| Apr-08 | May-08 | Total* | YTD | |
| Innovation Index Fund | 6.30% | 5.58% | 12.23% | 8% |
| S&P 500 | 4.75% | 1.07% | 5.87% | -6% |
| Dow Jones | 4.54% | -1.42% | 3.06% | -7% |
| Nasdaq | 5.87% | 4.55% | 10.69% | -6% |
*Compounded for April and May
Innovation Index Fund had a solid performance jump in April and May 2008. Innovation Index Fund delivered 12.23% compounded return in two months, and handily beat S&P 500 and Dow Jones indices. Overall, the Innovation Index Fund is up 8% in 2008 as of May 31, 2008, whereas the major U.S. indices have lost 6% or 7% in 2008.
Innovation Index Group remains bullish for the 4th quarter of 2008; however, our understanding of the current market conditions lead us to believe that there will be some road bumps along the way. Particularly, during the summer months, the market may tread sideways or even course correct in the interim.
Three factors are critical for a second half turnaround in U.S. economy and its positive impact on the stock markets:
1. Inflation - Gross inflation that includes gas, utilities and food needs to come under control. The consumer will feel the pinch of $4 or higher price per gallon of gas in the interim (yesterday, I filled up at the cost of $4.25 a gallon for gas) and higher cost of basic groceries such as bread, milk and fresh vegetables. Either the consumer will adapt to the higher price of gasoline, or react by reducing gas consumption and thereby decreasing travel. Reducing consumption and decreasing travel will negatively impact the economy. Adaptation to a higher fuel price will either result in replacement of current automobiles to higher mileage hybrids, decrease in discretionary spending elsewhere, utilization of public transport or carpools. This will take time, and neither of these alternatives appear to create a net positive impact on the economy. Finally, higher food prices would not deter the monthly consumption of groceries; however, the consumer will likely spend less money for other necessities or luxuries.
U.S. Federal Reserve Chairman Ben Bernanke said rising long-term inflation expectations were a "significant concern" for policy-makers but dismissed worry a wage-price inflation spiral was developing. "Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve," Bernanke told graduating students at Harvard University. "We will need to monitor that situation closely."
He described overall inflation as "significantly higher than we would like," the second straight day in which he sounded a warning on inflation, which financial markets took as a firm signal that interest rates are likely on hold for some time.
2. Recession - U.S. employers shed 63,000 jobs in February 2008, the most in five years, 81,000 jobs in March and 20,000 jobs in April. How long will it take for the economy to turnaround and produce meaningful job growth? Would corporations go back to hiring mode in summer months or earlier? Which jobs will be in demand? So far, there are mixed signals on whether the economy is in recession or not, because the US economy actually grew in the first quarter by 0.6%.Construction lost 61,000 jobs in April, and manufacturing shed 46,000 jobs. Retailers also trimmed payrolls by 27,000 in the face of a pullback in spending by consumers - CNN Money.
But some other sectors that had posted job losses in previous reports rebounded, such as business and professional services, which grew by 39,000 jobs after a loss of 44,000 the previous month. The financial sector, which has lost jobs each of the previous 8 months due to problems in the credit markets, ended that streak with a narrow 3,000 job gain. Unemployment rate actually improved to 5% in April 2008.
Economist Glen Langan points out, "the unusual focus on subprime has caused the nation to overlook a broader trend regarding the housing sector -- namely, the psychology of the housing market."
"What we're not grasping yet, as a nation, is that even with programs to help people stay in their homes and avoid foreclosure, the public's stance toward the housing market has changed," Langan said. "The psychology of the housing market has changed. And this has little to do with at-risk mortgages. This a psychological shift among middle-income and upper-middle-income homeowners and taxpayers. It looks like they'll be sitting on the fence for a long period of time, and this will delay the housing recovery, hurting the economy in the process."
What's at the root of the psychological shift? Langan said factors that clearly indicate that tougher economic times are here and up ahead (higher oil prices, food prices, job lay-offs and little or no U.S. economic growth) combined with high home inventory levels -- about a 9.5- to 10-month supply at current sales rates -- telegraph to Americans that, unless you live in an oil boom town, median home prices are not going to recover any time soon, "not this year, and probably not in 2009."
According to this Bloomberg story, the number of Americans in danger of losing their homes to foreclosure rose to the highest in almost three decades during the first quarter as borrowers who fell behind on payments were unable to sell their homes.
