16 Mar 2007 Very Briefly

During the past couple of weeks, Mr. Greenspan and others have publicly weighed in with their own views on the economy and possible recession. While Greenspan says he puts the chances of recession at 1 in 3, most economists, including Fed Chair Ben Bernanke, think the economy is in pretty good shape. They think that the chances for recession are generally more remote. While they recognize that weaker mortgage borrowers could have a significant effect on lenders in those markets, most think that the problem will not drag the entire economy into recession.  

Similarly, market strategists continue to think that stocks will do relatively well this year. They cite favorable valuations as their primary reason for optimism. Most agree that volatility and risk are going to return to more normal levels though. In other words, stock and bond markets will be a bit choppier than in past months.

Summary of trends and expectations:

• Without further  economic turbulence, the 10-year Treasury is likely to stay locked in a 4.50%-4.60% yield range
• Inflation is generally easing, but still remains a concern for the Fed with today’s CPI increase not helping the cause.
• The economy continues to create jobs despite housing and manufacturing, as indicated by an unemployment rate of 4.5% for last month.
• Consumer confidence slipped in March, but still remains healthy.
• The Fed may change its policy stance from tightening to neutral in their June meeting.   Sub-prime woes likely will not hasten Fed’s move to reduce rates at this time. But if non-farm payroll or some other indicator of the major economy    shows significant weakness, odds increase for a move sooner.
• Crude-oil prices  are around $58 a barrel following OPEC’s announcement that would not  change output targets.
• Industrial  production in theU.S. rose last month by the most since November 2005, as manufacturing  rebounded and the return of cold weather prompted a surge in utility use.
• Capacity utilization, which measures the proportion of plants in use, rose to a      five-month high of 82%.
• The S&P 500  is 5% off of its mid-February highs, while the NASDAQ is off by 6%. The  decline takes them back to November’s levels. Because of diversification  and the positive impact of bonds, our models on average are down one to three percent less than the index declines.

While this correction was mostly a random event, it is likely not over. Talk is for several more weeks of weakness or greater-than-normal volatility. But no major strategist suggests that this is the beginning of a bear market. The most pessimistic suggest that it may continue as low as 8-10% and others suggest that the lows have been seen.

We continue to remain diversified among high quality global investments in our conservative models and we are carrying a rather significant (10-20%) level of cash in our more aggressive models. We favor the largest and most global of companies for all models and we continue to favor growth stocks. Growth has outperformed value in almost every category, domestic and global, during this latest market drop. We expect that major trend to continue indefinitely.