Issue 10- December 2, 2003

This week’s newsletter looks at recent economic data and corresponding U.S. market implications.

Back to the Future

Two astonishing pieces of economic data not only surfaced last week but also surpassed 20-year standing records. First, GDP for the third quarter was revised up to 8.2% from the previously stated 7.2% and second, the Institute for Supply Management’s factory index rose to a reading of 62.8, the highest reading since December 1983. When you consider the backdrop of recent investment dialogue, (where no one has been calling for a blowout recovery), this data is all the more noteworthy. In fact, many voices in the investment dialogue are still debating whether there is recovery or not. The question we asked rhetorically last summer; “What happens when 21st century productivity takes full advantage of 1950’s level interest rates?” is now being answered emphatically. The US economy is rocking and it is no longer just the consumer and housing providing the momentum.

Despite this news, perma bears continue to fret but their concerns seem to be shifting. Leading perma bear, Stephen Roach, is now promoting his theories by finding fault in productivity calculations as the jobless recovery is now moving towards a discussion of full employment. (See 11/30 New York Times Op/Ed).

So what can we expect in the coming months? We believe the Fed will continue to hold their ultra accommodative posture with Fed Funds fixed at 1%, as they balance concern for any possibility of deflation against the indisputable growth signs now at their disposal. The bond market is once again wrestling against the good economic news and an inevitable rise in rates as evidenced by 10-year US Treasuries flirting with 4.50%. And the dollar recently dropped, with the Euro rising above 1.20 making it even more likely that rates will need to rise in order to attract the foreign buyers who now finance 30%+ of our national debt. However, as long as declines in the dollar and the bond market remain orderly, they should pose little lasting threat to the economy. It is also important to remember that these levels of the dollar and interest rates are perhaps a return to normalcy as opposed to terminal economic weaknesses. The euro was introduced at 1.19 just five years ago and we had never seen 10-year US Treasuries at 4.50% in the modern era prior to Fall 2001.

In this Edition

  • Recent Economic Data
  • Market implications

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues
9- 11.14.03

Importance of Housing
Rising Debt and Equity

8- 10.31.03
3rd Quarter GDP

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



2004 Investing ­ All Teed Up and Ready to Go

All of this recent economic data sets up a very attractive environment for US equities. Low overall interest rates, high productivity, and a weak dollar should bolster a market our equity managers describe as fairly priced. The temptation to unwind successful positions at this time of year will be great as all major indices are at 2003 highs. However, if the market were volatile this month due to heavy profit taking, we could see a buying frenzy in January as investors rush to get re-invested. This is not to say that we would recommend investors leave their fixed income allocations, but we would encourage equity allocations be in place as we move into the New Year. An enthusiastic, early equity market could also break the back of the stubbornly low interest rates and may provide us with a suitable entry point (finally) for bond investing.


Market Highlights



9/30/03 6/30/03 3/31/03 12/31/02
DJIA US 9782.46 9275.06 8985.44 7992.13 8341.63
S&P 500 US 1058.20 995.97 974.5 848.18 879.82
Nasdaq US 1960.26 1786.94 1622.80 1341.17 1335.51
EAFE Int'l Equity 1195.82 1103.39 1025.74 868.55 952.65
5 Yr Treasury 3.368 2.865 2.41 2.71 2.74
5 Yr AAA Muni 2.48 2.300 2.17 2.50 2.59
10 Yr Treasury 4.288 3.932 3.52 3.80 3.82
10 Yr AAA Muni 3.648 3.670 3.30 3.75 3.72
30 Yr Treasury 5.057 4.857 4.56 4.82 4.77
30 Yr AAA Muni 4.630 4.680 4.50 4.66 4.69
EUR Currency 1.1980 1.1686 1.1425 1.0899 1.0488
JPY Currency 109.36 110.36 120.06 118.67 118.69
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