Brighton Perspective

Sentinel Portfolio - An Endowment Like Portfolio is Possible!

Endowments have tended to outperform most institutions over the last 20-25 years, including 2008. How they do it has been the subject of many books, including several by David Swenson, the CIO at Yale. Most endowments incorporate significant exposure to alternatives such as long/short strategies, arbitrage, futures, real estate, timber and private equity. Their objective is to manage downside risk while also providing an absolute total return of approximately 10% per year.

I argue in the attached paper, borrowing from a recent book "The Ivy Portfolio" by Mebane Faber, that endowment like returns can be generated by individual investors. The challenge is for them to view their portfolio as an endowment and accept the concept of inter-generational equity. Inter-generational equity means that the investor treats the next generation as they would themselves and build a portfolio that is expected to outlast the initial investor.

Click here to Download Sentinel Portfolio.

The portfolio isn't for all investors - the return objective might be considered too low for the truly risk aggressive and might not be high enough to meet the income needs of some investors. However, the majoriy of investors can consider this portfolio or a variant for themselves. Risk management should be a core consideration for everyone. For most of the last 15 years it wasn't, but that appears to be changing. As investors realize that supposed 20 year events are actually ocurring every 7 to 8 years they are becoming more concious of managing downside risks in their portfolio and are willing to reduce the upside to "keep what they have".

2nd Quarter Review

Download BFP 2Q09 Outlook

This is a short review of the 2nd quarter with my thoughts on what the outlook suggests for the near future. Feel free to download.

Essentially, the U.S. economy is likely to grow very slowly, at best, over the next 18-24 months as consumers and corporations continue to de-leverage and save. Developed markets remain highly linked to the U.S. economy and thus will follow our lead. Slow growth, high government debt and deficits. Emerging markets will do better as they generally had healthier balance sheets prior to the recession as well as higher investment and savings. They are also, by and large, commodity driven economies.

Equity markets are probably no better than flat to slightly positive - see earlier post - over the next 18 months. Fixed is mixed - inflation risk is real and that's not good for bonds. But, the credit dislocation suggests that value still exists.

Potentially attractive investments include commodities, other inflation hedges such as TIPS and Bank Loans. Oil and Gas may also be attractive as energy prices potentially go higher.

Weekly Update

Market Week: July 27, 2009

The Markets Ongoing cost-cutting helped produce earnings reports that, while not great across the board, were generally better than expected. That made the markets very, very happy and contributed to a second straight week of gains. All three indexes rose above their recent June highs, giving the Dow its most encouraging two-week streak since March 2000 and bringing it above 9000 once again--roughly where it was when the year began. After twelve straight days of gains, the Nasdaq hit a level it hadn't seen since last November before wilting a bit in the wake of disappointing results from Microsoft and Amazon. The S&P 500 finally broke through the closely watched 950 mark and also reached its highest level since November. The small-cap Russell 2000 has risen 14% in the past two weeks. Market/Index 2008 Close Prior Week As of 7/24/09 Week Change YTD Change DJIA 8776.39 8743.94 9093.24 +3.99% +3.61% NASDAQ 1577.03 1886.61 1965.96 +4.21% +24.66% S&P 500 903.25 940.38 979.26 +4.13% +8.42% Russell 2000 499.45 519.22 548.46 +5.63% +9.81% Global Dow 1526.21 1664.23 1747.64 5.01% +14.51% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.65% 3.67% 2 bps +143 bps Last Week's Headlines The Conference Board's index of leading economic indicators rose in June for the third straight month, by 0.6%. Seven of the ten indicators were up. Sales of existing homes rose in June--traditionally one of the busiest months for home sales--for the third straight month, increasing by 3.6% from May. However, they are still down slightly from last year. Federal Reserve Chairman Ben Bernanke continued to reassure Congress that the Fed's target interest rate is likely to remain practically nonexistent for quite some time. The Fed also rolled out a proposal for beefing up consumer protection and disclosure regulations dealing with mortgages and home-equity loans. The minimum wage rose to $7.25 an hour in all states where it wasn't already at that level. That's doubtless a relief to many workers and potentially a boon to the economy, but also raises concerns that it could prompt further cost (and job) cutting by employers. The University of Michigan consumer sentiment index joined last month's Conference Board report in finding that consumers are less optimistic about the economy than they were a month earlier (though they're still feeling better than they were last November). Overseas, the U.K. economy saw its largest annual decline since recordkeeping began, dropping 5.6% in the second quarter. However, German manufacturing exports are beginning to pick up a bit, largely on buying from Asian countries flush with their own governmental stimulus packages. Eye on the Week Ahead The initial assessment of economic growth in the second quarter will make for interesting comparisons to the continuing flow of second-quarter corporate earnings reports. Data on the housing market should suggest how the traditional summer buying season is going this year. The Commodities Futures Trading Commission will begin discussing how to rein in speculation in the energy markets. Key data releases: New home sales (7/27); consumer confidence (7/28); durable goods orders, oil inventories (7/29); second quarter GDP (7/31). Data source: Includes data provided by Forefield, Inc. & Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Alan Blinder: economy has hit bottom - WSJ.com

