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3rd Quarter 2006 Review
From the Desk of Ron Rowland
As a client of Capital Cities Asset Management, you receive these quarterly reports from us four times a year. Your report shows the performance of your account(s) as of the end of the quarter for various time periods. We are, of course, pleased to provide you with this information. It has to be considered in the proper framework, however.
The first thing to remember is that the numbers you see are a snapshot in time. There is nothing magical about the four days each year (out of about 250 market days) on which your accounts are measured to produce these reports. Indeed, the numbers will have changed - perhaps significantly - by the time you receive your quarterly report. Drawing conclusions, either positive or negative, from these brief snapshots is not a good idea. The numbers should be considered in the context of your own unique goals and circumstances.
Conceivably, you could look at your accounts every day and get a more complete picture. This creates a different set of problems, though. It is easy to become alarmed when the markets are difficult, and equally easy to become complacent when markets are favorable. In any case, one of the reasons you have engaged CCAM to manage your money is probably because you have better things to do with your time.
The bottom line is that we have a relationship of mutual trust. You are trusting us to take proper care of your investments. We are, in turn, trusting you to accept our recommendations, acknowledge our limitations, and give us the time we need to help you reach your goals.
Mutual trust requires open communication. We give you as much information as we can without overwhelming you. In return, we ask only that you let us know when you have questions or when your objectives change. Your account representative is always available to address any concerns you have, however minor they may seem to you. Please do not hesitate to call. We are here to help.
The Quarter in Review
The third quarter of 2006 was marked by three significant and interconnected market events.
- The Federal Reserve ended its campaign of rising interest rates, at least temporarily.
- The bull market in commodities such as oil and gold stumbled badly and may be finished.
- The U.S. economy appeared to be entering a period of slower growth as well as mild inflation - the much-anticipated "soft landing" scenario.
Together, these events add up to a bullish picture for stocks, though as always, there will be winning and losing sectors.
With money market rates now over 5%, it is hard to believe that it was only 2004 when short-term rates were 1% or less. The liquidity created by that low-rate environment led to an incredible boom in the housing sector and kept the economy growing at a rapid pace. At the same time, strong growth in emerging markets like China put upward pressure on commodity prices, especially energy.
Commodity traders have long noted that "the solution to high prices is high prices." Sure enough, with crude oil climbing to the $75 area, exploration activity exploded while energy consumers began looking for ways to conserve. The process takes time, but the aggregate effect seemed to finally kick in this quarter. Crude oil, gasoline, and natural gas inventories all climbed, causing prices to tumble. The windfall that oil-producing nations had been re-investing in gold also came to a halt, bringing down precious metals prices as well.
With short-term interest rates steady and the inflationary pressure of energy easing, the U.S. economy appeared to be on the brink of either a mild recession or a "soft landing" with growth and inflation in near-perfect balance. The picture for corporate profits remains strong, and in September capital began rotating out of defensive sectors such as utilities, health care, and consumer staples and flowing toward growth-oriented industries like technology, financial services, and retailing.
How long this trend will continue is difficult to say. The picture is not completely rosy. For one thing, the Fed has steadfastly refused to rule out further rate hikes. Long-term interest rates have fallen well below short-term rates, which is normally a signal of recession.
Nevertheless, for now we believe the intermediate-term forecast for the stock market is bullish, and we have moved most of our programs into a fully-invested position. There is a seasonal tendency for the fourth quarter to provide major rallies, and that seems to be a likely scenario for this year as well. January could, as it often does, bring a change of pace. We will continue striving to capitalize on the current trend, while watching carefully for signs of change.
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