16 Feb 2007 Tuning the Symphony
Bond and stock investors alike are struggling to find some broad theme on which they can base their investment propositions. A problem is getting too close to the data, which, according to Fed Chair Ben Bernanke is ‘noisy.’ In his testimony before Congress Wednesday and Thursday Mr. Bernanke issued a balanced assessment of the economy with moderate growth and easing inflation. He said that he sees stabilization in the housing sector, and pointed to increasing strength in manufacturing and consumer spending.
He received immediate confirmation on his industrial outlook as the Federal Reserve Bank ofNew Yorkreported that their economic index rose to 24.4 in February from 9.1 the month before. The increase was the largest since July 2005. But, today, he received some of the ‘noise’ he predicted as the government reported that home construction fell to its lowest point in nearly 10 years during January in an unexpectedly large 14% drop that erased gains posted in two prior months. Construction of single-family homes dropped 11.2% last month to a 1.108 million rate, also the weakest since August 1997, according to Bloomberg.
It is feared that if housing continues to decline, it could spill over into the larger economy and cause damage. If the consumer begins to worry that his savings (largely, his home) is not growing or is indeed shrinking, he might curtail spending, which is the bulk of our economy. In fact, retail sales did slow in January as cheaper gasoline limited service station receipts and car sales dropped. However, sales excluding autos and gasoline rose 0.5% as toughly 40% of gift card recipients redeemed their cards. The .5% rise compares to a 1% rise in December.
In his Congressional testimony Bernanke said “the U.S.economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes.” His comments sounded guardedly hopeful as he said; “recent declines in overall inflation have primarily reflected lower prices for crude oil, which have fed through to the prices of gasoline, heating oil, and other energy products used by consumers… But as we have been reminded only too well in recent years, the prices of oil and other commodities are notoriously difficult to predict, and they remain a key source of uncertainty to the inflation outlook… Upward pressure on inflation could materialize if final demand were to exceed the underlying productive capacity of the economy for a sustained period… projections … are for inflation to continue to ebb over this year and next… But as I noted earlier, the FOMC has continued to view the risk that inflation will not moderate as expected as the predominant policy concern.
The government reported today that wholesale prices fell last month, after two strong months of gains. Core prices, however, which exclude volatile food and energy costs, rose slightly, suggesting the Fed will remain on the offensive to fight inflation. Rate cuts continue to be further down the road than investors earlier anticipated.
As we tune out the noise of short term economic data, Fed policy statements, even regional tensions, one might hear a faint, yet beautiful symphony of global economic potential. The world economy remains abuzz with growth. Only a very few countries and regions are left behind. Even there the hope is that information age will facilitate awareness which demands change. Domestic and global opportunities look bright indeed.
Stock markets have had a very good run for the past six months, but are still considerably cheaper than bonds on a relative return basis. Given their run, they may be due for a brief and limited pull-back. After that, however, when the Fed eases off the brakes, we think growth stocks will spring from the shadows of their rich bloated value cousins and shine like never before in this new global economy.
As you know, our migration to the growth side of the style spectrum is already several months old. Our latest addition is a relatively new ETF which invests according to Value Line’s proven stock ranking system of three critical growth-stock measures; timeliness, safety, and technical strength. We are also concentrated on the growth side in both our domestic and our foreign equity indices. Most have begun to persistently outperform their value counterparts.
Have a nice long weekend. The markets and we will be closed on Monday in observance of the Presidents’ Day holiday.