Alan Blinder: economy has hit bottom - WSJ.com.

I hope Mr. Blinder is correct in his assessment of the economy but I remain skeptical. While I think the economy may be improving from a statistical perspective, I don't think consumer and corporate sentiment is improving in step with the data. As he notes, unemployment is lagging other data and is likely to continue to lag. However, that's a key point. The bottom line is consumers won't begin to consume again, meaningfully, until they're confident they're personal employment is secure or, if they're currently unemployed, until they have jobs again.

As I've noted elsewhere, I believe corporate capital spending will be a key driver in true economic and financial markets recovery in the developed markets, particularly, the U.S. As companies reduce inventories (hit zero as Blinder comments), and wring out all of the cost savings which have contributed to the great 2Q earnings so far, they will be in a position to reinvest in capital stock - physical and human. As companies begin to make these investments and hire to meet their expectations of expansion, we'll begin to see a true return of consumer confidence and economic and financial markets recovery.

I believe the 2Q earnings are being driven mostly by effective cost management and not by top line growth. Cost management can only succeed to a point so there are diminishing returns to cost reduction. At some point, the companies must begin to grow their top line again. When market participants become convinced that earnings growth is being driven by top-line growth (this will happen before we actually see it in results), we'll have the foundation for a real equity market recovery.

My expectation continues to be that we won't see improvements in capital spending, consumer confidence and top line growth until 2010. Further, if cost management gains run out before we see these improvements, we could have an ugly spell in the markets as prices adjust to new expectations. Thus, as I've said before, it's always good to remain skeptical and hedge your downside risk.

Bernanke Op-ed in WSJ: The Fed’s Exit Strategy - WSJ.com

Bernanke Op-ed in WSJ: The Fed’s Exit Strategy - WSJ.com.

To date, in my opinion, no one in the U.S. government has done a better job attempting to stabilize the economic and credit crises. The Fed activity and the stimulus do create inflationary fears and I think we will see inflation in 18-24 months. However, I think the inflationary pressures will result from the stimulus and not from Fed activity. They have the ability and the forethought to withdraw dollars when necessary.

Let's hope they can counter-act the stimulus as well.

