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cash
to many needy public corporations will not end in disaster.
Bond investors may have to lick their wounds when corporate
bond defaults rise in the future if the anemic U.S. economy
begins to falter again.
May was another bullish month for stocks, as most
major stock market indexes continued their ascent.
However, the economic news being disseminated throughout
the month of May continued to depict that the U.S. economic
recovery was at best very fragile and tentative, and at
its worst, heading back into a recession.
The aftermath of the war in Iraq was not as predicted by
the U.S. government administration, as social, economic,
and political chaos, proliferated.
Stock market investors however, would not abandon their
optimism throughout May, as they continued to bid up many
stocks higher and higher anticipating robust corporate profit
growth ahead.
The bond market followed the stock market throughout May,
with most bond yields falling to the lowest levels in more
than four decades. High bond prices and low yields prognosticate
the slowing of the U.S. economy by bond investors.
So bond investors through
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out
May were betting that the U.S. economy would continue to
decline, as stock market investors bet it would grow robustly.
Most global stock market bourses kept pace throughout May
with the U.S. stock market, that is heading higher and higher.
I guess investors in the global stock markets were convinced
that the predicted U.S. economic recovery at the end of
2003 would help revitalize the ailing global economies,
and resurrect corporate profits.
June started out the same way that May ended for the U.S.
stock market, as most major stock market indexes continued
to rise.
Most of the economic data being disseminated throughout
June continued to depict an ailing U.S. economy,
a deteriorating labor market (rising unemployment rate,
and rising new unemployment claims), with little if any
pricing power for most companies.
Alan Greenspan the chairman of the Federal Reserve (Fed)
in his public comments throughout June, expressed his concern
that the potential for deflation ahead for the U.S. economy
was now a distinct possibility.
Furthermore, Greenspan admitted publicly that the Fed had
little if any experience in the past 50 years to combat
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deflation
if in fact it took hold.
Moreover, with interest rates near zero for short-term bonds,
Greenspan asserted that there was very little ammo left
to ward of deflation as the Fed couldn't lower interest
rates below zero.
The Fed did in fact lower short-term interest rates on June
25th by 1/4%, reaffirming its commitment to help bolster
the growth of the anemic U.S. economy.
Stock market investors however, wearing blindfolds continued
to bid up stocks significantly off their March 2003 lows
as June and the second quarter of 2003 came to an end.
With many stock prices now reflecting historically high
valuations, if in fact the U.S. economy does not emerge
from the doldrums by the end of 2003 (corporate analysts
are predicting 20% growth for corporate profits for
the 4th quarter of 2003), it is probable that many stocks
will resume their free-fall soon, crushing the
portfolios of all but the most astute traders.
I remain unconvinced that the recent stock market rally
will continue, and as such, I am still committed to short-term
treasuries as the core holdings of the portfolios that I
manage for my clients.
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