Fidelity Independent Adviser

The Sector Momentum Tracker portfolio was up 17.16 percent net of fees in 2007 and continues to grow faster than the overall market since inception!

In this Issue:

· Portfolio Update
· Fund Spotlight—Fidelity Select Energy (FSENX)
· Big Movers
· Big Losers

Please note: This is NOT our weekly Sector Momentum Tracker newsletter. If you are a subscriber to the Sector Momentum Tracker and need assistance following our newsletter devoted to Fidelity sector investing, do not hesitate to call us at (800) 548-3797. We hope that you continue to benefit from this email Hotline, which provides insight into weekly sector activity but does not substitute for the trading system provided by our newsletter, which is published every Monday.

Although oil prices rose to a fourth consecutive all-time record yesterday, equity investors looked past the inflationary effect of higher energy prices, and the major stock market gauges closed with gains. The Dow Jones Industrial Average gained 52 points, or 0.4 percent, to 12,867. The winner on the 30-stock Dow was Alcoa, up 4.1 percent. The aluminum producer has ridden the broad-based rally in commodities to a 38 percent increase in share price since late January. The S&P 500 advanced 5 points, or 0.4 percent, to 1,398, thanks to strength in the energy sector. Ongoing investor interest in technology shares lent support to the Nasdaq Composite Index, which increased 13 points, or 0.5 percent, to 2,451.

Economists who have examined the commodities boom are saying that fundamental market forces—and not speculation by investors seeking to profit from movements in the futures markets—are the primary drivers behind rising energy and food prices. Demand from hundreds of millions of newly affluent consumers in China and India could keep the cost of oil, corn, soybeans, copper, and other basic materials at or near their current levels even if an economic slowdown in the U.S. curtails the demand for those products here at home.

The consumer appears to be retrenching, although expenditures on staple items contributed to better than expected sales at big retail chains last month. Wal-Mart reported same-store sales growth of 3.2 percent last month, well ahead of the 2.1 percent growth Thomson Financial had forecast. The retailing giant, which many investors consider a useful indicator of overall U.S. economic trends, said that staple grocery and drugstore items contributed the most to its bottom line. Sales at Costco warehouse stores open for at least one year increased by 8 percent, and Target reported growth of 3.1 percent.

In other economic news, the Department of Labor reported earlier this week that worker productivity—a key indicator of the economy’s ability to expand without triggering inflation—unexpectedly rose in March, at an annualized rate of 2.2 percent. Economists polled by Bloomberg were expecting a more moderate increase of 1.5 percent. The productivity data reflects four straight months of contractions in nonfarm payrolls that have left fewer workers on the job doing more work. The data also jibes with the Federal Reserve’s basic economic forecast for the remainder of 2008, which calls for a slowing economy and essentially stagnant wage growth to counteract inflation.

	Inception	YTD	2007	2006	2005	2004
Sector Momentum Tracker Gross	56.39	0.19	19.23	3.93	10.73	13.75
Sector Momentum Tracker Net	45.98	-0.25	17.16	2.00	8.60	12.76
S&P 500 Index	24.66	-4.81	5.49	15.80	4.91	10.88
NASDAQ Composite	23.13	-7.58	10.66	10.28	2.17	9.15
Dow Jones Industrial Average	26.11	-3.00	8.88	19.05	1.72	5.31

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Fund Spotlight—Fidelity Select Energy (FSENX)

Crude oil topped $124 per barrel yesterday, once again confounding the experts who said it wouldn’t reach $100, and then $110. Funds tied to the price of oil and natural gas rallied once again as well, including Fidelity Select Energy, which gained 2.8% in the week ending May 7.

At the moment, FSENX isn’t part of the Sector Momentum Tracker portfolio. Since we already hold Select Natural Gas, Natural Resources and Energy Service (FSESX), we’ve skipped the fund to avoid overexposure to energy stocks.

Still, FSENX’s relentless momentum continues: The fund has ranked No. 3 or No. 4 on the Sector Momentum Table since late November, and among the top six since May 2007. And because it differs from FSESX (No. 4 as of last week), it could climb back into the portfolio.

