THE MARKETS
With little to serve as a catalyst, the major averages stayed close to the flat-line last week as most of the indices ended the period with minor losses. Traders pushed the market higher on Wednesday but the rally was short-lived as a lackluster earnings projection from Wal-Mart cooled the enthusiasm. For the week the Dow Jones Industrial Average, which was down on four of the five trading days, lost 41 points (-0.42%) and closed at 9768. The NASDAQ fared much worse as it lost 40 points (-2.03%) and closed at 1930.
The percentage of bullish investment advisors remains bearish at 57.3%, up a touch from last week’s 56.3% reading. This is a contra-indicator, meaning the higher the percentage of bullish investment advisors, the more they are already invested and therefore the less cash they have available for additional investment. For the week ending November 12, 2003, U.S. equity mutual funds had inflows of $3.5 billion compared to outflows of $854 million the previous week. At the current time, all sentiment, momentum, and strength indicators are neutral to bearish, increasing the possibility of market weakness heading into the end of the year.
The earnings season is quickly coming to a close, and all eyes will turn to the next round of reports due out after the first of the year. In the meantime, one more scheduled meeting from the FOMC, the usual dose of economic reports and institutional jockeying will drive the markets into the end of the year. We expect the final few weeks of the year to be volatile as many institutional traders look to either lock in gains for the year or to play “catch up” if they have underperformed their benchmarks.
THE COMPASS PORTFOLIOS
No changes again this week as the markets have largely been able to hold their yearly gains. While many of our indicators have yet to prescribe portfolio changes for the quarter, we are very close to several downgrades that would be triggered if the advance should falter.
In addition to the outstanding performance of our equity positions this year, our fixed income components have fared equally well. We currently hold positions in very specialized income producing investments, each of which has been selected due to their propensity to perform well in an expanding economy. Our positions in utility stocks and high-yielding bonds have performed as expected, producing the meaningful income our investors desire along with sizable capital gains. Unlike many investors who continue hold significant positions in most at-risk fixed-income investments (such as U.S. Government bonds, mortgage backed securities and high quality corporate issues), the flexible nature of our portfolio management process has continued to position our clients prudently for the market directly ahead.
THE ECONOMY
Despite recent signs of gathering strength in the U.S. economy, the Federal Reserve is likely to keep rates low for quite some time, according to recent remarks by several Fed policy makers. Chairman Alan Greenspan, in prepared remarks delivered to the Securities Industry Association annual meeting in Boca Raton, Fla., last week, hinted the Fed could stay on the sidelines longer than some market participants might expect, despite recent reports of strong third-quarter economic growth and job creation in September and October. At its most recent policy meeting, in late October, the Fed left its key short-term rate at the lowest level in more than 41 years and promised to keep rates low for a “considerable period.” In a coordinated effort, several FOMC members have echoed Greenspan’s willingness to be patient, and indicate that a “neutral” bias (from the current “easing” bias) would be a prudent but not immediate next step.
Of increasing concern to investors is the escalating rate of personal bankruptcies. The tight U.S. job market pushed personal bankruptcies to a record high level in the fiscal year that ended Sept. 30, according to a government report released Friday. Non-business bankruptcies rose 7.8 percent in fiscal year 2003 to 1.63 million, the Administrative Office of the U.S. Courts said in a statement. Central California tops the list of personal bankruptcies with 77,131, followed by Northern Illinois with 59, 647 and the Middle section of Florida with 54,908. All bankruptcy filings rose to 1.66 million, but business filings fell 7.4 percent to 36,183 in the 12-month period, the courts said. A continued rise in personal bankruptcies could limit consumer spending which drives two-thirds of the U.S. economy.
