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May 5, 2008

Stocks Post Another Week Of Gains As
Good Economic News Buoys Sentiment
(week ending Friday May 2, 2008)

Selected Funds' Performance For Week-Ending Friday April 25, 2008 Domestic Equity Funds % Return Contrafund 0.72 Magellan 1.57 Growth Company 0.68 Equity-Income 1.40 Low-Priced Stock 1.02 Value 1.31 Mid Cap Stock 0.47 Small Cap Stock 1.74   International Funds % Return Diversified International 0.68 Emerging Markets 1.99 Europe 0.35 Japan 3.22   Fixed-Income Funds % Return Investment Grade 0.94 Total Bond 0.78 Government Income 0.26 Inflation-Protected Bond 0.47 Capital & Income 1.53   Select Funds % Return Consumer Staples -0.20 Energy -2.65 Financial Services 1.99 Gold -2.73 Health Care 0.80 Technology 3.23

Against the backdrop of another cut in interest rates, stock funds made modest gains this week of about 1%. It also helped that the dollar gained a little bit of ground and oil retreated a bit from prior record levels. While the accompanying statement by the Fed was not explicit, it hinted that it may be ready to take a pause in this round of rate reductions. The next meeting of the FOMC is in June.

The Fed's statement stressed the central bank's mission of keeping inflation in check. This may have contributed to Thursday's 190-point rally in the Dow Industrials, and a 1% rise in the dollar. As for oil, its price briefly fell below $110 a barrel, before ending the week over $116.

Elsewhere, the week saw some interesting merger activity. The most notable was a $23 billion buyout of the chewing-gum company Wrigley by candy-maker Mars. Part of the financing for this sweet deal will come from Berkshire Hathaway's Warren Buffett.

On the economic front, first-quarter GDP came in at just 0.6%. Meanwhile, the nation's unemployment rate fell from 5.1% to 5% in April, and while payrolls continued to shrink, last month's decline was less than had been expected.

For the week, the Dow Industrials rose 1.3%, the S&P 500 was up 1.2%, the small-cap Russell 2000 was ahead 0.6%, and the tech-rich Nasdaq Composite rose 2.2%.

Most Fidelity funds were ahead this week, with technology giving a boost to many, especially those with a bent towards growth. Dividend Growth, which has 20% in tech, was ahead 2.5% through Friday. However, with energy stocks in retreat, funds that are heavily invested in this area (such as Independence, which fell 1.2% over the five-day period), saw their gains clipped.

For the year, our models continue to navigate this tricky market very well. Only the Aggressive Growth Model (down 7.0%) is down more than the market's (S&P 500) loss of 3.1%. Our Growth Model is off 1.5%, and our Growth & Income Model has slipped 1.1%. And our most risk-sensitive portfolio, the Income & Preservation Model is ahead 0.4%. Click here to view the latest details on our model portfolios.

In anticipation of the Fed's meeting on interest rates — and in the wake of their move to make what may be its final cut for the foreseeable future — all of Fidelity's bond funds moved fractionally higher last week. Investment Grade Bond rose 0.9% and Inflation-Protected Bond gained 0.5%. And, thanks to better-than-expected economic news (though it can hardly be called "good" news), high yield funds enjoyed even stronger performances. For example, Capital & Income and High Income jumped 1.5% and 1.3%, respectively.

Windfall Pain Or Gain?
I've been known to complain that Exxon and Mobil should never have been allowed to merge. This week, we learn that the oil giant gushed profits of nearly $11 billion in the first quarter. As it turns out, this was a billion dollars short of analysts' expectations, and so the stock retreated almost 5% for the day. Noting that Exxon's net was 17% above the same period from a year ago, a certain presidential candidate was quick to respond with a solution to this profit problem:

" I believe we should impose a windfall profits tax on big oil companies and use that money to suspend the gas tax and give families relief at the pump."

At first blush, that sounds like a good idea, but what would Exxon Mobil's shareholder's think about that? And, who are Exxon Mobil's shareholders anyway?

