HCMI Client Letter - August 2nd, 2002
Dear Clients & Friends,
Since our client letter on Wednesday, July 24th,
we've seen two giant short-covering rallies which cut month to date losses in
half. Short sales occur when traders aggressively borrow stocks
and sell them short, hoping to buy them back at lower levels later, locking in a
profit. Short covering occurs when traders rush to protect their profits
on these short sells, and the sudden increase in buying drives stocks
higher. Unfortunately, these rallies rarely last more than a day unless
real buyers follow. We haven't seen real buying (e.g. money market funds
flowing into equity mutual funds) for months, and we don't see it
now.
Last week, we mentioned that this week's economic
reports would indicate how well the economy was progressing - unfortunately,
these reports disappointed across the board. The first estimate of GDP for
the quarter ending June 30th was well below consensus at 1.1%. The
silver lining was a net increase in business capital expenditures on eight
quarters - this indicates that corporations are starting to upgrade systems and
software after gorging in the late 90's. The next day's manufacturing
report showed a slowdown in activity, although still modest gains. Today's
jobs report showed unemployment unchanged at 5.9% with a tiny 6,000 gain in
total employment. Manufacturing jobs have now declined for 24 straight
months, although this month's decline of 7,000 jobs was the smallest loss in
that period.
The Fed's Beige Book, a monthly compilation of
economic figures showed optimistic measures in home sales and residential
construction, and also showed a pick-up in retail sales and manufacturing
activity, while inflation remained negligible. Net, the economy is
growing, just not as fast as we'd like.
Earnings reports continued to roll from last
week. With about 75% of companies reporting, 13% of companies failed to
make expectations, 25% matched expectations and 62% beat expectations.
Overall growth for the quarter is 1-2%, with 5% growth projected for all
2002, and 19% growth projected for all 2003. The August 14th deadline for
certifying company accounts looks like a non-issue for 99.9% of
companies. The SEC publishes a list of those companies who have
certified at http://www.sec.gov/rules/extra/ceocfo.htm.
Probably the most bullish development of the last
10 days is that, despite failing to get strong economic reports, leading to
chatter about "double-dip" recessions, the major averages remain 10-15% above
the intra-day lows set 7/24. Even though economic growth, and therefore
earnings growth will be lower than expected earlier this year, so many
stocks are at such bargain levels that investors can't resist taking
positions. We're still moving cautiously to invest our new cash,
especially ahead of annual tax loss selling in October, but as we said last
week, "the risk now is more in missing the next leg up than suffering further
declines."
Yours sincerely,
David Edwards, President
Heron Capital Management, Inc.
(800) 99-HERON
http://www.HeronCapital.com