WHERE SHOULD YOU HAVE PUT YOUR MONEY IN 2006?

A weekly newsletter based on the fact that stock market sectors are made up of industries, that industries are made up of individual stocks, and that individual stocks in the same industries and sectors move as a group. The proven best way to profit from the stock market is to keep your funds invested in the stocks of top performing sectors/industries at all times, and the best measurement of performance of these sectors/industries is their price movement over the previous six months. Below you will find commentary of Sectors, Industries, and Stocks based on the most recent 6-month period as well as updates on the past week’s action...

June 30, 2006

Our New, Third Responsibility

Today, unlike anytime before, we have three responsibilities. Long ago and far away, we were hunters and gatherers. We moved from place to place scrounging for sustenance. The only responsibility we had back then was to work smart in order to survive. No work = no food or shelter = no survival. Non-workers and inefficient workers soon died out. So, our first responsibility was to work intelligently in order to live.

Time evolved, and we learned a few things. Some bright soul figured out that planting crops and staying in the same place produced a surer method of survival than being constantly on the move. Another brainy individual figured out that if we produced more than we needed for personal consumption, we could trade our surplus of one thing for another person's surplus of something else. Nobody would have to be totally self-reliant and we would all be more productive. Adam Smith got credit for the concept of "division of labor" and we increasingly became consumers of each other's surplus production.  We each became producer and consumer. The way we consumed sent messages to the way we produced. The more we satisfied each other's desires, the more profit we earned, the harder we worked to keep each other happy. If we failed to produce what others wanted, or if we consumed foolishly, thereby wasting precious resources, we suffered for it. So, our second responsibility was to consume intelligently by sending the right messages of what we wanted and needed to our producers.  Surpluses turned into savings. Savings turned into wealth. 

And wealth turned into investment.

Not so long ago, within the past 50 years, a third responsibility evolved. We still worked, and we still consumed, but now we also invested. Our work produced surpluses which produced wealth which was then invested in additional production. More recently, the concept of intelligent investing has manifested itself in a movement called Socially Responsible Investing (SRI). Much debate currently takes place whether this is a valid investment theory or not. Regardless of that, it is an idea whose time has come and we can no longer be unaware that the way we invest will have an impact on the employment, consumption, and production in our future world. So, our third responsibility is now to invest intelligently - to allocate investment funds most efficiently. 

Additionally, we are at the beginning stages of the securitization of everything and everybody - Call it Asset Nation or Trading Nation. This geometrically expands the concept of assets, and means that more and more of us will be involved in the allocation of these assets into and out of investment entities. John C. Edmunds outlined this coming securitization in the Fall 1996 issue of Foreign Policy in an article titled Stocks - The New Wealth Machine. Stan Davis and Christopher Meyer continued the dialogue in Future Wealth (2000). Robert Shiller expanded the possibilities in The New Financial Order: Risk in the 21st Century (2003). (His idea of trading derivatives on home prices just debuted on the Chicago Mercantile Exchange (CME) this past April.)

In today's interconnected world no person is an island. Just as a butterfly flapping its wings in Brazil can result in a rainstorm over Italy, we are now aware that each of us has three responsibilities to ourselves and to each other. We each work at a job, producing something of value to someone else; we each consume our choice of what others produce; and finally, we each invest in the production capacities that will both employ us and serve us. And this brings us to the point that where (should) you put your money will become your most important decision as we go forward.

Two hundred years ago, the French philosopher, Joseph de Maistre, summed it up quite well: every society gets the government it deserves. To restate that phrase in today's lingo he would say: every worker and consumer are allocated the investment funds they deserve. How we do it will determine what kind of a world we spend the rest of our lives in.

FOR THE WEEK...fireworks before the 4th

Multiple Choice

Thursday's rocket launch, the best performance from stocks in a couple of years. was __________________________ 
(a) the start of a new leg of the bull market? 
(b) a horrendous short squeeze that will quickly evaporate as stocks continue downward?
(c) just a rally needed to keep the markets going sideways until the mid-term elections in November?

We don't know. And neither does anyone else. But for Simplespreaders who took advantage of the late-May and early-June weakness to establish positions, it served as a potential getting-out opportunity with some pretty healthy gains.

Metals & Mining's strong showing made it 30 out of 34 weeks in the pole position. Taking a look back at the charts, we see that on November 4, 2005, when the sector climbed into the #1slot, the Amex Gold Bug Index (HUI), made up of the major, unhedged gold miners, was sitting at a value of 233. By May 10th of this year, it had rallied all the way up to 394 - a gain of 69%. Even after the recent selloff, it sits at 337, which works out to a gain of 45%. During this time, the Dow Jones Industrial Averages have managed to tack on a mere 5.8%.  

Transportation celebrated its 34th week in the Top Ten - entering the select group also last November 4th as the metals ascended into #1. Manufacturing came in at #3, having entered the Top Ten during the first week of December, 2005, and remaining there through this week. A recovering Energy sector bounced up to #4. And Aerospace/Defense clung onto the #5 position. The Top Five have the familiar ring of "hard" stuff that has dominated our markets since last winter. The May-June swoon evidently hasn't dislodged the leadership.

Automobiles came in at the #6 position on the strength of GM's rally. #7 went to Real Estate, thanks to the REITS, because nothing else connected with Real Estate can get its head above the water, let alone show any strength. Leisure nailed down the #8 spot with strong performances by gaming and lodging. Utilities made another showing in the Top Ten at #9. And Media finished out the Top Ten in the #10 position. 

Realistically, new blood is seen only in Media and Leisure. Whether that can lead the market higher is questionable. Otherwise, we have to revert back to the same names and reasons (worldwide infrastructure and domestic manufacturing) to lead us higher. While a summer rally is certainly due, and we have to like how things are shaping up right now, we have to be extremely cautious to geopolitical as well as domestic political issues that can derail world economic growth.

As the Commentary below indicates, not much for Simplespreaders to do this week except take profits if and when they presented themselves. 

THE TOP TEN...