Market retrospective - week of 31 July

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “A few words about housing”

"If you don't sell, you're never wrong, but there's no perfection in the market, only change. The only perfection is in the graveyard where nothing stirs.” – Martin T. Sosnoff, chairman and founder of Atalanta/Sosnoff Capital, a private investment management company with more than $8 billion in assets under management

Overview

This July has been a real winner!

The Dow Jones had its best July performance since 1989 and the S&P500 put up its best result since 1997. Just for the month alone, the Dow was up 8.6%, the S&P was up 7.4% and the NASDAQ up 7.8%. There are many years when we don’t get that kind of result…

Since the March 6th low, the Dow is up 40% and the S&P is up 46%. The NASDAQ has outperformed both – up 57% during this time. This means that the NASDAQ is now only down 12% since last September. That’s much better than the Dow and S&P, which are both still 20% below where they were before Lehman Brothers filed bankruptcy.

The market's gains have been driven primarily by corporate earnings news. For the quarter so far, 75% of the S&P 500 companies have topped Wall Street expectations. Since earnings drive stock values, that’s really good news.

So, can August do as well? It says here that since 1896, the Dow has been up 61% of the time, with an average gain of 4.5%. And when July is a positive month for stocks, most of the time August is also higher. For the Dow, August was higher 64% of the time following a positive July, but the gains were more tempered, averaging just 1.6%. In other words, it looks good but probably not as exciting.

It’s typical that in the early stages of a new bull market, after the initial powerful rally off the lows, investor moods shift from the depression levels of those lows. Then, a set of worries set in as people wonder if the market has come too far too fast. This is where we are now.

As I’ve mentioned many times in these writings, it’s been my experience that each market drop has seen a subsequent recovery that ultimately exceeds the prior highs. For those thinking that we’re close to the top, consider this. When looking back at the most recent highs set in October, 2007, the Dow is still off 35%, the S&P is down 37%, while the NASDAQ remains 30% lower.

There’s definitely more to go. In the spirit of the season, come on in (to the market) – the water’s fine!

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.)


“It's a good time to buy stocks. Traders are a little trigger-happy to trade on the slightest bit of bad news these days. As for all the talk about earnings only being good because of cost-cutting efforts and sales still being weak, people are reading too much into it. We are at the bottom of the recession and sales are exactly where they should be. Why would anyone expect there to be good sales growth at the bottom of a recession?” - Jim Paulsen, chief investment strategist, Wells Capital Management

"We always say that markets climb a wall of worry and with that said, on every front there's something to be worried about. The tug-of-war has existed from the very beginning that the recovery was going to be muted against those who say you're going to be surprised that this is going to be a stronger recovery." - Quincy Krosby, general market strategist, Prudential Financial

"The only thing that you're hearing the bears scream about is that without jobs there can't be a real recovery. For the last several decades, the jobs have been more and more of a lagging indicator." - Jordan Kimmel, market strategist, National Securities

"I'd hesitate to be part of that big crowd that is always going to be worried about a pullback or think we definitely have to correct here. I don't think it's time to lighten up. Ride the trend as far as it goes." - Richard Sparks, senior analyst, Schaeffer's Investment Research

The S&P 500 was down 2.2% per year (total return) for the 10-years ending 6/30/09. Ten years ago, the S&P 500 was up +18.8% per year (total return) for the 10-years ending 6/30/99 - BTN Research (Average return = 8.3%; the case for long-term equity investing)

Support for President Barack Obama’s health-care effort declined over the past five weeks, particularly among those who already have insurance, as Congress struggled to finalize legislation and attention focused on the high price of the proposals.

