Market retrospective - week of 29 May

Contents: Overview; Tea leaf readings; Economic reports; Perspective

“You cannot help the poor by destroying the rich. You cannot strengthen the weak by weakening the strong. You cannot bring about prosperity by discouraging thrift. You cannot lift the wage earner up by pulling the wage payer down. You cannot further the brotherhood of man by inciting class hatred. You cannot build character and courage by taking away people's initiative and independence. You cannot help people permanently by doing for them, what they could and should do for themselves.” - Abraham Lincoln

Overview

What a week! All the indexes, along with most of the major commodities, moved higher.

The Dow Jones Industrial Index gained 2.7% this week and 4.1% during May. The S&P 500 was up 3.6% this week and 5.3% for the month. The NASDAQ added 4.9% and 3.3%, respectively. This was the third month in a row with market gains. Matter of fact, only the Dow is down for the year - and just slightly so.

Crude prices jumped 30% this month – the fourth month of increases. Gold was up as well, to its highest point in three months.

Interpreting all this says to me that we are definitely trending better in terms of the US economy and stock markets…and will continue to do so. The global economic recovery potential has boosted the oil prices as well. Gold is moving up in concert with the oil prices.

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.)

“The system has had an incredible adrenaline shot, so I think we’re going to have a pretty strong recovery. I see the near future as brighter, with a powerful comeback in equities because of government stimulus packages around the world.” - Barton Biggs, former chief global strategist for Morgan Stanley, now with Traxis Partners LP.

“We’re confident we are in a bull market. US stocks are at the start of a new market that may spur an 88% advance in the S&P 500 Index in the next two or three years.” - Lazlo Birinyi, founder of research and money-management firm, Birinyi Associates Inc.

“After the run up we have seen since March, it’s quite logical that we have some consolidation” in stocks. We see some cracks here and there and it’s quite likely we see some consolidation over the next couple of weeks. It could last for one or two months.” - Phillip Baertcshi, senior equity strategist at Bank Sarasin, Zurich

“Sharp gains in confidence typically occur right at the end of a recession. These gains are due to jumps in expectations, which is also what is happening now.” - Abiel Reinhart, JP Morgan

“The May consumer confidence report is another indicator that suggests that the recession's grip on the economy has slackened significantly and that the recession may be drawing to a close. While the labor market indicators still point to significant job losses, both the jobs components of this report and the weekly data on initial jobless claims suggest that the peak rate of job loss is now behind us.” - RDQ Economics

"We will come out of this rid of some of the historic legacy costs that have been dragging us down for the last 20 years or so. We will come out of it with an all new focus on product development." - GM Vice Chairman Bob Lutz

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

Consumer Confidence Makes Biggest Gain in 6 Years ~ US consumer confidence in May moved to its highest level in six years as the strains in the labor market showed signs of easing. Fewer Americans said jobs were "hard to get," the survey found.

Existing-home sales ~ Sales in April rose 2.9% to an annual rate of 4.68 million in April, up from a downwardly revised 4.55 million pace in March. The median home price dropped 15.4%, year over year, to $170,200.

US credit rating ~ Moody's Investors Service affirmed the AAA credit rating of the United States, minimizing fears about our creditworthiness that have been creeping up in financial markets. The rating agency said the US economy's “long-term resilience and key role in global affairs should bolster its ability to resume a strong performance following the current recession.” No one else can say that…

Durable goods orders rise ~ New orders for long-lasting manufactured goods had their biggest gain in 16 months in April. The Commerce Department said new orders for durable goods rose 1.9%. That’s the biggest percentage advance since December 2007.

Initial unemployment claims ~ The Labor Department reported initial claims for state unemployment insurance dropped in the week ended May 23, falling for a second straight week. Changes in continuing claims always lag shifts in initial claims. So, while initial claims appear to have already started a downward trend, more evidence supporting the ending of the recession, continuing claims may not peak for several months.

US GDP ~ Our Gross Domestic Product, the total goods and services created within US borders, dropped at a 5.7% annual rate, the Commerce Department said. That was less than the 6.1% estimated by the Feds last month and much better than the 6.3% drop in the fourth quarter.

Consumer confidence ~ Consumer confidence in the US improved in May to its highest level since last September. This is a leading indicator of consumer spending, which accounts for about 70% of our economic activity.

Perspective

On Friday, GM’s common stock closed at 75 cents per share, the lowest since April, 1933. After Monday, the only value those common shares will have will be as memorabilia. Kind of hard to believe, isn’t it?

The company will no longer be part of our everyday lives. It will be removed from the Dow Jones and S&P Indexes. It has moved into the realm of Cord, Tucker, Hupmobile and others. Cars produced by GM – and Chrysler – have now become collector’s items of a sort.

GMs will be the largest industrial bankruptcy we’ve ever had and the 4th largest of any type.
However, because it’s been coming for a while, it won’t have the relative impact of the Penn Central bankruptcy in the mid-70s. No one expected that. The company had been the largest, most prestigious name in the railroad business – an icon - and then, literally overnight, it was gone.

Have you heard anyone talking about the Penn Central lately? How many investors – who aren’t rail buffs – even know the company existed?

My point is that this event – highly painful as it is for all directly impacted by it – has happened before. The economy and the market have been through such events in the past and moved on.

GM says they’ll be better when they come out of this. I hope so since the April issue of Consumer Reports, which includes rankings of 2009 models, rated Chrysler as the worst automaker and GM the second lowest. Seems like all they can do is to improve.

In terms of the overall market, we’re transitioning too. We’re moving from the bear into the bull. Unemployment, GDP and other news still isn’t great but it’s definitely turning better. As we see the estimates for improved earnings from companies – as if by magic – the economists also start seeing things more positively and even the media ultimately catches on.

Like GM – though not as traumatically – the whole market is going through an evolution. We’re evolving from the dark cave that the bears live in out into the brighter climes that favor the bulls.

To be a successful investor requires that a person have a positive outlook – not just on the markets. While we’ve all been tested over this past year or so, I know my positive view about the upward direction and trend of our economy and market remains totally positive.

Come out and enjoy the sun! The trend is definitely your friend…

All my best,

Mike

Closing values as of 29 May 2009:
Dow Jones 8500 NASDAQ 1774 S&P500 919 Oil $66.31/bbl Gold $979.40/oz