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Special Edition e-Newsletter for July 3, 2010

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Also In This Issue
2nd Quarter Market Report
A Chuckle by Bob Veres
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 Gary Silverman, CFP
Mid-Year Market Overview
 
 Since it is the end of the 2nd quarter, we thought that we'd start off this holiday weekend with a special edition of our newsletter (we'll get back to our standard newsletter next week). First is a review of what has happened in the investment world in the last 3 months, complete with additional links if you would like to do more research. For those of you more interested in something a bit lighter, skip down to the end for Bob Veres' comical view of the roller-coaster ride investors have been on lately.
 
 
Have a great weekend!
Gary
 
Gary Silverman, CFP

 Market Report 2nd Quarter 2010

 

It was not a good three months for the U.S. and global stock markets, as everything fell more or less in tandem.  The U.S. investment markets were depressed by questions about the viability of the European Union and stubbornly high unemployment levels, which tended to obscure the potentially bullish news about economic growth and corporate profitability.

 

        The Wilshire 5000 index, which covers the broad spectrum of U.S. stocks, finished the quarter down 10.18%, down 4.55% for the year. 

        The Russell 3000, which also covers a broad range of domestic stocks, fell 11.32% for the quarter, and finished the first half of 2010 down 6.05%.

 

Large, medium and small companies produced virtually the same results. 

 

Large:

        Wilshire's large cap index was down 10.50% for the quarter.

        The S&P 500 index of large cap stocks closed at 1,041.24--down 10.96% for the quarter, down 6.62% for the first half of the year.

         The Russell 1000 Index fell 11.44% for the quarter, and is down 6.40% overall since the start of the year.

 

Medium:

        The Wilshire U.S. Mid-Cap index lost 9.76% for the quarter and is down 1.99% for the year.

        The S&P 400 index fell 9.90% for the quarter, and finished the first half of the year down 2.06%.

         The Russell Midcap index fell 9.88% in the second quarter; down 2.06% for the year.

 

Small caps also barely managed to avoid a double-digit drop:

        The Wilshire U.S. Small-Cap index fell 8.81% for the quarter, but is up a slim 0.04% for the year. 

        The S&P Smallcap 600 fell 8.97% for the first three months of the year, down 1.4% in the first half. 

        The Russell 2000 dropped 9.92% for the quarter, down 1.95% in the first six months of 2010.

 

The Nasdaq index, meanwhile, started the quarter at 2,404.36, rose to 2,530.15 on April 23, and zig-zagged lower for the rest of the quarter, finishing down 11.39% for the three months ending June 30, down 5.90% for the first half of the year.

 

There was nowhere to hide in the international markets.

       The EAFE index of stock market returns in developed nations was down 14.70% in dollar terms for the quarter; down 14.51% for the first half of the year. 

        A composite of European markets fell 20.18%

         Pacific nations were down 10.70%. 

        The MSCI Emerging Markets index fell 8.56% for the quarter.

 

Once again, we were prescient enough not to invest a majority of our portfolio holdings in the Cyprus or Kazakhstan markets (down 30.1% and 26.3% respectively for the quarter), but regret our significant underweighting in the Sri Lankan and Ugandan markets (up 23.1% and 15.5% respectively over the three months ending June 30). 

 

Commodities weren't much help to investment portfolios.

        The S&P GSCI index fell 10.68% for 2010's second quarter, for an overall 11.48% loss in the first half of the year.  The index's petroleum component fell 13.34% for the quarter, while industrial metals were down 19.04%. 

       The NAREIT Index, which tracks real estate investment trusts invested in commercial, residential and industrial real estate, was also down 3% for the quarter, after posting a 10% gain in the first three months of the year.

 

The safe havens have been less-than-compelling.

        10-year Treasury bonds are currently yielding 3.74%

         5-year maturities currently yield 1.79%

        One-year notes are offering just 0.32%. 

 

In U.S. markets, the recent quarter was notable for the so-called "flash crash" on May 6--a roughly 9% drop in U.S. equities prices in the space of an hour.  The event is still being investigated by regulatory authorities, who speculate that it could have been caused by a series of faulty computer-automated trades acting in concert.  The markets stabilized later the same day, but never recovered any upward momentum. 

 

Despite the uncertainties in the U.S. stock market, the U.S. economy continues to grow.  According to recent reports from the U.S. Department of Commerce's Bureau of Economic Analysis (BEA):

        The U.S. gross domestic product rose an annualized 2.7% in the first quarter of 2010, following a 5.6% annualized jump in GDP in the 4th quarter of 2009. 

        Inflation was up a modest 1.7% in the first quarter (annualized), down from the 2.0% rate in last year's 4th quarter.

