THE MARKETS
Aided by Thursday’s 222 point surge, the Dow Jones Industrial Average managed to make it seven in a row as it ended the week within 200 points of its August high. For the week, the Dow gained 225 points and closed at 8804 (+2.6%). On a percentage basis, the NASDAQ outpaced the Dow as it gained 56 points for the week and settled at 1468.74 (+4.1%). Led by the semi-conductor and telecommunication stocks, the NASDAQ bettered its August high on Thursday as it closed at 1467.55.
The percentage of bullish investment advisors was steady at 49.4% down a touch from 50.6%. This indicator is now regarded as neutral after having been a very bullish 28.4% five weeks ago. This is the highest that this indicator has been since the week ending 05/31/02 when the DJIA closed at 9925.25. Redemptions of U.S. equity mutual funds continue to outpace cash inflows. For the period ending November 20th, outflows totaled $2.2 billion compared to outflows of $278 million the previous week. Outflows have exceeded inflows for thirteen of the last sixteen weeks.
As it is Thanksgiving week, I thought it would be appropriate to list things to be thankful for in each of the three segments of this weekly market comment: The Markets, The Compass Portfolios, and The Economy. Here goes…
Things the markets should be thankful for:
• Low interest rates.
• Elliot Spitzer (Attorney General for the state of New York) who is taking large brokerage firms to task for undisclosed conflicts of interest, and biased research.
• Deflation appears as unlikely as high inflation does.
• The nation’s overall demographics are still favorable (savings rates are going up)
• Christmas shopping season starts on Friday, and retailer’s expectations are extremely low.
• The U.S. Federal deficit isn’t likely to balloon with fiscally conservative Republicans in control of both houses of congress.
• The U.S. markets are not as bad as Japan’s markets.
THE COMPASS PORTFOLIOS
No changes to our models during the past week. Our model portfolios continue to participate in the current rally, with only small defensive positions to speak of. We have been able to capture approximately 50% of the quarter’s gains, and as we become more fully invested the participation level becomes even greater. We are still cautiously optimistic that the worst of the bear market is behind us, but given the continued outflow of assets from the U.S. equity market and the cautious stance by Alan Greenspan’s Federal Reserve open market committee, we stand ready to protect gains when the need arises.
Things that I am personally thankful for:
• The awesome opportunity and responsibility of helping a select number of families meet their financial goals.
• A terrific wife and young son.
• Two highly qualified and meticulous executive assistants.
• The freedom to ask two critical questions: “What should investors own?” and “When should investors be owners?”
• Objective, unbiased research that makes The Compass Portfolios successful and our clients comfortable.
• The support of those individuals who helped me in my transition from “seller” to “server.”
• Morningstar for their objective process of ranking Separate Account Managers.
• Traditional money managers with unsuccessful risk management techniques for making us look so good.
• The support of countless individuals behind the scenes at our strategic partners: Schwab Institutional, Morningstar, Microsoft, Barclay’s iShares, the attorneys at McCarty Curry Wydeven Peeters and Haak LLP, Todd Behm of Schenck & Associates, Dick Grall of The Business Bank of the Fox River Valley, Dan McClone of The McClone Agency and many countless others who make The Appleton Group the successful firm it is.
THE ECONOMY
For a couple of weeks, it looked like the October rally might stall out in November. Not anymore. The Dow Jones industrial average has risen 22% since its Oct. 10 low. November 21st was particularly heartening, with the Dow surging 220 points. What’s especially encouraging about the latest upward move is that it’s taking place at a time when economic news is looking mixed at best. Most economists expect gross domestic product to slow to a 1.00% annual pace in the fourth quarter from 3.00% a quarter earlier. The Wall Street strategists who expect corporate profits to boom anytime soon could be counted on one hand. And corporate chiefs remain remarkably pessimistic. Even the Federal Reserve, which labels the current weakness a “soft patch,” felt a half-percentage point cut in interest rates was necessary on November 6th to ensure its “long-run goals of price stability and sustainable economic growth.” In recently released minutes from its September 24th policymaking meeting, the discussion was all about a “less robust pickup in final sales” and activity levels that “would remain below that of the economy’s potential for a longer time.”
In a recent survey, chief execs who are members of the Business Roundtable trade group predicted weak growth, declining employment, and flat capital spending in 2003. Particularly ominous was the survey’s finding that 60% of CEOs expected employment at their companies to drop (11% thought it would rise, and the rest said it would be flat).
For now, what’s helping a rebound in earnings, aside from cost-cutting, is improving productivity. With rising productivity, corporations can improve earnings even if sales don’t increase. Plus, for companies that have slashed costs already, even a small sales gain can translate into attractive earnings growth, thanks to the power of operating leverage. That’s one reason Standard & Poor’s, one of the most bullish firms, expects operating earnings for companies in the S&P 500-stock index to grow 20% in 2003 on top of 20% gains in 2002.
Things the Economy is thankful for:
• Manageable unemployment (under 6.00%).
• Increased productivity.
• The unstoppable U.S. consumer.
• “Nesting,” the phenomenon of reinvesting one’s home equity back into residential improvements.
• Low interest rates.
• Low expectations.
• The U.S. Economy is not Japan.