Weekly Update

Market Week: July 20, 2009

The Markets Reversal of fortune: The Dow, S&P, Nasdaq, and Russell were up 2%+ across the board to start the week, then beat that performance two days later. Positive reports out of the tech and financial sectors sent indexes up by 3% or more on Wednesday, and the Nasdaq hit its highest level in nine months, while the Dow and S&P 500 reached their highest level in a month. Market/Index 2008 Close Prior Week As of 7/17/09 Week Change YTD Change DJIA 8776.39 8146.52 8743.94 +7.33% -.37% NASDAQ 1577.03 1756.03 1886.61 +7.44% +19.63% S&P 500 903.25 879.13 940.38 +6.97% +4.11% Russell 2000 499.45 480.98 519.22 +7.95% +3.96% Global Dow 1526.21 1561.11 1664.23 +6.61% +9.04% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.30% 3.65% 35 bps 141 bps Last Week's Headlines The federal budget deficit in June was $94.3 billion--lower than May's $189.7 billion. However, that brings this year's deficit so far to $1.08 trillion; last year at this time, it was $285.8 billion. Wholesale prices rose in June for everything from energy to food to cars. The Producer Price Index was up 1.8% from May, though that was still 4.6% lower than last year. June U.S. retail sales were up 0.6% from May, but that money was largely spent on gasoline and automobiles. Subtract those, and all other retail sales dropped for the fourth straight month. Gas prices also pushed up the June consumer inflation numbers by 0.7% from May, though the Consumer Price Index is down 1.4% from last year (remember last summer's $4 a gallon gas). However, excluding food and energy, consumer prices were up 1.7% since last June. Federal Reserve officials projected at last month's meeting that unemployment could top 10% this year, drop slightly next year, and by 2011 might still be around 8.4%-8.8%. However, they also forecast that economic decline would be slower than previously expected for the rest of the year, and growth next year would be slightly higher than anticipated (between 2.1% and 3.3%). CIT Group became the latest financial institution to face severe liquidity problems, raising the specter of a new credit crunch for the small and mid-size businesses to which CIT lends. Trading in the stock was halted before the company's bondholders reportedly rode to the rescue over the weekend with additional financing after the federal government denied assistance. Several of the financial companies that received bailout money last fall (and in some cases have repaid those loans) reported robust earnings and profitability. Unemployment rather than adjustable-rate mortgages accounted for much of the 11% increase in foreclosures during the second quarter, according to RealtyTrac. June foreclosures were over 300,000 for the fourth month in a row. As summer finally began to make an appearance in many parts of the country, new home construction rose for the third consecutive month, increasing by 3.6% from May. The increase was largely in single-family homes. Eye on the Week Ahead More earnings reports, especially from tech and consumer-oriented companies, are on tap. The reported CIT rescue also will be closely watched for any signs that the credit crunch might turn ugly again. Key data releases: Leading economic indicators (7/20); existing home sales (7/23). Data source: Includes data provided by Forefield, Inc. and Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

CIT Bankruptcy: CIT Strikes Deal for $3 Billion Rescue to Avoid Bankruptcy - Companies * US * News * Story - CNBC.com

CIT Bankruptcy: CIT Strikes Deal for $3 Billion Rescue to Avoid Bankruptcy - Companies * US * News * Story - CNBC.com.

We don't have the full details and won't know how successful this deal will be in the long-run but, right now, it demonstrates that capitalism can work. Believe it or not, not every company is too big or too important to fail. Not every potential bankruptcy is catastrophic to capitalism and free markets.

Equity Forecast?

I was asked recently where I thought equity markets were going in the next 12-24 months - higher, lower or sideways. I decided to take a look at the S&P 500 earnings forecast produced by S&P and updated regularly. I am not bullish on U.S. equities and think its appropriate to consider hedging this exposure. Here's why -

The average trailing 12 month P/E for the S&P 500 (end of each quarter) is 15.98. The standard deviation of the rate of change on a quarterly basis is roughly 14%. Clearly, the trailing P/E at year end 2008 was unsustainable - in fact, it's high because Q4 earnings were negative for the first time in the history of S&P's calculations. Here's where it gets interesting - the earnings forecast for the trailing twelve months ending 9/30/09 is ($2.10) per share. Per S&P that is the first time, trailing annualized earnings will be negative. For calendar 2009, they're forecasting $29.97 and for 2010, $37.26. Let's assume these estimates are dead-on. What then is fair value?

