THE MARKETS
Worries over Wednesday’s corporate sign off day proved to be a non-event as the Dow Jones Industrial Average gained over 260 points and set the stage for its fourth straight winning week. Of note was that the major averages were able to hold Wednesday’s gains and stayed above their support levels for the remainder of the week. For the period the Dow gained 33 points (+0.4%) and closed at 8778. The NASDAQ, led by tech stocks, fared much better as it gained 55 points (+4.1%) and finished the week at 1361.
The percentage of bullish investment advisors nudged up to 38.5% from 35.5%. Readings below 40% are considered bullish. Mutual funds had cash outflows of $4.6 billion for the period ending 08/14/02 compared to outflows of $1.9 billion the previous week.
We see evidence that institutional investors are adjusting their portfolio allocations by shifting funds from fixed-income instruments to equities. With bargain hunters testing the water and short sellers moving more carefully, overall supply and demand are in better balance.
Investor skepticism has diminished somewhat now that many companies have certified their financial statements and the Financial Accounting Standards Board has indicated that it will soon require the quarterly reporting of options expense. A recent pick-up in share buybacks and in mergers and acquisitions is also a promising sign.
THE COMPASS PORTFOLIOS
Recent market activity has resulted in upgrades of two key market segments: large-cap value and large-cap blend. We have recently added half positions in these areas in an effort to have a foot-hold in the market should additional upgrades present themselves. Trading activity early this week will set the stage to either add to positions or to maintain the selective buying we have undertaken. We feel that a policy of selective and unhurried accumulation will prove rewarding over the long haul.
I had the good fortune of picking wild blackberries with my father this past weekend, and amid the thorns and underbrush we were able to find some of the most flavorful and juicy berries of the season. Two things struck me as particularly relevant: First, the best berries were the ones off of the path. Makes sense, since anyone who would have come through the patch first would have presumably taken the ones closest to them (after all, who wants to go through the thorns and underbrush if you don’t have to). Second, our timing was perfect. One week earlier and the berries wouldn’t have been ripe, one week later, and many of the juiciest ones would have fallen onto the ground to rot. Had we not been in a position to pick when we did, the fruit would have undoubtedly gone to waste.
Growth, be it in nature or of human origination, goes through the same cycles of expansion and contraction. The Compass Portfolios use many of the same principals as nature: we strive to be in a position to harvest growth when appropriate and to reinvest (or plant) when the cycle of expansion begins again. Admittedly, the path of growth and renewal in the capital markets is extremely difficult to gauge, and requires patience, discipline and a commitment to daily care. For more on this topic, check out the book “Biomimicry” by Janine M. Benyus. It’s a great read on modeling human endeavors using nature as a model.
THE ECONOMY
The most important statistic from last week came again from the retail sector as sales rose a strong 1.2% during July, or 4.8% over the past 12 months. Many economists we follow believe this report should be interpreted as more evidence that consumers are continuing to spend. In fact, the composition of strength points to greater spending in the future. Spending on items and services such as eating and drinking establishments doesn’t usually flourish during periods of consumer uncertainty. Major spending continued throughout July on big-ticket items like cars, which registered an incredible 4.2% increase in July 2002, or 7.5% since July 2001. Just a quick glance at the 12-month rates for a number of sectors reminds us that consumers aren’t tossing in the towel anytime soon: health & personal care (+8.3%), electronics (+7.0%), eating & drinking establishments (+6.8%), sporting goods (+5.3%). These are extremely strong rates of growth, and do not indicate to us that consumers are unsure about the economic and financial climate.
