As for the "gas tax" (the inflation that hits all pocketbooks across the US as energy prices inflate), anyone with any vision can see it is going to hit profits but until a bunch of companies admit to it, the minions on Wall Street will continue to ignore it and sweet talk the future. The warning after the bell Friday by Fedex (FDX) is just a harbinger of things to come. While the "credit crisis" has been swept under the floor as "it can't get worse than it was" and "no matter what the Federal Reserve will create billions out of thin air to make sure things don't get too bad" the after effects of such a safety net are now being seen. No free lunch. And in the sound and fury of the credit crisis everyone is ignoring the recession - oh I'm sorry "a few bumps in the road on the way to 2nd half recovery". At some point the market will recognize this, and the hit to profits as oil is literally the grease that skids commerce in the 21st century - but until it is plain in people's faces and they cannot ignore it anymore (as they have so far), I guess stocks can continue to levitate on the fairy tale of 2nd half rebound.

For the fund I spent the early part of the week closing out some outlier positions to clean up the portfolio and begin to make it more concentrated; along with selling off parts of some huge winners we've had which have enjoyed multi-week runs. I do expect to be hit with a commodity related sell off at some point... the drumbeat will be "at some point high commodities will be a drag on global growth" and therefore "demand for said commodities will drop" and thus the stocks will sell off. I expect to hear a lot of that as we go into 2nd half 2008 as Western Europe joins the US in protracted slowdown and Japan... well Japan has been in slowdown for 2 decades. At that time many of our holdings will sell off... and people will turn to stocks that... rely on the US consumer "early cycle" which for reasons mentioned in the first paragraph will be a complete disaster. Sorry, there are just not many shelters in the storm in a high inflation, slow growth scenario - and banks, retailers, and restaurants sure are not it.

In a nutshell I am back in a more neutral/defensive stance - I do not know when reality will hit this market, but as we saw in January - when it does it can turn ugly very fast. Corporate profit estimates for 2008 are far far far too high. As they drop, stock prices should drop with them. But $1.3 Trillion of liquidity has now been "created" (no inflation created of course) to help prop up the markets, so it's a war between reality and liquidity. Further, in my view, complacency seems to have set into this market, with the undying believe in the Federal Reserve as the savior... much like September/October 2007. That didn't work out so well.

Below are the fund changes this week - the specific rationale for each of these major moves is explained in the weekly posts which can be accessed in the left margin under archives.

Some of the larger changes (chronologically) to the fund below:

1. Monday, I closed out my 2 precious metals stocks, Kinross Gold (KGC), and Silver Wheaton (SLW) - I'd rather be exposed at this point to commodities that are used less as a hedge against inflation, as opposed to ones who will continue to benefit as inflation continues plus I think the fundamental story is still not appreciated by the Street.