Issue 8 - October 31, 2003

In this week’s newsletter we review recent economic news and provide a comparison of the current government deficit to historical levels.

Third Quarter GDP - Smokin'

The U.S. Economy expanded 7.2% during the third quarter of 2003. This far exceeded even the most optimistic expectations, representing the fastest rate of growth seen in the last nineteen years. The marketís initial reaction has been subdued as a result of media rhetoric; many perma bears cite tax cuts and low rates as the one time catalysts for this growth. However, non-residential spending resumed and corporate earnings grew by over 20% during the quarter. We would expect these trends to provide stimulus for above trend growth in coming quarters. This will provide an underpinning of support for U.S. equity markets.

Data source: BCA Research

In this Edition

  • Third Quarter GDP – Smokin’
  • Binomial Pundits
  • Budget Deficit Derby

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

7- 10.15.03
Private Equity

6- 10.02.03
Stimulus/Bear's Last
"At Bat"

5- 09.15.03
Hedge Funds

4- 09.03.03
Econ Highlights/Bluetooth

3- 08.15.03
Tirade on Bonds/ Modern Portfolio Theory

2- 08.01.03
Econ Data/Asset Allocation

1- 07.15.03
Economy/Rates & Currencies


Binomial Pundits

The pundits who could find no wrong with the economy well into the correction now find little to applaud. Consider the facts: the economy grew at an annual rate of 4.375% (Bloomberg data) for the period of 1996 through 1999. If the economy were to slow down to a rate of 5.6% for the fourth quarter of this year, the economy of 2003 would be right on par with a period that many pundits defined as perfection. The take away point is that the economy itself should not pose any unreasonable barrier to the success of equity managers.


Budget Deficit Derby

As the U.S. economy begins to produce in line with its capability, the budget deficit and the plans to address it should move closer to the top of the political pile. In looking at the current deficit in relation to those we experienced in the early 1980ís, the overall numbers are significantly larger. However, on a percentage basis, todayís debts are still well below those of the Carter and Reagan administrations. However, todayís deficit does win the deterioration derby. We have gone from a surplus of 2.4% to a deficit of 4% in four years. This compares to deterioration from a deficit of 1.6% to a deficit of 6% in the 1979 -1983 time frame.

Perhaps the biggest cause for concern is the lack of fiscal responsibility on both sides of the political aisle. Instead of having thoughtful discussions on reducing spending, the two sides disagree on where to spend the money they donít have. This is in stark contrast to the early 1980ís when the size of the deficit sparked double digit interest rates and much political attention and debate. Our current leaderís deficit spending has enjoyed the benefits of lower rates. It may well be up to the bond market to demand responsibility in the form of higher interest rates. Higher rates would make the deficit increasingly uncomfortable.

The second biggest cause for concern is the weakness of economic forecasting. The April 2001 forecast for 2003 predicted a surplus of $334 billion, whereas in the reality the current deficit totals $455 billion. (That equates to a miss of over $789 billion in a matter of two years!)

On the positive side of the ledger, the current economy enjoys many advantages unavailable in the early 1980ís, including lower tax rates, lower interest rates and improved technology. It is tantalizing to consider what magnitude of efficiencies the government could achieve if it were only to look. Perhaps the most powerful motivator will come from the looming demographic shifts as the first baby boomer will apply for social security in 2007.



Market Highlights



9/30/03 6/30/03 3/31/03 12/31/02
DJIA US 9786.6 9275.06 8985.44 7992.13 8341.63
S&P 500 US 1046.94 995.97 974.5 848.18 879.82
Nasdaq US 1932.69 1786.94 1622.80 1341.17 1335.51
EAFE Int'l Equity 1182.36 1103.39 1025.74 868.55 952.65
5 Yr Treasury 3.295 2.865 2.41 2.71 2.74
5 Yr AAA Muni 2.49 2.300 2.17 2.50 2.59
10 Yr Treasury 4.3 3.932 3.52 3.80 3.82
10 Yr AAA Muni 3.8 3.670 3.30 3.75 3.72
30 Yr Treasury 5.103 4.857 4.56 4.82 4.77
30 Yr AAA Muni 4.75 4.680 4.50 4.66 4.69
EUR Currency 1.1713 1.1686 1.1425 1.0899 1.0488
JPY Currency 108.01 110.36 120.06 118.67 118.69
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