April 15, 2005
Inflation: “an increase in the general price level…an excessive or persistent increase, causing a decline in purchasing power.” Webster’s New World College Dictionary Fourth Edition. One of the persistent price increases that I have noticed so far this year, and I am sure you have too, is with the price of a gallon of gasoline. Depending upon the filling station, a gallon of unleaded gasoline is selling for about $2.30, while the premium gas is selling for $2.50 per gallon. A barrel of oil is now selling for close to $55. As China moves from third world status to an economic power, their demand for oil has increased dramatically. The price of steel, cement and other building products are also in high demand and, once again, we have China to thank for it. With a limited supply of these products, and the constant building frenzy, the raw material prices have no where to move, but higher.
While we have seen some increases in general prices, for the most part inflation has remained in check. How is this so? This time you can thank corporate America for constantly looking at ways to make their companies more efficient. Small companies are quickly updating their firms with the latest computer technology while larger firms are integrating more robotics into their assembly lines. The more efficient these companies become, the less labor intensive their work force. This allows firms to absorb the increase in raw material costs without passing them on to you and me. If they do pass these increases on to the general public, then efficient competition jumps in and produces the same product for less.
Of course, do not expect this cost absorption to last forever. The Federal Reserve expects inflation to pick up some steam later this year; thus, they have continued their measured interest rate increases this past quarter. With rates as low as they are, borrowing money is still very inexpensive. With the Federal Reserve increasing rates, fewer people will have the means to borrow and fewer individuals and businesses will be able to build that brand new home or office complex. That is the theory. We’ll see if it pans out.
Based on this theory, we have continued our approach of emphasizing short-term fixed income investments. In order to protect against a rising inflationary environment, most portfolios now have a small percentage in treasury inflation protected securities (TIPS). While these might be a bit more volatile than the short-term bonds in the near-term, over the long haul, we expect these funds to be an excellent addition. As far as stocks are concerned, we continue to emphasize large-cap domestic and foreign stocks. We believe there is better value to be found in these areas compared to the rest of the stock market.
Enclosed, you will find your Portfolio Performance Summaries, Portfolio Holdings Statement as of March 31, a quarterly Account Management Fee Statement, and a Notice Regarding Treatment of Confidential Information. 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,
President
Portfolio Manager