Issue 33 - September 21, 2006


Steady As She Goes

The Federal Reserve’s Open Market Committee met this past Wednesday and resolved to maintain its current stance on the benchmark Federal Funds Rate at 5.25%. While the Committee conceded that certain elements of core inflation remain worrisome, they are appreciative of the cumulative impact of their previous rate increases. The finding however, was not unanimous. While this is unusual, it does speak volumes about the current set of opinions surrounding markets.

Wide Open Range

It is hard to remember a time when the range of opinions on the outlook for the U.S. economy has been as disparate as at present. Essentially every conceivable outlook has been voiced by at least one reputable pundit and supported with copious materials. There are arguments for hard and soft and even late landings; inflation running ahead as well as below trend; and demand readings that are both indicative of a recession and an economy growing briskly. Part of the reasoning for the disparate opinions lies in the fact that we are coming out of a period of predictable actions by the Federal Reserve as they have largely, if not entirely, completed the interest rate normalization. However, there may be two other points which are leading to the greatest confusion: 1) the implications of global demand for commodities and, 2) the ramifications of the slowdown in housing. It is proving to be exceedingly difficult to get a consensus on these broad trends.

Just the Facts

China and other emerging economies pose a 21st century dilemma. On one hand,
they are a primary source of oil and raw material demand and price inflation. On the other hand and at the same time, they are also a primary source of price deflation in essentially everything else. Which factor has a larger impact? The bulls clearly believe this long term secular deflationary trend will carry the day. However, the timing of any energy and/or commodity shocks could be particularly damaging
given the current geopolitical climate.

Housing, on the other hand is providing ample fodder for the bears. Overall, housing has clearly contributed to the strength in the economy over the past few years. Alan Greenspan, in his testimony to congress in March of 2005, highlighted the importance of housing with over 70% of households now owning their own home. It is important to realize that this contribution was the unintended consequence of the Federal Reserve’s battle against deflation. There was never a policy to have asset-based savings replace more traditional vehicles. Rather lenders combined historically low interest rates with a relaxed credit environment to create a perfect buying storm. As 20-30% down payments became historical footnotes, many more buyers became “qualified”. Low rates surely meant a buyer could afford more house, but it was the change in lending requirements that introduced a flood of first time buyers as well as speculators. How these new homeowners will navigate this slowdown is the wildcard. Many mortgages with teaser rates are poised to reset at substantially higher levels. However, current long-term fixed rate mortgages are now 2% below short-term rates and will afford those homeowners an opportunity to lock in what up until the past few years were considered extremely attractive levels. Traditionally, employment was the definitive factor impacting housing, not down payments. With employment running at high levels and income tax withholding now running at 9% year-over-year, the income side of the equation looks to be in good shape. Demographics will also be a source of support as the U.S. population continues to expand. The speculators, however, may be in for a rougher ride. As the housing market settles into its own period of normalization, it will be those projects at the margin which will suffer the most.

Financial Turbulence

Given the volatility experienced by market participants this year, it is no surprise
that return expectations for the balance of the year are mixed. We have already seen this year the waning of the appetite for riskier assets. Value oriented funds across capitalizations have outpaced their growth counterparts, and consistency and predictability are once again back in vogue. Markets like these are a strong reminder of the power of long-term approach to investment.


In this Edition

  • Steady As She Goes
  • Wide Open Range
  • Just the Facts
  • Financial Turbulence

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

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?

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

  09/21/06 06/30/06 12/30/05 12/31/04 12/31/03
DJIA US 11616.20 11150.20 10717.50 10783 10453.9
S&P 500 US 1325.18


1248.29 1211.92 1111.92
Nasdaq US 2252.89 2172.09 2205.32 2175.44 2003.39
EAFE Int'l Equity 1864.07


1680.13 1515.48 1288.77
5 Yr Treasury 4.69 5.08 4.355 3.649 3.231
5 Yr AAA Muni 3.61


3.50 2.79 2.45
10 Yr Treasury 4.748 5.158 4.403 4.257 4.225
10 Yr AAA Muni 3.8 4.24 3.89 3.64 3.6
30 Yr Treasury 4.844 5.194 4.497 4.817 5.01
30 Yr AAA Muni 4.26 4.6 4.39 4.58 4.54
EUR Currency 1.2743 1.2712 1.183 1.3652 1.2612
JPY Currency 116.80


117.48 102.48 106.92
If you would prefer not to receive future newsletters, or if you've changed your email address, please click here or send mail to