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Being Street Smart 7/9/4


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#1 TTHQ Staff

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Posted 10 July 2004 - 05:04 PM

BEING STREET SMART
____________________

Sy Harding

SECOND HALF OUTLOOK DETERIORATES. July 9, 2004.


The first half of the year was certainly not fun for investors. The market peaked a few weeks after the year began, and entered a narrow whipsawing trading range in which neither bulls nor bears could make any headway. The first half ended June 30 with the major market indexes down from their January and February peaks, but only by 2% or so. However, indicating how difficult it was to navigate the shoals, particularly after the market entered its unfavorable seasonal period in April, mutual fund ranking service Morningstar Inc., reports that diversified U.S. equity mutual funds on average lost 11.3% of their value in the 2nd quarter.
The second half of the year has not gotten off to an encouraging start either.
At least the first half was supported by evidence of a strong economic recovery. Gross Domestic Product (GDP), the total output of the country’s economy, came in stronger than expected in the final quarter of last year, and first reports were that it grew even more, 4.4%, in the first quarter of this year. Individual economic numbers then became even more impressive in April and May. So forecasts for 2nd quarter GDP were ratcheted even higher. Given the forecasts for even stronger economic growth, Wall Street increased its earnings forecasts for U.S. corporations. The optimism kept investors pouring new money into mutual funds.
It was also a positive that the market had not gone into a nosedive in reaction to the increasing violence in Iraq, terrorist attacks in Saudi Arabia and Spain, record U.S. budget and trade deficits, and growing election uncertainties.

The second half of the year has begun with most of the international and terrorist concerns still in place, election uncertainties even greater, and unfortunately with the previous promising economic outlook having suddenly turned sour.
Newly surfacing economic concerns began with the recent announcement that 1st quarter economic growth, which was the basis for much of the rosy economic forecasts during the spring, was not as strong as had been previously reported. The Commerce Department has revised its previous reports that GDP grew 4.4% in the first quarter, now saying the economy grew only 3.9%. The news surprised economists. But the new worries don’t stop there. The Federal Reserve raised interest rates a week ago last Wednesday, to begin slowing what it thought was a strong economy, and so ward off inflation. Almost immediately that it did so, disturbing new economic numbers came out indicating the economy may be slowing on its own. Those reports included declines in factory orders in June, news that only 112,000 new jobs were created in June, half of what economists had forecast, and not even enough to keep up with the 200,000 new job seekers that enter the labor force each month. Then there were unexpected declines in auto sales in June, and warnings of slower sales from retail giants WalMart and Target, followed by similar warnings from tech sector companies like Veritas, PeopleSoft, Siebel, and BMC.

The situation prompted Merrill Lynch analysts to warn that economic growth is decelerating at a pace that is likely to see 2nd quarter GDP come in around 2.5%, rather then the 4 to 5% that is the current consensus forecast. That would surely be a negative surprise for the market. The number will be released by the Commerce Department on Friday, July 30.

Mutual Fund firm Comstock Partners, has also issued a report, saying, “It looks to us like the economy is already slowing and could slow enough to drive the U.S. into a double-dip recession, and possibly deflation if the Fed continues to raise interest rates too much further.”

So it doesn’t look like investors will have any better environment over the next few months than it had over the last six months.

In a column some weeks ago I said there was a window of opportunity for a summer rally, but not to get too excited about it since summer rallies seldom amount to much, and are usually followed by a decline to a more important low in the fall. The window of opportunity was based on continuing good economic news and forecasts, and therefore that 2nd quarter earnings reports would also be strong. That thought had some cold water poured on it by the negative surprises in recent economic numbers, and warnings of softer auto, retail, and tech sales in June, the last month of the 2nd quarter.

Meanwhile, nothing I’ve seen in the economic or technical indicators over the last couple of weeks changes my mind that any summer rally will be of high risk and limited, and that the market, after last year’s anomaly, when it continued to make gains in its unfavorable season, has returned to its historical seasonal pattern. That is that it suffers most of its losses and declines in the summer months, and makes most of its gains each year in its favorable seasons, which begin from a low that is usually seen in the September to October time frame.

#2 TTHQ Staff

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Posted 12 July 2004 - 11:01 AM

Our apologies but there was an error in Sy's 'Being Street Smart' column sent to you on Friday, Sy quoted an article in the New York Times that said Morningstar reported diversified U.S. equity mutual funds lost 11.3% of their value in the 2nd quarter. That is incorrect. Lipper Inc. reports that the average U.S. equity fund gained 0.8% in the June quarter. Patti Piatt Manager, Subscriber Services