Issue 30 - March 9, 2006


Out of the Gate 2006

The 2006 new year is off to a solid start across all major equity indices. This performance is particularly encouraging in light of several factors – most notably the long awaited hand-off of the Federal Reserve chairmanship, and the initial evidence of a cooling in consumer and corporate profits.

A New Captain

With the hand-off from Alan Greenspan to Ben Bernanke, the market consensus indicates that the Federal Reserve’s immediate work is essentially complete. The consensus view is that although we may see a few more rate increases, it is hard to make any compelling argument for significant further upside adjustments. With
much of corporate America healthy and overall employment strong, we would not expect the new chairman to have too much to contend with in his first few months on the job.

A Long Race - Goldilocks and the Three Bears

In any endurance event, it is always important to set a sustainable pace. This is likewise true in investing. Ideally, the economy grows at a sufficient speed to ensure growth and employment, but not so fast as to induce inflation. This in turn keeps the Federal Reserve contained and the bond market relatively stable, thus creating a
solid backdrop for equity investments. The potential problem with the virtuous cycle – which we will call “goldilocks” – is that there are always three bears lurking.

Bear #1 is the possibility that the Federal Reserve overshoots and raises rates too much thereby inadvertently slowing the economy into a recession. Bear #2 is the possibility that the consumer has become tapped out (while the market believes that the consumer is the main driver of growth). Bear #3 would be the twins – the fiscal and trade deficits.

The Bear's Den

The concern that Mr. Bernanke and his team might choke off the economy is predicated on the belief that the Fed has been “raising rates” for these past two years. One might suggest, however, that the Fed’s actions could better be described as restoring rates from artificially low levels. (The low level of interest rates was put
in place to deal with the discreet circumstances following 9/11.) As we commented in our October 2004 newsletter, there is nothing normal or sustainable about negative real interest rates. Through their deliberate and transparent actions, the Fed has put itself back into a position to reign in inflation if needed.

Consumers have certainly borrowed great sums in the past few years. However, according to the Bank Credit Analyst, 80% of these flows have gone into home mortgages. In addition, IRS withholding has grown by 8% over the same period versus last year. Individuals are indeed carrying bigger balance sheets, however strong employment and wage growth should continue to provide ample resources.

The Twin Deficits are undoubtedly the biggest concerns among the bear camp.
The government’s lifestyle has in large part been subsidized by the willingness of foreign central banks to buy US bonds. However, these bankers do not do this out
of the goodness of their hearts. Their support solves a very necessary need on their part. It allows their currencies to remain stable and their goods to remain affordable. While it might be an interesting philosophical discussion to debate the ramifications of the absence of central bank support, the practical realities of damaging their own global competitiveness should provide sufficient incentives to continue their support. It is also hard to argue that the US is going to have a hard time selling paper when the world’s pension funds are ravenous for long duration, fixed income assets.

The Value of Preparation

The US economy has accomplished a great deal in the past few years. Out of the wake of terrorist attacks, wars, and market corrections, we now enjoy an economy with normalized interest rates, strong employment, and robust corporate balance sheets. The future, as the bears are always happy to tell us, is clearly filled with substantial challenges. However, the market does not need a perfect environment in which to make forward progress. Slowing growth does not translate into no growth, and we believe the market is reasonably prepared and priced to contend with the current environment. We look for a sustainable pace.


In this Edition

  • Out of the Gate in 2006
  • A New Captain
  • A Long Race
  • The Bear's Den
  • The Value of Preparation

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

29 - 12.01.05
Determined Not to Yield
Bond Market History Lesson
2005 Home Stretch

28 - 10.03.05
The Pennant Race
Just the Facts
Fourth Quarter Implication

27 - 08.11.05
Back to the Future
Reports of Demise
Greenspan Countdown

26 - 06.09.05
Measured Conundrum
Possible Explanations
Implications of an Uncoupled Market

25 - 04.13.05
1st Quarter 2005:
Up, Down, Sideways
Calm on Top, Turbulence Below
What's on Deck?

24 - 03.09.05
Housing: Priority
#1 for the Federal Reserve
Calling the Top Again
Policy Implications

23 - 02.11.05
Interest Rates and the Federal Reserve
A New Demand Paradigm
No-Traditional Buyers
4% Looks Good
Chicken & Egg Market

22 - 12.02.04
Drooping Dollar
Not Everyone is an Investor
Implications for 2005
Putting the Euro in Perspective

21 - 11.04.04
Personal Savings
Absence of Rising Tide
US Elections

More Past Issues
can be found in our

Newsletter Archive


Market Highlights

  02/28/06 12/30/05 12/31/04 12/31/03
DJIA US 10993.40 10717.50 10783 10453.9
S&P 500 US


1248.29 1211.92 1111.92
Nasdaq US 2281.39 2205.32 2175.44 2003.39
EAFE Int'l Equity


1680.13 1515.48 1288.77
5 Yr Treasury 4.607 4.355 3.649 3.231
5 Yr AAA Muni


3.50 2.79 2.45
10 Yr Treasury 4.571 4.403 4.257 4.225
10 Yr AAA Muni 3.83 3.89 3.64 3.6
30 Yr Treasury 4.508 4.497 4.817 5.01
30 Yr AAA Muni 4.36 4.39 4.58 4.54
EUR Currency 1.189 1.183 1.3652 1.2612
JPY Currency


117.48 102.48 106.92
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