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Dividend Equity Portfolio:

Weekly Portfolio Update
as of September 10, 2004

The Market This Week

• Despite a nearly $2 jump in energy prices, stock investors appear to be becoming more comfortable that the recovery will be sustained, albeit at a slower pace.  Stocks as measured by the Russell 3000 gained +1.1% last week.  Technology shares (up +4.3%) and other cyclicals led the market.  Defensive groups like consumer staples and healthcare lost ground.  Utilities and energy moved to new 52-week highs. 
  
  
• After the poor performance by stocks in August, investor sentiment has fallen.  Adding to the pessimism, the press regularly trumpets the fact that September, on average, is the worst performing month of the year.  Since 1945 the monthly return for September has averaged -0.8%. 
  
  
• What’s not as well know though is that in election years, September ranks slightly better, at ninth, staying roughly flat on average since 1945.  Interestingly, in election years, April ranks last (-1.7%) and November ranks second best at +1.7%.
  
  
• In economic news initial jobless claims fell 44,000 to 319,000 for the week ending September 4th, but the report is tough to interpret due to the hurricane effect and the late Labor Day throwing off seasonal adjustment factors.  Other reports came in surprisingly strong. 
  
  
• July consumer credit expanded $10.9 billion versus an expectation of $7.5 billion, and wholesale inventories increased +1.3% over June.  Economists expected inventories to expand just +0.6%.  This will boost third quarter GDP, but without a corresponding pickup in final demand inventory gains will likely decelerate. 
  
  
• The Federal Reserve’s Beige Book or Summary of Commentary on Current Economic Conditions indicated the economy continued to expand in July and August, although improvement was uneven.  Consumer spending softened, but capital investment improved and several districts noted increased demand for commercial loans.
  
  
• Payrolls continued to expand in most districts.  The report really didn’t answer the question of whether the soft patch is behind us.  Indeed, despite the optimism of the Fed, there were hints last week of more soft patch reverberations.  For example, Alaska Airlines, Mitsubishi, and EDS all announced job cuts.  EDS indicated layoffs could run as high as 20,000.
  
  

The Portfolio this Week

• The market clearly favored technology this week, up 4.2%, causing us to lag, but we were affected by preannouncements by Anheuser Busch and Dow Jones and also saw declines by Coca-Cola due to its largest bottler having disappointing sales and Air Products, due to a disappointment at a competitor. 
  
  
• The more cyclical industries were the better performers last week, but only industrials also outperformed the S&P (up 1.0% vs. 0.9% for the market) showing just how dominant technolgy was as a theme.  Every other group was down with the generally defensive consumer staples (-1.0%) and the usually cyclical materials groups (-0.9%) down the most. 
  
  
• Conclusion:  not much of a pattern except that tech was oversold, particularly equipment and semis.
  
  

Trading Activity

• None.