Indeed, FSESX’s recent top-three holdings— Schlumberger, National Oilwell Varco and
Transocean—were all part of FSENX’s top-10 holdings. But FSESX invests in a narrow slice of the energy industry, buying mostly shares of firms that dig and pump oil wells, just one slice (recently, between 25% and 30%) of FSENX’s broader, industry-spanning portfolio.

John Dowd manages both funds (and Select Natural Gas), using what Morningstar’s Michael Herbst terms a “measured” approach to the sector. In short, he looks for shares of companies trading at a discount to the replacement value of their assets. That keeps the FSENX away from “broad macro calls,” as Herbst says. Dowd anchors the portfolio with stocks of the big boys, topped by ExxonMobil, which has recently accounted for more than 15% of assets.

Still, Dowd gives careful consideration to the price of oil, natural gas, and even coal and other fuels, the better to find bargains with stock valuations up. The fund’s mix includes the stocks of exploration and production firms, refiners and distributors, as well as providers of coal, electricity, and nuclear and solar power.

During a spectacular 2007 and 2008 (thus far), Dowd has emphasized more midsized players, including cost-conscious natural-gas producers such as Range Resources and Ultra Petroleum. He’s also added exposure to such oil-rig firms as National Oilwell Varco and Ultra Petroleum, because, as Herbst points out, “he thinks they’ve been looking cheaper than the value of their existing rigs.”

The fund’s huge stake in ExxonMobil sets it apart, as only Select Natural Resources includes the diversified energy giant in its top 10 (at less than 4% of assets, recently). That’s interesting, because while the stock is down 4.8% year to date, some analysts like ExxonMobil because of its size, business and geographic diversification.

S&P’s Tina Vital rates XOM as a strong buy, given the assumption of high oil prices, but also because of its strong balance sheet and opportunity for growth (earnings are projected to grow 16% this year versus 8% for the supermajor oils, Vital says).

It’s that high-oil-prices assumption that brings risk to FSENX. Prices are high enough that some investors wonder if they won’t dampen demand, and after such a long run-up, a reversal in the tide of crude prices could have devastating effects on FSENX.

Just as oil prices have swung wildly this year, FSENX has been riding a roller coaster. The fund fell 16.6% from Jan. 3 to Jan. 22, gained almost all that back, and then fell 12.1% from Feb. 26 to March 20. Since then (through May 7), it’s up 5.8%.

FSENX carries a three-year standard deviation of 21.65, about two and a half times that of the S&P 500. (That’s not as high as FSESX or FSNGX, which carry 25.59 and 24.64, respectively.)

Of course, lack of correlation with the broad market—on the upside for most of the last decade—is what makes the fund attractive in down markets. FSENX recently had an r-squared of 22, meaning its performance followed the S&P 500 only 22% of the time during the last three years.

Of the 42 funds we cover, FSNGX has the best year-to-date return, at 15.71% through May 8. FSENX is third, and one of only nine funds with a positive YTD return. Over the last month, FSESX is second, with Energy and Natural Gas ranked ninth and tenth.

The three funds, along with Select Natural Resources, own the best five-year annualized returns of the group, ranging from 30.88% to 33.98%. They also lead over the last year, with even more impressive returns.

Technology (FSPTX) +4
Communications Equipment (FSDCX) +2
Multimedia (FBMPX) +1

Technology (FSPTX) and Communications Equipment (FSDCX) are the biggest momentum gainers in our universe for the second consecutive week. Qualcomm has been the standout this year among the top FSPTX holdings. The San Diego-based company reported higher-than-expected quarterly profit in late April and boosted its full-year earnings outlook, despite an ongoing dispute over technology licensing with Nokia. Qualcomm shares are up 12.4 percent on the year.

Top FSPTX stock Cisco, the maker of computer networking gear, said this week that its quarterly net income fell 5.4 percent, in part because of costs related to acquisitions in made earlier in the year. But Cisco, which investors look to as a gauge of overall corporate IT spending, has also said it expects growth in its key routers and switches businesses to be slower this year than it has in the past. Cisco is down 5 percent from the beginning of the year through yesterday’s close.