The S&P has historically trended higher exiting a recession with the P/E ratio typically peaking roughly 6 to 9 months post recession and gradually declining toward the longer-term trend. So let's say that the P/E at end of 2009 is 30, which would roughly match the trend forecast I calculated using just the last 5 years data. That would suggest an S&P 500 index value of 899.10. We're at 940 today and began 2009 at 903.25. That would be a decline of (0.05%) for the year.

For 2010, if earnings are dead-on and we maintain a P/E ratio of 30 (recall it has historically peaked 6 to 9 months post the recession's end), the index will close 2010 at 1,117.80. That would be a roughly 24% gain (obviously matching the earnings growth as the P/E ratio is held constant). More likely is a reversion to the mean. Let's be optimistic - the average P/E since the end of the 1991 recession has been 24.36. That would suggest an index level of 907.65 at year end 2010.

The bottom line is that IF the S&P earnings forecasts are accurate and IF P/E multiples hold in line with recent historic trends we're likely to be flat to modestly positive over the next 2 years. If the economy breaks out and earnings ramp up more than expected then maybe 1,117 is possible. But with consumers not spending money, with corporations not investing in new capital and government threatening higher taxes on consumers and businesses, which is more likely - break-out earnings or weak earnings?

By the way, the average P/E ratio since the end of the 2001 recession is 24.38. Hedging U.S equity exposure here would not be an unreasonable action. Better to give up some upside and protect the downside.

The Bernanke Market - WSJ.com

The Bernanke Market - WSJ.com.

Well Written commentary by Andy Kessler. I've stated before I believe Bernanke is the only one in government who has done well. I also agree that his actions won't be enough. We'll need the private sector to pick up and that will be a challenge if fiscal stimulus gets in the way.

What's So Absolute about Absolute Return Funds? - Morningstar - Fund Spy

What's So Absolute about Absolute Return Funds? - Morningstar - Fund Spy.

This is almost willfully deceptive. The term absolute return is credited to David Swenson, head of the Yale Investment Management Co and the Yale Endowment. It is used to describe strategies that have as an OBJECTIVE an absolute positive return in all periods. It includes therefore a wide range of strategies, not just those which incorporate the phrase "absolute return" into their title.

By intentionally defining the "absolute return" category as only funds with "absolute return" in their title, the writer leaves out such strategies as equity market neutral and merger arbitrage. Funds employing these strategies have done well, including the HighBridge Stat Arb Fund she refers to at the end of the article. Ironically, she doesn't present it as an absolute return fund. However, that is exactly what an equity market neutral strategy is. The intent of such a strategy is to generate an absolute positive return by capturing the manager's skill and eliminating any beta exposure.

Remember the absolute return is an OBJECTIVE, not a guarantee. Consequently, when markets move decisively to the downside, as in 2008, and cross-sectional volatility is low, it is likely that these strategies will generate negative returns. They can also generate negative returns in shorter time periods if the particular skill or insights the manager uses are incorrect or out of favor, for example, employing a momentum strategy during 2001-2002. It goes without saying that strategies designed to be absolute return incorporating short exposure will likely under-perform long-only strategies in strong markets. Investors assuming long-only returns in good markets and absolute positive returns in poor markets are fooling only themselves.

Many of the absolute return oriented funds mentioned are deserving of criticism, but leaving out well run funds to ensure the narrative fits is disingenous. Finally, relying on a one year (or less) time period to make this argument is absurd both from a return and, particularly, from a risk analysis perspective. In fact, any funds with a track record of one year or less should be parsed out as they're irrelevant to this kind of research. Realistically, only funds with at least 3 years of monthly data (at least) should be considered.

A quick review of just one fund, the Merger Fund, which is a merger arbitrage fund with an absolute return objective suggests good options do exist. I looked at the rolling 3 year (monthly) returns for this fund in Principia. This fund has never had a negative return in 17 years of rolling data. It has an annualized return over its 20 year history of 7.55% with and a 10 year standard deviation of 5%. That's a pretty good history of absolute returns with bond like volatility!

