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2006-06-02 :: Friday's Thoughts

Yesterday was a rally day in the markets.  Just about everything was green on my screen, particularly in the last hour as the market ended on the high for the day.  US optimism helped to push up Asia and Europe’s markets overnight as well.

Last week, I wrote that for a turnaround to be sustainable, we’d want to see that this very situation would happen.  Today, the indicators (at least at this time, a couple of hours before the market opens) look like we’ll see continued rising prices at the open.

Investors are looking for the short-term trends that are going to make them some money.  There is a lot of talk of Stagflation now as some economist fear that we are going to see rising prices continue due to energy-related inflaiton finally leaking into other prices plus slow-to-falling growth as the Fed continues to raise interest rates.   Time will tell, but this scenario seems a bit draconian.   The Fed is going to go for a soft landing as the new Fed Chairman wants to balance the impact of rate increases on economic growth with their impact on price increases.

Whenever the short-term gyrations of the market attempt to get us sidetracked from the long-term fundamentals, I like to review my basic investment thesis to make sure its still intact.  Truly, the long-term trends are still in place, even if the short-term is rocky: 

  • energy – demand is increasing and supply is limited; this won’t change anytime soon
  • coal – increasing in importance as an alternative to oil in power generation, particularly now that it is a major component of Hilary Clinton’s national energy policy announced this week
  • metals – the supply in the ground may not be as limited as with energy, but geopolitical issues and the length of time it takes to bring a new mine online will continue to put upward pressure on commodity prices and shares of the miners themselves
  • healthcare – the graying of the industrialized world is going to accelerate as the baby boom generation hits retirement age and will do whatever it takes to remain young and active
  • inflation – higher energy and metals prices will ultimately have an impact on consumer prices as companies will be forced to raise prices in other industries due to squeezing margins; however the inflation will be subdued compared to the 70’s as China will continue to export wage deflation
  • wealth transfer – we are facing the greatest wealth transfer in history as the baby boomers are inheriting and bequesting wealth greather than any previous time; investment management companies will prosper in coming generations
  • infrastructure – as the premier countries of the third world (China, India, Brazil and Russia) close the gap with the industrialized world, construction spending will continue at a well-above average pace, making construciton, infrastructure, and concrete companies core holdings
  • dollar bear – the dollar has no where to go but down as the US is the worlds largest debtor nation; the fiscal problems in Washington coupled with the negtive consumer savings rate and increasing personal debt levels from home equity loans and credit cards can only devalue the dollar against stronger currencies; qualtiy foreign equities will continue to be core components to our portfolios

More later!