Market retrospective - week of 26 June

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Inflation?”

“An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.” - Dr. Laurence J. Peters, (1919-1990), Canadian Writer

Overview

“Déjà vu all over again”

Mr. Lawrence Berra, better known by his nom de sport of Yogi, was renowned for his ability to create statements that didn’t sound right at first but do as you consider them longer. I’m borrowing this one to describe the market week – and, truthfully, the two prior to that and likely the one to come. It’s something we’ve just experienced and we’re about to do it again. Think of it in a three part synopsis.

Light volume, no direction, lack of buyers.

There is nothing to inspire the traders right now as there are no economic reports of note coming out in this holiday shortened week. (Markets are all closed Friday in observance of the 4th.) No earnings reports either. These will start being reported in force beginning the 6th. Once those start coming, we’ll learn who is able to grow in this early recovery environment and whose share values will represent a brighter outlook.

So, try and stay awake through this week and, hopefully, some positive fireworks will be in store for after the holiday.

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 Federal Reserve will "employ all available tools to promote economic recovery and to preserve price stability and that it would keep its target rate for overnight loans, currently between 0% to 0.25%, at exceptionally low levels for an extended period.”- Federal Reserve news release after their on Wednesday

"I think the window dressing is a big deal. There's just a force underneath the market that wants to keep it higher." - Joe Saluzzi, co-head of equity trading, Themis Trading LLC
"People are hesitant to take a position one way or the other." - Doug Roberts, chief investment strategist, Channel Capital Research

"The credit crisis is abating and the worst is behind the Federal Reserve." - Michael Feroli, an ex-Fed official, now with JPMorgan Chase

“A careful study suggests that the Fed has decided to stay the current course. Indeed, with no explicit mention of an exit strategy or an indication that the Fed will increase the size of its Treasuries purchases, the stance of the Fed appears to be unchanged. Notwithstanding, it appears that the deflationary fears that may have pervasive only a few months ago among some members may have abated.” - Millan L. B. Mulraine, TD Securities

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

Market moves ~ JPMorgan Securities said that they believe the Standard & Poor's 500 was facing a correction that likely would take it to between 830 and 875, which would represent a 5 to 10 percent drop from its current level. A rally likely would follow the drop and take the S&P to 950 to 1,000 by the end of the year.

Consumer Confidence Survey ~ Consumer confidence rose in June to the highest since February 2008. The Reuters/University of Michigan Surveys of Consumers said its final index of confidence for June was at 70.8 from 68.7 in May, equaling that of February, 2008.

"Such a sizable gain has usually indicated that an end to the economic downturn is on the horizon, as consumers begin to increase their spending on houses, vehicles, and large household durables," the Reuters/University of Michigan Surveys of Consumers said in a statement.

Personal Savings Rate ~ The Commerce Department reported that personal spending, incomes and savings all rose in May. Personal saving rate is now 6.9%, the highest since 1993, compared to zero early last year. This rise will help support consumer spending in the year ahead.

Q1 Gross Domestic Product ~ The economy contracted at a 5.5% rate, the Commerce Department said in its final reading on first-quarter GDP. That was a smaller contraction than the 5.7% initially reported.

Treasury auction ~ There was solid demand for three Treasury auctions this past week. In all, the government sold a record $104 Billion worth of debt. The successful auctions helped boost confidence in some that Washington will be able to raise enough money to fund its economic recovery programs.

Durable goods orders ~ According to the Commerce Department, new orders for durable goods, such as transportation equipment, machinery and metals, rose 1.8% in May. Those suggest companies in the US and abroad are becoming more optimistic about business and sales.
Orders climbed for the third time in four months. The gain was driven by higher orders for aircraft, machinery and computers, which helped offset a slump in demand for autos.

Existing home sales ~ The National Association of Realtors reported that, for the second straight month, sales rose. They increased by 2.4% in May. The inventory of exiting homes for sale also moved lower.

Perspective

“Inflation?”

For whatever reason they select, people seem to becoming more concerned about potential inflation issues and not the deflation that many were all up in arms about just four or five months ago. I didn’t ever believe that deflation was going to be long-lived. Right now, I don’t think inflation is a threat either. Having said that, it’s the one I am setting my long-range detectors for, however.

The Fed thinks that with unemployment as high as it is – and will likely become before peaking - along with the large amount of currently idle factory space, there is probably little near-term risk of prices overheating. That gives the Fed the ability to keep borrowing costs low until it believes that the economy is strong enough to handle an interest rate hike.

Matter of fact, according to economists advising the American Bankers Association, there may be four consecutive quarters of positive US economic growth before the Fed is ready to budge, probably in the third quarter of 2010. I think that’s a little long myself but that’s my opinion.
Nobel prize-winning economist Milton Friedman believed that inflation is “always and everywhere a monetary phenomenon. Persistently creating too much money chasing too few goods will, over time, push up inflation.”

Current Fed policies will likely produce some inflation. Before we need to really worry about it, we’ll need to see some evidence that home prices have stabilized. We’ll also need to see more evidence that normal lending policies are returning, without government intervention. And then, government being government, the Fed will probably hesitate in its changes to policy with the rate of inflation eventually getting higher than what many would prefer. I don’t think that whomever is at the Fed will let things get to the hyperinflation stage.

Stocks are a great inflation hedge and this is yet another fine opportunity to check your asset allocations. Strictly from a valuation standpoint, stocks definitely appear more attractive than any fixed income instrument alternative over the next five years. You get a store of value in stocks. It’s not just the dividend “while you wait”, but the capital appreciation for you to draw upon at a later time.

There is still plenty of liquidity to help move the stock market higher. Historically, initial periods of monetary stimulus like we’re in now are usually great times for stocks. Those periods where inflation ranges from 0-4% is associated with some of the best times in the stock market.

There is never a “best” time to buy. I heard something once that I’ve always thought made sense along those lines and that is that “the best time to buy is when you have the money.”
If you only wait for the times of economic certainty to invest in the stock market, your performance would be dismal…the largest part of the move up has already occurred by then.

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 26 June 2009:
Dow Jones 8434 NASDAQ 1838 S&P500 918 Oil $69.35/bbl Gold $941.40/oz