Market retrospective - weeek of 5 June

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “The real risk is being in cash”

“Become a possibilitarian. No matter how dark things seem to be or actually are, raise your sights and see possibilities, always see them, for they're always there.”
- Norman Vincent Peale (1898-1993) American Preacher, Writer

Overview

While, overall, the week was fairly quiet, we did manage to finish higher, so we’ve now been up 11 of the last 13 weekly market sessions.

We did get a nice big blast on Monday to start the week and month.

The first trading day of the month often brings with it a big chunk of new money from mutual funds, especially those in 401(k) plans. This month it appeared that a large part of the money went into stock funds. That flow helped the S&P and Dow break through their 200-day moving averages for the first time in well over a year. (Moving averages are closely watched technical barometers for market trends. Some traders use strategies to automatically buy or sell if those levels are penetrated.)

I do firmly believe that we’re still going higher. I also believe that we can see profit-taking take place, either in a sideways market as people reallocate their profits, or in a more defined selloff. It matters not. The trend is still firmly and strongly higher.

By the way, also on Monday – “as you may have heard” – GM did file for Chapter 11 bankruptcy. As it stands now, the administration will spend a bit more than $30 billion to fund the bankruptcy and in exchange receive 60% of GM's stock. The Canadian government will put in $9.5 billion for a 12% piece and the UAW pretty much controls the rest. I think the government involvement is totally inappropriate and sets taxpayers up for a chance to throw huge amounts of good money after bad. Right now, if you could buy the new GM stock, it would qualify as a speculative investment, at best.

A fine example of just how well this government “business management” works can be demonstrated in the ongoing boondoggle known as Amtrak. This year, that fine institution is expected to lose yet another $476 million. It’s never, ever been profitable while run by the Feds over multiple long years. While chump change compared to what’s already been burned by GM, I’m afraid it’s a preview of what’s to come from our now, Government Motors…

Tea Leaf Readings (I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)

Consumer Reports ~ The magazine recommends 70% of Ford’s vehicles, but only 19% of GM’s. Finances are only one of GM’s many challenges.

Microsoft ~ The company said its new Windows 7 operating system will be generally available on 22 October, well ahead of its original schedule and in time for the holiday shopping season. The new operating system will replace the (polite term) unpopular Vista. No word on what affect this will have on Apple’s ad campaign…

“For the time being, US macro-economic data seems to be what’s driving crude prices and not the fundamentals, which look uninspiring at best. For now, it is inadvisable to stand in the way of what seems to be investor money clearly piling into commodities.” - Edward Meir, analyst with MF Global Ltd.

“I think everyone’s waiting for a pullback so that they can get in. So, that tells me we’re not going to get much of one — and if we do, it’s not going to be as big as people expect.” - Scott Billeadeau, managing director, Fifth Third Asset Management

“At some point, it's hard to fight the trend and the trend over the last couple of months has been up. People don't want to be left out.” - Ryan Larson, senior equity trader, Voyageur Asset Management

“Inflation is likely three to five years down the road and investors should stay relatively close to the front end of the yield curve where the bond prices are protected by the Fed position of low Fed funds and interest rates.” - Bill Gross, co-CIO and founder, Pimco

Economic reports from the past week (with occasional translations…)

Personal savings rate ~ For the April period, it increased to 5.7% from 4.5% in March. It was the highest monthly increase since 1995.

Energy Information Administration ~ Oil soared to seven-month highs earlier this week -double its price in March - on investor expectations that the economy is stabilizing. The EIA also said Wednesday that the amount of crude oil being held in storage unexpectedly rose by nearly three million barrels last week. That’s about 20% above year-earlier levels, suggesting demand remains sluggish. (Nonetheless, a prediction from Goldman Sachs Group Inc. this week said that crude may reach $85 a barrel by the end of the year.)

Initial unemployment claims ~ For the third straight week, fewer Americans filed claims for unemployment benefit. This suggests that the worst of job losses may be over.