Morningstar is capable of much more intellectually rigorous research than this. One gets the impression the writer was tasked last night with writing a column by 6 a.m. disparaging absolute return and this was the best she could do.

Weekly Update

Market Week: July 13, 2009

The Markets Investors seemed to signal impatience with "less bad" news as the major U.S. indexes all fell during the week. The S&P 500 broke a closely-watched level of technical support as both it and the Dow saw their fourth straight week of declines. Despite massive issuance of Treasuries in four separate auctions, demand still exceeded supply by a respectable margin, sending prices up and yields down. Market/Index 2008 Close Prior Week As of 7/10/09 Week Change YTD Change DJIA 8776.39 8280.74 8146.52 -1.62% -7.18% NASDAQ 1577.03 1796.52 1756.03 -2.25% +11.35% S&P 500 903.25 896.42 879.13 -1.93% -2.67% Russell 2000 499.45 497.21 480.98 -3.26% -3.70% Global Dow 1526.21 1608.29 1561.11 -2.93% +2.29% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.50% 3.30% -20 bps +106 bps Last Week's Headlines Non-manufacturing economic activity continued to contract in June, though at a slower pace than the month before. Consumer use of credit declined by 1.5% in May--far less rapidly than it had been dropping each month since February. Many large chain retailers reported stormy weather in June. High-end stores and some apparel chains suffered the most, though some teen-oriented retailers actually reported increases. The U.S. trade deficit in May fell to its lowest level since 1999, helped by both higher exports (mostly industrial supplies) and reduced imports. A new GM rolled off the assembly line as the automaker formally exited the bankruptcy proceedings that began only a month ago, selling its best assets to a new government-controlled entity in exchange for a $50 billion infusion of taxpayer support. The International Monetary Fund upped its forecast for 2010. It now estimates 2.5% global economic growth next year, though the 1.4% decline it foresees for the rest of this year is slightly worse than its earlier figure. The G8 meeting ended with an agreement on climate change--and without public U.S. embarassment over the touchy issue of alternative global reserve currencies (i.e., other than the dollar). The delegates, which also included representatives of five emerging nations, agreed to promote open trade and refrain from competitively devaluing their currencies. Crude oil prices dropped by roughly 10% in a single week, falling below $60 a barrel--good news for gas prices, but hardly a suggestion that recession-impaired energy demand is about to pick up steam. Eye on the Week Ahead Investors will continue to play connect-the-dots with earnings reports, looking for any signs of life in corporate profits. Several major technology and financial services companies are scheduled to report this week. Also, wholesale and consumer inflation data are due out. Key data releases: Wholesale prices, retail sales, business inventories (7/14); consumer prices, industrial production, FOMC minutes (7/15); housing starts (7/17). Data source: Includes data provided by Forefield, Inc. & Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

RealClearMarkets - The Consequences of Big Government

RealClearMarkets - The Consequences of Big Government.

Well-written article in the Washington Post by Robert Samuelson.

Why the Bears Are Wrong | Newsweek Business | Newsweek.com

Why the Bears Are Wrong | Newsweek Business | Newsweek.com.

He may be right but only in the same way that someone who predicts it'll rain in the future is right. Eventually it will and he'll take credit for being right. The thesis is that the bears are wrong about the markets though they may be right about the economy.

What he neglects is that what determines stock prices in the long-term is cashflow. The ability to consistently generate free cash flow and therefore to consistently improve earnings leads to consistently higher stock prices. Positive cash flow and positive earnings are difficult to come by in recessionary economies. The markets determin prices by discounting forward expectations of earnings growth. So, at some point, prices will be begin to rise because expectations of earnings growth will begin to rise. I don't believe that is true now. I believe prices rose between late March and mid June because investors had driven prices too low - beyond "fair value". The rally brought prices to "fair value". Now, real positive market performance should be driven by earnings expectations and those expectations are not good at the moment. Consumers are not spending money as they focus on paying down debt and prepare for higher taxes and corporate investment is declining as companies focus on reducing inventory and higher taxes. These are the two drivers of market performance. Government spending will not improve market conditions long-term.

