July 10, 2005
A few days ago, the government revised its measure of the first quarter economic growth to 3.8%. The initial estimate that came out several months ago was that the first quarter grew at a 3.1% pace. At that time, reporters jumped on the idea that the economy was beginning to slow. The mix of a slowing economy and a flattening interest rate yield curve made some speculate on the possibility of a recession taking place. The revision to 3.8% has put a damper on recession talk, but nevertheless, some professionals are still talking about it. The Federal Reserve, under Alan Greenspan, did not seem to miss a beat. If the Fed was worried about the economy slowing, it would probably stop increasing rates or at least mention in its regular statement that it planned on halting interest rate hikes in the near future. That has not happened. In fact, the Fed has stuck to its old statement suggesting that it will continue with the measured interest rate increases over the next few months. The Federal Reserve is worried about too much money chasing too few goods – it is worried about inflation.
As we mentioned in previous letters, when the Fed increases interest rates, our money markets and short-term bond funds will benefit almost immediately. However, the increase in the short-term rates usually takes a little longer to impact intermediate and long-term bond investments. For those on fixed income, the continued interest rate hikes will provide some relief.
If the stock market does well over the next few months, you will probably be able to point to a robust second quarter earnings report and a positive outlook for future earnings as the catalyst for the positive stock market. Should the earnings disappoint, the stock market will sour. Nothing new here – earnings help drive the stock market.
We continue to emphasize large-cap domestic stocks, foreign stocks and short-term bonds in each of your portfolios. Let us know if you have any questions regarding the individual funds within your portfolio. They are there for a reason and we would be glad to explain why.
Enclosed you will find your Portfolio Performance Summaries, Portfolio Holdings Statement as of June 30, and a quarterly Account Management Fee Statement. Please call us should you desire the most recent copy of our Form ADV, Part II. In addition, do not forget to notify us should your investment objectives or personal financial situation change.
Sincerely yours,
President
Portfolio Manager