THE MARKETS

The Dow Jones Industrial Average snapped its eight-week winning streak last week as it fell for five of the last six sessions while giving up over 285 points. The decline was broad based as all of the major averages followed suit. For the week, the Dow lost 251 points and closed at 8645 (-2.8%). On a percentage basis the NASDAQ fared worse as it lost 56 points (-3.8%) for the week and settled at 1422.

For the period ending December 4th, U.S. equity mutual funds had outflows totaling $2.1 billion compared to inflows of $3.5 billion the previous week. The percentage of bullish investment advisors moved up to 51.1% from 48.3%. Readings over 54% are regarded as bearish.

The progress made over the past several months is encouraging; nevertheless, market progress in the period ahead is bound to be erratic. Generally, nerves are frayed, given the frequent warnings about additional terrorism, the approach of the deadline for Iraq to declare its weapons of mass destruction and the start of fourth-quarter earnings pre-announcements. Also, some investors who suffered through the bear market have undoubtedly vowed to take advantage of any decent opportunities to reduce their equity exposure. This overhead supply is believed to be particularly heavy just now in a number of big technology issues.

THE COMPASS PORTFOLIOS

Last week we recommended that investors prepare themselves for the possibility of pullbacks in the equities markets after seven weeks of gains. As mentioned above, the markets are taking a breather, and this pullback should be looked at as a normal event in the recovery progress. As we have begun to venture deeper into the markets, many portfolios are participating in the normal ebb and flow of “two steps forward one step back.” We believe that after this week’s bout of profit taking and repositioning by the large institutions, the markets are beginning to respond better to the prospect of better corporate profits in 2003.

Is this week’s decline the start of another leg down? All of the data we use in our management process says “no,” but should the markets decide otherwise, we stand ready to adjust portfolios accordingly.

THE ECONOMY

Friday’s unemployment data provided the weekly fireworks investors have become so accustomed to. The nation’s unemployment rate jumped to 6.0% from 5.7%, a considerable shock given the fact the jobless claims figure announced just a day earlier showed real progress. In Thursday’s report, the number of new jobless claims fell to 355,000 new applications, compared to 365,000 claims announced the week before. This new data clearly shows that the job market is still struggling, and that companies are not adding jobs at a healthy enough pace.

Friday’s resignation of two key U.S. economic advisers suggests that the Bush Administration has in mind a different course for fiscal policy next year. Secretary of the Treasury O’Neill resigned Friday morning and may be replaced by CSX Corporation Chairman John W. Snow, while economic adviser Lawrence Lindsey also announced his resignation. Stephen Friedman, a former co-chairman of the investment firm Goldman Sachs, is Bush’s choice to replace Lindsey but his appointment wasn’t expected Monday, officials said.

A more aggressive fiscal stimulus approach may result from last week’s Bush Administration shakeup. The chances seem good for investor tax breaks, which could boost stocks. Among the possibilities is a corporate deduction for dividends paid or an exclusion from individuals’ gross income of a part of dividends received. Many companies might then begin to pay dividends if they don’t now and increase payments if they do, reversing a 25-year trend away from dividends.