“Thanks for a great newsletter!”
Donald Travis, Cameron, TX
Fidelity Navigator subscriber since November, 2001

This is the “Navigator Weekly Commentary” for the week ending July 18, 2008.

Even though stocks for the most part finished flat, the bulls had to be optimistic about how equities overcame early pressures from disappointing earnings reports out of some of the biggest Wall Street bellwethers. Citigroup and IBM provided the support, helping shares recover from disappointing results at Merrill Lynch, Microsoft, and Google, to underpin the Dow Jones Industrials. Crude oil was modestly lower after relinquishing afternoon gains to help limit some of the pressure. The NASDAQ Composite came under pressure after the misses at Google and Microsoft. Treasuries were lower amid continued inflation concerns.

The Dow Jones Industrial Average gained 50 points (0.4%) to close at 11,497; the S&P 500 Index was unchanged at 1,261, while the NASDAQ Composite declined 30 points (1.3%) to 2,283. On moderate volume, 1.7 billion shares were traded on the NYSE, and 2.3 billion shares were traded on the NASDAQ. Crude oil finished down $0.41 to $128.88 per barrel, wholesale gasoline rose $0.01 at $3.17 per gallon, and gold ended down $15.50 at $955.20 per ounce. For the week, the DJIA closed 3.6% higher, the S&P 500 Index was up 1.7%, and the NASDAQ Composite gained 2.0%.

Treasuries continued to struggle as worries about inflation remained and equities showed some relative resilience. There were no major economic reports scheduled for release today. The yield on the 2-year note increased 17 basis points to 2.66%, the yield on the 10-year note gained 10 basis points to 4.10%, and the yield on the 30-year bond rose 5 basis points to 4.66%.

In what must be sight for the bulls' sore eyes, financials led a solid rally this week after jumping more than 11%. The week started off looking like more of the same was in store for the severely wounded sector as uncertainty about the future of the government-sponsored enterprises (GSE) Freddie Mac and Fannie Mae carried over from last week, but a plan by the Treasury Department and the Federal Reserve to inject confidence back into the GSEs helped soothe some of the concerns. Also, regional banks came under fire after US regulators seized IndyMac Bancorp due to what the Office of Thrift Supervision called a "liquidity crisis" at one of the nation's largest savings and loans. The FDIC will run the bank until a buyer is found and is the second-largest bank failure in US history behind Continental Illinois in 1984. But the turning point for the sector and the market as a whole was Wells Fargo's better-than-expected profit report and the announcement that it boosted its quarterly dividend by 10%. Friday's profit report from Citigroup also helped push financials to the front of the bulls' herd for the week.

Another recent drag on sentiment loosened up this week as crude oil prices fell sharply to below $130 per barrel. As the parabolic rise in energy prices has held the consumer hostage, this week's drop helped boost consumer discretionary stocks over 6%.

Second quarter earnings season ramped up this week with a plethora of major reports that were released and Dow component J.P. Morgan Chase and PNC Financial helped the upbeat mood in financial after topping expectations, while Dow member and tech bellwether Intel also beat the Street's estimates. Delta Air Lines' and AMR Corp's expectation-topping profit reports helped amplify the tailwind the airlines received from the drop in oil. Elsewhere, Nokia, the world’s largest maker of cell phones, beat and provided an upbeat outlook, while Dow member Coca-Cola also topped but issued cautious comments.

M&A activity ramped up this week, highlighted by Anheuser-Busch's agreement to be acquired by InBev for $70 per share in cash, or an aggregate equity value of $53 billion, creating the world’s leading brewer.

Not even the biggest rise in 26 years for the Consumer Price Index, another hotter-than-expected headline reading for the Producer Price Index, and exacerbated fears about inflation and the economy from Fed Chief Ben Bernanke's semi-annual testimony on Capitol Hill kept the bulls from charging as the welcomed rebound in financials and the drop in oil this week more than offset the still elevated concerns.

The Navigator has made NO changes to our Fidelity, Schwab or Vanguard oriented newsletters since the June issues were published.

Next week's economic calendar will provide key reports that will help determine how the economy is holding up amid the backdrop of rising inflation concerns and further economic softening. Wednesday's release of the Fed's Beige Book will provide the latest broad-based view of information regarding current economic conditions in each Federal Reserve District across the nation. Traders will be looking for details about the magnitude of elevated inflation pressures on sellers, who have been handcuffed by deteriorating economic conditions and have not been able to pass along higher input costs to the consumer. Also, the Street will be looking at how the consumer, which accounts for the lion's share of the economy, is holding up as higher food and fuel prices continue to eat up more portions of disposable income. Friday's final University of Michigan Consumer Sentiment Index for July, anticipated to be revised slightly downward from the preliminary reading of 56.6 to 56.3, will help paint the picture of the health of the consumer amid the headwinds of the current economic environment.

With the housing market being the vital piece that could lead to the stabilizing of the financial markets, Thursday's existing home sales and Friday's new home sales reports will also likely be a major economic focus next week. Any upside sales surprises will be welcomed as inventories of homes on the market are uncomfortably high and appear to be rising, which needs to be worked through before the light at the end of the tunnel can begin to be seen. Unfortunately, existing home sales are forecast to fall 1.1% to an annual rate of 4.94 million units, while new home sales are expected to decline 1.5% to an annual rate of 505,000.

Durable goods will be released on Friday and will provide insight into the demand for goods designed to last three years or more. Headline orders for June are expected to decline 0.3%, while excluding transportation, orders are expected to be unchanged. Other reports that will be released next week that deserve a mention include the Leading Index on Monday, and weekly initial jobless claims on Thursday.

Thank you for subscribing and have a great weekend!