Portfolio strategy update

A false bottom?

By David Gottstein

Editor’s note: The following column was written at the end of June. David Gottstein is with Dynamic Research Group in Anchorage.

We said a month ago we could see the DOW trade down to 9,000. It dipped below that this past week, and has bounced back above that level modestly and now sits at 9,243.

Did we bounce off the bottom, and only see blue skies ahead?

For us, there are still too many dark clouds out there.

If you take out the special write-offs and charges, one can figure that the P/E of the broad market is under 20. On the other hand, based on actual reported numbers, whatever that means, we are closer to a very high 40.

The truth is probably somewhere in between.

The prospect for a recovery in the stock market, to the extent there is one in the foreseeable future, lies in the combination of large deficit spending by the Federal government as a result of the war on terrorism, and whatever real recovery in corporate earnings and increased employment and consumer spending is in store.

A lot of good news

And Pakistan and India are not lobbing nuclear bombs at each other.

The problem is that it is still tough to get visibility on what real earnings are, and what growth prospects are out there.

The twin deficits of trade and government spending are finally taking their toll on the U.S. dollar. Good news for exporters and job seekers, bad news for inflation sometime down the road.

However our greatest export still seems to be jobs to China, with no end in sight. The next recovery will be felt most in Beijing.

We are still at a precipice of global terrorism and pessimism shown by chief executive officers, largely justified, which has meant that capital spending is still dead in the water. Employment still is a problem.

As is consumer confidence. We have huge potential, but the excesses of the nineties still have to be paid for.

And that will take time. And who knows when the accounting and corporate ethics problems will abate.

I am afraid that when the party was in full swing, nobody cared much, but now that pennies are being counted, we are finding that many of the nickels are wooden.

Still, there will be a recovery at some point. The recession, except for technology and telecom, has been mild. And market and government forces will likely cleanse the markets and deliver faith once again. For awhile.

Hopefully, just shareholders won’t be the ones paying the price of bad corporate ethics, and that many of the heads of corrupt companies will exchange bonus time for jail time.