The downtrend in the overall market and financial sector was hastened by American Insurance Group, Inc (AIG), as investors speculated that the world's largest insurer would also need to raise more capital to protect itself from exposure to mortgage related assets. AIG has already posted $20 billion in losses over the last three quarters and raised $20 billion in new capital.

On a more upbeat note, oil prices retreated below $104 for the first time since April as Hurricane Ike's trajectory veered away from sensitive, energy infrastructure in the Gulf. Also helping drive prices lower were comments from OPEC President Chakib Khelil, who insinuated that the organization will hold production at current levels. Crude dropped $3.08 on the day to close at $103.26 a barrel.

And finally, the dollar ended a solid 2-week run against the Euro in today's session, as financial sector weakness eroded confidence in the Greenback.

The Focus List

The Focus List portfolio saw declines in today’s bearish market, averaging a loss of 4.43% for the day.

The commodities sell off environment has weighed on commodities related Focus List holdings. While many of these stocks continue to offer great fundamentals, falling commodity prices has caused us to execute a few deletions from the portfolio today.

The indiscriminate selling in the commodity sector has hit CF Industries Holdings (CF). Given the current backdrop and a recent trimming of Q3 estimates, we locking in a gain on CF in the Focus List. We hope to add the stock back at a later date.

Earnings estimates have been cut by 3 out of the 10 covering analysts recently on ConocoPhillips (COP). We continue to like the valuation, but cannot justify holding onto COP given the current anti-commodity sentiment.

The indiscriminate selling that is occurring in commodity-related stocks is leading us to initiate a quick stop-loss on Fluor Corporation (FLR). The market is clearly ignoring the company s positive fundamentals right now. We hope to add FLR back at a later date.

Though we continue to like the fundamentals on Genco Shipping &Trading Ltd. (GNK), the indiscriminate selling in commodity-related stocks and a recent trimming of 2008 earnings estimates is causing us to close our position.

The indiscriminate selling that is occurring in commodity-related stocks is leading us to initiate a quick stop-loss on Metalico Inc. (MEA). The market is clearly ignoring the company’s positive fundamentals right now. We hope to add MEA back at a later date.

In order to maintain sound diversification, we did not completely close off exposure to commodities and held on to such names as Bunge (BG). Though, this pick was one of Tuesday’s bigger Focus List decliners, analysts remain bullish on the farm and fertilizer stock as evidenced by the higher forecasts for this year and next.

It was not all doom and gloom today. McDonald’s Corp. (MCD) was up 1.2% for the day as the fast food giant reported worldwide same-store sales surging 8.5% in August.

"P" Free Stock Analysis: Buy? Sell? Hold?
"MCD" Free Stock Analysis: Buy? Sell? Hold?
"GSTL" Free Stock Analysis: Buy? Sell? Hold?
"CF" Free Stock Analysis: Buy? Sell? Hold?
"AQI" Free Stock Analysis: Buy? Sell? Hold?
"BG" Free Stock Analysis: Buy? Sell? Hold?
"FLR2" Free Stock Analysis: Buy? Sell? Hold?
"LEHH" Free Stock Analysis: Buy? Sell? Hold?
"MLAO" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

• Housing inventories are still rising
• Mortgages are both harder to get and more expensive
• 2009 profit forecasts continue to be cut on homebuilders and financial companies

My Home Buying Experience

I've been trying to buy a house via a short-sale, and from what I'm hearing and reading, my experience has been typical of many other would-be buyers. It also reaffirms my belief that the housing slump will extend into next year.

Last April, my wife and I made a bid on a house that was selling for less than what was owed (hence the term "short sale"). The owners used 100% financing to purchase the house and have since been unable to keep up with the payments.

In a short sale situation, the lender(s) absorb the difference between the loan amount and the purchase price. Therefore, any purchase offer must be approved by them. The first lender approved our offer in June. The second lender asked us late last week to raise our price, just as the lawyers were proceeding to put the house to auction.

The risk the second lender is taking is that if an agreement is not reached on a sale price, the house will go to auction. Houses don't always sell at auction and even when they do, the sale price can be lower than the offer price previously presented to the bank. In other words, the second lender is taking a big risk by asking us to raise our offer in a market where home prices are declining.

We've countered with a price that is above our previous offer, but below the banks' asking price, which we think is too high. It could be a few weeks before we hear anything.

