November 2010 Newsletter

The Market:

In October the market conditions didn't change much from previous months. The month started with the S&P at 1146 and ended with it at 1183 for a 3% gain. Well, that's better than a 3% loss, but still very modest. However, the S&P has gained 15% since July 2 and that is a nice record overall.

There is a great deal of money remaining on the sidelines so the gains that have been made are on low volume so that hasn't changed. Additionally there is still an outflow of money from stock mutual funds to the tune of 3.69 Billion in October. That money plus a lot more, totaling 25.25 Billion dollars, flowed into Bond funds during October as investors "seek shelter" from a storm they suspect is over the horizon. Those who don't see a storm are being very cautious waiting for some clarity about the future direction of the economy.

All Americans would like to see that clarity.

PWA

The PWA 500 Timer entered the orange sell band on October 5, dipped down briefly, and the spent the remainder of the month in the sell band presenting us with a somewhat extended selling opportunity.

The Online Analyzer S&P chart followed a slightly different pattern. The price line entered the orange sell band on October 5, dropped to neutral on October 19, and then returned to the sell band again near the end of the month on October 27.

Whether you acted on these sell indicators is a matter of judgment and a function of what level you bought into the market. If you bought in at a level that gives you a reasonable profit, well there's nothing wrong with taking it. One of the pearls of wisdom I like to bring out from time to time is Bernard Baruch's observation that, "I never lost money taking a profit."

Stars and Dogs of October:

Even though the market did not make dramatic moves in either direction as measured by the S&P, among the other stocks and funds on our list there were a few dramatic stars and amazingly few dogs.

Stars:

• The blue ribbon goes to Sohu.com, Inc (SOHU), an internet company in China, which exploded from $57.73 per share to $74.50 for a brilliant 29% gain for the month.
• The second place red ribbon was earned by Mosaic Company (MOS), a global agriculture chemical company, with a shiny 22% gain.
• The third place ribbon goes to Silver Standard Resources, Inc (SSRI), western hemisphere metals, coming in at plus 18%.

 

Dogs:

• The biggest dog in the pound this month, yet not a huge dog, was Intuitive Surgical (ISRG), a surgical equipment design and manufacture company, that presented us with a negative 9%.
• Rydex Inverse 2x S&P (RSW) was the second biggest dog with a minus 6% return. We know inverse funds will be dogs when the market is rising; but the become stars when the market is falling.
• Kinross Gold Corporation, (KGC), a Canadian gold exploration company, was the wagging tail with a 5% loss in value.

 

Recession Watch:

Some things about the recession recovery are looking up a little, but not dramatically. The stock market is up, but on thin volume. Trucking tonnage continues strong indicating that raw materials and finished product are moving. Housing is a little better but it is estimated that there is more than a one year supply of unsold houses on the market.

Initial jobless claims have waffled since January and continue to do so with fewer such claims in the last two months. The thing is these numbers do not include people who have, in effect, looked for work for months and have basically given up for the time being.

You'll find this interesting. Per Charles Payne's WStreet Market Commentary there are 17,000,000 college graduates doing work below their skill and training level.

• 5,057 janitors in America have PhDs or other doctorate degrees.
• 18,000 parking lot attendants have college degrees.

So people are taking work where every they find it, and the jobs situation affects not only blue collar workers. A college degree does not necessarily insulate a person from joblessness.

In effect, the recovery is limping along very slowly and I suppose the "jobless recovery" watch phrase is still alive, though I don't see how that notion can work out well in the long run.

In many past recessions the auto industry led the recovery, and in recent years housing has sustained economic growth. Neither of those industries are in good shape now so the question is where will the next wave of growth come from? I wish I knew.

Opinion

In my view the election results bring a ray of sun shine to an otherwise gloomy outlook. Maybe not a full no-cloud-in-the-sky day at the beach, but a ray of sun shine.

It is seldom a good thing when one political party controls the White House, and has filibuster proof majorities in the House of Representatives, and the Senate. When that happens there's a strong tendency for the ruling party to impose what they want because they don't have to work with the other party so the normal checks and balances are not there to slow them down. We've seen a lot of that in the last two years.

With the GOP in control of the House, the recent federal spending spree will be reined in somewhat and there's a possibility for the wealth and jobs producing segment of society (business) to gain a measure of freedom to operate and a measure of confidence in a stable business environment that presently isn't there.

The federal government is just flat not able to create either wealth or productive jobs. A dollar taken in taxes returns seventy cents to the economy. A dollar NOT taken in taxes returns ten dollars to the economy. So where in our economy has the massively expensive stimulus package promoted growth? The chart below will tell you.

In my view the proper role of government in the economy is to structure systems and laws that require us to treat each other fairly and then step aside to allow our historically free market economy to work its magic.

It's in the private sector where productive jobs, wealth, and a broader tax base are created.

Other PWA News:

You will have noticed that a new function has been added to our PWA Online Analyzer charts and that is "favorites." The notion behind this change is to permit subscribers to select charts they want to work with and then move from one to the other without needing to go to the entire list of companies and funds. Once you've selected you charts clicking on the "next favorite" button will take you to the next chart you have selected in alphabetical order.

We believe this is a good addition and will simplify chart navigation for you.

 

Final Word:

Whether it's the market we're considering or any other aspect of our lives, we human beings expect everything to continue as they are now far into the future. However, our beautiful world doesn't work exactly that way. There's an old saying, "the only constant is change."

So be of good courage, America's current economic struggle will change too. I wish I could tell you exactly when, in which case we would all make a ton of money.

Wishing you well,

Arley Loeffler, CEO
Investment Timing Software, LLC
arley@itspage.com