J.L. Davis Weekly Market Update 8/30/2011

Quote of the Week

"For a tree to become tall it must grow tough roots among the rocks" - Friedrich Nietzsche


Last Thursday and Friday, Jeremy and I learned yet again that the world, and the U.S economy, isn't coming to an end anytime soon. In fact, in some ways, it's more resilient than ever.

At the First Trust Summit, held at the Chicago Ritz-Carlton, one of the featured speakers was Brian Westbury, a leading economist, author, and frequent guest on CNBC, Bloomberg, and the networks from time to time. Mr. Westbury correctly predicted the tech bubble of the early 2000's. As well, he was one of the only voices in late 2008 who correctly predicted the "V-Shaped" recovery in the U.S. economy and markets. It is interesting to note that Mr. Westbury's model includes a fair value of the Dow at 14-15,000. Pretty amazing, given that we are currently around 11,000! (Investors cannot directly invest in indices. Past performance is not a guarantee of future results.)

Among the interesting items we heard were the following:

• Foreclosures are trending nearly 50% less than 18 months ago.

• Intel recently opened 2 new state of the art, large scale plants in Oregon and Arizona (not overseas)

• Stock buybacks, as well as mergers and acquisitions activity is accelerating with recent deals by Johnson & Johnson, Google, Microsoft, Applied Technologies, and others.

• Japan will spend nearly $400 billion to rebuild, borrowing zero, with the expected result being state of the art plants throughout their coastal region, and, ultimately, possible greater productivity than ever.

• U.S. Personal Consumption (i.e. spending) is some $500 billion over the 2008 high, according to the Bureau of Economics. This is an amazing fact we are hearing nothing about.

• The five largest US banks have roughly $54 billion of exposure to government, business, and individual debt in the "PIIGS" countries (Portugal, Ireland, Italy, Greece, and Spain). These same institutions have $713 billion in capital.

However, according to the speakers, the recent data on the economy has been spotty. Though Mr. Westbury sees a recession in the short term as "unlikely", he stated that "it is entirely possible that we could scare ourselves into recession, if consumers significantly curtail spending."

Our personal view is that the odds of a recession are roughly 100%. Every recovery so far has seen a follow on recession. But we agree; we don't see it happening just yet.

Though we're cautious, as always, in positioning assets, we remain convinced that with interest rates near zero, real estate still in recovery mode, and oil and other commodities extremely volatile, stocks are very attractively priced at present.

We are more convinced than ever that solid diversification, downside protection strategies, and careful management are absolutely required in order to achieve long term goals for our clients.**


The Markets

Shake it up, baby: As an earthquake and impending hurricane shook the East Coast, equities rattled and rolled, but for the first week since the end of July, the volatility was to the upside. The Dow once again topped the 11,000 mark as the industrials continued to be the year's most resilient domestic index. The NASDAQ saw its best week since the beginning of July, while the small-cap Russell 2000, hardest hit during the recent slump, had the week's biggest gains. The S&P is now up just over 5% from its August 8 low.

As confidence in equities revived, Treasury yields were up from the prior week's historic lows. And after nearing $1,900 an ounce, gold sold off sharply during the week, giving up nearly $150 an ounce at one point before recovering a bit on Friday.


Last Week's Headlines

• Federal Reserve Chairman Ben Bernanke said fiscal policy measures, not monetary policy, are needed at this point and are not in the Fed's job description, thus putting the responsibility for stimulating economic growth in the hands of Congress and the Obama administration. Low interest rates aren't much help in fighting an ongoing housing slump whose problems appear to be more structural than previously thought, he said. Though there was no sign of a QE3, the Fed's Open Markets Committee will expand its September meeting to two days to allow fuller discussion of the Fed's options.
• Second-quarter economic growth was even slower than previously estimated. The Bureau of Economic Analysis said gross domestic product (GDP), initially thought to be 1.3%, was actually 1%.
• New home sales continued to languish in July, falling 0.7% from the month before. However, the Commerce Department said that though sales were up almost 7% from the previous July, they were at their lowest level since February.
• New orders for durable goods leaped 4% in July, and according to the Commerce Department, were up 9.4% from last July. The figure was driven largely by autos, which began to recover from the Japanese auto-parts supply problem, and large orders for commercial aircraft.
• Moody's downgraded Japan's credit rating to Aa3 from Aa2. The ratings agency said it foresees difficulty for the country in improving its debt-to-GDP ratio, which the International Monetary Fund estimates at 234% (by comparison, the IMF puts the U.S. ratio at 99% and Greece at 139%).
• The Congressional Budget Office reduced slightly its estimate of the current fiscal year's federal budget deficit to $1.3 trillion, but forecast unemployment of 8% or more would continue through 2014.
• Apple CEO Steve Jobs announced that the health issues that have plagued him in recent years were forcing him to step down as
CEO, though he will continue as the company's chairman. Chief Operating Officer Tim Cook will take over as CEO.
• Gold prices, which began falling on Monday, weren't helped by the CME Group's decision to raise margin requirements on gold contracts for the second time in a month to try to curb speculation.


Eye on the Week Ahead

Investors will be trying to gauge the economic impact of Hurricane Irene, and Friday's unemployment data, as always, will be closely watched.

Key dates and data releases: personal income/spending (8/29); FOMC minutes, consumer confidence (8/30); business productivity, U.S. manufacturing, construction spending, weekly new jobless claims (9/1); unemployment (9/2).



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