February 28, 2010
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Commentary
The Economy
During the final week of the shortest month, economic reports were mixed. The Commerce Department revised its estimate of fourth quarter GDP growth upward to 5.9% (from an earlier estimate of 5.7%). Caution is advised in projecting this growth rate in 2010, as most of the growth was attributed to inventory change. Without this change, growth was 2.3%. While this number is subdued, it is positive and provides further evidence we are coming out of the recession.
A trio of other economic reports was not as favorable. New home sales fell 11.2% in January from the December level to an annualized rate of 309.000 units - the lowest in almost 50 years. Consumer confidence fell to its lowest mark since the deep recession of 1982-83. In initial claims for unemployment increased by
22,000. Meaning the unemployment number on the first Friday of March will move up toward the 10% level.
Weather conditions along the East Coast contributed to some of the negative reports. Record-breaking snowfall and wind conditions kept consumer spending and construction work at a standstill for nearly two weeks.
Although it may take awhile, some of this will likely be made up in coming weeks.
Housing should benefit from the tax-credit stimulus that has been extended until the end of April. Prices are beginning to firm nationwide. The Case-Shiller Index of home prices in 20 markets was down 3% year over year. Six months ago, the year-over-year decline was in double digits. The inventory of unsold homes moved slightly higher - to nine months - but is down from levels of last year.
Inflation in January (as measured by the core CPI) was a disquieting negative 0.1%. Looking at the full year, core inflation is a low 1.6% rate. Gasoline prices at the pump were $2.62 a gallon according to the February 19th Lundberg Survey. This represents the national average price for self-service, regular gas and is down 3.3 cents from the prior report. Lundberg noted that the price «has fallen for six straight weeks, but a price increase at the pump is likely if crude prices remain high."
We will be watching economic numbers closely over the next couple of months. AI this time we do not see any trend indicating a double• dip recession. Federal Reserve Chairman Ben Bernanke reported to Congress that the V.S. economy is in the "nascent" stages of recovery. He and the economists at the Fed "expect the economy to grow at a moderate 3.0% to 3.5% this year." This indicates it slow "V" shaped recovery, rather than a double-dip recession.
Stock Market
Along with the mixed economic data, stock market performance has also been mixed during the first two months of the year. Broad market indexes such as the Dow Jones Industrial Average and the S&P 500 are down approximately one-half-percent, the NASDAQ is down 1.4% and the global MSCI EAFE Index fell 5%. At the same time, the S&P MidCap 400 Index is a positive 1.8%. Overseas investing hit some headwinds including a stronger dollar and concerns over Greek debt. Greece is not alone with its fiscal problems. Investors are now referring to the PIIG countries (Portugal, Ireland, Italy, and Greece) as areas of concern. Index performance for February and year-to-date are presented below:
Equity Total Return Performance as of February 28, 2010
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 |
February |
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YTD |
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S & P 500 |
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1.4% |
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-0.6% |
|
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DJIA |
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1.7% |
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-0.5% |
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NASDAQ |
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1.6% |
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-1.4% |
(Source: Bloomberg)
Past performance does not guarantee future results.
We continue to believe that the economic growth, earnings growth, low inflation, and an election year, bode well for equities. Our Outlook calls for S&P earnings per share of $83 in 2011, or an increase of 7% over the consensus estimate of $77.50 for current year 2010. This could translate into a price of 1200 for the S&P 500 Index. Again, we continue to stress selectivity, diversification, and quality in our portfolio presentation.
Fixed Income Market
Short and intermediate Treasury yields fell again in February, steepening the yield curve to record levels mid month. The treasury market was able to shake off burgeoning supply and the economy’s fragile recovery as buyers sought the safety of the Treasury market as Greece’s fiscal problems intensified.
In a surprise announcement the Federal Reserve Board raised the discount rate to 0.75%, a 25 basis point increase. While many may assume that the increase in the federal funds rate may be in our immediate future, we believe that the increase in the discount rate is only one of dozens of moves necessary as part of the Fed’s “exit strategy.” We do not believe the federal funds rate will be increased until the fourth quarter of early in 2011. We recognize the need to normalize monetary policy, moving from a crisis policy to a policy that is merely accommodative. However, politically it is difficult to raise interest rates in the face of nearly 10% unemployment. We believe the Federal Reserve meant to downplay the significance of the discount rate by announcing it on a day without an FOMC meeting, and by the Federal Reserve Board (instead of the FOMC) and at 4:30pm.