I agree that bull markets begin when everything is darkest, we're just not there yet. I continue to believe the S&P will be around 950 at year-end and that meaningful improvement will not occur until early 2010.

Obama’s Jobless Safety Net Torn by 48-Year-Old Rebecca Alvarez - Bloomberg.com

Obama’s Jobless Safety Net Torn by 48-Year-Old Rebecca Alvarez - Bloomberg.com.

There are several lessons here:

1) I was taught in grad school many many years ago that the natural rate of unemployment in the United States was roughly 5%. This was because of frictional issues - available jobs were in one state, say Michigan, and available workers were in another state, say California, and workers weren't going to move from California to Michigan. They might now, but that's another story! These frictional issues remain. Addressing unemployment at the state or local level essentially is accomplished two ways - workers move to where the jobs are or companies bring jobs to workers. I read a recent survey that stated something like 50% or more of all Americans live within 50 miles of where they were born. Workers will move but it will take time as they'll need to overcome the psychological barriers of leaving "home". Companies bringing jobs to workers entails state governments making the effort worthwhile. That is accomplished, in my opinion, via lower taxes or incentives. Unfortunately, the states with the unemployment are also among the states with the highest taxes rates or with declining industries - think California and Michigan. This link is to the Bureau of Labor Statistics website - http://www.bls.gov/web/lauhsthl.htm - several states are at historical highs for unemployment (9). Interestingly, most states (29) historical highs were during the 1982-83 recession. Bottom line - because of the need for workers to either move or states to make themselves more attractive to companies, reducing the unemployment rate from 10%+ to something approaching 5% will take time.

2) If you are currently employed, make an effort to save 6 months to 12 months of expenses. That's challenging even in good times, but if you become unemployed and it takes as long as is noted in this article to find a new position, you'll need that "rainy day" fund to get through.

Upper-Income Consumers Most Inclined to Trim Their Debt

Upper-Income Consumers Most Inclined to Trim Their Debt.

This is both good and bad news - mostly good for consumers, mostly bad for the economy, at least in the near term. Cutting debt is a positive step for consumers. The old measures (maybe still used) for determining mortgage financings were max 27% of monthly gross for the mortgage payment and max 33% for total debt. Many consumers in the early part of this decade easily exceeded that ratio as money became easy to borrow. That improved their standard of living but eventually they had to pay the piper.

Monetary responsibility by consumers should benefit the country in the long-term, however, in the short-term, (and maybe long-term as well!), it will be problematic. As most are aware 2/3rds of GDP is consumer spending. If consumers are cutting debt and saving more, they're not spending. So GDP does not improve. The current administration's answer is to spend more itself. Unfortunately, most of that spending won't occur for several more years. In the interim, we can expect GDP to remain sluggish which should also mean sluggish financial markets.

Weekly Update

Market Week: July 6, 2009

The Markets

Fourth-of-July fireworks started early on Wall Street. The door was slammed on the second quarter (not to mention Bernie Madoff) as a back-and-forth week ended with a decline that wiped out any gains--and then some. It was the first time since the spring rally began that the Dow and S&P 500 have seen back-to-back-to-back weekly declines.

