Market retrospective - week of 28 August

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Wither goes the rally?”


“Increased wages, higher pensions and more unemployment insurance, all are of no avail if the purchasing power of money (caused by inflation) falls faster.” -- Bernard M. Baruch (1870 – 1965) American financier; economic advisor to FDR


Overview


We had another up week for the markets – sort of. It wasn’t exactly a tremendous run as the Dow, which had the best showing of the three major indexes, only gained 0.4% for the week. But – up is up.


Volume has been extremely light as many traders are on vacation now and that adds to the market's recent choppiness.


So, the question is - is the rally over? We’ve had this light trading volume combined with churning, i.e., stocks not really showing direction, over quite a few sessions. You can’t really make much out of it.


Stocks have gone nowhere for the last few days despite better economic news on several fronts. The markets, as they always do, have run up in expectation of these better numbers. And now, some say, we’ll need to see even stronger numbers to move it forward.


This coming week also has some economic reports due out but, as noted, whatever the response by the markets, remember that there aren’t enough players to give a move much credence – up or down.


The best thing to do for this last week of “official” summer is to relax. Making grand pronouncements about market trends or rallies with this type of trading isn’t a good idea….



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.)


“Those of us that live by looking in a crystal ball learn to eat a lot of broken glass.”- Peter Grandich, chief commentator, AGORACOM.com


"There is a lot of money still waiting to participate and it hasn't participated yet. The debate in semantics is whether it is a long-term recovery or not. It's not a crazy rally, it's an inevitable rally. The monetary policy will remain highly stimulative for a protracted period. The fundamentals are that costs have been contained and costs are still ok. You have a cyclical earnings recovery." - Peter Toogood, head of investment, Old Broad Street Research


“I think you have to give this rally the benefit of the doubt for a while. We are up 50% from the lows for the stock market—but from the beginning of last year, we’re still down 25% and over the last decade, we’re still down 10%. So I don’t think just because we’ve had a fast and furious rally, it’s necessarily too much too soon. The earnings surprises so far have come mostly from cost-cutting so there is now some scope for the topline to drive growth.” - Jeff Knight, CIO, Putnam Global Asset Allocation Team


“Equities over the next 12 months are going to be up in comfortably double-digit rates of return. The surprises are all going to be on the upside for growth and corporate profits and that’s going to be keeping the markets going higher.


Additionally, the consumer does not have to come back to revive the economy. In the cyclicals, in the energy, materials, even in industrials, companies that are able to feed into much higher growth overseas and the US growth are going to surprise and be a lot stronger than what people think. So, we don’t need the consumer for the next couple of quarters—the rest of the world will do quite well for us.” - Margaret Patel, portfolio manager, Evergreen Investments


"The upward trend has still not broken. It's too dangerous to fight the trend in the market, even though clearly a lot of people are nervous that it's too extended." - Brian Daley, sales trader, Conifer Securities


“It is time to stop worrying about downside risks and instead to get back to ‘normal’ investing patterns. Investors should give up on holding cash with next to no yield. We don’t want to be worried about the potential pain of a double-dip than the opportunity cost of missing a continuing rally.” - Aaron Gurwitz, head of global investment strategy, Barclays Wealth


“I expect a sell off and expect stocks to pull back in the fall. My year end target for the S&P is 1000. This time of year you tend to get a lot more focus on the coming year and, as you get into the third quarter reporting time frame, you also tend to get a lot more management guidance. I expect third quarter earnings to be ‘decent,’ showing benefits from production increases and cost cutting.


We're not talking about a return to March or anything like that, or the fears of last November following Lehman's collapse, but some correction is probably a good thing in a weird way. You consolidate some of the gains instead of overshooting really badly and instead of suffering bigger losses as people get sucked in at higher prices.” - Tobias Levkovich. chief US equities strategist, Citigroup


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


The US will rack up larger budget deficits over the next decade than previously thought, (as in more than the sum of all previous deficits since America's founding – I guess that qualifies as larger). The White House said it now expects the economy to contract by 2.8% this year, steeper than its previous forecast of a 1.2% decline. And the recovery, projected by them to begin later this year, is expected to be “less forceful than previously hoped.” The unemployment rate is expected to peak later this year at around 10% before declining next year. The new deficit projections will push the 10-year deficit forecast up by $2 trillion, to $9.05 trillion. By the next decade's end, the national debt will equal three-quarters of the entire U.S. economy. (Gotta love that change somebody voted for…) - The Office of Management and Budget

The Standard & Poor's/Case-Shiller U.S. National Home Price Index rose 1.4% in the second quarter from the January-March period, the first quarterly increase in three years. Sales of newly built U.S. single-family homes rose for a fourth straight month in July to set their fastest pace since last September, while the inventory of unsold homes fell to the lowest level in 16 years.

