 |
Integrity
Performance Service
|
|
|
|
|
|
|||||||||
|
|
||||||||
|
While not denying the severity of any of these real world concerns we believe the intense focus on them is misleading to investors. Serious geopolitical and economic challenges are not a new phenomenon nor are they ever resolved in a short-term time frame. In fact they have been overhanging the markets for all of 2005, and earlier. During this time the U.S. economy has been shifting smoothly from an interest rate driven emphasis on housing to an industrial base, augmented by firmer growth trends overseas. The slowdown in Gross Domestic Product growth to a 1.1% rate in the fourth quarter was caused by weak automobile performance, and masked a strong underlying expansion. Business capital spending has advanced for ten consecutive quarters now, with no sign of exhaustion. In fact, the free cash flow of corporate America continues to grow faster than capital expenditures, implying that corporate America is fully internally financed and has money left over for dividend increases, share buy backs, or acquisitions. This surplus of free cash flow is the catalyst for additional capital spending, in our opinion. It is also the driver of the significant increase in corporate earnings we expect in 2006. The course of inflation is the thorniest financial issue confronting the financial markets today. The actions of the Federal Reserve Board in raising the target rate to 4½% demonstrate its awareness of the danger of a new inflationary spiral. The risk is real and intensifying, as some producers have been successful in passing price increases through to their end markets. The new Fed Chairman recognizes this pressure, as indicated in his first testimony to the Congress. With capacity utilization inching up and tighter labor market conditions, the odds of further increases in interest rates are very high. We would not be surprised if the Federal Funds Rate this year reaches 5 to 5 ¼%. The good news is that the Fed, both by its words and actions, has signaled its goal of forestalling a broad and sustained increase in inflation. We believe it will be successful and that the financial markets will view the monetary policy positively and supportive of future non-inflationary growth. By every measure, whether it is employment, incomes, production, or productivity, the domestic economy is on track for a solid expansion this year. This broad domestic expansion is accompanied by rising economic activity in long dormant foreign countries. Pent up demand in foreign countries, long deferred by their under-achieving economies, is providing the impetus for a consumer led expansion overseas. Japan, with 11% of global GDP, is clearly enjoying a solid expansion, and providing a welcome lift to its neighbors in Southeast Asia. Germany likewise appears to have turned the corner. This broad global upturn is a healthy development, benefiting long economically under-achieving countries. Despite the periodic angst caused by an onslaught of real concerns we believe the outlook for the financial markets, especially the stock market, remains very attractive. Investment Policy Committee Alfred A. Lagan, CFA, Chairman Daniel A. Lagan, CFA, President February 17, 2006 This information is intended solely to report on investment strategies and opportunities identified by Congress Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell of any financial instrument. 2 Seaport Lane Boston, MA 02210 www.congressasset.com
|
|
|||||||||||||||
