Maybe Just a Correction?

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The financial markets came unhinged shortly after peaking in the last week of April. The explanation is rooted in the out-of-control budget deficits of southern Europe, as well as the U.S. It began with Greece and quickly enveloped Hungary, Spain, Italy and England and is now acknowledged as a worldwide problem. There is also growing concern that monetary tightening in China, intended to cool their overheated economy, will drag the rest of the world, including the U.S., back into recession. The good news is that the Federal Reserve will continue to keep interest rates low and print money. Both are very good for stocks!

As if the specter of European insolvency isn't enough, the Gulf oil spill has metastasized into a more than 75 day demonstration of how not to manage anything more complex than a cub scout meeting, much less an environmental disaster.

During the 2nd Quarter, these issues conspired to push the stock market’s metaphorical down button. So, is it time to reduce our stock holdings and move to less shifty terrain? I don’t think so. Considering what it’s going to take to get the worldwide economies back on track, bonds and cash, the obvious alternatives to the stock market, look far more risky.

The best way to ensure economic recovery is to lower taxes, reduce government spending and print lots of money. Reductions in taxes and spending will be difficult, but I think we should expect most of the world’s central banks to begin printing money on a scale that will dwarf the previously unprecedented increases of the past two years.

At the end of June, the stock market appears to be oversold, with only 5% of S&P 500 stocks trading above their 50 Day Moving Averages.

Having fewer than 35% of the S&P 500 constituents above their 50 Day Moving Average is an indication of a potentially oversold market. Volatility, as measured by the VIX Index, spiked significantly during the 2nd Quarter; which, along with a majority expectation of a disappointing jobs report on July 2nd, may lead to a meaningful bounce.

Despite current widespread concern over the ecological safety of offshore drilling, it will undoubtedly continue somewhere in the world, if not in U.S. territorial waters. If the drilling moratorium is extended, the rigs will eventually move. Regardless, they won’t remain idle for long. Transocean (RIG) is oversold and worth far more than its current stock price.

Apple (AAPL) has achieved stunning successes in recent weeks with sequential launches of the new iPad and iPhone 4G, while their shares have managed to remain above the 50 Day Moving Average. We expect further gains from AAPL.

Our two mining stocks, BHP Billiton (BHP) and Southern Copper (SCCO), retreated along with the market, compounded by indications of another slowdown in home building. Additionally, BHP was threatened with an Australian tax increase aimed specifically at mining company profits. The proposal led to the political defeat of former Australian Prime Minister, Kevin Rudd. With the new Prime Minister, Julia Gillard in office, the proposal now appears much less likely. As central banks focus on additional quantitative easing, they’ll keep printing money until a housing recovery is in place.

Sangamo Biosciences is seeing significant results in their Phase II clinical trials for the treatment of diabetic neuropathy, increasing the likelihood of commercial partnerships to exploit their therapeutic pipeline. Progress has been frustratingly slow, but I believe very strongly that the end result will justify our patience.

As always, please keep us informed of any changes in your personal situation that may affect the management of your accounts .