Now, multiply our situation by thousands of other would-be buyers and it's obvious why the housing slump continues.

Too Much Inventory

Most realtors don't like short sales because they take a long time to close and, at the same time, create competition for other houses. Short sales are certainly contributing to the glut of unsold homes, though the overall drop in the number of buyers is the biggest reason for the rising inventory.

How bad is the inventory problem? Well, last week the overly optimistic National Association of Realtors admitted that the inventory of homes continued to rise, reaching 11.2 months. In other words, if no other homes were put on the market, it would take nearly a year to sell all of the houses currently listed on the MLS.

More homes for sale means more pricing pressure. It's economics 101.

Therefore, it is not surprising to see brokerage analysts continue to cut their fiscal 2009 earnings estimates on the likes of Pulte Homes (PHM) and Toll Brothers (TOL). The average forecasts now call for PHM, TOL and other homebuilders to post another year of losses in 2009; previously, the brokerage analysts had actually projected profits.

No Money, No Buyers

Even for those who want to buy a house, credit is no longer easy to get. Many mortgage brokers are asking for credit scores of 720 or higher, far above the national average.

Interest rates have also risen. Bankrate.com currently shows the national average for 30-year fixed mortgages at 6.25%.

Even for those of us with good credit, interest rates can vary. Last week, I was given rates for a 30-year fixed mortgage that ranged between 6% and 6.875%. (My experience has been that rates in Illinois are typically higher than the national average.) All of the brokers I talked to blamed the ongoing problems with Fannie Mae (FNM) for the higher rates. (One mortgage broker told me business was so bad, she decided to take the summer off.)

The problem is not just with GSEs (Fannie and Freddie Mac (FRE). There is also the risk that the ongoing implosion within the financial sector will get worse. Consider the following:

• The FDIC's list of problem banks grew to 117 in June, up from 90 during the first quarter.
• The FDIC's insurance fund's reserve ratio dropped so low, 1.01%, that it is being forced to develop a plan for replenishing the safety net for depositors.
• Bloomberg News estimates that banks and securities firms have cut more than 100,000 jobs this year.

And if that wasn't bad enough, many consumers are struggling with debt:

• Nearly 1 million petitions for bankruptcy have been filed during the past 12 months; personal bankruptcies are up 28%.
• Net charge-off rates for Capital One (COF), and probably several other credit issuers, have been rising for several quarters.

Yet, in the background of this mess, some market observers have actually advised buying financials. These calls contradict the ongoing reductions in profit forecasts: financial companies account for nearly 25% of all negative earnings estimate revisions for 2009.

More importantly, if the problems in the financial sector weren't bad, than why is Lehman Brothers (LEH) going hat-in-hand to the Korea Development Bank?

Trading the Financials and Homebuilders

I realize that some financial and homebuilding stocks have entered into trading ranges. Regardless of what the charts show, the risks of owning these companies continue to outweigh potential rewards.

At some point, the tide will turn. It hasn't yet, however, and investors would be prudent to be cognizant of this fact.

Despite this analysis, some of you will nonetheless choose to be contrarians and attempt to find a bottom in financial and homebuilding stocks. If so, I strongly suggest doing a lot of research and only buy those firms that are both fundamentally sound and trading at discounts to their historic earnings. Even then, dollar cost averaging may be advantageous since a recovery is unlikely to occur until next year, at the earliest.

Related ETFs

Dow Jones U.S. Home Construction iShares (ITB) contains the major homebuilders. S&P Homebuilders SPDR (XHB) is a bit more broad, having exposure to building supply companies and home improvement retailers.

There are various ETFs that focus on the financial sector, from broad ones such as Vanguard Financials (VFH), to those that focus more on regional banks and thrifts, like KBW Regional Banking (KRE).

