Marketing Commentary- Q2 2005

What’s Been Happening?

Alan Greenspan describes the flattening yield curve as a conundrum, and he is about as close to the issue as can be. The surprise for Greenspan and Co. is that as they have raised short-term interest rates nine times in recent years, longer-term rates have fallen. Ten-year treasuries now yield about 4%, whereas overnight loan rates to banks are 3.25%. That very small difference between short and long-term rates historically indicates a slowing economy, yet profits are improving, home prices keep rising and you hardly hear about unemployment rates any more.

Winners this past quarter were real estate securities, bonds and US based small cap value stocks. The US dollar gained (unexpectedly!) against other world currencies, further benefiting US domiciled companies.

Trends to be Aware of

Oil has now topped a psychologically important price of $60 per barrel. The chairman of General Electric wrote in the Financial Times in late June that the US needs an energy policy that emphasizes conservation and efficiency. GM and Ford can’t seem to raise rebates high enough to move SUV’s, while hybrid vehicles get all the buzz. This is the sound of market forces at work.

What To Expect From Here

Stocks are a better value than bonds today. After five years of negative returns for the S&P 500, earnings have recovered. At around 6.5%, the earnings yield of stocks (earnings per share divided by price per share) is now over 50% higher than the guaranteed 4% return on ten year government bonds. Rarely in recent times has this gap been as great.

Some Numbers for Comparison:

The following table compares the main indices against which fund performance is measured. All figures are for the periods ending 6/30/05.

Source:  Thompson Financial