QInsight Group





 

Weekly Advisory – May 12 , 2008

Index

Closing Level

Week Return

Year-to-date Return

Dow Jones Industrials

12745.88

-2.39%

-3.91%

Nasdaq Composite

2445.52

-1.27%

-7.80%

S&P 500 Composite

1388.28

-1.81%

-5.45%

Russell 2000 Index

720.05

-0.78%

-6.00%

Yield on 10 Year US Treasury Note

3.767%

 

 

The Economy:

The Bureau of Labor Statistics released the productivity (output per hour) and unit labor costs computed from the gross domestic product data (GDP) for 1st quarter of 2008.  This data is important because the productivity and unit labor costs often lead corporate profits.  Productivity for non-farm businesses rose to 3.2% in the 1st quarter of 2008 from 1.8% for all of 2007 (QInsight uses a 4-quarter rate of change basis), and unit labor costs fell to 0.2% for the quarter from 3.1% in all of 2007.  See the graph below.  There were no signs that the inflationary pressures in material costs are spreading to the labor market in the US.

The Institute for Supply Management reported that its non-manufacturing index (services index) rose to 52.0% in April from 49.6% in March.  Economists did not expect this increase.  The reading above 50% means the services sectors in the US were not contracting in April.  The prices paid sub-index, however, rose to 72.1% in April from 70.8% in March, which indicates rising inflationary pressures in the services sectors.         

The Markets:

The stock indexes fell for the week.  Stock investors are concerned that crude oil prices rose 8.3% for the week and are now at a record $126 a barrel.  The extended decline in the dollar has contributed to the oil price increases, but the Fed’s policy concerning real interest rates (and the fact that certain emerging markets peg their currencies to the dollar) has stimulated price increases for many commodities.  The Oil and Gas sector (+3.33%) was the best-performing sector and the Financials sector (-5.69%) was the worst-performing sector for the week.  American International Group (AIG) reported a large loss for the 1st quarter and disclosed plans to raise $12.5 billion in the capital markets.  Stock market technicians are concerned that the S&P 500 index has so far failed to break above the 1560 – 1580 level it reached in 2000 and 2007.  QInsight remains concerned that stock prices may not be able to rally much further unless energy, food and material prices start to decline.

QInsight’s proprietary business cycle model is in the PLUNGE phase.  The Financial, Financial Services, Basic Materials, Consumer Discretionary and Consumer Staples sectors have historically led the broad stock market indexes during the PLUNGE phase.

Graph of the Week:

Series Id:  PRS85006091
Duration:   % change year ago
Measure:    Output Per Hour
Sector:     Nonfarm Business

http://data.bls.gov/PDQ/graphics/PRS85006091_130467_1210529890854.gif

Since the QInsight Group defines the US economy to be in a PLUNGE period, investors may buy or hold stocks with the following characteristics: 

1.  The stocks should be in industry groups that have historically outperformed in the PLUNGE phases of the business cycle (see www.qinsight.com/current.htm for a list of these industry groups). 

2.  The industry groups should show rising relative strength (on a 52-week basis) as compared to the S&P 500 index. 

3.  The stocks should have excellent "valuation" characteristics (as measured by a price-to-earnings ratio, price-to-sales ratio or price-to-cashflow ratio well below the industry average) to avoid stocks that may have become overvalued.