Sales rose 9.6% to a 433,000 annual pace, the highest in ten months, and come on top of a 9.1% gain in June. That was the biggest monthly percentage gain since a matching increase in February 2005. – US Commerce Department (The trend is our friend…)

Bookings for durable goods (big ticket items that last 3 years or more) climbed 4.9%, exceeding forecasts and the most since July 2007. Excluding transportation gear, orders increased 0.8%, for a third consecutive gain. – US Commerce Department


Ford said that it would add a third shift to production plants in Michigan and Missouri to meet increased demand for its F-150 trucks and Escape crossover vehicles. The moves offer specifics about Ford's plan to increase production of cars and trucks in the fourth quarter by 33% over 2008 levels to a total of 570,000 vehicles. Ford is gaining market share in the US. (With cars and light trucks (pick-ups and SUVs) being scrapped at a 13+ million annual rate, vehicle sales should grow strongly over the next couple of years - with or without government programs.)


Consumer spending in the US rose in July with a 0.2% gain in purchases. This was in line with forecasts and followed a 0.6% increase in June. - US Commerce Department


US consumer confidence fell to its lowest since April but above economists' expectations and the mood managed to improve from earlier this month.


"Confidence rebounded in late August as consumers increasingly expected improved conditions in the national economy even as they reported the worst assessments of their finances since the surveys began in 1946." - The Reuters/University of Michigan Surveys of Consumers (These are pretty much headline driven. The real sentiment is shown when, how and where money is spent.)



Perspective
“Wither goest the rally?”


I don’t know – not the foggiest. While I’m always in favor of rallies, let me tell you why I think the near-term direction of the markets doesn’t really matter. It’s like weather guessing. It’s going to be what it’s going to be and our views aren’t going to influence it at all…


Let’s agree on one thing at the outset. NObody knows for sure what is going to happen with the markets on a short-term basis. Daily market stuff, such as whether a rally lasts a week or multiple months, is important to traders. To most of us west of the Hudson River, it can be of interest but that’s about it. Since we’re investors, it’s all about trends – the big major moves that influence economies all around the world. Let’s see where we are right now.


Just so you know, perverse as it may seem, a correction – a downward move of 5% to 10% - is a good and very normal part of a bull market trend. So, if – and likely, when – a correction appears, just relax, perhaps put some more money to work, and ride it back up the other side.


The US Commerce Department was kind enough to provide us with reports this week that, to me, reinforce the very positive trends we have going on. In no particular order, let us review…


Durable goods – Over the past three months, total orders are up at an annual rate of 21%. These gains are starting to be translated into shipments – an important component of our GDP. These shipments are already up for the past two months and seem likely to be picking up later into the year. That’s a positive.


Housing –In July, new home sales were up by the biggest amount since 2005 – the peak of the boom. June sales had been up almost as much. Both existing and new home sales are trending up. And now, prices – for the first time in 3 years – are starting up as well. There may be a few more little bumps but the overall trend in this sector of the economy is definitely – up.


Spending and Income – Private sector wages and salaries increased in July for the first gain since last August. Small business income (all types) increased by the most since 2006 in July. Better pay and more demand for labor as the economy picks up suggests hiring is about to pick up.


To me, the trends are all positive and growing more broadly and deeply so each week. All of this suggests the economy and, therefore, the markets will continue to grow for some time to come…corrections or not.


Don’t let the leftover effects of what happened last year prevent you from having the future you want.


All my best,


Mike


509-747-3323


Closing values as of 28 August 2009
Dow Jones 9544 S&P500 1028 NASDAQ 2028 Oil $72.85/bbl Gold $956.70/oz