7/31/2019 1st Quarter 2004 Commentary
1/2
QUARTERLY COMMENTARY FIRST QUARTER 2004
THE MARKETS
After a stellar 2003 the stock market paused in thefirst
quarter. On 25% of the quarters trading daysthe Dow Industrials
moved over 1%, yet for thequarter the index ended down 0.43 %. In
the firstnine weeks of the quarter the market rose 3%, fell6%
during the next two weeks and rose 3% in thelast two. Bonds,
especially in the 3-5 yearmaturities were a mirror image of the
stock
market. Foreign and small capitalization stockssignificantly
outperformed large cap stocks withthe EAFE index up 4.44% and the
Russell 2000rising 6.27% for the quarter.
During the quarter, the Fed Governors changedtheir bias
indicating that the next move they makein the short-term rates they
control would be anincrease, although marketparticipants dont
expectthis to occur until 2005.
Also during the quarter, FedChairman, Alan Greenspan,surprised
theAdministration by statingthat last years tax cuts
haveexacerbated the deficit andthat in the long run this would have
a deleteriouseffect on economic growth.
The markets herky-jerky moves reflect analystsperceptions of the
economy. In the last half of
2003 the economy grew 4.1%, the highest growthfor a 6 month
period in ten years. Then in the firsttwo months of this year new
jobs grewsignificantly less than expected. The February jobreport
showed 21,000 new jobs against 150,000expected. Faint cries of Its
the economy,stupid, which you may recall was the Clinton-Gore
slogan in 92, could be heard from
Democratic pundits. Fortunately for Republicans,in March jobs
grew a surprisingly strong 308,000,alleviating fears of a double
dip like the one thatdoomed George Bush Sr.s reelection.
POLITICS
John Kerry emerged early in the primary processas the Democrats
candidate. We believe thePresidential contest of Bush vs. Kerry
will be
divisive and very negative. At present votersseem highly
polarized, loving the candidate oftheir choice and abhorring his
opponent. As themudslinging progresses this summer we anticipatethe
growing disillusioned middle. Whichevercandidate can persuade these
voters will likely winthe election. For the Bush
administration,improving economic news offsets the controversy
over 9/11 preparedness andthe growing quagmire ofIraq, but will
it be enough?
Terrorism is again affectingmarket psychology. Thetrain bombing
in Madrid,fertilizer confiscated inLondon and increased alerts
in the US are weighing on investors minds. Mediafocus on the
continuing financial scandals, MarthaStewarts conviction, and the
Tyco trial underminethe average investors confidence in the
systemsreliability. In reaction, todays legal system is
dramatically less tolerant of financialimproprieties as
evidenced by the 24-year termhanded to the executive who was found
guilty ofabetting the fraudulent financial reporting atDynergy.
Index Performance Q1 2004
Dow Jones Industrials 0.43%
S&P 500 1.69%
EAFE 4.44%
Russell 2000 6.27%
Lehman Intermediate 2.47%
Lehman Municipal 1.73%
7/31/2019 1st Quarter 2004 Commentary
2/2
THE ECONOMY
The Silicon Valley economy is generallyimproving. Venture
funding is up. JazzPharmaceuticals raised a record $250 million in
asecond round of venture financing. Our clients are
receiving capital calls from their venturepartnerships which are
raising capital for futurefundings. With the continuing very low
mortgageinterest rates, the local housing market is risingfrom very
expensive to extraordinarily expensive.
The February Producer Price Index came in at a2.1% increase over
a year ago. This statisticbelies the very rapid inflation seen in
some basiccommodities, notably crude oil and steel. Theprice per
pound of scrap steel today is more than
the price of finished steel one year ago. Crude oilis up 33% in
the last 6 months as we are allpainfully aware each time we visit
the gasolinepump.
Crude Oil Futures
Some of these pricing pressures can be attributedto our economic
recovery, but not all. Asignificant part of the demand that is
driving theworldwide price in certain commodities is comingfrom
Southeast Asia and especially, China. Themainland Chinese economy
has been roaring oflate. GDP growth last year was 8-9%.
Capitalexpenditures on plant and equipment were up 48%on a year
over year basis. For example, there are
16 blast furnaces being built in China. Similarlyloan growth is
up 21%. Analysts report that asmuch as 50% of all commercial loans
in Chinamay now be non-performing. All of this soundsvery much like
an economic bubble that
eventually must also burst.
EXPECTATIONS
What can we expect for the rest of 2004? Withnegatives such as a
vigilant Fed preparing to raiseinterest rates sometime in the next
year, apolarized electorate suffering through a negativeand
divisive election, nagging fears of terrorism, abrewing quagmire in
Iraq counterbalanced by animproving economy with favorable earns
reportsand new job creation we expect that both the stock
and bond markets will continue with the firstquarters pattern:
Lots of volatility but littleprogress. Longer term we think the
trend forstocks is up and that of bonds down.
WHOS WHO AT BROOKS NELSON
INVESTMENT ADVISORS
Since the firms founding in mid-February we areplease to
announce that Brian Roberts, CFA,Shasta Burdick and Lindy Hobbes
have joinedBrooks Nelson. Brooks is focusing his time on
investment analysis, portfolio management andclient service. In
addition to these activities Brianhas taken on the management of
the firms day-to-day operations. Brooks and Brian workedtogether
for 10 years before founding the firm.Shasta Burdick is the sunny
face and voice thatusually greets you first. Shasta worked
withBrooks and Brian until 2002 on portfolioaccounting and general
ledger and has joined usafter an interim work experience in
Arizona. Sheis familiar with our systems and can be helpful to
any requests you might have. Lindy is inputtingand reconciling
account data. She is also helpingus build each clients wealth
analysis.Additionally, we are actively interviewing to fillour
Analyst/Portfolio Manager position. Please letus know how each of
us can be most helpful toyou.