In mid-June, the public was evenly divided when asked if they thought Mr. Obama’s health plan was a good or bad idea. In the new poll, conducted July 24-27, 42% called it a bad idea while 36% said it was a good idea. Among those with insurance, the portion calling the plan a bad idea rose to 47% from 37%. - Wall Street Journal/NBC News poll

45% of retirees aged 55-75 surveyed in April 2009 have either not calculated how long their assets are anticipated to last during their retirement years or they have never given the issue any thought. - Society of Actuaries

"We're seeing companies use temporary workers to fill short-term gaps where they've cut too deeply. That's typically a leading indicator things are bottoming out and companies are positioning themselves for a recovery." - Bill DeMario, COO, Ajilon Professional Staffing, a unit of Adecco

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

Gross domestic product (GDP) measures total goods and services output within US borders. GDP fell at a 1% annual rate in the second quarter. First-quarter GDP was revised to a 6.4% drop from an earlier reading of a 5.5% decline. Economists surveyed by Dow Jones Newswires projected a 1.5% decrease. But the slump was still smaller than the contraction over the previous nine months, in a powerful signal that the recession has eased. - US Commerce Department

There is better news around the world. It has been reported many times that China's economy is growing at an 8% rate. The German IFO index, a measure of business sentiment, rose for the fourth month in a row. The European Composite Purchasing Managers Index has been up five months in a row. South Korea's GDP grew 2.5% annually last quarter, which is the fastest growth rate in five years. – Forbes

Most of the 12 Fed district banks indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level. The pace of the recession has slowed or stabilized in most areas of the US. - Federal Reserve beige book (named for the color of its cover)

On a seasonally adjusted basis in the week ended July 25, the four-week average of new claims, which aims to smooth volatility in the data, fell by 8,250 to 559,000, the lowest level since January 24. The tally of continuing claims -- those drawn by workers for more than one week -- fell by 54,000 during the week ended July 18 to 6,197,000 - the lowest level since April 11. - US Department of Labor (the trend is definitely our friend here…)

Orders for US durable goods, excluding automobiles and aircraft, unexpectedly gained in June, signaling that manufacturing may expand in the second half of the year. Excluding transportation equipment, orders for goods meant to last several years climbed 1.1 % - the most in four months. – US Department of Commerce

"Crude stock data looks bearish from any angle ... the increase looks like the beginning of a trend reversal in crude supply that could eventually erase more than half of the draw of the past two and a half months." - Jim Ritterbusch, president, US energy advisor, Ritterbusch and Associates (A recent Reuters poll of analysts forecast oil prices will average $73 a barrel next year, up from an average 2009 price prediction of $58.23 a barrel. According to the DOE, the production of crude oil that occurs in the USA today (5.0 million barrels a day) is the same level of domestic production as it was in 1949.)

“The administration has fulfilled a promise to cut spending by trimming $100 million from the 2009 budget. That's right — $100 million with an "m," an imponderably small slice of this year's expenditures. In fiscal 2009, our federal government will spend nearly $4 trillion, according to the Office of Management and Budget's historical tables. The $100 million cut represents 0.0025% — less than one one-hundredth of 1% — of those outlays.” – Investor’s Business Daily

Perspective

“A few words about housing”

I am not a real estate expert. I do stay on top of those markets however, as part of my advisory practice, since it’s always been important to me to be informed so I can help my clients know how to position that portion of their assets. In that regard, I thought I’d offer a few observations.
So, let’s see where we are now.

The Commerce Department reported last week that new home sales increased 11% in June for the largest one-month increase in almost nine years. The last time sales rose so much was in December 2000. Sales have risen now for three straight months. That’s good. Matter of fact, sales blew came in higher than any of the 63 economists who made a forecast. If we compare the current numbers with January, new and existing home sales are up 17% and 9%, respectively. A good trend here.

When you do the big picture view, even with this increase, new home sales are still well below their long-term trend of about 950,000 per year. Says to me that sales will have to continue to move up a bunch over the next few years.

According to the S&P/Case-Shiller home-price index, home prices in 20 metropolitan areas climbed in May from the previous month for the first time in three years, another sign the market is stabilizing.

Another engine to help drive home construction is that in January, the supply of new homes was 12.4 months; now it’s down to 8.8. The number of new home homes for sale is less than half it was at the inventory peak in 2006 and the number of unsold new homes under construction has not been lower in about 40 years.

Falling home inventories and rising home sales are an important part of the broad economic recovery that’s taking place all around us.

Remember – Don’t fight the trend. The future is so bright, you have to wear shades!

All my best,

Mike
509-747-3323

Closing values as of 31 July 2009: Dow Jones 9171 NASDAQ 1976 S&P500 987
Oil $69.50/bbl Gold $954.50/oz