Issue 31 - May 19, 2006


Petulant Markets

Never let it be said that Wall Street is a contented lot. After reaching a number of all time highs across numerous stock and commodity indices in early May, the markets are in the midst of a substantial pull back in response to the latest Federal Reserve interest rate increase and fresh data regarding potential inflation.

What’s a Chairman to do?

In each of the last sixteen consecutive meetings spanning a period of less than two years, the Federal Reserve raised the short-term benchmark rate in equal quarter point increments. There was substantial debate along the way as to the necessity of the next increase. However, in the end, the Fed’s final action was rarely in doubt. Now that rates have been restored to neutral territory, market participants no longer enjoy the luxury of a scripted playbook. Further increases will be as the Chairman Bernanke said, “data dependent”. Markets may dislike bad news, but the certainty of bad news can be quantified. Uncertainty on the other hand creates the unpleasant possibility of being definitively wrong.

Recipe for Volatility

The combination of uncertainty in interest rates and over bought conditions (particularly in commodity markets) set the table for a pull back. What is perhaps different this time is the speed with which these corrections take place. Large pools of “fast money” all chasing incremental performance have little capacity for patience. Further exacerbating the problem is the fact that the bond market is no longer the safe haven it was perceived to be during the early and mid stages of the Federal Reserve’s efforts to restore rate neutrality. While markets are liquid and deep, they will likely be subject to significant volatility until the markets settle into these rate levels last seen in 2002.

Source: WSJ Market Data Group

Restoring the Foundation

While the immediate pull back is unsettling, the underlying strength of the economy is still in evidence and valuations across much of the market remain reasonable. Corporations reported another quarter of solid earnings, the unemployment rate remains at 4.7% and the Treasury reports that tax withholding receipts are up 7.8% year over year.

In many ways we are in the last stages of restoring the basic underpinnings to our economy which were upended by the market crash of 2000 and the aftermath of September 11th 2001. While we may have all enjoyed the cheap money provided by negative real interest rates in the early part of this decade, that was not the measure of a healthy and vibrant economy. We are now in the later stages of interest rate restoration. These final adjustments made by the Federal Reserve may create further short-term turbulence, but long-term investors should once again be rewarded for their patience.


In this Edition

  • Petulant Markets
  • What's a Chairman to do?
  • Recipe for Volatility
  • Restoring the Foundation

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

30 - 03.09.06
Out of the Gate 2006
A New Captain/A Long Race
The Bear's Den/ The Value of Preparation

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

  04/28/06 03/31/06 12/30/05 12/31/04 12/31/03
DJIA US 11367.1 11109.30 10717.50 10783 10453.9
S&P 500 US 1310.61


1248.29 1211.92 1111.92
Nasdaq US 2322.57 2339.79 2205.32 2175.44 2003.39
EAFE Int'l Equity 1910.15


1680.13 1515.48 1288.77
5 Yr Treasury 4.925 4.832 4.355 3.649 3.231
5 Yr AAA Muni 3.77


3.50 2.79 2.45
10 Yr Treasury 5.088 4.889 4.403 4.257 4.225
10 Yr AAA Muni 4.15 4.020 3.89 3.64 3.6
30 Yr Treasury 5.161 4.897 4.497 4.817 5.01
30 Yr AAA Muni 4.5 4.41 4.39 4.58 4.54
EUR Currency 1.255 1.2095 1.183 1.3652 1.2612
JPY Currency 114.17


117.48 102.48 106.92
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