The mortgage market is also surprised by the timing of the FHLMC and FNMA announcement that they would be purchasing delinquent loans past due at least 120 days from outstanding mortgage-backed securities (MBS) pools. It is significant that the prepayment spikes occurring in March will coincide with the conclusion of the Federal Reserve’s $1 trillion buybacks in the MBS sector. As the Fed steps away from the MBS market, natural buyers such as mutual funds and banks will have new money to invest.
Past market performance
is no guarantee of future results.
Index performance cited is for illustrative purposes only and is not indicative of the performance of any specific investment. An investment cannot be made directly into any index.
International investing involves special risks including currency risk, increased volatility of foreign securities, political risks, and differences in auditing and other financial standards.
Diversification does not assure a profit nor protect against loss.
High yield, lower-rated securities generally entail greater market, credit and liquidity risks than investment grade securities, including higher volatility and higher risk of default.
The Dow Jones Industrial Average (“DJIA”) is an unmanaged index, which represents share prices of selected blue chip industrial corporations as well as public utility and transportation companies.
The Consumer Price Index (“CPI”) is a measure of change in consumer prices as determined by a monthly survey of the U.S. Bureau of Labor Statistics.
The Nasdaq Composite Index is an unmanaged index that measures all Nasdaq domestic and non U.S.-based common stocks listed on the Nasdaq Stock Market.
The S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The S&P Mid Cap 400 Index is an unmanaged capitalization-weighted index of common stocks representing all major industries in the mid-range of the U.S. stock market.
The S&P Small Cap 600 Index is an unmanaged capitalization-weighted index representing all major industries in the small-cap the U.S. stock market.
S&P Utility Index: An unmanaged market cap-weighted index of natural gas and electric companies.
S&P REIT Composite Index represents approximately 90% securitized U.S. real estate market.
The Barclays Capital Government/Credit Bond Index is an unmanaged index which includes non-convertible bonds publicly issued by the U.S. government or its agencies; corporate bonds guaranteed by the U.S. government and quasi-federal corporations; and publicly issued, fixed rate, non-convertible domestic bonds of companies in industry, public utilities, and finance.
The Barclays Capital Aggregate Bond Index is an unmanaged index composed of securities from the Barclays Capital Government/Corporate Bond Index, Mortgage-Backed Securities Index, and the Asset-Backed Securities Index.
The Barclays Capital Municipal Bond Index is a market-value-weighted index for the long-term tax-exempt bond market. To be included in the index, bonds must have a minimum credit rating of Baa. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date.
The S&P 500/Barra Growth Index is an unmanaged capitalization-weighted index of stocks ill the Standard & Poor's 500 index having the highest price-to-book ratios.
The S&P' 500/Barra Value Index is an unmanaged market capitali7.ation-weighted index of the stocks in the Standard & Poor's 500 Index having the lowest price-to-book ratios.
The Federal Funds [{ate is the interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight.
Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations.
GDP - Gross domestic product is a basic measure of a country's economic output.
FOMC- Federal Open Market Committee creates monetary policy.
The Lundberg Report/Survey is a research report by an independent market research company (Lundberg) specializing in U.S. Petroleum marketing and related industries.
FHLMC - Otherwise known as Freddie Mac. FHLMC is the Federal Home Loan Mortgage Corporation.
FNMA - Otherwise known as Fannie Mae, FNMA is the Federal National Mortgage Association.
MSCI EAFE Index - Stock market index that is designed to measure the equity market performance of developed markets.
Examples of bond issuers are cited for illustrative purposes only and are 110t representative of any particular investment portfolio.
Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.
The information contained in this Investment Commentary was prepared from sources believed to be reliable. hut we do not guarantee that the information is complete or accurate. Opinions and projections contained he rein reflect our opinion as of the date of the analysis and are sub.iec! to change without notice. This report is distributed for information purposes only, and in no way should be construed as advice on how to conduct an investment program. Before acting on any information, you should consult with your professional advisor.
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