The pressure of surging oil prices (approaching $50 a barrel) was more than the market could handle last week as most major indexes finished lower. For the week, the Dow Jones Industrial Average lost 237 points (-2.30%) and settled at 10047. This was the worst weekly performance by the Dow since early August. The NASDAQ posted its highest close since mid-July on Tuesday but slipped back below 1900 at week’s end as it lost 31 points (-1.62%) and closed at 1879. For the year, the Dow is down 3.9% while the NASDAQ has lost 6.2% of its value.
Mutual fund inflows continue to sparkle: for the week ending September 22nd, U.S. equity mutual funds had inflows of $2.1 billion compared to inflows the previous week of $1.7 billion. Of additional importance is the high amount of short interest in the market at the present time (a counter-indicator), now 20% higher than just a week ago. This level was last seen in March of 2003, the bear market bottom and along with the mutual fund inflow data supports a cautiously bullish stance.
THE COMPASS PORTFOLIOS
While we continue to be cautious, we have taken steps to put a sizable portion of our money market assets to work into more productive areas. While few (if any) of the issues which led to the summer volatility have been resolved, institutional money managers are receiving and actively putting additional cash to work. We have taken steps to be more fully invested, and now carry a more neutral money market exposure. Prudence dictates that we proceed cautiously, as the aforementioned summer issues (namely the continued war on terror, higher oil prices and the upcoming election) will undoubtedly continue to be of concern. Additionally, none of the advances attempted by the markets so far this year have resulted in any permanence, at least not yet.
The following is reprinted from The Compass Portfolios commentary published earlier this month, as the issues discussed here continue to be significant:
Doing too much vs. doing too little. This is one of the central issues that I frequently confront as a professional money manager. Now, more than ever, the equity markets are mechanisms of opportunity. Opportunity for significant profit (and security) for those well positioned to participate, opportunity for significant losses (and insecurity) for those who fail to invest with a true discipline. Using equities as tools for growth can mean a life of continued comfort, a life of doing good deeds, a life of stability and sustenance for those who embrace our free markets. However, the “extreme” capitalism of our day also requires that a strict wealth management discipline be embraced to avoid the slippery slope of compounded losses. During 2003, 1.3 million Americans slid into poverty. Poverty due to job losses or due to financial mismanagement or due to terrorism or due to sizable stock declines is poverty none-the-less, a condition that I fear will become a greater burden for those with no recourse. The double edged sword of extreme capitalism means that some in our society will thrive and some will languish.
More than a few clients (including my mother and grandmother) have noticed that several times this year, we’ve taken a defensive position by selling an index at a given price, then buying it back later at a slightly higher price. The net result has been that we’ve missed out on a small amount of opportunity (and incurred a small commission) by taking a prudent but unnecessary step. The “unnecessary” part of the equation became evident as the weakness that we were responding to quickly abated. Had the weakness persisted (which is always our assumption), the position would have continued to decline, creating sizable losses and rendering our discipline useless. Our markets will undoubtedly continue to be volatile, creating individuals who thrive and individuals who languish. Those who thrive will do so not because we sold a position at $100 and bought it back later at $105; rather, they will thrive because we sold a position at $100 (to protect against holding it should it drop to $75) and bought it back later at $105 (to protect against not owning it should it rise to $125). Doing too much can occasionally mean that we’ve been on the wrong side of the market for a short period of time, but doing too little can mean that we’re caught on the wrong side of the market for a long period of time, always an intolerable condition.