Except for Monday and a bit of Tuesday, the market lost ground all week.  We anticipated as such last week when we closed all positions.  This week's activity is not surprising given the double wammy of having had roughly a 9 week uptrend which invariably called for a break in the action, along with the Memorial Day weekend ahead.

The news continues to shake many investors.  Unemployment numbers along with the recent news that Standard and Poor has given notice that Great Britain's AAA rating for issuing its own bonds is in jeopardy, kept the market at bay.  Add to this that Fed Chairman Bernanke's recent statements that a recovery may take up to six additional years, and it is no wonder that all the indexes were down this week.

There is some good news in the fact that although the market was down this week, the overall volume during the week was light.  Again, to refresh what we have said in the past, if the volume of trading in the market is light, it generally means that many investors stayed put.  It is when volume is high that it becomes precarious, unless of course this increased volume is Buying rather than selling.  Buying drives the market higher, while volume selling drives the market lower, taking with it even healthy stocks.

While we here in the states are worried about the viability of the government's stimulus package, the situation in Great Britain seemingly is far worse.   Bond rating agencies are concerned about the increase of UK debt as an overall percentage of that country's Gross Domestic Product (GDP).  We here in America may wonder why that is a concern for UK but so far not an issue for US Govt. sponsored debt?  One can only surmise one of two conclusions;

 

1) either there is one standard for the US and another for the rest of the world, or

 

2) the downgrading of US credit is just a matter of time? 

 

Estimates have Britain's debt climbing to 66% of GDP by 2010.  This is compared to the U.S. at 70%, Canada at 29%, Germany 58%, and the 16-nation euro area at 68%.

In Thursday's currency trading the U.S. dollar index fell, yet again, while Gold moved higher.  As we reported in earlier Newsletters, there has been no improvement in foreign investor appetite for US Bonds. With interest rates at their current low level, coupled with the recent rebound in the value of the US Dollar, overseas buyers of Treasuries face a higher risk of investment losses if they buy new issues of bonds.  Here, the primary concerns are coming from China, our largest lender who has heretofore unequivocally bought almost all the Treasury could print.

 

To entice buyers, the continued issuance of more bonds by the U.S. Treasury would logically also invariably require, at some future point, a weaker US currency.  This would allow foreign investors to get more for their investment money.  Yet, a lower dollar may anger China as that would make their products more expensive in the U.S.  Yet again, a lower dollar may not be all that bad for the stock market.  Therein lies much complexity.  We may touch on this topic at a later time.  Suffice it to say that there are many variables at play and how they all fall into place is something we are monitoring closely.

With all the above issues, along with negative unemployment news, the continued over-supply of homes for sale with few buyers, and the continued stranglehold on the availability of financing, it's no wonder the market has decided to take a breather.

Two weeks ago we warned that the Market was entering a critical point in its attempt to mount a recovery from the Sub-Prime Mortgage meltdown.  This week reinforced those concerns but did not give any concrete answers as to the future direction of the Market;  namely, is it just a minor adjustment, a pause in the action if you will, or could we see a re-test of the market bottom we experienced in March? 

 

I am of the opinion that the former is the most likely scenario and that we will soon get some positive movement to the upside.  That is why we are building our inventory of possible buy candidates, and assessing which stocks have the best chance of taking our portfolios higher.
 
For now, patience is the operative word.  The beauty of moving portfolios into an all cash position is that we can watch from the sidelines without anxiety.  We are able to better assess the true nature of the market, rather than being invested during a downturn and finding ourselves in a "hope and see" mode.  Given what has transpired over the past year and half, I for one do not pin our portfolio's success on hope.  From here on in it's about numbers and the trend of the market; when things are healthy we will buy, and when things turn sour, we will exit.
 
Have a great Memorial Day weekend!  The weather should be quite pleasant.