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 July 2010 Investment Journal 
Stocks rallied into the first half of July, anticipating good earnings announcements for Q2. Mid-way through the month, as the details of the financial reform bill were closely examined upon passage, large bank stocks were hit hard, with Bank of America off by over 8%, and Citigroup down 6% on July 16. That proved to be the nadir for the month, as stocks rallied to close up 6.9% for July. The stock market continues its see-saw battle between recovery and "double dip" recession, and the bulls won July's round. It is not unusual for a "summer rally" to occur on light volume and volatile sentiment, and July can certainly qualify for this year's version of it.
Short term bond yields headed lower during the month, as macroeconomic conditions weakened. The two year US Treasury Note yield hit a modern era record low of .54%. Mortgage rates also hit record lows, with the average 30 year fixed rate at 4.56%, and the 15 year at 4.03%. (At this rate, it won't be long before mortgages have a 3% handle on the front end!) Longer term Treasuries declined 1.1% for the month, as yields rose slightly.
Gold was off 5.1% for the month, and the US Dollar similarly declined 5.2%. Gold is pausing to consolidate its recent gains, and still remains in a strong long term uptrend. The Dollar's decline reflects a relief rally in the Euro, as European bank stress test results were published late in the month which gave investors hope that the worst is over in Euroland.
In sum, the primary market conundrum intensified in July. Lower bonds yields are telling us that a weaker economy lies ahead. The lift in stock prices says the economy should improve. There is a very distinct tension between the two markets right now, and, in our experience, the bond market is usually savvier when it comes to calling the macro trend. It is saying there is a slowdown coming, even a "double dip" recession. Numerous economic indicators also confirm this, especially the ECRI Index of Leading Economic Indicators, which is contracting now at over a -10% rate:



Two of the world's most brilliant economists noted this potential outcome in July interviews. Martin Feldstein wrote: "Recent US data have clearly raised the possibility that the economy will run out of steam and decline during the next 12 months. The key reason for increased pessimism is that the government stimulus programs that raised spending since the summer of 2009 are now coming to an end. The government programs failed to provide the 'pump priming' role that was intended. They provided an early spark, but it looks like the spark did not catch."
Joseph Stiglitz also said in an interview with the Australian Broadcasting Corporation: "It's almost sure that growth in the United States is going to slow markedly...the U.S. has hoped to export its way out of the recession through a weak dollar...(he discusses the weak Euro this year)...so the dollar is stronger, and that's gonna make it more difficult for the U.S. to export and that's going to mean that our economy is going to be all the weaker." The full 30 minute interview is a real globetrotting review and is highly recommended: 
(Incidentally, this is a real time/real life example of what is known as a "beggar thy neighbor" policy, where countries devalue their currencies by stealth or dictate to keep their factories humming and the masses employed. The consequence of not acting is stubbornly high unemployment.)
The stock market may or may not be anticipating this slowdown, but the probability is present enough that we are keeping a less than full weighting in equities, while building in protections against increased volatility. We are maintaining our overweight stance in precious metals, and are increasingly disposed towards bumping up our bond holdings.
As always, we welcome your questions and comments, and we look forward to sending you our next Journal entry in August.



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