Back in February of this year Mr. Greenspan labeled the unusual condition of falling long-term rates and steadily rising short-term rates, a ‘conundrum’.  The rates generally move in parallel.  Yesterday, he told the Congress that the reason long-term bond yields have continued to fall while short-term rates have tripled over the past year was that global savings exceeded investment, inflation expectations are low, and the world economy is stable.  He also debunked the theory that an inverted yield curve signaled an economic slowdown, calling it a “misconception.”  He said “the quality of that signal has been declining in the last decade, in fact, quite measurably.” 

The economy is growing fast enough to create jobs, but not so fast to cause significant inflationary pressures.  The nation’s unemployment rate dropped to 5% in June from 5.1% in May.  Cutbacks at auto factories kept the payroll growth of 146,000 new jobs, below the expected 200,000, but the last two months’ job growth numbers were revised significantly upward, improving the job growth picture. 

The quarter was remarkable on several fronts; the world mourned and buried a beloved Pope John Paul II, oil prices set new record highs (but not inflation-adjusted highs), but failed to derail corporate earnings which soundly beat analysts’ estimates, and corporate managers felt good enough about their futures to book some healthy acquisitions.  But after digesting three months of mixed economic news and promises of higher rates from the Fed, investors chose to be more optimistic.  During the quarter the S&P 500 gained 1.4% while the tech-heavy NASDAQ rose 3%.  The 30 Dow Jones Industrials didn’t fare so well dropping 1.6% during the same period.  Our three models performed very well in comparison.  Your quarterly reports are in the mail and are available on our website at

Until Monday, investors seemed little interested in rising oil prices.  But oil’s crossing of the $60.00 threshold rattled more than a few.  Stocks declined for the past four days as oil prices increased.  When the price of crude briefly crossed $60.00 yesterday for the second time this week on the New York Mercantile Exchange, even more headed for the exits.  FedEx didn’t help matters as they reported earnings that fell short of expectations; blaming high fuel process for some of their problem.  The DOW was down 1.6% and the broader S&P 500 was down a little over one percent. 

The economy is neither too hot nor too cold, according to the government’s announced revision yesterday of the U.S. Gross Domestic Product.  Continued steady consumer spending and a narrowing trade deficit prompted the government to raise its estimate of the economy’s first quarter growth from 3.1% to 3.5%, which exceeds the ten-year average of 3.3%.  Many had feared that higher energy prices would dampen consumer spending more dramatically than it has so far.  Offsetting the higher costs have been wages and salaries.  They expanded considerably more in the final quarter of 2004 than the government first reported. 

Recent economic signs point to the fact that the Fed may be close to accomplishing its goal to slow the economy enough to keep inflation under control.  There are also signs in the bond markets to indicate that investors think rates are high enough.  Don Hays observes that the short-term money markets (the 90-day T-bills) have consistently anticipated the Fed’s rate hikes for the past year as they hovered just above the Fed Funds rate (set by the Federal Reserve policy board).  In the last few weeks, however, the T-Bill has resisted following the Fed Funds rate higher.  As pointed out last in last week’s Brief, commodity prices have shown signs of topping out.  Money supply growth is slow, industrial production lately weaker, and regional Fed manufacturing surveys are showing weaker activity.

Evidence of short term price pressures continue to arise here and there.  The government reported this morning that imported goods rose in April at twice the expected rate, led by higher costs of automobiles, oils, and steel.  The increase follows a gain of 2% in March, the largest in 14 years.  Most of the rise was in the goods used to make other goods.  But, as we mentioned last week, commodity prices (used to make other goods) are showing signs of peaking.  Import prices for consumer and capital goods actually fell during the month of April.

This week the markets have fared far better than last.  The S&P 500 is up almost 1% as of this morning and the NASDAQ is up over 2%.  Bonds have had a good week as well with the Lehman 1-3 Year and 7-10 Year Treasury Indexes rising .2% and .4% respectively.