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Sterling Weekly for August 8th, 2005

As I wrap up this week's edition of the Sterling Weekly and look back at last week; it strikes me as a rather boring week with the exception of the Treasury Department's decision to re-introduce the 30 year long bond to the market (more on that in a later edition.) What does stand out about last week was the amount of positive economic news that was released during the week, and the results of a poll from Friday's edition of Kudlow & Co. on CNBC showing that 55% of the population disapproves in the way President Bush is handling the economy. While 45% of the over 3,500 poll participants did approve of the way President Bush is handling the economy. These poll results did not seam correct given the recent ecomoinc news. During a conversation with another market professional late Friday, the comment was made that the majority of the population would not know how to define a good economy, or for that matter what defines a bad economy.

Well for starters a bad economy is defined by negative economic growth and high unemployment. A good economy isn't necessarily defined as not being a bad economy. There is an area between an economy that is not in a recession (or depression) and one that is a strong, growing economy; there is a form of economic malaise that is somewhere in between. Let's focus on how to define a "strong, growing" economy. A strong and growing economy is typically defined as having relatively low and declining unemployment and strong economic growth, as measured by Growth Domestic Product (GDP).

When I was in college the unemployment was experiencing a long term decline and had dropped to around 6.25%. College textbooks described the "natural rate" of unemployment, that level for which unemployment could not drop below without causing a severe overheating of the economy and rampant inflation as 5.5%. It was literally thought of being nearly impossible for the unemployment rate to drop below this level. Well in the late 1990s and early 2000 the unemployment rate actually dropped below 4.0%! Something that had never happened in the post Great Depression modern economic era! Not even close in modern economic times! Last week the government announced that the unemployment rate had declined to 5.0%, a level to still be considered a historical low by modern economic standards.

Since the end of World War II when millions of soldiers returned from the war and the United States shifted from a war-time economy back to a civilian economy the long term rate of GDP growth has been 3.0%. This is a very simple economic indicator to understand. It basically measures the growth of the US economy. There are three (3) types of GDP growth rates to remember. A negative GDP growth rate for two (2) consecutive quarters signals the start of a recession (that is not good, and makes for a painful economy), a positive GDP growth rate that is less than 3% is a growing economy, but not necessarily worth celebrating. A positive GDP growth rate above 3.0% is a strong and growing economy, let the good times roll. (If the GDP number is above 5-6% a level of growth very rarely is ever seen, then its party time but be prepared for the hangover afterwards!) The recently released GDP numbers show that the economy is growing at just under 4%, significantly enough above long term average of 3% to demonstrate solid growth. (One percentage change in GDP is a huge amount)

The bottom line is we have a strong and growing economy. Unemployment would not be this low, the GDP numbers would not be this strong, and inflation would not be this low if the economy wasn't hitting on "all cylinders," not to mention there would not be all this talk of a real estate bubble. I believe that the feeling that this is not a good economy is created by negative media and political hype and a lack of economic knowledge.

Sterling Calendars for the Week of August 8th, 2005
Economic Calendar
Date Est. Time Release For

Briefing.com

Consensus Prior
8/09 8:30am Productivity-Prel Q2 2.0% 2.0% 2.9%
8/09 10:00am Wholesale Inventories Jun 0.2% 0.4% 0.1%
8/09 2:15pm FOMC Policy Announce        
8/10 2:00pm Treasury Budget Jul ($58.0b) ($56.0b) ($69.2b)
8/11 8:30am Retail Sales Jul 2.4% 1.9% 1.7%
8/11 8:30am Retail Sales-Ex Auto Jul 0.9% 0.8% 0.7%
8/11 8:30am Initial Jobless Claims 8/06 320K 315K 312K
8/11 10:00am Business Inventories Jun 0.1% 0.1% 0.1%
8/12 8:30am Export Prices-ex ag. Jul n/a n/a (0.1%)
8/12 8:30am Export Prices-Ex. Oil Jul n/a n/a (0.4%)
8/12 8:30am Trade Balance Jun ($57.2b) ($57.1b) ($55.3b)
8/12 9:45am Mich. Sentiment-Prel. Aug. 96.0 96.0 96.5

  Misc. Calendar
Date: Comments:
8/08 American Mortgage Acceptance 'AMC' reports earnings before the open
8/08 Delphi 'DPH' reports earnings before the open.
8/08 Forest Oil 'FST' reports earnings after the close.
8/08 Priceline.com 'PCLN' reports earnings before the close.
8/09 Blockbuster 'BBI' reports earnings before the market opens.
8/09 Cisco Systems 'CSCO' reports earnings before the market opens.
8/09 EchoStar Communications 'DISH' reports earnings (time not supplied)
8/09 Walt Disney 'DIS' reports earnings after the market close.
8/11 Analog Devices 'ADI' reports earnings after the close.
8/11 Bema Gold 'BGO' reports earnings after the close.
8/11 Dell, Inc. 'DELL' reports earnings after the close.
8/11 Dreamworks Animation SKG 'DWA' reports earnings after the close.

Prime Update:

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Dow Jones Industrial Average (INDU)

Current Opinion: Closed @ 10,558.03 Last Signal: Called Lower on August 5th with the previous day's close of 10,0610.10 Current Expectations: I am expecting the Dow Jones Industrial Average to pullback over the short term and move lower and test 10,546.32 If the Dow closes below this level then it should continue to move lower and test 10,432.51

The S&P 500

Current Opinion: Closed @ 1,226.42 Last Signal: Called Lower on August 5th with the previous day's close of 1,235.86 Current Expectation: I am expecting the S&P 500 to to pullback over the short term and test 1,225.31 and then 1,2166.96 if the support at 1,225.31 fails to hold.

The NASDAQ 100 (NDX)

Current Opinion: Closed @ 1,601.59 Last Signal: Called Lower on August 5th with the previous day's close of 1,608.74 Current Expectations: I am expecting the NDX to pullback over the short term and test 1,568.96

CBOE Ten Year Treasury Index (TNX)

Current Opinion: Closed @ 4.392% Last Signal: Called Higher on August 1st with a close of 4.319% Current Expectations: The TNX should move higher and test 4.491% on a closing basis.

Disclaimer: The Sterling Investments series of newsletters is produced by Sterling Investment Services, Inc. All information used in the production has been obtained from sources believed to be reliable and accurate. Sterling Investment Services does not warrant or assume any liability for inaccuracy of the information used to produce our publications. To receive further information on these services please visit our web page at: www.sterlinginvestments.com If you would like to contact us our fax # is (404)-816-8830 Email address is: enelson@sterlinginvestments.com Sterling Investment Services may hold positions in the securities recommended or may be providing consulting services to the companies mentioned within this report.
 
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