THE MARKETS
Amid a backdrop of rising Indian Pakistani tensions over Kashmir, ongoing accounting concerns, and an anemic profit recovery, investors see few reasons to pile into stocks at this point. For the week, the Dow Jones Industrial Average fell below the 10,000 mark losing 181 points (-1.8%) and closed at 9,923. The NASDAQ staggered through the week closing down on three of the four trading days and ended the period down 46 points (-2.8%) at 1615.
The accounting fiasco, which began with an energy company (Enron) and then trashed the telecom services sector, is now back in the energy sector, as sector investors can ruefully attest. Halliburton was in the spotlight for questionable revenue bookings that occurred when Vice President Dick Cheney was CEO. El Paso fell much harder, however, after the company acknowledged that it would miss consensus EPS forecasts by a wide margin. Amid the general selling, consumer defensive stocks regained their appeal, led by Philip Morris. Lately battered drug companies also recovered.
The market is lacking a forward driver at this point, and yet another rally try has fallen apart. The economic recovery is real, but incremental; dramatic profit recoveries are not in prospect. Wall Street is filled with unbelievers at this point, and their conversion to the bullish faith will be a gradual process. The vast cost reductions across corporate America over the past year should begin to enhance earnings leverage, with results becoming apparent perhaps as soon as the current quarter.
THE COMPASS PORTFOLIOS
We continue to be defensive in the current market. As we indicated last week, our models indicate that a base may be forming in the growth segment of the market, but further work will have to be done in this area to warrant additional investment. We continue to recommend value over growth, with continued emphasis on core growth areas such as energy, banking, and consumer staples.
I’m proud to announce an additional component to my practice: Compass 401(k). For companies whose participants prefer meaningful, professional advice and guidance, the Compass 401(k) offers a powerful array of features. All plans can choose from over 1,200 historically high performing funds, mutual funds are available at no-load, administration is streamlined through Schwab Institutional, there are no proprietary funds, and no conflicts of interest. Best of all, participants can choose to manage their accounts on their own, or hire The Appleton Group, LLC to manage their assets under the Compass Portfolio system. We monitor the investments on a daily basis, and allocate assets among the selected mutual funds according to our quantitative models. We are excited about the good work we can do and the value we can add in the 401(k) arena!
THE ECONOMY
The most important U.S. economic story since Sept. 11 — by far — has been the amazing, unstoppable American consumer. Retail sales held up well last fall, keeping the economy afloat, as mortgage refinancings, falling energy prices, the tax cut and price discounting all combined to support solid gains in real disposable income. That story isn’t as impressive now, as energy prices have moved higher and refinancings have tapered off. But solid wage gains — combined with modest overall inflation — have been sufficient to keep the consumer going, as data confirmed on Friday when April personal income and consumption figures rose by 0.3 percent and 0.6 percent, respectively.
The other major chunk of economic data came on Friday, when April factory orders rose by 0.6 or 0.7 percent, up from 0.4 percent in March. There are still some loud economists who insist that the economy is headed for a double dip slowdown, but that appears to be increasingly unlikely. Even with only moderate consumer spending, there are enough signs of strength elsewhere — inventory building, improved global conditions, some signs of a pickup in business spending — to keep the economy growing by at least 3 percent. This morning’s buzz is that corporate profits are now turning up — more confirmation that the economy has turned a corner. But the economy is the easy call; there are much, much tougher calls on the geopolitical front, which may continue to dampen the level of market enthusiasm that ordinarily would accompany an economic turnaround.
