We believe the market is in the process of bottoming. While news of the bailout of Fannie and Freddie will not be the panacea investors were hoping for, the actions of the US government will go some way towards halting the deflationary effects of a shrinking US housing market. This will take time though.

With this in mind, we have identified a number of solid buying opportunities that we hope to bring to you in the near future. However equities will undoubtedly remain volatile for some time, so caution is still warranted at this point.

Given this situation, we have reviewed our portfolio and are making some minor changes. At the same time, we acknowledge that we have made mistakes in the past in holding onto our losing stocks for too long. This is a situation we will remedy in the future.

Many of the stocks in our portfolio are at the smaller end of the market capitalisation spectrum and resource related, meaning the share price falls you have experienced recently have been sharp and gut-wrenching. This has been especially so for our gold stocks in the last month, as wholesale liquidation has left no stock in the sector unharmed.

But in most instances, we believe that either the fundamentals of the companies, or of the underlying commodities, have not changed at all. We therefore remain long term bullish on many of our exposures, despite the recent share price falls.

That said, there have been some real disappointments, and while these stocks may bounce back with a generally rising market, we believe we are better off taking our losses now and switching into better quality stocks with much stronger recovery profiles.

In a separate article in this week’s report, we recommended switching from the hugely disappointing Tap Oil into Australian Worldwide Exploration. Tap’s exploration program has been disappointing and so have we in holding onto the stock for so long. Following the merger with Arc Energy, we believe AWE’s production profile, exploration potential and balance sheet strength make for a better relative investment.

Also in the hugely disappointing camp is Oceanagold. While resource based hedge fund Ospraie (who shut their doors last week) was a major shareholder and has probably accounted for much of the recent selling, we believe that short of a takeover, the company’s near term prospects are average. At the recent Denver Gold forum OGC said the financing of the Didipio gold/copper project would not be finalised until early 2009.

We are in the process of evaluating some other gold companies that have also been pummelled recently, but have much better chances of recovery because of management and project quality. So Oceanagold remains in the portfolio for now, but we will look to recommend a switch idea in the coming weeks.

From a charting perspective, while it is somewhat encouraging that downward momentum in OGC has slowed since August, we anticipate an extended period of consolidation at the lows before a sustainable upward trend can emerge.

We are also recommending Westpac office Trust (WOTCA) as a sell. While the stock has underperformed along with the rest of the listed property trust sector, we think the recovery prospects are not as sound as some other sectors. Based on 2009 guidance, the trust trades on a net yield of around 8.5%, 100% tax deferred.

We believe there are more attractive risk reward opportunities in the market. As we have highlighted in previous reports, Babcock and Brown Japan (BJT) has suffered significant falls over the past 12 months and trades on a prospective yield of around 15%. While not tax deferred, we believe BJT’s combination of capital appreciation and yield potential is relatively more attractive than WOTCA. We therefore recommend switching from WOTCA into BJT.

For those Members not wanting to switch into another property trust, we aim to have additional yield based ideas in the coming months.

Nufarm (NUF) and Australian Pharmaceutical Industries (API) are our final sell recommendations. Nufarm is a fantastic company that has delivered relatively strong outperformance over the past 12 months. While we are not suggesting the stock is headed for a decline, we believe Nufarm is fully valued at these levels and given the broader falls experienced across much of the market, we think better value resides in other areas.

From a charting perspective, Nufarm has been a standout performer since inclusion in the Fat Prophets portfolio in October 2002. And while the longer-term upward trend remains intact, broader upward momentum has stalled since the beginning of the year, giving way to a period of volatile consolidation. Technically, an increase in volatility can often precede a broader change in trend.

While we do not think that Nufarm’s share price is heading south in a hurry, the prospect of further strong gains are unlikely.

We think API remains a value/turnaround story but the downtrend in the share price remains persistent and further falls are possible. While the stock looks incredibly cheap, the restoration of margins in the distribution business and the rollout of the Priceline Pharmacy brand may take longer than expected to achieve.

Indeed, the most dominant feature on the charts remains the broader downwards trend. While it is encouraging that momentum is beginning to slow, we anticipate an extended period of consolidation and base building will first be required, before a sustainable upwards trend can emerge. Until then, rally attempts are likely to be short lived.

We still think there is considerable upside potential in the stock and will continue to follow API’s turnaround prospects. We will alert Members should an improvement eventuate.

On the buy side, we continue to like resources, however, we acknowledge that the sector remains under considerable short term pressure. Aside from those stocks mentioned above though, we encourage Members to continue to hold their positions in the resource sector.

The US government has begun the process of opening its balance sheet and monetising dodgy mortgage related debt. Longer term, this will be hugely inflationary and resources will benefit strongly.

The financials received a big boost from the Fannie/Freddie bailout news on Monday. We believe much of the buying came from short covering as the timing of the Treasury announcement took many by surprise. This may well be the case as the sector couldn’t follow through on Tuesday.

We are still cautious on the banks and many of the banks’ charting structures remain bearish. But the pure wealth managers are beginning to look interesting. At the larger end AMP and AXA both look attractive. We sold AMP last year at over $10 but believe an opportunity is emerging to buy back into this quality wealth manager. And after falling from over $8 last year, AXA is looking like good value, although the stock has run too hard in the short term.

Following the impulsive rally on the back of the US mortgage giant bailout, we would not recommend chasing these stocks. But should the rally fade in the coming weeks, we’ll look to recommend these companies on any price pullback.

Other wealth managers already in our portfolio are also looking interesting, including Platinum Asset Management (PTM) and Australian Wealth Management (AUW).

Also on the financials, Insurance Australia Group (IAG) is looking stronger. Once again the stock has run hard over the past few weeks and a pullback would not be surprising. We would view any retreat into the $4-4.10 area as a buying opportunity.

In terms of our recent traffic light recommendations, Toll Holdings (TOL) is also a quality company that we would look to buy on any upcoming weakness. There are also a number of other smaller industrials that we have been assessing over recent months and we will look to bring you those opportunities soon.

Despite the positive market reaction to the US government bailout of Fannie Mae and Freddie Mac, it is important to understand that this does not necessarily mark the end of the bear market. The US housing market and economy are still in poor shape (that’s why a government rescue was necessary) while much of the developed world’s economies are still slowing down.

The purpose of this article is to communicate that we are attempting to position the portfolio to an eventual market recovery. We acknowledge we have more work to do but as we have stated on past occasions, we think the market is attempting to form a bottom and we will continue to make further adjustments in the weeks ahead.