THE MARKETS
The market continued to get slammed last week as the majority of the major averages dropped below their September lows. During the week the S&P 500 fell to its lowest finish since October 1997. The Dow Jones Industrial Average, which was down on four of the five trading days, lost 665 points (-7.66%) for the week and closed at 8019. The Dow is down on nine of the last ten trading days and has lost over 1300 points for the period. On a percentage basis, the NASDAQ fared better as it lost 54 points (-3.93%) and settled at 1319.
Investors would have preferred the stomach-churning volatility experienced Wednesday over what they got the rest of the week, which was simply decisive selling. Sub-par earnings news and lackluster forward forecasts mid-week from the likes of Eli Lilly, Siebel Systems, and Automatic Data Processing sent the market lower in early trading and it never recovered, which followed through on Friday. The rocky market and the seemingly endless spiral of accounting misdeeds are now jeopardizing the recovery, or so the data from Philly would suggest. The Philadelphia Federal Reserve Bank’s index of regional economic activity expanded in July at its slowest pace in seven months, as the market selloff is freezing corporate spending in its tracks.
As unlikely as it may seem, the signs of a market bottom are becoming manifest. These include rising trading volumes, a consistently high reading in the options volatility index, weakening investment advisor bullishness, and a shrinking percentage of NYSE stocks above their 200-day moving averages. Still, only the heartiest bull will attempt to catch this falling knife — particularly as the knife-throwers are in the corporate suite.
Last week, we spoke briefly about the belief of the Federal Reserve and the U.S. Senate that companies who issue stock options to their employees should “expense” such options to more accurately reflect their true cost to the company. On Monday afternoon, the Senate voted unanimously not to require the expensing of stock options, and instead passed legislation that would encourage accounting boards to develop a standard method for resolving this issue. In other words, stock options will likely be accounted for in the manner Alan Greenspan favors, but the Senate will not be held accountable for such a drastic change.
THE COMPASS PORTFOLIOS
No changes this week. The momentum is still clearly negative, and our models currently prescribe minimal positions, focusing solely on the value sector. The sentiment hasn’t changed much in the past twelve weeks, and the vast majority of our clients have experienced only fractional losses compared to the general population. Of that I’m proud, and I believe the management strategy has demonstrated value.
I’m re-reading Homer’s Odyssey, the epic tale of the King of Ithaca who is more relevant today than I had imagined. The hero begins his adventure in search of fame and fortune by joining comrades in sacking the ancient city of Troy (remember the Trojan horse, a gift to the city secretly filled with soldiers who emerge from the belly of the beast and lay ruin to Troy?). Odysseus succeeds in capturing riches beyond his wildest dreams, but on the journey home he has to endure many hardships, including the loss of every one of his men, the loss of all of his treasures and imprisonment on the island of the nymph Calypso. Nymphs notwithstanding, he eventually makes it home to his wife and son, but not without the assistance of many guides, some immortal, but many common folk who treat our fallen hero with care and hospitality.
In many respects, our portfolio management process seeks safe harbor for individuals in search of riches, offering assistance when needed. It is my goal to help guide all investors through difficult markets, helping them reach their goals safely, comfortably, and confidently. I invite you to stretch out a hand to other investors who may not have been as well protected. Invite them to explore alternatives through The Appleton Group if you feel a helping hand may be appreciated.
THE ECONOMY
Federal Reserve Chairman Alan Greenspan’s semiannual testimony before the Senate on July 16 about the state of the U.S. economy was a resounding victory for those predicting that he would sit on the fence in economic and policy terms. While he remained resolute in his opinion that economic fundamentals are improving, the Fed chief refused to throw a lifeline to an unusually volatile stock market.
Clearly, Greenspan came to Capitol Hill intending to talk about corporate-governance problems, which he laid out in his typically methodical way, detailing the history and impact of recent failures and ailments. Investors looking for some sort of rescue bid from the chairman were essentially told that the Fed would remain accommodative in its monetary policy — so long as the temporary forces inhibiting growth continued to outweigh the improving fundamentals.
Greenspan made it clear, however, that this was merely a holding pattern before the Fed tightens the monetary-policy reins once more, and not a step back toward a looser policy.
He expects the demand side of the economy — the consumer — to remain resilient, while the supply side — manufacturing — struggles to regain its feet after the effects of inventory restocking run their course
Gazing upon the business sector, though, the Fed chief was more subdued. He repeated the mantra of the policy-setting Federal Open Market Committee: “While final demand has been increasing, the pace of forward momentum remains uncertain.” Still, the Fed’s updated economic outlook, via its central-tendency forecasts, was a little more bullish on the economy than it was in February.
Prices of Fed fund futures, a trading vehicle for market pros to bet on future interest rate moves, slumped on July 16, mostly in a profit-taking move, after Greenspan signaled that he would not be corralled into an imminent easing. For now and the foreseeable future, caution remains Greenspan’s guide.
WORDS OF WISDOM
“If you know what you need then to get what you want better see that you keep what you have!”
-Baker’s wife from “Into the Woods” (Stephen Sondheim)
