May 31, 2002

Week In Review ...

The markets trended generally lower during the final weeks of May as daily trading volume decreased in front of the holiday and failed to significantly pick up in the closing week of May. The accompanying chart of the Standard & Poor's 500 Index illustrates the decline since mid-May.

Money managers are yet unwilling to commit cash balances to the market even though there has been a spate of favorable economic data released during recent weeks. In large part, consumer spending has been responsible for warding off a deeper recession than has occurred to date - especially considering the change in mindset brought about by the September 11th terror attack.

In the foreign exchange arena, the dollar continues to weaken vis-à-vis foreign currencies, and gold is beginning move higher – the timeless harbinger of trouble ahead. Although the establishment and the financial press explains the rise in gold away as simply undue speculation, fostered by uncertainties in financial and monetary markets, there is more to the advance this time. Further underpinning the advance, the India/Pakistan standoff and the never ending problems emanating from the Mideast do little to calm jittery investors who have to date watched $6.0 trillion in equity value evaporate.

A more sustained and vigorous economic recovery must get underway before money managers will be willing to reenter the market in any significant manner. This will probably be led by increasing capital expenditures by businesses and an expansion in employment at the middle and upper management levels. In fact, the outlook for employment and unemployment is growing ever more dismal with additional corporate layoffs announced nearly weekly. Without a pickup in employment and incomes, the rate of consumer spending is unlikely to maintain levels of the recent past. Without continued consumer spending, the U.S. economy could easily head deeper into recession.

Investors should remain conservative and cautious. Remember, cash continues to appreciate in terms of stocks, with each downturn in the market.

In Gold and Silver - Uptrends Appear Intact

May 3, 2002

April Unemployment Rises Unexpectedly to 6.0%

The Labor Department reported that the U.S. unemployment rate rose to its highest level in more than 7 1/2 years during April to 6.0% as the economy created fewer jobs than many economists had expected. Businesses remain cautious when in comes to hiring new employees and are offering more overtime to current employees, awaiting a real (undeniable) pickup in the overall economy. Temporary Service Agencies, i.e., Kelly Services Inc., reported a healthy demand to hire temp-workers in the service sector for the fifth consecutive month in April. Offsetting the rise in service sector employment was a drop in construction employment. Underlying the headline figure of 6.0% unemployment, the Labor Department's report shows that factories shed 19,000 more jobs in April - following a decline of 38,000 jobs in March. Conversely, the service-producing sector (including: retailers, transportation companies, and government agencies) added 134,000 positions in April - following a jump of 62,000 job creations in March. Clearly, although abating somewhat from previous levels, the trend to eliminate higher-paying manufacturing jobs with less-secure, lower-paying service jobs is intact.

The hope by many that the economy would show a V-shaped recovery is slowly dissipating into a realization that we're likely to see a long, U-shaped rebound. Just how long is anyone's guess at this time. The rebound in the US economy during the first quarter of 2002, which grew at a 5.8% annual rate, the fastest pace in two years, was led by a slowing pace in inventory reductions and a willingness by consumer's to keep spending. In a separate report by Bayerische Landesbank, "private consumption plays a pivotal role in deciding whether or not economic growth proves sustainable." The report points out that between 1995 and 2000, real private consumption (RPC) expanded at an average annual rate of roughly 4.3%. At this rate, RPC outpaced real disposable incomes by a full percentage point. To accomplish this, consumers have reduced their savings rate from just shy of 6.0% to below 1.0% during this 5-year period. On top of this, consumers have taken on significantly more debt to maintain living-standards. Below is a chart illustrating the rising level of private household liabilities. The "Blue Line", left axis, 50% to 110%, shows the ratio of liabilities to real disposable income. The "Black Line", right axis, US $Bil. $0 to $9000, shows liabilities in absolute terms.

Chart provided by Bayerische Landesbank