THE MARKETS
The markets continued their winning ways early last week until running into major resistance later in the week. After making a run at their January highs on Wednesday, all of the major averages pulled back for the remainder of the week. Prior to the sell off, the Dow Jones Industrial Average was up 13% from its March low while the NASDAQ was up 15%. The good news is that for the first time in nearly three years, the majority of the major indexes are above their respective 200-day moving averages. Based on the strength of our breadth indicators, it is likely we will see the markets break out of these resistance areas in the near future. For the week, the Dow lost 31 points (-0.4%) and closed at 8306. The NASDAQ managed a gain of 10 points (+0.7%) and finished at 1434.
The percentage of NYSE stocks above their 200-day moving average jumped to 58.4% from 48.4% while those above their 50-day moving average continued to improve to 78.1% vs. 67.3%. Surprisingly, the percentage of bullish investment advisors fell to 42.7% from 50.6% the previous week. Readings under 40% are bullish. For the week ending April 23rd, U.S. equity mutual fund inflows were $800 million compared to inflows of $5.7 billion the previous week.
Looking ahead in the week, Alan Greenspan will present his quarterly Humphrey Hawkins testimony to congress on Wednesday. This congressional update gives the Fed Chairman the opportunity to brief lawmakers on the current state of the U.S. economy, and to hint at whether additional changes in short-term interest rates are likely. The market will also continue to digest quarterly earnings releases, consumer confidence figures, and unemployment statistics.
THE COMPASS PORTFOLIOS
No changes to our models. We have largely completed our portfolio adjustments to reflect our more optimistic stance. Client portfolios are participating nicely in the current rally, keeping pace with all of the five major indexes we use as benchmarks. We continue to reduce positions in bonds and other fixed income instruments in favor of equity investments with comparable yields. This flexible approach allows our clients to participate more fully in the market advance while continuing to receive meaningful dividend income.
We have often stated in this forum the importance of objectivity when prescribing investment allocation changes. The Compass Wealth Management Process is a quantitative process, that is, a process driven by independent analysis of market activity, not driven by the opinion of analysts who may be swayed by relationships with the companies they follow. This distinction allows us to make buy and sell recommendations to our clients with only the health of the portfolio in mind. Early this week, the global brokerage settlement was finalized by the Securities and Exchange Commission which levies fines and other settlement costs of over $1.4 billion on ten Wall Street firms, including Credit Suisse First Boston, Goldman Sachs, JP Morgan, Merrill Lynch, Pipar Jaffray, Citigroup and others. Conflicts of interest arising from corporate finance relationships led to fraudulent and deceptive research, much of which was disseminated to individual investors through their brokers. In addition, much of this research was distributed to regional brokerage firms, who in turn used it as the basis for their client recommendations.
The settlement will force brokerage firms to clearly separate investment banking from research, it will require brokerages to educate their clients on how to protect themselves (from the brokerages providing the research), and it will require the formation of “objective” research centers funded by the entire brokerage industry. It will also pave the way for a flood of individual lawsuits which will allege damages to individual investors.
THE ECONOMY
Last week’s economic data painted a schizophrenic picture of the U.S. economy — a little good news, a little bad — leaving economists sharply divided about the next course of action for the Federal Reserve.
On the one hand, new weekly claims for unemployment benefits jumped to their highest level in more than a year, staying well above the benchmark 400,000 level that indicates the labor market is getting worse. On the other hand, orders for big-ticket, long-lasting goods like cars and appliances stunned economists with a strong jump in March. Even excluding spending on defense and airplanes, the “core” reading on business investment seemed to indicate that corporate demand was improving — something that economists consider crucial for a pickup in the world’s largest economy.
Stuck in the middle are Federal Reserve policy-makers, who have been crossing their fingers that the end of the U.S.-led war with Iraq will clear the decks for an economic recovery, justifying the do-nothing approach the central bank has taken in the past several months.