As it turns out, lots of Fidelity's fund shareholders own plenty of Exxon Mobil stock (about 101 million shares worth $90 billion). Contrafund owns the most: $2.2 billion worth. Equity-Income holds $1.6 billion worth, and Puritan has about $571 million. So when Exxon makes money, so do Fidelity investors, and plenty of other shareholders, too. In fact, apart from institutional owners and direct stock owners, we found 3,655 different equity funds in possession of Exxon Mobil shares. So when the company has "windfall profits," so do millions of American investors.

Click here to learn more about our outlook on Select Energy and Fidelity's three other energy related funds.

Weak Dollar Helps Domestic Funds
In the May report, we mentioned in Eric's Outlook that "the weak dollar is helping exporters." We went on to say that our model portfolios have a bias for large-cap funds such as Mega Cap Stock, Dividend Growth and Blue Chip Growth, as they're typically bigger players overseas. But just how do these funds benefit?

In the case of Blue Chip Growth, 16% of its assets are held in foreign stocks. None of these securities are among its 10-biggest holdings, but they are sprinkled throughout the fund in a variety of industries. As the dollar falls, locally priced securities are translated back into dollars, so shareholders get a performance kick.

But this doesn't speak to the issue of exporter-driven gains. What does, is Microsoft, which is a top-10 position in all three funds.

With $51 billion in revenue last year, Microsoft operates in every corner of the globe. Overall, revenues jumped about 15%. However, read what it says about foreign growth:

"In Russia and Vietnam our revenue grew in excess of 70% in 2007. Other emerging markets that saw impressive growth included India, China, and Brazil, which all delivered revenue growth that topped 40%. Growth was strong in many developed markets as well, with Ireland, the Netherlands, Spain, and Australia each exceeding revenue growth of 25%. All told, revenue jumped 25% or more in 46 countries in 2007."

Since the May Outlook ...
As we went to press last Wednesday night April 30, news that the Fed had once again cut interest rates by a quarter percentage point to just 2.0% had, obviously, reached our ears. Although we didn't have a lot to say about that development, it certainly didn't surprise us. (Just between us, we had already written into the May report that the Fed would do exactly what it did.) What we also suspected was that the Federal Open Market Committee (the governing body that sets rates), was increasingly concerned about inflation — and that seems to be the case. So are we. However, we, along with the Fed believe that a slow-growth economy will help to moderate inflation in the months to come.

Of course, with respect to food and energy prices, all bets are off. That said, with the dollar strengthening a bit last week, commodities and even oil showed signs that a slowdown in price appreciation may be in the offing.

Fidelity's Toolchest
Fidelity has introduced two new online college planning tools on its College Planning Web Portal. The 529 Plan Comparison Tool and the 529 State Tax Deduction Calculator allow investors to make side-by-side comparisons of the features and benefits of 529 college savings plans. Enter your state of residence, choose a 529 plan offered in your state, and select up to four more 529 plans to compare and contrast information such as investment options, fees and expenses, rewards programs and contribution minimums.

Fidelity's 529 State Tax Deduction Calculator will help you to decide if there is a significant
tax advantage to investing in the 529 college savings plan offered in your state. "While
withdrawals from 529 plans that are used for qualified higher education expenses are federal
income tax-free," says Fidelity, "the Calculator can be used to determine the state income tax deduction available with specific 529 contributions.

Uncle Sam Wants You To Spend
The first of the "Tax Rebates" have now made their way electronically into bank accounts across America. According to the government, $110 billion will be sent out to 130 million households. Naturally, everyone from Home Depot to Wal-Mart are encouraging customers to come in and spend their money. In fact, President Bush is in their camp, as he wants this money (up to $1,200 for married couples filing jointly) spent ASAP to stimulate the economy.

With all due respect to the president, taxpayers are better advised to pay down their own debt (starting with revolving credit) and pay some bills. If you don't have any of those things to worry about, then take the longer-term approach to economic growth: invest it. I think that's just as patriotic.

Of course, if you're looking for a place to invest your rebate money, one study suggests you're in the minority: only 32% plan to invest this money. As for the rest, 45% plan to pay bills and 19% will head to the shopping malls. Of course, if you're looking for some investment ideas, "Which Funds Should You Buy Now!" appears in the May report.  

As always, we continue to welcome your thoughts. — John Bonnanzio, Group Editor

 

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