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Sector Rank as of Sep 3
Sector	This Week's Zacks Rank	Last Week's Zacks Rank	FY08 Revisions Ratio	FY08 Estimates Revised Up	FY08 Estimates Revised Down
Aerospace	2.66	2.66	3.17	38	12
Conglomerates	2.67	2.81	1.00	12	12
Oils-Energy	2.72	2.66	0.99	467	470
Medical	2.84	2.84	1.02	493	481
Industrial Products	2.88	2.85	0.85	105	123
Transportation	2.88	2.94	1.21	136	112
Basic Materials	2.89	2.82	0.77	117	151
Retail-Wholesale	3.00	3.02	0.99	391	393
Computer and Technology	3.01	3.02	0.66	470	709
Utilities	3.02	2.98	0.81	136	167
Business Services	3.07	3.08	0.75	77	102
Consumer Staples	3.08	3.13	0.81	116	143
Consumer Discretionary	3.14	3.13	0.60	154	257
Construction	3.17	3.13	0.51	42	83
Auto-Tires-Trucks	3.23	3.36	0.36	20	55
Finance	3.27	3.30	0.40	349	866

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

"TOLL" Free Stock Analysis: Buy? Sell? Hold?
"PUH" Free Stock Analysis: Buy? Sell? Hold?
"VFH" Free Stock Analysis: Buy? Sell? Hold?
"XHB" Free Stock Analysis: Buy? Sell? Hold?
"LEHH" Free Stock Analysis: Buy? Sell? Hold?
"ITB2" Free Stock Analysis: Buy? Sell? Hold?
"COF1" Free Stock Analysis: Buy? Sell? Hold?
"FNM" Free Stock Analysis: Buy? Sell? Hold?
"FREP" Free Stock Analysis: Buy? Sell? Hold?
"KRE2" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

• Housing inventories are still rising
• Mortgages are both harder to get and more expensive
• 2009 profit forecasts continue to be cut on homebuilders and financial companies

My Home Buying Experience

I've been trying to buy a house via a short-sale, and from what I'm hearing and reading, my experience has been typical of many other would-be buyers. It also reaffirms my belief that the housing slump will extend into next year.

Last April, my wife and I made a bid on a house that was selling for less than what was owed (hence the term "short sale"). The owners used 100% financing to purchase the house and have since been unable to keep up with the payments.

In a short sale situation, the lender(s) absorb the difference between the loan amount and the purchase price. Therefore, any purchase offer must be approved by them. The first lender approved our offer in June. The second lender asked us late last week to raise our price, just as the lawyers were proceeding to put the house to auction.

The risk the second lender is taking is that if an agreement is not reached on a sale price, the house will go to auction. Houses don't always sell at auction and even when they do, the sale price can be lower than the offer price previously presented to the bank. In other words, the second lender is taking a big risk by asking us to raise our offer in a market where home prices are declining.

We've countered with a price that is above our previous offer, but below the banks' asking price, which we think is too high. It could be a few weeks before we hear anything.

Now, multiply our situation by thousands of other would-be buyers and it's obvious why the housing slump continues.

Too Much Inventory

Most realtors don't like short sales because they take a long time to close and, at the same time, create competition for other houses. Short sales are certainly contributing to the glut of unsold homes, though the overall drop in the number of buyers is the biggest reason for the rising inventory.

How bad is the inventory problem? Well, last week the overly optimistic National Association of Realtors admitted that the inventory of homes continued to rise, reaching 11.2 months. In other words, if no other homes were put on the market, it would take nearly a year to sell all of the houses currently listed on the MLS.

More homes for sale means more pricing pressure. It's economics 101.

Therefore, it is not surprising to see brokerage analysts continue to cut their fiscal 2009 earnings estimates on the likes of Pulte Homes (PHM) and Toll Brothers (TOL). The average forecasts now call for PHM, TOL and other homebuilders to post another year of losses in 2009; previously, the brokerage analysts had actually projected profits.

No Money, No Buyers

Even for those who want to buy a house, credit is no longer easy to get. Many mortgage brokers are asking for credit scores of 720 or higher, far above the national average.

Interest rates have also risen. Bankrate.com currently shows the national average for 30-year fixed mortgages at 6.25%.

Even for those of us with good credit, interest rates can vary. Last week, I was given rates for a 30-year fixed mortgage that ranged between 6% and 6.875%. (My experience has been that rates in Illinois are typically higher than the national average.) All of the brokers I talked to blamed the ongoing problems with Fannie Mae (FNM) for the higher rates. (One mortgage broker told me business was so bad, she decided to take the summer off.)

The problem is not just with GSEs (Fannie and Freddie Mac (FRE). There is also the risk that the ongoing implosion within the financial sector will get worse. Consider the following:

• The FDIC's list of problem banks grew to 117 in June, up from 90 during the first quarter.
• The FDIC's insurance fund's reserve ratio dropped so low, 1.01%, that it is being forced to develop a plan for replenishing the safety net for depositors.
• Bloomberg News estimates that banks and securities firms have cut more than 100,000 jobs this year.

