Issue 18 - August 3, 2004


July: A Difficult Stage

Having just thoroughly enjoyed watching Lance Armstrong and his US Postal Team put on one of the greatest athletic displays of all time, the team’s performance is a poignant reminder of what it takes to win a long and grueling race.

Despite good news on the earnings front, a long awaited Microsoft dividend distribution, and continuing solid economic news, the US markets in July could find nothing to like about current conditions. The market was dominated by anxiety exacerbated by conventions, Olympics, elections, rising rates and a cooling economy all wrapped up in summertime disaffection.

However, just as the 5th Stage from Amiens to Chartres featured pelting rain, real headwinds, wet cobblestones and four US Postal riders hitting the deck, we know that in the end it was just a difficult stage to be endured en route to more advantageous conditions.

The Derby: Earnings versus Rising Rates

It is never easy to distill down a month’s worth of events into a few meaningful ones, especially a month as chock full as July was. In this case though, the ambient anxiety was more of an excuse than a factor. If market participants had felt strongly about the economic outlook they would have borne the risk and exogenous factors be damned.

Rather, traders have for the moment convinced themselves that they are faced with a stock market which is fully valued standing on the precipice of a rising rate cycle. Surely no one can make forward progress given those circumstances. However, we will politely point out a few contrary positions.


Much has been said about the overall valuation of the market trading at a price earnings ratio of approximately 16 when historically, the market traded closer to one of 12. But stocks don’t trade in a vacuum. In a very real sense, you can value a stock just like a long dated bond. In order to compare the valuations of today’s markets to those of yesteryear, one must consider that those lower price earnings ratios were associated with much higher long term interest rates than we have today. So are stocks with price earnings ratios of 12 in a 7% long term rate environment definitively cheaper than stocks with price earnings ratios of 16 in a world of 4.75% rates? The answer is “yes” only if we think long term rates are going back to 7%.

However, as we noted in our last newsletter, the bond market has already normalized long term rates to a large degree. Furthermore, long duration fixed income investors ­ pension plans, insurance companies, and individuals ­ have essentially been starved for income these past three years and their overall appetite may well keep a tight lid on the potential rise of the long end of the bond market.

The period between March of 2003 and February of 2004 saw the broad market rise 45% essentially righting itself after the tumultuous period of 2000-2002. As we noted in our February newsletter, we would expect equities to perform in line with their earnings growth which we consider to be reasonably attractive given the moderate rate environment and the continuing high levels of productivity.

Remember ­ it is a long race.



In this Edition

  • July: A Difficult Stage

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

17 - 07.01.04
2004 Second Half Outlook

16 - 06.01.04
Big Bad Fed

15 -05.04.04
Rising Rates/ Google IPO

14 -04.01.04
First Quarter 2004

13 - 03.02.04
2004: Encore Performance

12 - 02.03.04
Market Outlook/Cell phones

11 - 12.16.03
Auctions - eBay, US Treasury, IPOs

10- 12.02.03
Recent Economic Data
Market Implications

More Past Issues
can be found in our

Newsletter Archive


Market Highlights

  07/30/04 6/30/04 3/31/04 12/31/03 12/31/02
DJIA US 10139.7 10435.5 10357.7 10453.9 8341.63
S&P 500 US


1140.84 1126.21 1111.92 879.82
Nasdaq US 1887.36 2047.79 1994.22 2003.39 1335.51
EAFE Int'l Equity 1283.96 1327.97 1337.07 1288.77 952.65
5 Yr Treasury 3.73 3.818 2.89 3.231 2.74
5 Yr AAA Muni 3.01 3.150 2.38 2.45 2.59
10 Yr Treasury 4.52 4.636 3.874 4.225 3.82
10 Yr AAA Muni 3.88 4.020 3.49 3.6 3.72
30 Yr Treasury 5.06 5.166 4.69 5.01 4.77
30 Yr AAA Muni 4.86 4.93 4.51 4.54 4.69
EUR Currency 1.2056 1.2157 1.2227 1.2612 1.0488
JPY Currency 111.41 108.88


106.92 118.69
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