August 1, 2003

Welcome to the second edition of the Huntington Steele newsletter. For those of you who commented on our first edition, thank you for your feedback. Please keep the comments coming. This newsletter is written for you, so please let us know what you would like to hear about.
Happy August,
Jen and Patsy

In This Edition
  • An update on recent economic data
  • An update on Washington area calendar Q2-‘03 corporate earnings
  • Month end market highlights
  • Why we preach the “gospel” according to asset allocation

  • An Update on Recent Economic Data - Increasingly Positive, But Still Mixed
    (Source: BCA and Bloomberg)
    • Today’s payroll report showed another decline. The loss of 44,000 jobs represented the sixth straight monthly decline, and a sign that the economy needs to accelerate further before companies add to payrolls. However, improved manufacturing and consumer spending reports suggest that may happen soon.
    • The composite index for US manufacturing, released today, rose above the 50% level, confirming that manufacturing activity is expanding. Demand was solid in the second quarter, catching producers by surprise.
    • Yesterday’s GDP report showed broad-based strength in US demand, with Q2 growth at 4.6%. This was the fastest pace since Q1-’01. Corporate spending remained high, with net trade and inventories as the remaining areas of weakness. The GDP data explained why, broadly speaking, Q2 corporate earnings beat expectations.
    • The Fed’s latest Beige Book had a more positive tone with regard to regional economic conditions. Reports from the various Fed districts pointed to a pickup in economic activity during June and the first half of July. Only three of the 12 districts reported sluggish conditions. The odds of an August rate cut are small.
    • The drop in US consumer confidence in July (to 76.6 from 83.5 in June) confirms that the economy is still on shaky ground. Only 10.5% of consumers described jobs as being plentiful in July. This represents a new low for the cycle, and the weakest reading since December 1993. The recent backup in mortgage yields also likely weighted on consumer sentiment.
    • In contrast to consumer confidence, consumer spending remains fairly robust. June personal income and consumer spending each rose 0.3% in the month.

     An Update on Washington Area Calendar Q2-‘03 Corporate Earnings

    (Source: Bloomberg)

    ALK – Alaska Airlines
    EPS $1.70 per share announced 7/22/03
    7/31/03 Price $24.46 12 Month Total Return +2.70%
    52 Week High $27.23 52 Week Low $13.66
    Market Cap $636MM

    • ALK had a second-quarter profit of $45.2 million with help from a government subsidy. Net income was $1.70 per share, including $44.3 million in US payments to cover security costs, compared with a loss of $2.9 million, or $.11, in the 2002 period. ALK was one of the few major US airlines to grow during the quarter, with passenger traffic increasing 9.1% from the prior year period.

    AMZN – Amazon.com
    EPS $.061 per share announced 7/22/03
    7/31/03 Price $41.64 12 Month Total Return +188.85%
    52 Week High $43.10 52 Week Low $12.78
    Market Cap $16,237MM

    • AMZN announced a narrowed loss as the company cut costs and sold more than 1.4 million copies of the latest Harry Potter book. The company also raised forecasts for the remainder of 2003 due to higher expected sales forecasts.
    BA – Boeing
    EPS -$.431 per share announced 7/23/03
    7/31/03 Price $33.12 12 Month Total Return -18.28%
    52 Week High $41.65 52 Week Low $24.73
    Market Cap $26,003MM
    • BA reported a Q2 net loss due to expenses at its satellite and rocket divisions and continued weak sales in its aircraft division in the aftermath of SARS and 9/11. The company also lowered it 2004 sales and earnings forecasts as it projected that the 2 year decline in demand from airlines may extend longer than originally predicted.

    COST – Costco

    EPS $.312 per share announced 5/28/03
    7/31/03 Price $36.99 12 Month Total Return +11.30%
    52 Week High $39.02 52 Week Low $27.00
    Market Cap $16,825MM