New foreclosures rose to a seasonally adjusted 0.99 percent of all U.S. home loans, up from 0.83 percent in the fourth quarter, the Mortgage Bankers Association said in a report today. The total inventory of homes in foreclosure increased to 2.47 percent and the delinquency rate, loans with one or more payments overdue, grew to 6.35 percent. All were the highest since 1979, the Washington-based trade group said.
Falling home prices have stalled U.S. real estate sales, making it difficult for people who can't pay their mortgages to sell the properties. The increase in foreclosures was led by states with the biggest price declines over the past two years, said Jay Brinkmann, MBA's vice president of research and economics. California, Florida, Nevada and Arizona accounted for 89 percent of the gain in new foreclosures, he said.
Bottomline:Inflation needs to be stalled, and then reversed. Recession may last another couple of quarters or more, or may show modest turnaround within the next year. Housing industry may take the longest to recover. The Fed and the government are busy trying to help in all these areas by increasing liquidity in the financial markets, lowering the interest rates, providing rebate checks to consumers and families, and also beginning the work towards strengthening the dollar. The sooner these three elements improve for the American consumer, the better the chances of an economic rebound in the fourth quarter of 2008, and a resulting growth in the stock market.
Innovation Index Group believes that the U.S. economy will recover in the 2nd half of 2008, and the Top Innovators of The Innovation Index will reward the patient, long-term investor. So far, most of the top innovators have delivered solid earnings during the first quarter of 2008 owing to the strengths and growth in their global business, new innovations spurring new business growth, maintenance of US earnings, and benefits from the currency fluctuations. It would be great to witness a spiraling growth of their US earnings in the 2nd half 2008.
Innovation Index Group has long-term BUY recommendations on the Top 20 Innovators of The Innovation Index.
About Innovation Index Group:
Innovation Index Group, Inc. is a new investment management company focused on systematically identifying, tracking and investing in the most innovative publicly traded companies in North America – collectively called the Innovation Index. We have developed the Innovation Index Fund, LLC as our first vehicle to invest in the Innovation Index. Over the past six years, the Innovation Index would have generated a gross average annual return of 40% based on historical model.* The Innovation Index returned 66% in 2007, and the Innovation Index Fund Manager is up 10% in 2008.*
Innovation Index Group, Inc. and Innovation Index Fund LLC are registered California Corporations, and member of the Irvine Chamber of Commerce in Orange County. Further, Innovation Index Fund LLC is an investment management company organized under the California state regulation, and is registered with Department of Corporations and SEC Regulation D.
The Innovation Index Reports:
Invest in The Innovation Index - Innovation Index Fund tracks The Innovation Index
The Innovation Index closes 2007 at 66% - 2007 Annual Report on the Innovation Index
Top 50 Innovative Companies in the world - 2007 Report on Top 50 Innovative Companies
Annual Report - Chapter One - Total Innovation Activity - 2006 Annual Report One
Annual Report - Chapter Two - The Top Innovator - 2006 Annual Report Two
Annual Report - Chapter Three - The Innovation Insights - 2006 Annual Report Insights
Innovation and Stock Performance Correlation - The Innovation Index and Stock Performance
About The Innovation Index
The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in
The Innovation Index returned 66% in 2007 based on performance model, and would have returned 174% over the previous five years (2002-2006) based on historical model*. This assumes equal investment in each stock of The Innovation Index as of December 31, 2001. An average of $100 invested in The Innovation Index on December 31, 2001 returned $454 as of December 31, 2007. By comparison, $100 invested in S & P 500 returned 28% or $129, $100 invested in NASDAQ returned 34% or $136, and $100 invested in the Dow Jones Index returned 30% or $131 through December 31, 2007. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by more than seven times over the past six years.*
Alphabetical list of the Top 20 Innovators of The Innovation Index for 2008 and their stock ticker symbols:
3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
AT&T Inc. - (NYSE: T)
Best Buy Co., Inc. - (NYSE: BBY)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Costco Wholesale Corporation - (NASDAQ: COST)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NASDAQ: INTC)
International Business Machines Corp. - (NYSE: IBM)
Merck & Co., Inc. - (NYSE: MRK)
McDonald's Corporation (NYSE: MCD)
Microsoft Corporation - (NASDAQ: MSFT)
NIKE, Inc. - (NYSE: NKE)
Research In Motion Limited - (NASDAQ: RIMM)
The Proctor & Gamble Company - (NYSE: PG)
The Innovation Index will analyze the positions and standings of the Top 20 Innovators at the end of each year. For 2008, there will be no further changes in The Innovation Index.
Disclaimer: The Innovation Index Group, Inc. invests in the stocks comprising The Innovation Index.*Past Performance Does Not Guarantee Future Results
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