News & Insights
A Memorable Quarter
In our Summer 2007 commentary we indicated our belief that the tighter monetary conditions caused by the sub-prime mortgage panic would likely be met with supportive action from the Fed, thus averting an equity meltdown and creating the case to stay invested. As we write this quarterly commentary, the Dow has crossed into record territory after a 10% correction in July and August. We are seldom so specifically right in such a short interval. Financial prognostication being such a humbling endeavor, we can't resist the temptation to note this modest predictive success.
What lies ahead seems less clear to us now that the market has, for now at least, shrugged off this latest test to the financial system. A continuation of current conditions portends a weaker dollar, falling house prices and below trend GDP growth for the next several quarters. Slow growing consumer spending will take a bite out of earnings expectations for the next several quarters. Global economic growth will continue to outstrip U.S. growth and justify a bias toward companies that earn a substantial amount of their income abroad. The level of risk in the market is higher than at any time since 2003, and so supports a conservative investment policy built around financially sound U.S.
Larger globally oriented U.S. companies with sound finances are beginning to lead the market. For example, General Electric has moved to a multi-year high on what we believe is an investors' appreciation of its financial strength and its global business model. We believe that companies like these will continue to lead.
Increasingly global demands will come from the developing economies of the world like China, India and Brazil. These growing societies need expanded infrastructure like electric plants, bridges, roads and housing. This will mean more business for the companies that supply the capital goods and are responsible for the design and construction of these facilities. We will seek investments which benefit from this trend.
Commodity prices have rebounded sharply in the wake of the Fed's easing. While there is some speculation involved in the volatile industrial metals sector, strong secular trends are driving increases in precious metals as well as agricultural goods. In our view, exposure to the commodities complex makes sense.
Trade imbalances with the emerging economies such as China have introduced a growing risk to the markets. These countries' fast growing dollar reserves are being recycled into assets of all kinds, potentially destabilizing financial markets if this liquidity is withdrawn. Currently all the players in this global game have an interest in the process continuing, which is supportive of the markets. We will need to stay aware of conditions that might cause a reversal of these trends and be prepared to invest accordingly.
Altavista Investment Team - Fall 2007