Market/Index	2008 Close	Prior Week	As of 7/2/09	Week Change	YTD Change
DJIA	8776.39	8438.39	8280.74	-1.87%	-5.65%
NASDAQ	1577.03	1838.22	1796.52	-2.27%	+13.92%
S&P 500	903.25	918.9	896.42	-2.45%	-.76%
Russell 2000	499.45	513.22	497.21	-3.12%	-.45%
Global Dow	1526.21	1633.36	1608.29	-1.53%	+5.38%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	2.24%	3.51%	3.50%	-1 bps	+126 bps

Last Week's Headlines

• Unemployment--a lagging indicator of the state of the economy--continued to rise in June, reaching 9.5%, a tenth of a percent higher than the May figure. Including involuntary part-time and "marginally attached" workers puts the June unemployment rate at 16.5%. Coincidentally, Eurozone unemployment was 9.5% in May--the highest rate there in 10 years.
• The pace of decline in home prices slowed in April, according to the S&P/Case-Shiller index of 20 metropolitan areas. Prices fell 0.6% from the previous month, and are now down 18.1% from last year. However, that's an improvement from March, when the monthly decline was 2.2% and prices were down 18.7% from March 2008.
• The Conference Board's gauge of consumer confidence fell to 49.3 in May, reversing direction from the previous month, when the number rose to 54.9. A number above 50 is considered optimistic, so both the number and the downward movement represented a disappointment.
• The state of California, which has the equivalent of the seventh largest economy in the world, declared a fiscal emergency and announced it will be issuing IOUs to local governments and vendors because of a budget shortfall that could leave the state out of cash by month's end.
• New orders for manufactured goods rose 1.8% in May. However, actual shipments were down for the 10th straight month--the longest consecutive decline since 1992--and were almost 1% lower than in April. Inventories, in their ninth month of declines, dropped by 0.6% from April, and the ratio of unfilled orders to shipments was up by 0.9%.

Eye on the Week Ahead

As earnings season begins, investors will be watching for any early signs of whether corporations might manage to beat dismal forecasts of a 30%+ drop in second-quarter earnings from last year. The answer could help determine whether the last three weeks represent the beginning of a correction or a pause that refreshes.

Key data releases: ISM services (7/6); consumer credit (7/8); wholesale trade, chain store sales (7/9); trade balance, imports (7/10).

Data source: Includes data provided by Forefield, Inc. and Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Housekeeping

I have added a link on the left hand side below my picture for my monthly newsletter- Brighton Bulletin. I write on 3 to 4 topics each month, trying to stay brief, which I believe are of interest to readers. I welcome new subscribers as well as suggestions on relevant topics. Feel free to subscribe!

Time to Tame Inflation Is Before It Strikes - The Wall Street Journal.

Readers know I believe inflation will be a risk in the near future. This article covers a few options for hedging that risk. Consider commodities as well. Time to Tame Inflation Is Before It Strikes http://online.wsj.com/article/SB124605287991763101.html The Wall Street Journal Mobile Reader for iPhoneTM delivers the latest global news, financial events, market insights and information to keep you ahead of the curve. Get the information you depend on plus entertainment, culture, and sports coverage when, where, and how you want it from the most credible source for news and information. Click below to download the WSJ Mobile Reader for free from the iTunes App Store. http://www.wsj.com/iphoneinstall Sent from my iPhone

Economy to Stay Weak 'For a Number of Years': Gross - Economy * US * News * Story - CNBC.com

Economy to Stay Weak 'For a Number of Years': Gross - Economy * US * News * Story - CNBC.com.

Poor unemployment numbers today contributed to a very poor market heading into the three day weekend (markets are closed tomorrow). When we return next week we'll be moving into the "earnings season" and I believe we can expect at best mixed results. More likely will be more companies disappointing than surprising positively. Consumers are simply not spending as they have in the past. If you're long individual stocks, keep a skeptical eye on them. It shouldn't surprise you if markets are weak in July and some particularly high flying, poor quality stocks give up their recent returns.

I'm in agreement with Gross that economic growth in the near future will be anemic and that inflation remains an issue - he discusses stagflation which is poor growth coupled with inflation. Be prepared for this scenario by introducing some sort of appropriate hedge - TIPS, commodities, short dollar ETF, bank loans, etc. How you hedge is up to you but consider it a longer term investment and be patient if it struggles in the short-term before inflation picks up.