During his recent State of the Union address, President Bush outlined an ambitious goal to decrease gasoline consumption in the U.S. by 20% by 2017. To maintain attention on this critical issue, the President visited a North Carolina plant yesterday focused on researching alternative fuels. His recent tours of tech and energy facilities highlight his belief that America can innovate its way out of the increasing dependence on foreign oil.
“The future of alternative fuels is limitless,” the President remarked on Wednesday. “Soon, especially if you live in a big city, you’ll be able to drive 40 miles on a single battery,” as reported by The Guardian. “And don’t worry—your car won’t just be a golf cart; it could even be a pickup truck.”
The concept of utilizing corn and other local resources for fuel production represents an optimistic vision. The potential benefits of reducing foreign oil imports are monumental, resulting in substantial economic advantages.
Since Ben Bernanke took the helm at the Federal Reserve a year ago, he has been advocating the notion that a slower economy will help stabilize general price trends. Although economic growth has indeed slowed, it remains uncertain whether this moderation will be enough to alleviate inflation concerns.
As of last month, core CPI is growing at an annual rate of 2.7%, slightly up from 2.6% in 2006 and nearing the recent peak of 2.9% from last September. This rising trend in core inflation is concerning, given that the Fed’s target is 1-2%, suggesting that the central bank is struggling to maintain control.
Exchange-traded funds (ETFs) operate like stocks, but should they be approached in the same way? Michael Krause, who heads AltaVista Independent Research, argues that they should. In an interview with the editor for the February issue of Wealth Manager magazine, Krause outlined his analytical method and the importance of fundamental analysis in evaluating ETFs. He pointed out, “When considering an investment in companies like General Electric or IBM, a simple price chart isn’t sufficient; you also need to examine earnings growth and other metrics,” he states. “I see no reason to treat an ETF, which is essentially a collection of stocks, any differently.”
To read more of his insights, click here….
Bull markets are widespread, and the M2 money supply exemplifies that trend.
According to Federal Reserve data, seasonally adjusted M2 grew by 5.6% for the year ending February 5, marking the fastest growth rate in two years.
To illustrate how substantial this rise is, last year’s fourth-quarter economy expanded at a rate of 5.0%, measured in seasonally adjusted nominal terms (Bureau of Economic Analysis). This indicates that the money supply is growing faster than the economy itself.
Although it has only been a few weeks since renewed optimism about the economy emerged, it may already be time to reconsider previous assessments. We seem to be entering an era of revisions in economic forecasting.
Recent economic data raises new questions about the stability of growth in our economy. For instance, this morning’s report showed that new housing starts in January plummeted 14% compared to December, hitting a nine-year low. Additionally, the Federal Reserve revealed that industrial production decreased by 0.5% last month compared to December, with the manufacturing sector experiencing a 0.7% decline, largely driven by a 6% drop in motor vehicles and parts.
Further deepening concerns, yesterday’s jobless claims report indicated a significant rise to the highest levels seen since last November during the week ending February 10.
Is it time to reconsider the recession narrative? “There was a prevailing sentiment that housing had stabilized,” mentioned Amitabh Arora, head of U.S. interest-rate strategy at Lehman Brothers Inc., in a statement to Bloomberg News today. “This development will prompt some reevaluation of that perspective.”
Between 1997 and 1998, several emerging markets and commodities faced significant downturns. However, robust growth in U.S. and foreign developed market stocks helped to offset those losses, along with strong bond performance.
During the substantial bear market from 2000 to 2002, REITs stood out as a rare bright spot, posting solid gains while the broader stock market struggled. Interestingly, commodities also saw good performance during two out of those three years.
This history underscores the value of diversification. The key question is whether a diverse mix of asset classes will continue to perform well in the future. It’s worth noting that since 2003, most asset classes have experienced consecutive annual gains, although some have seen variations.
This widespread positive trend prompts us to reflect on continued investment strategies in a shifting financial landscape.
Investing in oil has gained mainstream traction, especially following the introduction of various exchange-traded products that make commodities accessible to a broader audience (iPath Goldman Sachs Crude Oil and U.S. Oil Fund). Additionally, numerous ETFs and mutual funds now track extensive commodity indices with significant investments in oil. In recent years, institutional investors have also strategically allocated funds towards commodities and oil, indicating a substantial influx of capital into these markets.
“We believe that the ongoing U.S. economic slowdown will exert downward pressure on inflation in the next four to six quarters. As inflation tends to lag behind economic growth, we expect it to reach a point where it will no longer pose a significant concern for the Federal Reserve. Subsequently, they may consider easing monetary policy in response to a sluggish economy.”
This perspective, offered by John Brynjolfsson, a managing director and portfolio manager at the renowned bond investment firm PIMCO, reflects broader market sentiment. His views are supported by recent activity in the bond market, which shows a growing interest in the 10-year Treasury Note as its yield dipped below 4.80% from around 4.90% in late January. While this cautious optimism prevails, it’s essential to remain vigilant rather than blindly allocating substantial long-term investments into bonds. Brynjolfsson acknowledges a more cautious long-term outlook, stating, “Beyond the five-year horizon, inflation remains a significant concern, largely driven by the rising national debt and unfunded obligations.”
In 2006, Barclays launched its iPath brand of exchange-traded notes, which may appear similar to exchange-traded funds (ETFs) but have distinct differences in structure and function, as noted by your editor in the February issue of Wealth Manager. Currently, there are four ETNs:
iPath GSCI Total Return Index (GSP)
iPath Dow Jones-AIG Commodity Index Total Return (DJP)
iPath Goldman Sachs Crude Oil Total Return Index (OIL)
iPath MSCI India Index (INP)
More ETNs are expected to be introduced, with indications that they may eventually track indices and asset classes that aren’t feasible for ETFs. Currently, essential questions linger: Are ETNs superior to ETFs? Do they carry more risk? Are they a viable alternative? To explore these concerns, here’s my analysis from the latest issue of WM….
Never underestimate the significance of momentum.
This observation is particularly relevant as we look at the year-to-date returns for major asset classes through last night’s close. Except for commodities, which have been facing challenges for some time, the trend shows a strong performance across various sectors.
As illustrated in the table below, profitability has been notably prevalent this year, making it difficult to incur losses.
The standout return thus far in 2007 is an impressive 10.9% from REITs, and this comes just halfway through February. It’s remarkable considering 1999 was the last year when REITs suffered losses. Given their strong performance lately, a slight correction might be expected—though this doesn’t necessarily predict a bear market.
Overall, returns thus far are relatively moderate, but it’s still early in the year. The positive trend continues with most asset classes, maintaining a sustained growth streak since 2003. However, one investment strategist expressed awe regarding the current equity landscape. “The global stock market surge may be turning into a significant advancement,” said Ed Yardeni, chief investment strategist at Yardeni Research. “It’s an incredible phenomenon, witnessing so many stock markets rising simultaneously, reminiscent of last year’s pattern.”
