Issue 28 - October 3, 2005


The Pennant Race

In the wake of hurricanes Katrina and Rita, U.S. financial markets stand at a crossroads. Will the drag of higher energy prices and dampened short-term growth force the economy to turn toward a period of extended sluggishness? Or will the stimulus of the Gulf Coast rebuilding process provide sufficient forward momentum to keep the economy on track? Quite simply, will the good news or the bad news win the financial market’s “Pennant” race?

Prior to the storms, U.S. markets had been primarily focused on two fronts: the Fed and energy prices. Now the markets must make sense of a context featuring not only pre-hurricane concerns but also exogenous storm-related factors. Forthcoming economic data will be confusing at best.

Just the Facts

It is perhaps natural to accentuate the negatives in the period following such extreme human suffering. Indeed, the increases in all types of fuel prices will be not only noticeable but painful. It is also likely these increases will be sticky and not short-lived. No one wants to remember, let alone revisit, the gas lines and rationing of the 1970’s.

However, if we distill the realities of our economy down and focus for just a moment on the positive elements including low unemployment, high productivity, strong wage gains, and a persistently low interest rate environment, there is much to recommend about the U.S. markets. David Malpass of Bear Stearns writes:

“ Expensive oil is a drag on the economy, but not as strong as the tailwinds from
low interest rates. 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.”

The strong undercurrents combined with what will be unprecedented post-hurricane, stimulative expenditures, will likely stabilize and propel the current economic expansion.

Fourth Quarter Implications

While we are optimistic as to the longer-term trends in our economy, the markets must still contend with a number of short-term hurdles.

The Federal Reserve will have two more opportunities to raise rates in 2005 and they have shown every sign they will continue to do so. As a result, the benchmark Fed Funds rate will likely top 4.25% going into 2006. Long-term U.S. interest rates which have remained stubbornly low may finally retreat in the face of a 4% plus Fed Funds rate.

The equity markets will soon begin to digest another quarter of earnings releases as well. Time will tell how many companies will make reference to the impact of the hurricanes, but it is important to remember the market is forward looking. Investors will likely put far more weight than is typical on forecasts for early 2006 instead of on historical data which will be hopelessly muddled by the weather. If this proves to be the case, we may well see another strong late year rally as we have seen in both 2003 and 2004.


In this Edition

  • The Pennant Race
  • Just the Facts
  • Fourth Quarter Implications

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

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

23 - 02.11.05
Interest Rates and the Federal Reserve
A New Demand Paradigm
No-Traditional Buyers
4% Looks Good
Chicken & Egg Market

22 - 12.02.04
Drooping Dollar
Not Everyone is an Investor
Implications for 2005
Putting the Euro in Perspective

21 - 11.04.04
Personal Savings
Absence of Rising Tide
US Elections

More Past Issues
can be found in our

Newsletter Archive


Market Highlights

   09/30/05 06/30/05 03/31/05 12/31/04 12/31/03
DJIA US 10568.70 10275.00 10503.80 10783 10453.9
S&P 500 US 1228.81


1180.59 1211.92 1111.92
Nasdaq US 2151.69 2056.96 1999.23 2175.44 2003.39
EAFE Int'l Equity 1618.84


1503.85 1515.48 1288.77
5 Yr Treasury 4.207 3.731 4.21 3.649 3.231
5 Yr AAA Muni 3.26


3.29 2.79 2.45
10 Yr Treasury 4.368 3.972 4.512 4.257 4.225
10 Yr AAA Muni 3.720 3.54 3.920 3.64 3.6
30 Yr Treasury 4.522 4.163 4.731 4.817 5.01
30 Yr AAA Muni 4.47 4.3 4.580 4.58 4.54
EUR Currency 1.2052 1.2053 1.2958 1.3652 1.2612
JPY Currency 113.39


106.88 102.48 106.92
If you would prefer not to receive future newsletters, or if you've changed your email address, please click here or send mail to