Even better news, in terms of the trend of unemployment, is that the number of people actually collecting unemployment insurance fell for the first time in almost five months, breaking a string of 17 consecutive record months of increases.

Worker productivity ~ According to the Department of Labor, productivity, a measure of employee output per hour, rose at double the gain estimated last month.

National unemployment rate ~ Also from the US Labor Department, the report for May showed job losses dropping at the lowest rate since September, 2008. However, the national unemployment rate moved up to 9.4%. This is the highest level since August, 1983, when we last had a tough recessionary period. It’s important to understand that this rate will continue to go up for a period because it’s a lagging indicator. This means it reports data that are based on past events. It will be the last major indicator to turn positive.

Pending sales of previously owned homes ~ April unexpectedly had the biggest monthly gain in 7 1/2 years, according to the National Association of Realtors. It was the biggest monthly increase since October, 2001, taking the index 3.2% above its year-ago level.

China and US Treasury paper ~ China – along with Japan, India and South Korea - all said in separate interviews that they would “keep buying US Treasurys even if the US credit rating were to be cut.” Those comments this week were viewed as an expression of support for all the dollar-denominated assets of these nations that, collectively, control about half of the world's currency reserves. Federal Reserve data show foreign central banks added about $69 billion to their holdings of Treasurys in May. They don’t seem too afraid to me.

The grandstanding by the locals around the Treasury secretary’s visit to China this week was really for domestic consumption. It seems pretty obvious that, as long as China continues to run a trade surplus and control its currency by buying up the dollars generated by that surplus, it has little choice but to park the proceeds in US Treasurys where they know they’re safe.

Perspective

“The real risk is being in cash”

Here’s my benchmark.

The bear market ended March 9 and the “official” end of the worst recession since the 70s is within sight/reach/grasp. I think it’s already dead, personally.

Many people are using the rear-view mirror and deciding that if Treasuries were good last year, they’ll still be good today. Not a solid investing approach. My good buddies at Merrill Lynch – the former brokerage firm currently part of a bank – have created something called the US Treasury Master Index. The Master says that Treasuries – so far this year – have provided investors with a total return of MINUS 5.3%. My point is that nothing is always a good investment…

And consider this.

Because of how the Feds are keeping short-term rates at basically zero, many – a lot – of money market funds are not paying any return. (Their return would be negative too if the fund managers hadn’t elected to waive their usual management fees…) I guess the thinking is that, as long as it doesn’t go down, I’m okay.

Don’t let the media keep you from making good decisions by telling you that GM’s bankruptcy will really mess up the economy. GM is an out-of-date company. They’re a 19th century technology, using mid 20th century systems to try and survive in the 21st century. Sure, unemployment numbers will go up for a while as a result of their bankruptcy ripple effect but, in the big picture, it’s no biggie. There are 25,000 remaining employees. There are millions working for the new economy companies of Microsoft, Cisco, Wal Mart, Home Depot, Apple, et. al.

To the point, earnings yields on high quality companies still remain comfortably above the yield on 10-year Treasuries. Based on my experience, they should have the ability to absorb higher interest rates driven by economic recovery. Your total return potential, growth plus dividends, remains excellent.

It’s summer. You know how you dip your toes into the pool, lake or ocean to get used to it? And then, once you’re in, it’s quite refreshingly comfortable. I think the same can be true with your investing.

Start getting your monetary toes wet now. If you have one, step up your 401(k) contributions into the best options you have – you’ll automatically be buying the dips. Even if you don't, look for some of the many good quality choices that are now available. Make sure that you will participate in the recovery.

And again, in the spirit of summer, remember that…

The future’s so bright – you have to wear shades.

All my best,

Mike
509-747-3323

PS If you, or someone you know, has suffered the death of a spouse, been divorced or changed jobs and has a retirement plan they’re not sure what to do with, please let them know I can be of help. Thank you.

Closing values as of 5 June 2009:
Dow Jones 8763 NASDAQ 1849 S&P500 940 Oil $68.58/bbl Gold $955.70/oz