Issue 32 - August 11, 2006


The Pause

On Tuesday, the Federal Reserve chose not to raise its benchmark Federal Funds
rate beyond its current level of 5.25%. This marks the first pause in over two years and 17 consecutive quarter point increases. While this may close the current chapter on the two year rate normalization process, a more complete read on the modern benchmark rate actually goes back to 2001 when the Federal Reserve went into action in an effort to fend off the concurrent forces of a recession, stock market collapse, and terrorist attack. From January of 2001 until the turn of that year, Fed Funds plummeted from 6.50% to 1.75%. It was not until December of 2004, almost three full years later, that the rate rose back above 2%. We bring up this historical context in order to better illustrate the fact that our current rate environment grew from a healthy economy rather than one on the brink of recession.

Headwinds and Tailwinds

Interpreting the upcoming economic conditions will look a lot like predicting the weather – it is likely to be a challenging and unsettled picture. On the positive
side – the persistent headwind of the Federal Reserve’s tightening program should now be behind us. On the negative side – the tailwind of rising home values and equity is seemingly behind us as well. As we have argued in previous newsletters however, the strength of the U.S. economy that we have seen in recent years was not solely predicated on housing. Both consumers and corporations are sitting on strong balance sheets at this time and that will certainly help navigate any extended slowdown. Increases in debt service and energy costs will provide a drag, but employment remains close to full and an easing in the economy should also provide an accompanying ease in inflationary pressures.

Winning with Defense

The best portfolio offense in the coming quarters is likely to be a good defense.
First, with the Federal Reserve moved to the sidelines, municipal bonds are likely to be a boost to returns as well as providing their reliable income stream. Secondly, this year we have seen a dramatic differentiation in the returns of value over growth and this is likely to continue with further emphasis being applied to the largest and most predictable companies especially those with a good history of meaningful dividends. Finally, tax efficiency, which is always important to individuals, will play an even more valuable role if returns are harder to come by.


In this Edition

  • The Pause
  • Headwinds and Tailwinds
  • Winning with Defense

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

31 - 5.19.06
Petulant Markets
What's a Chairman to do?
Recipe for Volitility
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?

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


More Past Issues
can be found in our

Newsletter Archive


Market Highlights

  08/10/06 06/30/06 12/30/05 12/31/04 12/31/03
DJIA US 11124.4 11150.20 10717.50 10783 10453.9
S&P 500 US 1271.81


1248.29 1211.92 1111.92
Nasdaq US 2071.74 2172.09 2205.32 2175.44 2003.39
EAFE Int'l Equity 1831.93


1680.13 1515.48 1288.77
5 Yr Treasury 4.845 5.08 4.355 3.649 3.231
5 Yr AAA Muni 3.7


3.50 2.79 2.45
10 Yr Treasury 4.932 5.158 4.403 4.257 4.225
10 Yr AAA Muni 3.99 4.24 3.89 3.64 3.6
30 Yr Treasury 5.069 5.194 4.497 4.817 5.01
30 Yr AAA Muni 4.4 4.6 4.39 4.58 4.54
EUR Currency 1.2852 1.2712 1.183 1.3652 1.2612
JPY Currency 114.88


117.48 102.48 106.92
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