J.L. Davis Weekly Market Update 8/22/2011

Quote of the Week

"Anyone who stops learning is old, whether at twenty or eighty. Anyone who keeps learning stays young. The greatest thing in life is to keep your mind young." - Henry Ford


Last week I happily received multiple reminders of the anniversary of my birth. My friends, clients, and family all meant well, I'm sure, and we had quite the week. It's true: I've officially reached middle age (since I plan to live to 110).

Among the cards and gifts, one thoughtful business associate sent me a list of events, prices, and other statistics from 1977, the year in which I turned 21.

I remember that year quite well. Kathy and I were working hard; she at the First National Bank, and me in the financial services world. We had started our family. Still in my first year, I had passed the various securities and insurance examinations, obtaining all my licenses....and I bought my first mutual fund, in the amount of $100 (it was tough coming up with the money!)

My friend's birthday note also pointed out that a gallon of gasoline cost 65 cents in 1977. As I filled my tank yesterday, for a total of $58, I remembered that less than ten bucks did it back then. Her same note reminded me that at that time, the Dow Jones Index of 30 stocks stood at 831. That's not a typo. 831. As I write this, it flirts with 11,000. Our $100 investment has increased mightily, thank heavens, and we've been able to add to it, almost every month since. Importantly, by putting money in during down market times, we've prospered even more since 1977, as the Dow Jones index has always come back above its previous highs over those years. Wow.

The point to all of this, in my mind is that while Kathy and I were minding our own business in the intervening years, the Dow Jones Index multiplied some 13 times over, through good times and bad. Our investments have done well as a result of having a plan, and sticking to it. Just like you're doing!

Finally, you may find this fact VERY interesting. The recent big decline in stock prices has seen a huge increase in senior executives (i.e. "insiders") buying their own company's stock at what they may perceive as an incredible value. TrimTabs reports that insiders had already purchased over $861 million of stock as of August 11th, which is more than any month since March of 2009, the end of the bear market (source: CNN.com). According to Reuters, U.S. companies bought back $305 billion (that with a "b") shares of their own stock. It's pretty clear that CEO's and boards of directors of the large U.S. companies think stock prices are a bargain. Yes, we need downside strategies in volatile markets such as this one, but the lessons of history are helpful!**


The Markets

Equities managed to erase the previous week's losses, only to see those gains vanish once again over the rest of the week on discouraging economic reports. Domestic equities saw their fourth straight week of declines. The small-cap Russell 2000 has now corrected roughly 24% since July 7 (an extended 20% decline is considered bear-market territory). Global markets also suffered; the German DAX lost almost 10% for the week, partly because of figures that showed stalling economic growth there.

Treasuries once again benefitted from all the anxiety. Yields plummeted as investor demand drove prices up. The 10-year yield saw levels not seen in decades, while the 30-year yield plummeted more than 30 basis points. The spread between short-term and long-term Treasuries narrowed as investors were willing to trade off higher yields for the reassurance of U.S. debt. Gold shot up to yet another new record, ending around $1,850.


Last Week's Headlines

• Led by raw materials and consumer goods, the nation's industrial output rose 0.9% in July, according to the Federal Reserve, and estimates for May and June were revised upwards. Roughly 77.5% of the nation's industrial capacity was in use, 2.2% more than last July. However, the Federal Reserve's survey of Philadelphia-region manufacturers during the second week in August showed a 34-point drop. The -30.7 reading is the survey's lowest level since March 2009, though firms said they expect growth over the next six months.
• Consumer prices rose 0.5% in July, keeping the consumer inflation rate for the past year at 3.6%. Rebounding gas prices accounted for roughly half of the increase, according to the Bureau of Labor Statistics, while higher food prices (especially dairy and fruit) also were important. Inflation at the wholesale level rose 0.2% in July. However, excluding food and energy, the figure was 0.4%, marking the eighth straight monthly increase.
• French President Nicholas Sarkozy and German Chancellor Angela Merkel agreed to establish a council to oversee economic issues affecting the eurozone. They also proposed a tax on all financial transactions and a requirement that all member countries agree to balance their budgets by next summer. However, they declined to support the concept of a eurozone bond backed collectively by the entire European Union. Meanwhile, second-quarter growth in both Germany and France was essentially flat, raising concerns about their ongoing role as the linchpins of the EU economy.
• Housing starts slipped 1.5% in July, according to the Commerce Department. However, starts of multifamily buildings rose 6.3% from June and were up 66.7% from a year ago, while single-family home starts were 9.8% higher than in July 2010. Meanwhile, sales of existing homes fell 3.5%, according to the National Association of Realtors®, though sales were 21% higher than a year ago. The NAR said the large number of cancelled contracts was a major factor.
• Fitch reaffirmed its AAA rating for U.S. debt. However, the ratings agency said that could change if economic recovery is weaker than expected or if the committee charged with tackling additional deficit reductions fails to reach an agreement.
• Standard & Poor's is reportedly under investigation by the Justice Department for allegedly improperly rating mortgage-backed securities prior to the 2008 financial crisis.


Eye on the Week Ahead

Federal Reserve Chairman Ben Bernanke's speech Friday at this year's economic symposium in Jackson Hole, Wyoming, could be of interest; at last year's meeting, he signaled the possibility of QE2. If the initial estimate of 1.3% growth in gross domestic product is substantially revised on Friday, estimates of the potential for a renewed recession could be affected.

Key dates and data releases: new home sales (8/23); durable goods orders (8/24); second estimate of Q2 gross domestic product (8/26).


Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2011