The following is reprinted with permission from the June 2010 issue of the Investor Advisory Service, published on May 28, 2010 by ICLUBcentral Inc. StockCentral subscribers can save 50% on a subscription -- see the StockCentral Discounts page for details.

Investment Comments

After experiencing the worst May in seventy years, the stock market has started to improve hesitantly so far in June. Many governments around the world have taken early steps to address their budget deficits, a key factor behind recent market volatility.

Portugal and Germany have proposed spending reductions. Spain and France are working on improving labor market flexibility. In each case, however, these governments are meeting resistance from advocates of heavier government spending and organized labor. Still, when a socialist government such as that in Spain is willing to promote labor reform, this has to be considered a favorable step. The euro had been steadily declining versus major world currencies, and this trend has reversed itself at least temporarily due to proposed government reforms.

We have consistently maintained that global economic growth will be restrained by the need of governments and households to get their budget and debts under control. This will likely be the case for several years, both with and without the proposed reforms. It is encouraging that governments are starting to attack their underlying problems.

Despite volatility in the stock market, the consumer and industrial sectors of the U.S. economy seem to be on a path of steady, but modest, growth. Consumer sentiment continues to rebound. Personal income remains on a steady upward path. Consumer spending was flat in April after rising for five straight months, and while this is somewhat of a concern, it is overshadowed by the continued growth in personal income.

The official number of jobs created in May was high because of temporary census hiring. Disappointingly few private sector jobs were created in May after a terrific April. In retrospect, the April number was probably too good to be sustained in the short-term. The reality most likely lies somewhere in between. Official employment numbers will probably be quite poor for a couple of months when the temporary spike in census employment will come to an end. We tend to disregard census employment because its duration is just for a few months.

Earlier in the year, we were concerned that inflation could rise as 2010 and 2011 unfold unless the Federal Reserve Board enunciated a clear plan to sop up the excess liquidity it pumped into the financial system over the past couple of years. While the Fed did take some basic steps in the first part of the year, inflation has yet to become a problem at all. In fact, if anything, inflation is almost too low. Excluding volatile food and energy prices, "core" inflation was flat in April and up just 0.1% in May. Idle labor and production resources make it very hard for businesses to raise prices and for workers to demand significant raises. Low inflation is helping to keep interest rates low, which must be having a favorable impact on economic growth. Eventually, the Fed will have to come up with a good plan to absorb the excess liquidity, but for now it looks like this level of support is needed by the economy.

After a good first quarter for the U.S. economy and for corporate sales and profits, stock prices look reasonable compared to the growth that can be expected. Investor expectations should remain moderate since we are in a multi-year period of adjustment and moderate growth rather than the robust economic growth that we saw many years ago. But, the growth is still there and investing in well-run, growing businesses still appears to be a better path to success than the alternatives.