Issue 37 - June 05, 2007


Rally Time

Historically, it has been difficult to profitably time the equity markets and we need to look no further than the last two months for further proof of this. After a roller coaster first quarter which finished up relatively flat; strong corporate earnings combined with continuing employment and wage gains to propel equity markets into back to back record performances. Stock buyback programs along with private equity acquisitions have provided a significant tailwind. But it is the strength found within current global forces rather than these more ephemeral trends that should provide the foundation for continued equity gains.


Good news and bad news are not created equal. That is not to say that good news always trumps the bad, but it is to say that the current crop of good news is in fact much more meaningful. The engine behind today’s markets is the global growth story. Improving conditions in Europe and the UK along with the entry of China and India into the mainstream of commerce have much more horsepower than the well documented drags of housing and higher energy prices. The underlying deflationary impacts of this wave of labor coupled with continuing technology and productivity gains make this a positive trend which is likely to persist.

Closer to home, IRS tax receipts from withholding are running up over 10% year over year. Employment is the most critical element in our economy. It obviously provides consumers with the ability to withstand the negative impacts from higher expenses. But it is the differential in importance that truly distinguishes this factor. We noted in our October 2005 newsletter the following:

“ Energy comprised 5.4% of $9 trillion consumption, or $487BB in 2005’s second quarter, up 15% year over year or $63BB. Meanwhile compensation grew at 7%
or roughly $500BB.”

Compensation can grow much more slowly than the rate of energy inflation and still provide a significant positive net impact to the economy. A real challenge to policy makers is to get a better handle on US employment trends. Historical measures are clearly inadequate. People continue to migrate to work in ways that were not traditionally possible. Half of all non public workers are now employed by firms of less then 500. This underestimation of employment may also help to explain how the US Fiscal Deficit fell 45% in the last 12 months to $145BB to stand at 1% of GDP, a point of further good news. Since the high of $455BB in April of 2004, it has fallen 68%. The government has responded to these lessening borrowing needs by announcing that they will no longer be issuing three year notes as part of its quarterly refunding set. The Treasury will instead emphasize issuance in 3 and 6 month Treasury Bills along with 2 year and 10 year Treasury Notes as these instruments have the most demand.


After these past few months it would be appropriate to ask if this recent market action is sustainable. Profits for the first quarter did decelerate to 6.3% from a whopping 21% in 2006, but it is fair to say that the market did not keep pace last year and that some catch up was required just to maintain a market multiple of approximately 15x. There are other encouraging factors at work. The supply reduction we noted earlier in the form of buybacks and acquisitions is clearly playing a role. There has also been some help from outside the US as our weaker dollar has made an attractive market even more compelling. Finally, there appears to be some sector rotation into US Equities as investors move out of those areas which appear fully valued.

The Federal Reserve took no action at their May meeting; and those who were looking towards a rate cut later this year continue to be disappointed. Liquidity remains abundant and the Committee appears to be comfortable with the current level of the benchmark rate of 5.25%. The 10 year US Treasury traded back from 4.63% to 4.92% over the course of the past two months as hopes of cuts faded. The yield curve has not quite returned to normalcy but appears to be headed slowly in that direction. This is perhaps not too meaningful and with diminished issuance in certain parts of the curve, we may continue to experience a yield “wiggle” rather than an old fashioned positively sloped curve. The overall stability of our rates at historically low levels is yet another point in favor of continuing growth.


The markets may take a breather at any moment. However, recent overnight sell offs in Asia have not provoked the same abrupt downside reaction that we saw in February. In fact the most recent sell off was followed by an extremely strong day in the US perhaps due to the fact that being short this market is proving to be extremely painful. That being said, further forward progress this year will not come in a straight line. But the backdrop is firmly in place: low rates coupled with ample liquidity and riding the slip stream of global growth provides an attractive environment for equity investors.



In this Edition

  • Rally Time
  • Attribution
  • Encore
  • Outlook

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

36 - 04.03.07
Q1 2007: Two Sides of the Same Coin
Flat Water
The Need to Ease

35 - 02.28.07
Unhappy Tuesday
The Road Ahead

34 - 12.18.06
2006 - The Good, The Bad, & The Very Good
Risks and the Gift of Fear
2007 - Outlook

33 - 9.21.06
Steady As She Goes
Wide Open Range
Just the Facts
Financial Turbulence

32 - 8.11.06
The Pause
Headwinds and Tailwinds
Winning with Defense

31 - 5.19.06
Petulant Markets
What's a Chairman to do?
Recipe for Volatility
Restoring the Foundation

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?

More Past Issues
can be found in our

Newsletter Archive


Market Highlights

  05/31/07 03/30/07 12/29/06 12/30/05 12/31/04
DJIA US 13627.6 12354.3 12463.20 10717.50 10783
S&P 500 US 1536.34 1420.86


1248.29 1211.92
Nasdaq US 2604.52 2421.64 2415.29 2205.32 2175.44
EAFE Int'l Equity 2263.21 2147.51


1680.13 1515.48
5 Yr Treasury 4.835 4.53 4.676 4.355 3.649
5 Yr AAA Muni 3.76 3.58


3.50 2.79
10 Yr Treasury 4.927 4.664 4.718 4.403 4.257
10 Yr AAA Muni 3.92 3.79 3.79 3.89 3.64
30 Yr Treasury 5.016 4.832 4.799 4.497 4.817
30 Yr AAA Muni 4.38 4.19 4.18 4.39 4.58
EUR Currency 1.3434 1.3304 1.3170 1.183 1.3652
JPY Currency 121.64 118.04


117.48 102.48
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