Market retrospective - week of 17 July

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “How do we stack up with the world markets?”

"Advice is seldom welcome and those who need it the most, always like it the least.” - Lord Chesterfield (1694-1773) English Statesman, Author

Overview

What a fun week for the markets!

Even though the traders looked tired by Friday, we still managed to pick up all we lost over the past four weeks – and then some. We had been down about 5% and we closed up over 7%. Trading volume remains seasonally low but – up is up…

Positive comments from a previously bearish analyst on the bank sector got us going and then the earnings from some of the market leaders not only came in positive but, in most cases, better than expected. JPMorgan, Intel, Goldman Sachs, IBM and Google, to name a few, all came in with nice numbers. More important, I believe, was that most of the companies felt that the remainder of the year and into next year looked very good for them.

Stocks go up because their earnings go up. Growth stocks go up not only based on today’s numbers but what the company and the analysts following it see for the future. As the future brightens, the shares go up in anticipation of those rising earnings. I believe that today’s market – and for some time to come – will see growth stocks at the fore. That’s one reason the NASDAQ is doing so well is that the Index is primarily growth and tech issues, aka, market leaders.

As I look at the markets from my perspective of 36+ years of day-to-day participation and advising, I am quite convinced that we’re going to see the economy grow much more than what the prevailing wisdom has it…and ahead of this growth, the equity markets will improve very nicely.

Here’s a few reasons why I quite comfortable saying this. Look for continuing drops in business inventories; increasing exports; home building to bottom soon and begin to rise as starts must rise a lot, just to get to normal and that consumer spending will continue to rise as well.

Bottom line. Get your money out of the First National Mattress and put it to work for you now.

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.)

“You’ve got a corporate America that’s poised for growth coming into the second half and the first half of next year. Inventory levels are down, companies have right-sized their levels of employment. You’re going to be in place for an explosive growth in a couple of quarters and the best upside surprise will be in technology.” - Art Hogan, managing director, Jefferies

“While markets remain fragile and we recognize the challenges the broader economy faces, our second quarter results reflected the combination of improving financial market conditions and a deep and diverse client franchise." - Lloyd C. Blankfein, Chief Executive, Goldman Sachs Group (announcing profits jumping 65% from a year earlier)

“The Great He-Cession - The unemployment rate for men hit double-digits, 10%, in June, while for women it's 7.6%. The industries that tend to employ lots of men, such as construction and manufacturing (and auto dealerships), have suffered deeper job cuts in the recession than the education and healthcare jobs that employ more women.” – Wall Street Journal

“Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand. A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low. Supply is outpacing demand by about 1 million barrels a day.” - Philip Verleger, academic and former US government adviser (He correctly predicted in 2007 that prices were set to exceed $100.)

“Stocks traded outside of the U.S. are worth $14 trillion, or 59% of total value of global shares. (The figures are as of June 30.) Yet the average American has only 11% of their stock holdings abroad…they are missing an opportunity for better diversification and returns.” – Forbes

“Bank stocks are in for, at least, a short-term gain of 15% as the industry benefits from accounting changes and legislation aimed at helping lenders.” – Meredith Whitney, bank analyst (She had been very bearish on the entire sector since early 2007)

"The data showed the (Chinese) economic recovery is stronger than expected. There will be no suspense about achieving the government's goal of 8% GDP growth this year." - " Zhu Jianfang, chief economist, Citic Securities, Ltd.

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

“The Dow Jones Industrial Index managed to cement a 7.3% rally this past week that came as earnings season kicked into full gear. The Standard & Poor's 500 and the tech-laden NASDAQ both also capped off strong weeks. For the week, the S&P was up a shade under 7%, while the NASDAQ gained 8% over the past eight sessions.” – Wall Street Journal

US homebuilder sentiment in July jumped to its highest level in 10 months as improved sales conditions boosted confidence in the market for new single-family homes according to The National Association of Home Builders. "Builders are seeing slightly better sales conditions this month as consumers take advantage of the first-time buyer tax credit, low interest rates and attractive home prices." - Joe Robson, NAHB Chairman and home builder, Tulsa, Oklahoma

US business inventories 1% in May, marking a ninth consecutive monthly decline. Business sales slipped 0.1% in May. That pushed down the inventory-to-sales-ratio, which measures how long it would take to clear shelves at the current sales pace, to 1.42 months' worth from 1.43 in April. Companies have been purging inventory and that has contributed to the recession. Many economists expect that pattern to reverse soon, which should help lift economic growth in the second half of the year. - US Commerce Department

Initial jobless claims dropped for the second straight week to levels lower than forecast on a seasonally adjusted basis, while total continuing claims also fell by a record amount to the lowest level since January. – US Labor Department (Continuing drops in initial unemployment claims are positive leading indicators of the change in the economy.)

China's economic growth accelerated in the second quarter amid a stimulus-fueled surge in consumer spending and factory output.

