Our Compass Remains True…
www.sierratimes.com Stock Market Overview Cambridge Asset Management
By Martin & Bart Siegel, CPA, CFP We continue to use our sailing analogies to communicate to our readers the way we approach the market. The ocean is an unforgiving taskmaster, as well as a limitless source of riches. I am sure you can come up with your analogies, but they all come down to the basic laws of nature, and how we adapt to them. Whether you are a sailor, an explorer, a pilot, or even a hunter, you need a compass, or map, to know where you are. Our compass is the profile of the 30 stocks that make up the Dow Jones Industrial Averages. We also monitor the Standard and Poor, and Mid-cap averages. They all pretty much track each other. We monitor the percentage of stocks that are rated buys, holds, and sells, according to our criteria. These indices do not show any signs of dramatic deterioration, despite all of the confusion, and anxiety. In our opinion the stock market is exhibiting remarkable stability, and order.
It has been, and continues to be our strategic decision, that we are witnessing a broadening bottom that has been unfolding over the past months. The final test is going to occur this week when President Bush decides to attack Iraq. Historically, the first reaction in a wartime scenario has been a brief relief rally as we get past the initial confusion, and events begin to unfold. After this initial rally there is a period of consolidation, and filling, as the future unfolds.
There are presently three important elements effecting our economic decisions. These elements consist of the uncertainty over the war, President Bush’s economic stimulus plan, and the rate of inflation. As you know we are on the brink of a decision. Every indication is that the war is imminent. Depending on whom you believe this will either be a blood bath, or it will be over shortly after it begins. There are many who expect the Iraqi army to surrender upon declaration of war. No one has predicted anything other than an American dominated military victory. The cost in time, money, and lives are the variables. Presently many capital investment plans are on hold because of the tax advantages being anticipated in President Bush’s proposed tax package. His proposed tax package is designed to stimulate the economy, bolster the stock market, provide incentives to work harder, and take investment risks. Lastly the greatest contributor to inflation in recent months has been the increase in the cost of energy. The latest report on the oil picture is that Venezuela is producing, and delivering, oil at the rate of 3 million barrels a day. OPEC has assured us that they will deliver the oil that we need. Some estimates predict that a favorable resolution to the Iraqi crisis will result in oil falling into the $20 a barrel range. The other indicators of inflation show that deflation is the greater risk. Interest rates continue to remain at historically low levels. The recasting of mortgages has produced a very dramatic infusion of hundreds of billions of dollars into our economy. Sixty percent of those that hold mortgages have refinanced.
Although the economy has not responded as dramatically as we would like, there is continued evidence of economic growth. After pushing near recent lows, Wall Street staged its strongest advance on increased trading volume in five months. This surprised many that doubted the market could rally given investors’ fear of war. The investors’ unwillingness to sell stocks implies that they believe the economy is not that bad, and they expect things to improve. Positive factors likely to contribute to a strengthening economy include low interest rates, an expanding money supply, and the end of a three year cycle of low investment in computers, plant, and equipment.
From a different point of view we have strong evidence that America retains its lead in invention, and innovation. The new Intel chips, the science of nano technology, and the shift from silicone to carbon based technologies implies dramatic improvements in the speed, and applications, of computers. Wait till you hear the reviews on Windows 2003. Early indications are that Bill Gates did it again. We are also beginning to come to grips with hybrid automobile propulsion systems, and hydrogen cell fusion.
Stay strong, and if you choose optimistic. If you are nervous it is not unjustified. Life is not without risk and that there may be some rough seas ahead. On the other hand you also have ample reason to be positive. We at Cambridge find it a heck of a lot more fun anticipating good times ahead. Don’t underestimate the presidential election cycle. Act responsible, remain diversified, don’t take risks you can’t afford, live within your means, and try to enjoy life.