October 17, 2005
The biggest financial headline during the third quarter of 2005 was the impact of Hurricanes Katrina and Rita on the U.S. economy. While the stock market held up very well during both of these storms, the price of oil, gasoline and natural gas increased. Consumers are beginning to notice a significantly larger percentage of their income going towards gasoline. This impact on the consumer’s wallet may crimp future corporate earnings. If the consumers are not spending, companies are not selling their products.
The Federal Reserve continued to share the economic spotlight during the past three months. Their “measured” interest rate increases have not lapsed, even though many were calling for an end to these quarter point increases due to the catastrophic hurricanes. There are two main reasons that the Federal Reserve has continued their interest rate increases. First and foremost, inflation continues to show-up in most economic numbers. Second, since Alan Greenspan will be stepping down in January 2006, he will not want to leave his successor subjected to the harsh criticism and political wrangling that is inherent in the chairman’s job. Mr. Greenspan wants a smooth transition. As I have mentioned in previous quarter-end letters, increasing interest rates will affect how much consumers and businesses can borrow. Many will not be able to borrow without a strong balance sheet.
These factors, taken by themselves, make the economic and stock market outlook seem less than promising. However, let me take a moment to point out some of the positive notes I am reading and hearing about. Many economic forecasters, including Liz Ann Sonders, Chief Investment Strategist for Charles Schwab & Co., Inc., believe that the price of oil may be a bit high right now (currently, oil is at $63 per barrel) and might trend lower over the short-term. Some analysts also believe the future Federal Reserve interest rate increases are already priced into the stock and bond markets. If the price of oil was to decrease and if the effect of increasing interest rates was already included in today’s stock market levels, we could have a foundation to build upon for the rest of the year. All attention would then turn to corporate earnings. As always, we will have to wait and see.
On a separate note, my long-time colleague, Manjula, has left American Investment Advisors, Inc. Manjula’s career goal is to eventually run a mutual fund of his own someday. Since AIAI has no intention of establishing a mutual fund at the present time, Manjula decided to take that next step that will move him closer to his dream. It has been a privilege to work with Manjula and I wish him the very best in the future.
While it will be difficult to replace Manjula, I found someone who is very eager to step into a new role. I am pleased to announce that Kathryn (“Katie”) Eral has accepted a position with AIAI and has been working the past few weeks at AIAI. Katie comes to us from Flad Affiliated Corporation where she worked for the past 10 years and in the early 1980’s worked with Allan Topp at Lumbermens Service of Madison, Inc. She has been a Madison resident for many years and is very enthusiastic about starting this new position. I am looking forward to introducing her to you.
Sincerely,
William A. Bullock