         More promisingly, the BEA reported that corporate profits increased $116.9 billion in the first quarter, following a $108.7 billion increase in the 4th quarter.

 

What's next?

 

The only honest answer is: nobody knows for sure.  If the economy and profits continue to grow, if inflation stays low and the bond markets offer low-to-depressing yields, then we will have an environment that is traditionally good for rising stock prices.  But uncertainties about the European Union--where the Greek bailout and uncertainties around sovereign debt in Spain, Italy, Ireland and Portugal look an awful lot like the bailouts of the wirehouses--have cast a pall over market sentiment. 

 

In the short run, the markets move based on how people feel about the markets.  In the long run, prices will rise as sales, productivity and profits increase in the corporate sector--and as people finally start to notice.

 

 
For More about the topics in this article:
 

GDP estimates, inflation and corporate profits: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

 

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

 

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

 

S%P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

 

Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP

 

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

 

Individual country data: http://www.emerginvest.com/WorldStockMarkets/Countries.html

 

Commodities index data: http://www.standardandpoors.com/indices/sp-gsci/en/us/?indexId=spgscirg--usd----sp------

 

REIT Index: http://online.wsj.com/article/SB10001424052748703374104575337000701740896.html?mod=dist_smartbrief

 

Treasury market rates: http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

 

 
 
Chronicle of the Quarter:
A Chuckle by Bob Veres
 
 
Anybody looking at the zig-zag course of the stock market can see that the more closely you look, the more you miss what is actually happening.  Daily price movements jump around in what appears to be a totally random pattern; up one day, down the next--and it's only when you step back and look at the year or multiple years can you see whether actual money is being made or lost.
 
But even knowing these things, it's hard not to look at the daily drama of price movements, and listen to the analysts explain how events in Turkey or Sri Lanka are causing investors to feel bullish or bearish.  This quarter, I decided to immerse myself in the white noise and see if there are any conclusions one might plausibly draw from the bouncing of the tape.  In retrospect, it was a boring three months that managed to give back a little more than the gains of the first quarter.  But seem from the perspective of daily price movements, the past three months was a wild ride, full of drama and excitement.
 
Beginning: Things are looking good; yesterday, the Dow reached its highest point in a year and a half, and last year's 4th quarter showed a 5.6% jump in U.S. GDP.  The S&P 500 is up around 1,169.43, following almost a two month rally from rally from 1,056 in early February.  Those January Jitters seem to be behind us now; I'm optimistic that the next three months are going to add something to my net worth.
 
April 1-15: I was right to be optimistic; the Dow is up over 11,000, on (finally!) some good news on the jobs front and encouraging news about housing.  And Apple is launching this thing called the iPad, which commentators say is juicing the markets, for some reason...  Something called the regional manufacturing index was up 20.2 in April, which sounds bullish.  Still plenty of time between now and midnight to start filling out my tax forms...
 
April 16-30:  Maybe I spoke too soon; the rest of the month has been a bumpy ride to nowhere, down Friday, up Tuesday, flat Wednesday and Thursday, up Friday and Monday, down the rest of the week.  Consumer sentiment is down.  Darn consumers!  Also worries that Greece may default on its debt.  Darn Greeks!  The government is looking into a criminal investigation of Goldman Sachs, which is also apparently spooking the market.  Darn government!  Yet despite all those annoyingly gloomy consumers and spendthrift Greeks, the markets are still about where they were on the 15th.  Maybe the bad news is finally over.
 
May 1-7:  What the hell was that!?  Omigod...  Omigod...  The S&P 500 fell, like, 9% in an HOUR!?!  That's the kind of performance you'd expect from something Goldman sold its customers and then shorted for its own profits.  Is Goldman behind this somehow?  Why isn't the government investigating those bastards?  Okay, let's see, calm down.  How bad can it get?  If I project that hourly return out over the eight years until retirement--Omigod!  The portfolio drops below zero sometime late tomorrow afternoon, and the next day I have a negative compounding net worth in, like, total free-fall, and that's 300 trading days a year times eight hourly scary free-fall drops times eight years--oh...  Remember to keep breathing...  At this rate, I'm going to be something like a hundred billion dollars in the red by the time I retire.  And so will everybody else!  I wonder who we'll have to write that check to...?
 
May 10-May 12:  What a silly goose I was!  Selling my entire portfolio might not have been the best decision of my life, now that the markets seem to have stabilized.  The very day I jumped to the sidelines, I watched the biggest one-day gain in more than a year, up 404 points on the Dow, followed by a small decline and then another nice bounce. Sadder but wiser, I get my money back in the market before it can go up too much more without me.
 
