7/31/2019 2nd Quarter 2004 Commentary

1/2

QUARTERLY COMMENTARY SECOND QUARTER 2004

THE MARKETSDuring the second quarter stocks traded sidewaysand bonds shifted down. Equity and bond pricesreacted to concerns of rising interest rates as theMarch Jobs report significantly surpassed consensusexpectations, demonstrating the economys strengthand heightening fears that an increase in the FedFunds rate by the Federal Reserve Open MarketCommittee (FOMC) might be imminent. Mixedearnings forecasts, energy prices, fears of terrorismand the politics of an election year weighed on the

stock market, causing it to trade sideways withtrend-less volatility. (Please see the table below forquarterly and year to date performance data.)

Reversing a trend thatstarted in the spring of2003, large cap stockssuch as those in the Dowor S&P, performedbetter than small stocksand foreign markets in

the 2

nd

Quarter of 2004.The U.S. stock marketwas mixed during thequarter with the oil sector and big market names likeGeneral Electric, Proctor and Gamble and PepsiCoup while the technology and pharmaceutical sectorswere down. Late in the quarter the stocks of retailcompanies were weak reflecting the fear that higherinterest rates will lead to slower sales growth.

FEDERAL RESERVE

Most significantly, in May, Alan Greenspan wasnominated for a 5th term as chairman of the Fed. Hisfull 14-year term as a member of the FederalReserve Board of Governors will end on January 31,2006 at which time he will retire. The legacy of histenure will be to have successfully steered usthrough the 87 crash and the Internet boom andbust. In early May the FOMC, headed by ChairmanGreenspan, formally announced their bias change

with the words: At this juncture, with inflation lowand resource use slack, the Committee believes thatpolicy accommodation can be removed at a pace thatis likely to be measured. Few sentences have beenas analyzed or editorialized as much as this one.

On June 29th the FOMC took the first step toincrease interest rates by raising the Fed Funds ratetarget from 1.00% to 1.25%. (See the chart on thenext page.) This is indeed a measured response tothe significant increases weve seen in the prices ofraw material commodities such as crude oil, steeland other industrial metals. At this stage, 30months into an economic recovery, we would expec

a real rate of interest ofover 1.00%. With theCPI at 2.50% thisimplies that the FedFunds rate needs to riseabove 3.50%. Weanticipate short-termrates will increase muchfurther.

THE ECONOMYBusiness spending is accelerating. The most recentInstitute for Supply Management survey confirmedproduction, new orders, employment, and backlogare all growing. Inventories are reported to beunsustainably low therefore the trend ofimprovement in the ISM data is expected tocontinue. In December 2000 Carly Fiorina, the CEO

of Hewlett Packard, declared that business hadturned out the lights. Is she perhaps ready to declarethat they have been turned back on?

With the resurgence of the U.S. economy clearly inevidence, the Euro, which hit a high to the U.SDollar of $1.28/ in January, sank to $1.18/ inApril and ended the quarter at $1.22/. Weanticipate further Dollar strength as U.S. interestrates rise and attract foreign capital. The Chinese

Index Performance

2nd

Qtr

2004 YTD

DowJones Industrials 1.24% 0.80%

S&P 500 1.71% 3.43%

EAFE 0.43% 4.88%

Russell 2000 0.49% 6.78%

Lehman Intermediate -2.44% -0.11%

Lehman Municipal -2.37% -0.63%

7/31/2019 2nd Quarter 2004 Commentary

2/2

authorities have begun the process to slow theiroverheated economy. Speculation on whetherChinas economy will have a hard or a soft landinghas caused ripples throughout the internationalmarkets. Fueled partially by the strength ofeconomic growth in China, the world markets haveexperienced economic expansion. At this juncture itlooks as though the U.S. is again becoming theprimary engine of worldwide economic growth.

EXPECTATIONSLooking forward, this summer promises to be onewhere uncertainty prevails. Politics will take centerstage from the trend-less markets. We all fear aMadrid style terrorist strike in the run-up toNovember elections, and the summers politicalconventions are taking precautions by spending

significantly on security. The Presidential electionwill be close, negative and polarized. As alwayswith an incumbent, the election will be focused onwhether to rehire George W. Bush.

Over the last year President Bushs prospects havebeen fading. Abu Ghraib, the justification for theIraq war and the management of its outcome arehurting his re-election prospects. The election fireshave been stoked with the entertainment industrys

recent releases of Former President Clintons MyLife and Michael Moores Fahrenheit 911. Theformer is negative for the Democrats and the latterfor the Republicans, in exposing old wounds orcreating new ones. The parties spending is going tobe focused on the few swing states such asFlorida, Pennsylvania, Ohio, and Michigan etc.California is assumed to be going to the Democrats

Target Fed Funds Rate

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

and will see little attention from either party in 2004.Ronald Regans recent passing has reminded us ofhis legacy: How the fall of Communism and thereunification of Germany resulted in a significantincrease in worldwide consumers and set the stagefor the booming economic 1990s. Will either of our

current candidates be capable of such distinction?History will be the judge but the markets currentanticipatory behavior is not encouraging.

THE FIRMOur firm continues to grow. Assets under ourmanagement now exceed $160 million. In June,Katie Altneu joined us as our Trader and ResearchAssistant. Please join us in welcoming Katie and lether know how she can be of service when you call.