Just last week they put two new mechanisms in place, each one providing an additional $100 billion in liquidity. Yesterday, the latest salvo was introduced -- the Term Securities Lending Facility (TSLF) -- providing yet another $200 billion in liquidity. Time will tell how far these actions go in clearing up the current credit problems. Until we know that outcome, let's give the Fed some credit for being creative.

The equity markets underwent a broad sell-off last week that continued on Monday. Tuesday was the largest one-day rally in U.S. markets since March 2003, which of course was the kick-off for the nearly 5-year bull market that followed. Whether or not this is the start of a repeat performance is yet to be seen. Many suggest the latest Fed action is the catalyst for the move. However, technicians are quick to point out that the rally, launched from near the 1275 level on the S&P 500, happened to form a textbook double bottom with the January intra-day lows. With many investors just now coming to grips with the likelihood of recession, it is hard for them to imagine a new stock market rally getting underway at this time. However, the market looks forward. It is no longer a case of whether or not we have a recession. The performance of the market is now being swayed by expectations as to when the recession will be behind us.

The next FOMC meeting is scheduled for March 18. Additional rate cuts are expected, with odds currently favoring a 75bps reduction. The Treasury market has been the safest place to be amongst all the credit market turmoil, but the rate cuts combined with rising commodity prices have added to the mounting evidence of inflation. As such, TIPS (Treasury Inflation-Protected Securities) are currently the strongest segment of the bond market.

Sectors

The recent downside action has been accompanied by increased volatility, with daily moves of 2% or more now commonplace among the sectors. Granted, the volatility increase is not limited to sectors, but as is typically the case, whatever is happening in the broader market is being amplified in the sector arena. Energy holds on to the top spot this week as crude oil jumped to more than $108. Energy equities have been lagging the recent move in crude oil, providing some additional upside potential for stocks.

Styles

None of our style categories were spared in last week's across-the-board selling. Some minor shifting in the relative rankings took place as two Large Cap categories took the top two spots by moving ahead of two Mid Cap categories. This was by no means a "show of strength" by the Large Cap stocks but simply a case of a lesser of two evils.

International

International markets were hammered this past week too. This added another data point to the axiom: "correlation is one thing that always goes up during market sell-offs." China has been relatively flat and stable the past two months, and it appears to be in a bottoming process. Its momentum reading is low as a consequence of its frothy upside move last year. We expect a reduction in its large negative momentum values over the coming weeks as the recent stability starts to outweigh the prior corrections. Latin America retains the honor of being the strongest global market.

Note:

The chart above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value. Long-term and short-term strength
may be significantly different than what is represented here.

Pick of the Week
Buy The Dip in Natural Gas: UNG
Brandon Clay

In the past 52-weeks, the Energy sector has grown over 30%. At the same time, the broad market has declined. With Crude nearing $110 a barrel, companies heavily invested in petroleum continue to benefit from the appreciation. We think there's still room for growth in Big Oil. But that's not the only place to go for sector investors. There is another option.

Lately, natural gas has been a prime candidate. Trading nearly double what it was last year, natural gas is starting to rival crude for headlines. The harsh winter has propped up prices and history suggests it takes awhile for these prices to settle. Just yesterday, Piedmont Natural Gas (PNY) reported higher earnings and stood by its 2008 profit forecast. When gas companies like their prospects, it's important for investors to take notice. And we are noticing.

Remember Range Resources (RRC): it's a natural gas company out of Fort Worth. If you bought RRC on our recommendation a few weeks back, you're already enjoying some nice open gains in this sub-sector. As happy as we are with RRC's performance, we think there is room for more gains in natural gas.

The best place to invest in natural gas' continued ascent is United States Natural Gas Fund (UNG). This fund is tied to futures and other such derivatives so it's different from equity-based ETFs. With an average volume of 1,076,000 shares, it should also provide an easier fill than its counterpart at Barclay's. The iPath DJ-AIG Natural Gas ETF (GAZ) suffers much lower volume (9,195 shares).

UNG also shows a nice uptrend in progress. Many of you have heard the expression, 'The trend is your friend.' Looking at the chart, it's hard to argue with one so pronounced. UNG is trading well below its last-May high of $54. Look for UNG to make a run at the high, and possibly overtake it in the coming months.

All the best.

Note:

Keep in mind that the Pick of the Week is usually intended for aggressive investors. Don't risk money you can't afford to lose. You will need to decide when (and if) it is time to sell.

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© 2008 AllStarInvestor.com All Rights Reserved. Protected by copyright laws of the United States and international treaties. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. All Star Investor employees, its affiliates, and clients may hold positions in the recommended securities.

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