The world's third-largest economy expanded by 7.9% in the April-June quarter from a year earlier. That was up from 6.1% growth in gross domestic product (GDP) the previous quarter.” - National Bureau of Statistics (According to Forbes, many analysts expect China to be the first major country to emerge from the global economic slump.)

Housing starts in June climbed 3.6% from May. Single-family home starts jumped 14.4%, the biggest rise since December 2004. Both overall starts and single-family starts have risen for two straight months.

It was the first time since February-March 2007 that single-family starts posted two months of gains and the first time since January-February 2008 for overall starts. June permits to start construction, an indicator of builder confidence, increased by 8.7%, the highest since December. – US Department of Commerce

Perspective

“How do we stack up with the world markets?”

The media and many government types seem to have the goal of working to diminish our country’s position in the global economic stage. Many people are heard to recycle what they get from those sources as their opinions about our ability to compete, the horrors of outsourcing, the dollar being only good as wall paper and how foreigners “control” us by buying our bonds.

There is always an element of truth in these spin stories but most of it can be traced to the psychological fog those same sources have placed many people.

Let’s start with this fact – not opinion of some misguided media maven. The World Economic Forum, a global economic think tank based in Switzerland, recently announced that the US is number 1 – as in the top – in its annual global competitiveness report. These people have no ax to grind nor advertising space to sell. Could be why that hasn’t been made more of, I’m thinking.

Same church, different pew

Today’s economic environment – in terms of unemployment levels, fear, concerns, change – is highly reminiscent of times in the 1970s and again in the 1980s. I can assure you that those periods were just as uncomfortable as this one is now. The biggest challenge – I believe – is that because we had a period of unprecedented growth from 1982 through 2002, most people of any age have little experience with down markets other than having read or heard of them.

Markets and economies are cyclical – there are downs to follow ups and, as is the case now, the up to follow the down. And, contrary to my governmental and media buddies profess, this is nowhere near as bad as the Depression. Even if the economy ultimately hits over 3% down from its highs, in the 30s, that drop was 25% - and no FDIC or unemployment insurance!!! To attempt to compare the two periods is stupid and irresponsible.

Going back 60+ years, we have averaged a recession about every 5 years. It’s not usually as significant as this one is proving to be but that’s the cycle. The point is that we’ve had them before and we’ll have them again. The longer your investment time horizon, the less impactful they will be.

Debt and housing

The folks at the International Monetary Fund (IMF) tell us that Ireland, Spain, the UK, Australia and some eastern European countries have worse overall housing bubbles than we do/did.

As to the debt levels, the IMFers say that, as a percentage of our GDP, our total government debt will average about 57% - as compared with the median of around 40% over the last 20 years. By the way, in the US, the level was right at 50% in the 80s. For comparison, and according to the IMF figures, Japan will have a ration of 151% with the Euros (16 countries) averaging 66%.

Outsourcing is no biggie

This is the, I believe, natural progression due to a global trade reality. In the US, it’s true that we’ve lost about 6.5 million manufacturing jobs since 1980. The part that the negative types magically overlook is that – over the same period and adjusted for inflation – the total value of what we do put out from our manufacturers is up by 70%!

That’s done because we use technology to give us the greater productivity. The low-skilled and labor intensive jobs have gone to countries that flourish in that environment. The higher skilled and, by the way, higher paying jobs remain here.

Who has the biggest GDP?

You may recall/have read that in the mid to late 1980s, Japan was set to “take over” as the head of the economic pack. Oops! The media blew another one.

Right now, the US GDP – after getting beaten up over the past 9 months – is at $14.3 Trillion. The media and negative government types like to tell us that there are others “poised to take over our leadership role.” I concur that we need to adjust, adapt and tune-up a lot in our education system to help us stay ahead. However, let’s see where Japan is now.

Japan is in the number 2 slot. Their GDP is $4.9 Trillion. As a percentage or just a differential, that’s not even close. From a GDP per capita basis, China still has some way to go as it ranks number 100 of all the world’s countries. Safe to say, they’ll be growing but let’s keep things in context.

Prognosis

We can’t be complacent but neither should we be concerned about our ability to recover. WE will lead the global economy back. WE set the example for innovation, adaptability and flexibility. WE are still the place where the best and brightest want to come to learn and, perhaps, live.

Get rid of your fear – False Evidence Appearing Real. Our economy, our markets are the strongest in the world – media nay saying and governmental bad policies, notwithstanding.
Act in your own best interest and move into the markets today. Do it all at once; do it incrementally – just do it, as the folks in Beaverton say.

Remember – the future is so bright, you have to wear shades!

All my best,
Mike
509-747-3323
Closing values as of 10 July 2009: Dow Jones 8743 NASDAQ 1886 S&P500 940 Oil $63.51/bbl Gold $940.00/oz