And if that wasn't bad enough, many consumers are struggling with debt:

• Nearly 1 million petitions for bankruptcy have been filed during the past 12 months; personal bankruptcies are up 28%.
• Net charge-off rates for Capital One (COF), and probably several other credit issuers, have been rising for several quarters.

Yet, in the background of this mess, some market observers have actually advised buying financials. These calls contradict the ongoing reductions in profit forecasts: financial companies account for nearly 25% of all negative earnings estimate revisions for 2009.

More importantly, if the problems in the financial sector weren't bad, than why is Lehman Brothers (LEH) going hat-in-hand to the Korea Development Bank?

Trading the Financials and Homebuilders

I realize that some financial and homebuilding stocks have entered into trading ranges. Regardless of what the charts show, the risks of owning these companies continue to outweigh potential rewards.

At some point, the tide will turn. It hasn't yet, however, and investors would be prudent to be cognizant of this fact.

Despite this analysis, some of you will nonetheless choose to be contrarians and attempt to find a bottom in financial and homebuilding stocks. If so, I strongly suggest doing a lot of research and only buy those firms that are both fundamentally sound and trading at discounts to their historic earnings. Even then, dollar cost averaging may be advantageous since a recovery is unlikely to occur until next year, at the earliest.

Related ETFs

Dow Jones U.S. Home Construction iShares (ITB) contains the major homebuilders. S&P Homebuilders SPDR (XHB) is a bit more broad, having exposure to building supply companies and home improvement retailers.

There are various ETFs that focus on the financial sector, from broad ones such as Vanguard Financials (VFH), to those that focus more on regional banks and thrifts, like KBW Regional Banking (KRE).

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Sector Rank as of Sep 3
Sector	This Week's Zacks Rank	Last Week's Zacks Rank	FY08 Revisions Ratio	FY08 Estimates Revised Up	FY08 Estimates Revised Down
Aerospace	2.66	2.66	3.17	38	12
Conglomerates	2.67	2.81	1.00	12	12
Oils-Energy	2.72	2.66	0.99	467	470
Medical	2.84	2.84	1.02	493	481
Industrial Products	2.88	2.85	0.85	105	123
Transportation	2.88	2.94	1.21	136	112
Basic Materials	2.89	2.82	0.77	117	151
Retail-Wholesale	3.00	3.02	0.99	391	393
Computer and Technology	3.01	3.02	0.66	470	709
Utilities	3.02	2.98	0.81	136	167
Business Services	3.07	3.08	0.75	77	102
Consumer Staples	3.08	3.13	0.81	116	143
Consumer Discretionary	3.14	3.13	0.60	154	257
Construction	3.17	3.13	0.51	42	83
Auto-Tires-Trucks	3.23	3.36	0.36	20	55
Finance	3.27	3.30	0.40	349	866

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

"TOLL" Free Stock Analysis: Buy? Sell? Hold?
"PUH" Free Stock Analysis: Buy? Sell? Hold?
"VFH" Free Stock Analysis: Buy? Sell? Hold?
"XHB" Free Stock Analysis: Buy? Sell? Hold?
"LEHH" Free Stock Analysis: Buy? Sell? Hold?
"ITB2" Free Stock Analysis: Buy? Sell? Hold?
"COF1" Free Stock Analysis: Buy? Sell? Hold?
"FNM" Free Stock Analysis: Buy? Sell? Hold?
"FREP" Free Stock Analysis: Buy? Sell? Hold?
"KRE2" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Volume has been unimpressive at best. I saw some stocks trade at less than half of the average daily volume this week. It's neither good nor bad, but rather just what often happens this time of year.

Late-summer vacations and the end of earnings season are both big reasons why many traders are sitting out. The uncertainty about the economic environment is also playing a role. Then there is Russia, which has become more militarily aggressive.

In environments like this, I feel sorry for people like Jim Cramer who feel obligated to make something out of nothing. This is a quiet market environment and nothing else. My advice is let events unravel and see what trends develop after Labor Day.

The markets will change from day-to-day; your investing strategies shouldn't.

