The following is reprinted with permission from the August 2010 issue of the award-winning Investor Advisory Service, published on July 23, 2010 by ICLUBcentral Inc. StockCentral subscribers can save 50% on a subscription -- see the StockCentral Discounts page for details.

Investment Comments

The long recession and bear market of 2008-09 has done considerable damage to the collective psyche of investors. At the first sign of any bad news, the common reaction of consumers and investors is "here we go again." There have been at least a couple of those moments over the past two months.

There are a lot more moving pieces, some moving up, some moving down, than is typical in a normal economic recovery. Many people are worried about rising budget deficits while others fear a negative economic impact from pulling back on "stimulus" too soon. There are a significant number of unemployed people and an economy that is not growing strongly enough to re-employ them. We have been cautioning for some time that the degree of economic damage was too strong to allow for a sharp snap-back that would have made us all happy.

Rather than being another leg down, it appears that the current situation is the anticipated inflection point between demand from inventory-rebuilding and true underlying consumer demand. For a couple of quarters, economic growth was fairly strong as businesses throughout the supply chain rebuilt inventories that they had allowed to deplete during the period of unusually low consumer demand. In discussing their first quarter results, many companies pointed to an anticipated end of the inventory rebuilding phase. Once that phase is over, we are left with the underlying reality of the need to rebuild personal and governmental balance sheets. This may result in economic growth below its usual trajectory.  If this is true, then this is the reality that we have been talking about and guiding toward. And it isn't a bad reality, even if it is slower than what we have become accustomed to over the past few decades.

Recent economic news supports this concept, which might be rated "Okay, but could be better." Headlines read that the number of jobs fell by 125,000 in June. However, this reflects a loss of 225,000 temporary census jobs that we had disregarded all along. Private sector employment was up just 83,000 in June and 33,000 in May, but wasn't greatly different than the trends earlier in the year.

Personal income rose by 0.4% in May over the month before, the identical percentage increase of the previous two months.

Consumer spending continues to grow at a rate lower than the growth of income. This is part of our thesis that consumers need to rebuild their personal balance sheets.

Surveys of the manufacturing and service sectors of the economy show that both are still growing at a good clip, but slightly slower than before. The U.S. manufacturing sector grew for the eleventh straight month, and Europe and China are both seeing similar results. Germany and Japan seem somewhat stronger, although they were affected differently during the recession. Capital spending remains on a pretty solid trajectory-this is a good sign that businesses are not afraid of the future. In fact, it almost looks like they are afraid of being left out of rising global growth. Industrial production was up strongly in the month of May.

We are currently in a time of very low expectations for the economy and the market, which perversely provides surprisingly fertile ground for the investor. Consider the automobile market as a microcosm of low economic expectations. New auto sales are running in the low-to-mid 11 million range. This is actually an improvement from the 9-10 million range for much of last year, but well below the previous peak rate of 17 million. Each year we lose 12-13 million cars that are scrapped. It is hard to imagine the sales rate remaining below its present level for very long given that we aren't even replacing the cars we are taking out of service.

Similarly, investor expectations are quite low. A recent poll by the American Association of Individual Investors found that 25% of its members described themselves as bullish while 42% were bearish about the stock market. As we have described many times in the past, true bear markets rarely occur when everyone is looking for them. In fact, negative investor sentiment is a key ingredient for significant market improvement. At this point, we don't see anything in the economy that would prevent sales and profits, and therefore stock prices, from resuming their rise. Still, it won't be easy for the next few years as we grapple with an economy that is growing below its potential. We continue to expect good, but restrained, returns for stock investors in this economic environment.