When a Record is Nothing to Cheer About

Hi, Friends,

This was a busy week, both in the markets and for me personally. The week took me to London where I experienced first hand the pain of a weak dollar; we wrapped up a strong May for Wall Street Sector Selector and rebalanced the portfolio for June which got off to a strong start on Friday. Also, it was a huge week in the markets for reports and records.

Why I’m not cheering record closes on the S@P 500
This week saw the S@P 500 make not one, but three record closes, along with new highs for the Dow. Predictably, the records were met with great hoopla in the financial press, but I’m not cheering because what nobody mentioned too prominently was that the last record close in the S@P 500 was set on March 24, 2007!

What this means is that “buy and hold’ investors have just lost seven years of investment gains, finally managing to break even this week. More accurately, what this means is that investors have actually lost somewhere between 14%-21% due to inflation and lost purchasing power during those years.

To me, this is not a recipe for investment success or a great way to grow your net worth, and so I’m very happy to be involved in Wall Street Sector Selector and be able to offer a pleasant alternative to just “following the market.”

But, it was a good week, sort of
because the S@P and Dow did, indeed, reach new records, the employment report came in at 157,000 new jobs versus a forecast of 150,000, the Institute for Supply Management Index rose to 55% versus an expected decline, and the inflation numbers showed a year over year gain of 2% which is within the Fed’s “comfort zone,” the first time that has happened in 14 months.

But it wasn’t a good week for the University of Michigan Consumer Confidence Index which was down, or for the April pending home sales which were down 3.2% along with the first fall in housing prices since 1991. It also wasn’t a good week if you work for Dell Computer which is going to cut 10% of their workforce, or 8,800 jobs, or if you work in the manufacturing sector that lost 19,000 jobs, half of those in automotives.

So, the good jobs report came with more than 176,000 service jobs being added as we continue our shift from being a manufacturing economy to a Starbuck’s economy.

Sadly, this shift is starkly reflected in the fact that our personal savings rate for May was a negative 1.3%, the 25th consecutive month that Americans spent more than their take home pay.

In my view, this is not a sustainable path and as the old saying goes, “something’s gotta give.”

Also, this week the Fed released the minutes of their May 9th meeting in which they said that “inflation is the predominant concern,” and given the strong jobs reports, I think it’s obvious that there isn’t a rate cut in sight, but rather, it’s a likely possibility that 10 Year interest rates will go above 5% soon, possibly as soon as next week. This will be bad news for housing, adjustable rate interest mortgage holders, and all of the consumers who are maxing out their credit cards.

Also, the dollar bounced off record April lows against the Euro and a 26 year low against the British Pound, but I’m not optimistic that this recent turn around is the start of a trend in the right direction.

In London this week, I got 1 British Pound for approximately $2.00 U.S., and believe me, that makes prices over there really scary. I can remember not so many years ago when the ratio was exactly opposite and I could get 2 Pounds for my mighty greenback.

This is a subject all its own and one we can delve into next week, because a weak dollar has much greater implications than $300 theatre tickets in London.

In a nutshell, we’ll continue “following the money,” but being careful with our positions because a falling dollar and rising rates cannot be good for U.S. stocks in the long run.

But that’s the beauty of having a well thought out, disciplined trading plan. Whatever happens, there’s always a bull market somewhere, and I’m confident Wall Street Sector Selector will identify the next bull and allow us to profit from it.

This weekend is recovery time for us. A couple of home videos and takeout pizza.

I mentioned last week that we were in Carson City for a swim meet over Memorial Day Weekend. On the way to that meet, a Dad and his three sons were killed in a head on collision with a semi-truck, and on Sunday, we observed a moment of silence for that family at the start of the meet.

When the boys’ races came up, their lanes were left open with a bouquet of flowers on their blocks and their names glowed in the lights on the timing board with the seconds ticking away. This is an unspeakable tragedy, of course, and as we discuss record closes, higher interest rates and a weak dollar, it’s key to keep our family and friends at the forefront of our attention and live each day to the fullest.

Till next week.

Your partner in prosperity,

John Nyaradi
Publisher
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