And part of your strategy should be to always maintain some exposure to stocks. Those who try to time the markets are often the ones who take large losses and miss out on the big gains. Conversely, the most successful investors never stop researching stocks.

Financial Stocks

As I have previously stated, we have intentionally kept financial stocks out of the Focus List. Earnings estimates continue to be cut for both 2008 and 2009 as the credit crisis continues. Banks still don't know what is on their balance sheets, making it impossible for brokerage analysts to do little more than guess what future earnings will be.

The other big problem, that is not getting as much press, is the damage being done to shareholders. The actions taken by many financial companies to stay afloat are dilutive, at best, to existing shareholders. Unfortunately, many firms have gotten themselves into such a large mess that they don't have much choice.

Lehman Brothers (LEH) is talking to Korea Development Bank because it can't find other suitors. Fannie Mae (FNM) and Freddie Mac (FRE) are in need of massive taxpayer help because they have been so mismanaged. These are the type of situations that investors should avoid rather than using the latest rumor of salvation to pick up shares at discounted prices.

Always remember that just because something is cheap doesn't mean it is a bargain.

The Markets

The late-summer environment is evident in the charts of the major U.S. indexes, which show trading ranges.

Focus List Updates

Parker Hannifin (PH) was sold because of a drop in profit projections for fiscal 2009. The company remains fundamentally strong, but we are concerned that there could be additional short-term weakness in the stock.

We are watching shares of Central European Distributors (CEDC). Our presumption is that the recent weakness in the stock is being caused by the military situation in Georgia. Earnings estimates are up during the past 30 days and CEDC is a Zacks #2 Rank ("buy") stock.

We are looking for new additions, as we would like to increase the number of stocks within the portfolio to about 35.

Charles Rotblut, CFA is the Senior Market Analyst for Zacks.com. He can be reached at crotblut@zacks.com. Charles owns shares of CEDC.
"PH" Free Stock Analysis: Buy? Sell? Hold?
"FREP" Free Stock Analysis: Buy? Sell? Hold?
"CED2" Free Stock Analysis: Buy? Sell? Hold?
"LEHH" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Crude retreated from its big rally in yesterday's session, dropping $6.59 on the day to close at $114.59 per barrel. The descent came in response to a number of developments, none more important that Russia's apparent pullback from its occupation of Georgia. Today's move lower was crude's largest one-day drop in close to 4 years and provided the market with some much desired comfort.

Welcomed Words from the Fed

Dollar strength also contributed to the selloff in crude, which received a boost in response to language from Fed Chairman Ben Bernanke, who said that the Fed would "act as necessary," to control inflation. There has been speculation on the Street about the Fed's willingness to raise rates in fear of crushing any chance of an economic recovery.

A Bailout for Lehman?

Lehman Brothers (LEH) injected some optimism into the market and financial sector as word spread that Korea Development Bank said it might be interested in making an investment in the troubled US investment bank. Lehman's stock price has been crushed this year in response to concern about the company's litany of problems. That has made it difficult for Lehman to attract the attention of outside investors to inject some liquidity into the company to prop up its balance sheet.

The Oracle Speaks

And finally, Warren Buffet warned investors that he believes the country is still in a recession, and that he does not anticipate an economic recovery until at least 2009; cautionary words from the Oracle of Omaha on a day when the Street was feeling good about itself and logging a big rally.

The Focus List

The Focus List had a positive day but lagged the broader market a little with a gain of 0.44% for Friday.

Some of the companies that kept the portfolio from larger gains were the same stocks that gained a lot of ground yesterday, the commodities related holdings. This two-day trend of up and down action took place in response to oil prices ratcheting up $5.62 on Thursday and then giving up more than that on Friday.

The good news is that every Focus List stock that picked up sizable gains on yesterday’s higher oil lost only a portion of that gain, versus the price of oil wiping out its entire gain plus some. These companies that were down today but were able to maintain some of their gains from yesterday include CF Industries Holdings, Inc. (CF), ConocoPhillips (COP) and Genco Shipping & Trading Ltd (GNK).

GameStop Corp. (GME) was up 1.56% today after yesterday announcing stronger-than-expected second-quarter results and boosting its full-year guidance.
"P" Free Stock Analysis: Buy? Sell? Hold?
"GSTL" Free Stock Analysis: Buy? Sell? Hold?
"CF" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research