    • COST, the largest US warehouse-club chain, announced higher earnings on increased sales. Sales at stores open at least a year rose 6% (higher than other retailers). COST also benefited from the weaker US dollar as approximately 25% of the company’s 416 stores are located outside the US.
    MSFT – Microsoft
    EPS $.23 per share announced 7/17/03
    7/31/03 Price $26.41 12 Month Total Return +15.00%
    52 Week High $29.48 52 Week Low $21.56
    Market Cap $281,504MM
    • MSFT announced a 26% increase in year-over-year profit on increased sales of business programs and increased Internet advertising. SQL database and Windows for server computers program sale increases were of particular note. Contrary to rumors in the marketplace, the company said that it would not raise its dividend until it has some clarity on the impact of antitrust cases filed by Sun Microsystems and the European Union. The company’s expenses during the quarter were slightly higher than estimated by analysts. Of note also were the company’s announcements that it would begin deducting the cost of employee stock options, and that it would begin granting employees stock instead of options.
    PCAR – Paccar
    EPS $1.06 per share announced 7/24/03
    7/31/03 Price $7.24 12 Month Total Return +112.39%
    52 Week High $78.37 52 Week Low $30.69
    Market Cap $8849MM
    • PCAR, the world’s largest maker of trucks, announced a 68% increased in Q2 profit due to market share gains in North America and Europe. The company sold more trucks for beverage carrying and vehicle towing. The company continued to improve its gross margin (a good measure of manufacturing efficiency); the company’s gross margin was 17.6% versus the 14.3% of its closest rival Navistar International Corp.
    PCL – Plum Creek Timber
    EPS $.23 per share announced 7/21/03
    7/31/03 Price $27.16 12 Month Total Return -.30%
    52 Week High $29.19 52 Week Low $18.92
    Market Cap $4911MM
    • PCL’s Q2 earnings were better than expected due to higher than anticipated real estate sales and improvement in results due to the ’02 Wisconsin timberland acquisition. Most segments were flat to down versus the prior year due to continued lumber market oversupply.
    SAFC – Safeco
    EPS $.70 per share announced 7/28/03
    7/31/03 Price $37.23 12 Month Total Return +19.38%
    52 Week High $39.79 52 Week Low $29.95
    Market Cap $5094MM
    • SAFC, the Seattle-based home and car insurer, announced a 6.4% Q2 profit increase as the company made its first profit from car insurance in almost two years. The company raised auto rates and curtailed sales of homeowners’ policies as claims had outstripped premiums.
    SBUX – Starbucks
    EPS $.17 per share announced 7/24/03
    7/31/03 Price $27.77 12 Month Total Return +43.47%
    52 Week High $27.77 52 Week Low $18.48
    Market Cap $10,556MM
    • SBUX, the largest US coffee-shop chain announced quarterly earnings 23% above the prior year. SBUX added 283 coffee shops in the quarter (bringing the total to 6741). The company also added specialty drinks (including Mocha Malt and Chocolate Malt Frappuccino), wireless Internet access and gift cards.
    WM – Washington Mutual
    EPS $1.13 per share announced 7/15/03
    7/31/03 Price $39.48 12 Month Total Return +8.90%
    52 Week High $43.99 52 Week Low $27.80
    Market Cap $35,592MM
    • WM, the largest US savings and loan institution reported higher Q2 profits due to record refinancing rates. During the quarter, the company opened 50 branches, six home loan offices, and added 176,000 new checking accounts. The company also announced that it plans to buy back as many as 100 million WM shares and raise its dividend 33%. The new $.40 dividend will be paid in the middle of August.
    WY – Weyerhaeuser
    EPS $.41 per share announced 7/25/03
    7/31/03 Price $56.29 12 Month Total Return -1.21%
    52 Week High $59.14 52 Week Low $37.35
    Market Cap $12,292MM
    • WY’s Q2 earnings more than doubled due to gains realized on the sale of timberland. WY, which bought Willamette Industries Inc. in 2002, has been selling timberland to pay down debt, and has also been closing mills due to the decline of lumber prices and paper demand. The company projects that profit in Q3 will be hurt by lower and demand and prices.

    Month End Market Highlights

      7/31/03 6/30/03 3/31/03 12/31/02
    DJIA US 9233.8 8985.44 7992.13 8341.63
    S&P 500 US 990.31 974.5 848.18 879.82
    Nasdaq US 1735.02 1622.80 1341.17 1335.51
    EAFE Int'l Equity 1049.47 1025.74 868.55 952.65
    5 Yr Treasury 3.222 2.41 2.71 2.74
    5 Yr AAA Muni 2.83 2.17 2.50 2.59
    10 Yr Treasury 4.408 3.52 3.80 3.82
    10 Yr AAA Muni 4.09 3.30 3.75 3.72
    30 Yr Treasury 5.358 4.56 4.82 4.77
    30 Yr AAA Muni 4.92 4.50 4.66 4.69
    EUR Currency 1.1304 1.1425 1.0899 1.0488
    JPY Currency 120.02 120.06 118.67 118.69

     Why We Preach the “Gospel” According to Asset Allocation

    Academic studies have shown that asset allocation is the largest determinant of portfolio performance. An often referenced study by Gary P. Brinson, Brian D. Singer and Gilbert L. Beebower published in the Financial Analysts Journal entitled “Determinants of Portfolio Performance” concluded that 90% of investment risk and return can be explained by asset allocation. Less that 10% of investment risk and return can be explained by investment selection and implementation. An asset allocation process also provides the additional benefits of encouraging a systematic and disciplined approach to investing, and maintaining investor focus on long-term objectives. In determining an appropriate asset allocation, we focus on financial objectives, time horizon, risk tolerance, and liquidity requirements. A market timing strategy is sometimes pursued in the hopes of buying an investment when its price is low, and selling it in when its price is high. Many academic studies of shown, however, that market timing is very problematic. Minor mistakes in timing can lead to missing large market upward moves, and/or capturing significant downward moves.

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