May 13-May 20:  Did I say go up?  The Dow is back down under 11,000, apparently because the Euro is falling compared with the dollar.  I thought a strong dollar was a GOOD thing, but apparently not...  Also Germany banned short selling, which spooked American investors.  Why?  Now the markets are below where they were at the worst of that flash crash thing.  Darn Germans!  They're just killing my net worth.
 
May 21-June 7: What the hell?  Friday: Market up, financials are healthy.  Did the government stop investigating Goldman?  Monday: market down because we're all apparently still worried about Greece.  I'M not worried about Greece; why is everybody else?  I'm just thinking out loud here, but maybe Greece could sell that Acropolis thing to the Germans or Chinese, and if that doesn't pay off the European banks, there's always Rhodes or Crete or something.  Tuesday: a lot of see-sawing, but down again.  Wednesday, down again on improving economic news, the Dow is down below 10,000 and am I the only investor in the world who thinks that improving economic news is supposed to be GOOD for stocks?  The analysts are saying that it didn't improve ENOUGH, or as much as expected, or something.  Thursday, back up, which means maybe people realized good economic news is good after all.  Also China came to the rescue and said it wasn't going to dump its European bonds on the market.  Apparently that Acropolis deal isn't panning out...  Friday: another down day, this time with something about Spain defaulting on ITS debts.  Whose next?  Portugal?  Italy?  Monday: the Dow is down 1.1% because, get this, BP's "top kill" thing didn't stop the oil flowing into the Gulf of Mexico.  Does that affect IBM's business prospects?  Or General Electric's?  Is Alcoa or Merck less profitable or viable because "top kill" didn't save the shrimp fishermen?  Tuesday: up slightly.  Wednesday: the Dow is below 10,000.  Now we're worried about HUNGARY'S economy.  Thursday: A tiny bit of sunshine.  Friday: bad.  Monday: Awful.  Dow at 9,800.  Time to get back out?
 
June 8-June 18: I guess I might have been hyperventilating a little bit the last two weeks; thank goodness the market has finally started that rally that I was expecting way back at the start of April.  Has it really been that long?  Time moves VERY slowly when you watch the tape every day, but now, at least, I can rest easy.  Last Thursday, a bunch of economic reports came in, telling us that the economy is growing--and I'm glad to say that for once the market agreed with me that this was GOOD news.  Tuesday was up, Wednesday was down apparently because Ben Bernanke waxed optimistic about the economy (and why is that a bad thing?), Thursday was up nicely and Friday saw an uptick in consumer sentiment.  If anybody ever asks me about MY sentiment, I'm going to tell them I'm optimistic as hell even if I'm in a suicidal depression; that number seems to be inexplicably crucial to the health of my portfolio.  Friday was down because of Greece, and Monday saw nice gains, including shares of BP.  Go figure!  Wednesday: flat, thanks to something about Spain not needing a bailout.  Thursday: up, thanks to Spain selling some kind of bond issue without incident.  Friday: up slightly.  For the week: up 2.2%.  Why can't every week be like that?
 
June 19-June 30: Maybe I should just shoot myself.  Monday wasn't so bad, but then came down days on Tuesday, Wednesday, Thursday and Friday, as the Federal Reserve downgraded its economic outlook because of all that stuff going on in Europe.  Darn Europe!  Darn Federal Reserve!  Monday was down too, and on Tuesday, the markets hit their lowest level for the year.  The Dow is under 10,000, about where it was last November.  Why?  Get this: China's economic growth is slowing down.  Am I the only person who thinks that less economic growth in China could mean more for US?  That is how it works, isn't it?  Omigod, last day of the quarter; I can't look, except that I have CNBC on all day, and it's just like the month; up and down and finally, in the last couple of hours, down 1.01%. 
 
What an awful week!  But it seems like every time I give up hope, the markets bounce back, like a sucker punch in reverse.  Maybe I should be giving up hope sooner!  Like, right now I'm thinking maybe I should shoot myself and end all this misery.  Right after I answer the phone.  Hello?  Yes.  Yes.  I'm too busy right now to answer any polling quest--what?  What did you say?  My sentiment?  I'm giddy!  Ecstatic!  Overjoyed!  Yes, I know it's hard to hear the excitement in the tone of my voice, but trust me: optimism is flowing out of every pore in my body!  On a scale of 1-100?  At least a 104!  No, make that 110.  Whatever it takes to offset those depressed people you usually call.  Yes.  You're welcome.  Call back any time.  I'll be here tomorrow.  Yes.  Okay.  Goodbye.
 
I can hardly wait to see how THAT plays out in the markets tomorrow morning.
 
  
 
 
 

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