22 Mar 2002 ‘Steady as she goes’
Investors’ primary focus continues to be on the economic indicators as we near the next round of corporate earnings pre-releases. The week’s economic releases were decidedly more mixed than typical of the last few weeks, but the trend is still very good. Tuesday’s news from the Fed caused some difficulty for the stock and the bond markets. They left rates unchanged and dropped their stance that weakness poses the greatest threat to the economy, which was good news for economy watchers, but almost before the words were out, traders started selling stocks and bonds on fear that interest rates would soon be rising. The Fed said “the information that has become available since the last meeting indicates that the economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace.”
The optimistic tone of the Fed’s comments sent a signal to some that rate increases would not be far behind, meaning that borrowing costs for some businesses and consumers are likely to rise, slowing the recovery. As the week progressed, more investors seemed to accept the idea that recovery was underway, and that a logical reaction by the Fed would be to try to responsibly contain inflation as the economy grows, but not at the risk of stalling its recovery.
The biggest surprise of the week’s economic data was in the housing sector, which has been a major source of strength during this economic downturn. US housing starts rose to an annual rate of 1.769 million in February, well above the consensus forecast for 1.635 million. All of the February gain was in single-family starts (+7.4%) rather than the volatile multi-family numbers (-14.3%), which can sometimes distort the total. Both the December and January housing starts data were also revised higher. Q1-to-date, housing starts are running at an impressive 49% quarter over quarter-annualized rate ABOVE the fourth quarter average. Strong fundamentals, more than mild weather conditions, appear to be the underlying factor. Another explanation could be pent-up demand after projects were put on hold post 9/11. Also of note, building permits, a forward-looking indicator, rose 1.8%, implying strong growth in housing again next month. The current boom in housing sounds a bit like that of tech stocks in 1999/2000 doesn’t it?
Another very positive release came from the Labor Board, which reported that initial claims fell to 371,000, while continuing claims increased a very modest 11,000. The insured rate held steady at 2.7%. This data covers the survey week for payrolls. The four-week average for initial claims is broadly unchanged from the previous month’s survey period. Broadly speaking, that implies another moderate gain should be expected for March non-farm payrolls.
Leading Indicators were flat in February, though were revised up in January (+0.8% from +0.6%). The 3-month annualized growth rate in the LEI currently stands at 10%. One needs to go back to 1983 to find a faster three-month pace. The current profile seems to corroborate what the ISM orders index is saying also – expect a dramatic improvement in the industrial production numbers by the end of spring.
The Philadelphia Fed Survey waved a caution flag yesterday. The headline index came in weaker than expected (11.4 vs. a 16.0 consensus), but the level of the index is still well into expansion zone territory. An index of 11.4 is historically consistent with an ISM index (a national indicator of industrial strength) between 52-53 (ISM was 54.7 in Feb). The Philly has called the direction of ISM five straight months, and 16 of the last 18 months.
All the numbers add up to a gradual, but sustainable recovery for the economy. The consumer price index indicates the consumer is still in the driver’s seat; meaning retailers and manufactures have no ability to raise prices because of intense competition for fewer dollars being spent. Corporate profitability will have to come through controlling costs and improving productivity. Federal Reserve Chairman Alan Greenspan said last week that any recovery in business investment is likely to be “only Gradual” this year. While declaring that the economy was expanding “at a significant pace,” they said Tuesday the “degree of strengthening” remains in question.
March has been a good month for all of the model portfolios as investors gradually move back into the growth sectors of the economy. We hope to reward your patience with gradual, but steady improvement from here. For now it’s ‘steady as she goes.’
During the past week we have made the following changes to the model portfolios.
Quality
3/15/02 Bought Omnicom
Omnicom Group Inc. is a marketing and corporate communications company, with holdings of over 1,400 companies operating in more than 100 countries. The Company’s subsidiaries provide an extensive range of marketing and corporate communications services, including advertising, media planning and buying, promotional marketing, sports and event marketing, direct marketing, database management, field marketing, digital and interactive marketing, public relations, marketing research, custom publishing, brand consultancy, directory and business-to-business advertising, healthcare communications, recruitment communications and other specialty communications. We look for the company to be an early beneficiary of the economic recovery and to grow long-term over 15% annually.
Growth
3/18/02 Bought Ebay
eBay Inc. is a United States-based dynamic pricing online trading platform located at www.ebay.com. eBay developed a Web-based community in which buyers and sellers are brought together in an efficient format to buy and sell items, such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and miscellaneous items. The eBay dynamic pricing (auction-style) format permits sellers to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items. eBay’s service is fully automated, topically arranged and easy to use. Through its wholly owned and partially owned subsidiaries and affiliates, the Company operates trading platforms in the United States, Germany, the United Kingdom, Australia, Japan, Canada, France, Austria, Italy and South Korea. For the second quarter of 2001, eBay expects to expand its online trading to include Spain, the Netherlands, Belgium, Portugal, Sweden and Brazil. We believe that eBay will be a beneficiary of the gradually recovering economy due to the wide acceptance of their auction-based platform. They have done quite well during the sluggish period, and should see business improve as consumers and business increase their spending. We look for near term growth of 60-70% and growth of 40-50% for the next five years.
3/15/02 Bought Omnicom
See Quality
Aggressive Growth
3/18/02 Bought eBay
See Growth
3/19/02 Bought Cerner
Cerner Corporation designs, develops, markets, installs, hosts and supports software information technology and content solutions for healthcare organizations and consumers. Cerner’s product categories include: Enterprise Systems, which automate processes across and throughout the health system enterprise; Financial and Operational Management Systems, which automate business operations; Decision Support Systems and Knowledge Solutions, which enhance clinical and business processes with information and actions; Point of Care Clinical Systems, which automate the care processes within specific domains of health systems; Systems for Clinical Centers, which automate the clinical processes within specific departments; Personal Health Systems for individuals to manage their own health and connect to the health system; and Interface Technologies for connecting other technologies and systems to HNA Millennium. We look for earnings growth of 30-35% annually.
3/21/02 Bought nVidia
NVIDIA Corporation designs, develops and markets graphics processors and related software for personal computers and digital entertainment platforms. NVIDIA provides a “top-to-bottom” family of performance 3D graphics processors and graphics processing units that, in the Company’s opinion, has set the standard for performance, quality and features for a broad range of desktop PCs, from professional workstations to low-cost PCs, and mobile PCs, from performance laptops to thin-and-light notebooks. We expect earnings to grow 28-30% annually.
