BONDS - Odds are that the lows in interest rates have been seen. The outcry from many quarters protesting rising inflation and dollar depreciation, together with opposition by two Fed governors to the most recent rate cut and the failure of the ECB to cut rates, is finally turning the ship around. Government statistics on inflation, unemployment and GDP, in the opinion of many experts, are less than candid. The general feeling is that inflation is at least 7%; a recent reported numerical increase in unemployment led to a reported fall in the jobless rate. The figures are being tortured until they confess the desired result. Confusion reigns. The situation does not inspire confidence in taking on long maturities.
EQUITIES - Some diehards are refusing to admit the existence or the possibility of recession, but there is little doubt, at least in our mind, that a bear market is underway. The S&P 500 dropped by 20% from mid-October '07 to mid-January '08. Current strength is judged to be a bear market rally which will encounter stiff resistance the area of 1400-1425. The sub-prime disease is gradually spreading to hitherto unexpected and unanticipated areas of the economy. The enormity and complexity of the problem are even now not well understood, in our opinion. The solution, to the extent one can be found, is likely to take years. Its depressing market effects are unlikely to lift before the first quarter of '09. If the dollar recovers, the underpinning of large U.S. multinationals will be weakened. Corporate earnings in 1Q '08 were so-so, but managements' expectations for the balance of the year were distinctly downbeat, contrary to the projections of analysts and many economists. In the meantime, we expect emerging markets to be less affected by problems in the U.S. than in the past. Growth drivers not dependent on America are strong and should offer ample opportunity for investment gains. There will certainly be some issues of interest to be found in the U.S during a difficult market period, but we think prospecting abroad will be easier and just as rewarding.
William Wright