Research In Motion and Corning continue to buoy FSDCX. While Apple has managed to sell 5.7 million copies of its iPhone since last summer, Research In Motion’s BlackBerry is still the favorite among corporate users, with a subscriber base of 14 million. Corning, which makes high-performance glass for LCD television screens, is benefiting from ongoing growth in that market.

Leisure (FDLSX) -4
Paper and Forest (FSPFX) -2
Consumer Discretionary (FSCPX) -2

Leisure (FDLSX) is dominated by top stock McDonald’s, which accounted for 24.58 percent of this fund’s net assets at the end of March. Shares of the world’s largest restaurant chain hit their year-to-date high earlier this month but have sold off more recently in the face of skyrocketing food and fuel prices. Other top FDLSX shares include Yum Brands, Carnival Corp., and International Game Tech., the slot machine manufacturer, which is down 20.9 percent since the beginning of 2008.

Declining demand for raw materials from homebuilders has hurt Paper and Forest (FSPFX). Top holdings as of March 31 included Weyerhaeuser, Temple-Inland and Domtar Corporation. The National Association of Realtors, a private research group, reported on Wednesday that its index of pending home sales fell 1 percent in March to a new low. The index is down more than 20 percent since March of 2007. The housing market may get worse before it gets better. Rates on the bulk of a tier of mortgages known as Alt-A, a level of creditworthiness between subprime and prime—will reset over the next several months. The result could be another wave of mortgage defaults—and more homes on an already glutted market.

With gasoline and food prices on the rise, consumers are clearly beginning to tighten their belts, a trend that was clear in the latest round of retail sales data from April. Big discount chains like Wal-Mart, Target and Costco beat analyst expectations for same-store sales, while apparel and specialty retailers faltered. Investors are understandably wary of Consumer Discretionary (FSCPX) these days, despite the fact that the fund’s top holding is Target, which is up 5 percent on the year. Other top FSCPX holdings include Time Warner, Home Depot and Lowe’s.

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Fidelity Independent Adviser is completely independent of, and not affiliated with, Fidelity Investments or any of the Fidelity mutual funds listed above.

Performance Disclosure.All models and tables presented in this publication are the product of Fidelity Independent Adviser Newsletter, LLC, an independent company operated by Donald R. Dion, Jr., President of Dion Money Management, LLC (DMM), a registered investment adviser that manages assets for individuals, families, trusts and non-profit organizations. The Fidelity Independent Adviser is completely independent of and not affiliated with Fidelity Investments. The model performance returns are compiled by Fidelity Independent Adviser from historical returns of a determined mix of selected mutual funds or exchange-traded funds based upon investment strategies. These results include the reinvestment of all dividends and capital gains. Beginning 3/31/2007, portfolio returns are net of Dion Money Management’s highest fee, 0.4375% per quarter. The model results do not represent actual recommendations or trading. Model results do not reflect the impact of material economic and market factors that impact DMM's decision-making if DMM were actually managing clients' money. Because DMM manages its actual client portfolios according to each client's specific investment needs and circumstances, model results may in some cases differ significantly from the results our clients achieve, due in part to timing of the recommendations by DMM, market conditions, client money market balances, and timing of client deposits and withdrawals. In addition, client portfolios may contain less or more funds and may contain different funds in order to meet client needs. Model performance results may have inherent limitations. No representation is made that any account will or is likely to achieve profits or losses similar to those shown, and there are frequently significant differences between hypothetical performance results subsequently achieved by following a particular strategy. Model trading does not involve financial risk, and no model trading record can completely account for the impact of financial risk associated with actual trading. Other factors related to the markets in general or the implementation of any specific trading strategy that can adversely affect actual trading results cannot be fully accounted for in the preparation of model performance results. The volatility of the S&P 500, Wilshire 5000, Russell 2000, Dow Jones and Nasdaq indices may be materially different from that of the client's account, the securities holdings of which may differ significantly from those of the indices. The indices' results shown reflect reinvestment of dividends unless otherwise noted. These indices have not been selected to represent appropriate benchmarks to compare the clients' performance, but rather are disclosed to allow for comparison of the client's performance to that of well-known, widely recognized indices. This material has been prepared solely for informational purposes. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. All investments involve risk including loss of principal.