Long-Term and Short-Term Issues Moving the Markets

President Bush was in town yesterday conducting a town-hall-styled meeting to further explain his plans for a Social Security overhaul.  His aim is to provide workers with better growth than the current system’s performance, thereby generating more income at retirement.  A further advantage is the potential to pass any remainder along to heirs.  His plan obviously faces huge hurdles as many in Congress don’t believe there is a significant problem and others feel it can be fixed with less dramatic changes.  It is the President’s hope that he can remove much of the political fire from the discussion to have an honest and open discussion of options to improve this mammoth government program.

The Social Security system has evolved, since enactment in 1935, from a social safety net into much more than it was ever intended to be, not the least of which is a retirement program for millions.  If we consider Social Security to be a retirement program, should we be happy with a long-long-term return of less than 2%?  While that question should evoke little or no partisan argument, the disagreement comes over the shortfall that will be created when funds are diverted from paying current retirement benefits to the personal plans.  Social Security is a pay-as-you-go system, so there are no reserves built up to finance the transition from ‘pay-go’ to a combination of long-term personal investment accounts.

In our view, anything that promotes savings and investment on such a grand scale would not only benefit individual retirees but could have a huge impact on capital formation in this country.  Improved capital formation means improved business growth, translating into more jobs, and ultimately growth for the overall economy.  Given the rising global competitive threats fromChina,India, the European Union,Latin America, and others, our economy can use every advantage we can give it.  This issue could devolve into one big political circus or it could well represent one of the most important strategic decisions theUnited Statesmakes in the new millennium.

A more immediate benefit to business has come in the form or recent legislation.  A bill recently introduced by President Bush that moves most class-action lawsuits from state to federal courts is nearing passage.  The bill goes to the House next week for likely approval.  Businesspeople have lobbied strongly for this legislation as they feel they get fairer treatment by federal judges and their costs of defense declines through dramatic reductions in the number of trial locations.

Interest rates will likely continue to rise on the short end as the Fed has a ways to go before ending their accommodative stance.  A monthly survey of 56 private economists by the Wall Street Journal shows that they largely believe the Fed will continue lifting rates until meeting a target of 3.75%, up from 2.5% today.  Long term rates have largely declined over the past two months, but have spiked in the last three days, but remain below the 10-day moving average.  The longer trend is still decidedly down which is contrary to what one might expect given a strengthening economy.

Equity markets will likely finish slightly down this week as corporate earnings guidance has been more cautious than investors had expected.  Technology bellwethers Cisco and Dell downplayed their expectations for the first quarter leading others in the industry lower, but not as much as they have during previous quarters.

Oil prices, major market drivers, have declined steadily since the end of January, but are on a two-day uptick.  The International Energy Agency has reported that global fuel consumption could rise even faster than expected this year.  A positive development is that volatility in oil prices has declined as terror-related supply disruptions wane.  But uncertainty regarding the demand for oil continues to cause price disruptions andChinais at the forefront.  That country’s surging economy has made it the world’s second largest energy consumer behind theU.S.  Fuel requirements rose 15.6% last year according to Bloomberg and are expected to rise another 6.3% this year. That’s good news for the global economy, but maybe not for oil prices.

On balance, things look impressively positive for both our economy and much of the rest of the world.  Our strategy of sector-specific investing here at home and selective country investments abroad remains unchanged.