What I'm Doing Now...Staying Defensive

I continue to maintain a rather defensive, yet almost fully invested, posture. While I spent some of my cash last month on a new small-cap idea, I haven't changed my general investment stance at all this year. I'm holding onto my core sector positions in precious metals, commodities, oil and gas and major pharmaceuticals. Also unchanged are my other smaller sector positions in defense, finance and specialty retail. I've increased my "special situations" holdings by adding a new position. The bottom line for me is that for my core positions, I want to own solid companies, preferably ones that pay good dividends, in sectors that will benefit from current and anticipated economic and political events. I then can adjust the risk/reward profile a bit by sprinkling in different percentages of the "special situation" stocks when conditions permit.

Trend...The Energy Sector Remains Bullish

The greatest bull market in the stock market today is in the energy sector. Today, oil prices are around $44 per barrel, which is a new high. I believe that it is more likely that oil prices will rise to $50 per barrel than fall back to $30 again, thanks to the "war premium" and the basic laws of supply and demand. In addition, natural gas prices have been hovering around $6 per MMBtu, which is near their high in more than two decades. Coal prices also continue to rise and hit new highs. No matter where you look, energy prices are universally at their peak.

What does that mean to you? It means that as a consumer, you will be paying more at the pump, more to heat and cool your house, more to cook your food or heat your hot water tank, more to travel (either by car or by plane) and more for goods (like many chemicals) that rely on petroleum products for their production. It also means that energy prices will continue to be an inflationary force in our economy. That's the bad news.

So what is the potential good news? For investors, it means that there is money to be made by investing, as I have done, in this sector. You can participate in this bull market by owning individual stocks, ETFs or mutual funds. Keep in mind that most of these securities are at or near their highs right now, so there is risk to investing now. If the overall market declines, it takes most stocks with it. And if energy prices do fall unexpectedly, the whole sector will drop quickly. So, as always, invest with care and caution, and consult your financial advisor before making any decisions.

Statistics to Watch...The Economy Rolls Along

• The labor department announced that a smaller than expected 112,000 non-farm payroll jobs were added in June. Average hourly wages increased by $0.02 in June to $15.65. But the average workweek fell by 0.2 hours to 33.6 hours, reducing the average weekly earnings by 0.5% from May.

• 8.25 million people remained unemployed in June, roughly the same as May. The number of seasonally adjusted part-time workers fell slightly to 4.513 million from 4.655 million. The number of "marginally attached" workers remained 1.5 million. That means with a labor force of 139.0 million, my "underemployment rate" dropped slightly to 10.25% from 10.35%, while the regular unemployment rate reported by the government held fast at 5.6%.

• The four week average for initial jobless claims held steady at around 335,750.

• The University of Michigan Consumer Confidence Index rose again in July to 96.7, up from 95.6 in June. This survey indicates that people are more upbeat than ever about the economy.

• According to the Congressional Budget Office (CBO), for the first three quarters of the fiscal year, the federal government ran a deficit of $328 billion, as spending continued to outpace revenues. The Treasury ran a $62 billion deficit in May, about $2 billion less than forecast.

• According to the Census Bureau, the federal trade deficit in May was $46.0 billion, down slightly from a revised $48.1 billion in April, as exports grew a little faster than imports.

• The Labor Department reported that the Consumer Price Index, which measures changes in the prices paid by urban consumers for a representative basket of goods and services, rose 0.3% in June, to 189.7 (1982-84=100). Energy costs accounted for two-thirds of that increase. The "core" CPI, which excludes food and energy, rose 0.1%.

• The Labor Department also reported that the Producer Price Index (PPI), which measures the average change over time in the selling prices received by domestic producers for their output, decreased 0.3% in June after a 0.8% rise in May. The "core" PPI rose 0.2%.

• The American Association of Individual Investors' (AAII) bullish sentiment increased slightly from 33% for the week ended June 5 to 34% for the week ended July 30. Individual investors remain wary.

• According to the Bank of Tokyo-Mitsubishi, same store retail sales were up 2.6% on a year over year basis in June, which market the lowest increase so far this year. It is also worrisome to note that the two largest retailers, Wal-Mart and Target, both warned of lower than expected sales. Maybe consumers are finally starting to reduce their spending.

• According to the Census Bureau, sales of new single family homes in June rose 0.5% from May to a seasonally adjusted annual rate of 1.001 million units. The moderation in interest rates had an obviously beneficial effect.

• The Institute for Supply Management (ISM) index of manufacturing activity stayed essentially flat again in July, as it rose from 61.1 in June to 62.0, after falling from 62.8 in May. The nine months that the index has remained over 60, which is an indication of a growing economy, is the longest such stretch since 1973.

• According to the Bureau of Economic Analysis, the national GDP grew at a 3.0% rate in the second quarter, down from a blistering revised rate of 4.5% in the first quarter. According to 55 economists polled by the Wall Street Journal in early July, the GDP is expected to grow by 4.4% in the third quarter and 4.2% in the fourth quarter.

So what does all this mean to you? It appears that the economy continues to grow, create jobs and offer hope that the doomsday pronouncements are premature. I admit that I was, and to some extent continue to be, somewhat bearish in my overall outlook for the stock market and the economy. Although I seem to be proved wrong on the economy, the stock market seems to be discounting all of this good news and instead focusing on other events, like Iraq, terror threats and the election. While I'm still somewhat concerned about the staying power of this economy, it's hard to argue with the current numbers. As long as the disconnect remains between the good economic news and the bad stock market action, investors will be forced to pay even more attention to the external forces that shape the market.

Personal News and Notes

Due to summer vacactions, this month I have combined the July and August editions. I will return to a monthly schedule in September. Enjoy the remaining month of summer. Carve out a littel extra time to do something special with friends and family.

I hope that you have had a chance to visit my new website. It has quite a bit of information on it, and it continues to evolve as I add features and content. Please go to / and take a look. I would greatly appreciate hearing any of your comments and suggestions. I'm always looking for ways to improve your experience on my site.

Towards the end of last month I completed the chapter that I've been writing for The Black Book on Personal Finance. It is now going through the final editing process. I hope to have the e-book of my chapter, tentatively titled "Dynamic Sector Rotation Investing: How To Make Money In Good Times and Bad", available for sale by Labor Day. I hope many of you will be kind enough to purchase this e-book; I think you'll find it quite interesting. If all goes well, the entire book will be published and available in bookstores in time for Christmas.

For those of you who live or work in the Westchester/Fairfield County area, I would like to introduce you to a business networking organization called Contact Advocate, and more specifically, their Westchester Exchange chapter. I have recently become the Vice-President and co-organizers for this Chapter. The purpose of the group is to provide a forum through which business owners can meet and explore ways in which they can help each other build their businesses. We meet on the fourth Tuesday of every month. Please click here to sign up for a one year membership. It is only $150 per year and it is money well spent. If you would like to attend our next meeting, or if you would just like additional information about the group, please let me know.

As always, I thank you for your interest and consideration, and invite you to write or call me if you have any questions, or if I can be of service to you in any way.

Best regards,

Greg Werlinich
President