THE MARKETS
Despite a batch of late week earning disappointments and another dismal job report, the Dow Jones Industrial Average managed to finish in the plus column for the second week in a row. For the period, the Dow gained 49 points (+0.6%) and closed at 9119. It was the same story over at the NASDAQ, which recorded a fourteen-month high on Wednesday (1747.46). This was the highest the index has been since April 22, 2002. For the week, the NASDAQ gained 70 points (+4.2%) and settled at 1733. For the year the NASDAQ is up over 29% while the Dow has gained more than 9%.
While continuing to move in a positive direction, the markets have become considerably more volatile in recent weeks, highlighted by several days of sharp gains followed by equally sharp declines. Institutional sentiment continues to be positive, although less bullish than at the end of June. The percentage of bullish advisors returned to bearish ground at 56.5%, up from 53.1%. Readings over 55% are considered bearish. The put/call ratio was steady at 1.40 down from last week’s 1.46 reading while volatility readings remain anchored in neutral ground at 21.53 up slightly from last weeks 21.14. Readings under 20 are regarded as bearish. For the week ending July 9th, 2003, U.S. equity mutual fund inflows were $2.4 billion compared to inflows of $2.5 billion the previous week.
THE COMPASS PORTFOLIOS
All models continue to be positive, although several have triggered automatic reductions in client positions in the past several weeks. As any or all of the indexes we track break below key support levels, we attempt to protect sizable gains by selling “half-positions.” By selling half of a particular portfolio component, we capture gains on half of the positions, and still have the opportunity to participate in the markets. This strategy attempts to balance the desire to participate in the equities markets while simultaneously managing investment risk, and to prevent sizable losses from occurring. Should the markets continue to press higher, we can replace these positions, as we have begun to do.
The Compass Wealth Management Process continues to perform exceptionally well. For the most recently ended quarter, the vast majority of clients experienced solid double-digit gains in their portfolios, as the portfolio reallocations we enacted in late March and early April have led to significant market participation. We recognize the importance of being positioned properly for the market directly ahead of us, and the more bullish allocation we created have proven to be both timely and prudent. We continue to significantly reduce positions in fixed income instruments at the current time in favor of equities. Portfolios with significant exposure to bonds and other defensive instruments have significantly lagged the markets in the previous quarter, and thus our more prudent allocations continue to serve our clients well.
THE ECONOMY
U.S. unemployment rose to its worst level in nine years in June as businesses cut thousands of jobs, the government said recently. Unemployment rose to 6.4 percent from 6.1 percent in May, the Labor Department said. That’s the highest level since April 1994. It was also worse than the forecasts of economists, who on average expected a jobless rate of 6.2 percent, according to a Reuters poll. Non-farm payrolls fell by 30,000 jobs, the report said, after losing a revised 70,000 jobs in May. The original May reading had showed only a 17,000 drop in jobs. Economists, on average, had expected no change in June payrolls, according to Reuters.
In a separate report, the number of Americans filing new claims for unemployment benefits rose to 430,000 last week, which also was higher than economists expected.
Newly enacted tax cuts combined with low interest rates have put the U.S. economy on a path toward growth, U.S. Treasury Secretary John Snow said in an interview published last Thursday. Snow told USA Today he expected U.S. growth to top three percent in the second half of the year. But he said he would like to see growth of around four percent to bring the unemployment rate below six percent.
“The economy is beautifully aligned for takeoff,” Snow told the newspaper, noting the stimulative effect of the Bush administration’s latest $350 billion tax-cut program and historically low interest rates. “We’ve got companies tight as a drum with their inventories, and we’ve seen this enormous cost takeout from our businesses, which means that when the economy comes back there will be high profitability,” Snow said.
Snow also told USA Today that the budget deficit, estimated to be about $400 billion this year, was manageable but not something the administration was comfortable with. “We also need to have spending discipline, and tight spending discipline is going to be an essential component of bringing those deficits down,” he said when asked whether the deficit was becoming an economic or political problem.
