19 Mar 2004 Recovery Continues, But No Slam Dunks

Offices and worksites are abuzz with NCAA college basketball talk as the tournament got off to a great start this week.  The event is characterized as “March Madness” or “March Mania” because of all the hoopla (no pun intended) and energy of 64 college and university fanatics converging on 14 American cities over the next three weeks.  Good luck if you have a pony in this race.

We investors have our own January, February, March . . . ‘madness’ going on as we try to determine whether this economic recovery will win or go home.  Play remains pretty good, but not good enough for big cheers and certainly not good enough to change the channel.  The game is not yet in hand.

Jobless Claims fell to a three-year low last week as the government announced yesterday that initial unemployment claims fell by 6,000 to a total of 336,000.  Economists expected a rise of 4,000 to 345,000.  That brought the four-week moving average to 344,000, also the lowest level in over three years.  But as the Fed noted on Tuesday while “job losses have slowed, new hiring has lagged.”

Both the New York and the Philadelphia Fed’s surprised economists with lower than expected economic activity reports this week.  The Empire State index came in at 25.33 while analysts were expecting a 38 level.  The March index reading follows a much higher 42.05 in February.  The Philly Fed General Activity Index fell 7.2 points to 24.2 in March, a larger decline than the 30.0 reading expected on the Street.  But despite the large declines the respective Fed’s growth outlooks remain positive.

The Philly Fed reported that expectations continue high but they are weakening somewhat.  Indications for job growth were mostly positive, but still mixed.  In a special question, 75% of respondents said they had job openings in the past three months and 75% expected openings in the next six months.  But only 33% planned to fill those openings with temporary workers.  Nearly 90% cited a lack of qualified applicants as an obstacle to filling those openings.

Inflation is not yet a problem for the economy, but there are some warning signs.  The prices paid index rose nearly 10 points to 53.4, while prices received moved up just 3.7 points to 22.6.  Both readings were the highest since January 1995, indicating a further squeezing of profit margins as businesses remain unable to pass along higher prices to consumers.

The January Producer Price Index rose .6%, above expectations of .4%, largely due to the sharp 4.7% rise in energy prices.  On a year over year basis, the PPI eased back to 3.3% from 4.0%, and the core slowed to 0.9% from 1.0%.  Capital equipment prices, however, have risen at their fastest pace in three years. Core raw material prices have risen the most since March 1988, largely on the strength of metals prices.  The report shows clear signs of firming price pressures.

The Leading Indicators report continued to show strong economic growth and matched expectations in February. Led by a rebound in the money supply, six of the ten indicators advanced.  But, the big decline in consumer expectations neutralized most of the positives.  Over the past 12 months the index has risen 4.1%, the most in nearly 20 years.

Top-performing sectors for the week included Energy, Internet-related companies like Ebay, Amazon, and Yahoo, Natural Resources, and Real Estate.  For the past 30 days, Real Estate, Energy and Natural Resources led the way.  Of these groups, we believe that energy still offers an attractive long-term investment opportunity.  Prices will likely continue to rise further and remain high for years to come as China’s demand for it joins that of the Americas ,Japan and Europe.

Because economic conditions are so favorable, energy costs notwithstanding, we look for another market rally in the months leading up to the election.  Please understand that this is not a prediction; markets are random in the short-term.  Long-term there are incredible opportunities ahead for the global economy.  By investing in the leading companies, industries, and countries, we expect to achieve our goals of superior performance.