MoneyWatch

Athena financial & insurance services, inc.

Registered Investment Advisors
Text Box: One of my favorite cartoons growing up was Yogi Bear. I used to love the way Yogi and his sidekick Boo-Boo were always getting the best of Ranger Smith and would proudly announce, “I’m smarter than the av-er-age bear!” (Okay, I admit I occasionally still watch reruns of the show on the Cartoon Network, but that’s besides the point). The real issue is whether Yogi and his fellow bears are smarter then the av-er-age bulls when it comes to the recent retreat in the stock market. I am betting no, but by nature I am optimistic when it comes to equities. Without question the last 10 days have been painful. Ever since the Federal Reserve Board voted to raise interest rates on May 10th–and gently hinted that it may not be done hiking those rates–stocks have taken a tumble. The Dow, for instance, is off around 500 points from the high of 11,709 it hit during trading on May 10. The Nasdaq composite index and the S&P 500 have also lost significant ground since the Fed meeting. Lost in all the bustle, however, is the fact that the Dow remains up almost 4 percent on the year. Pullbacks during a market rally are as commonplace as a sunny summer day in Los Angeles. The market has been in rally mode since early 2003 and has gone through one of the longest stretches in history without a 10 percent correction in equity prices. And we’ve yet to experience a downturn that significant in this particular rally. Another catalyst for the frenzied selling was a stronger-than-forecast jump in consumer prices that ignited concerns that the Fed might have to keep boosting interest rates in order to keep inflation in check amid signs that record energy costs are beginning to seep into other parts of the economy. Will they or won’t they keep raising interest rates? Some analysts say higher interest rates are inevitable given the strength of the global economy and the market's recent retreat was indicative of investors' overblown expectations that the Fed was nearly done with its rate tightening. The uncertainty now lies in whether the Fed will sacrifice economic expansion in order to battle inflation. The reason I am not as alarmed by the inflation figures as the market reaction suggests is because of a quirk in the way the Consumer Price Index is calculated. The latest reading might actually be signaling a slowing economy and, eventually, less inflation, not the opposite. Nationally, excluding energy and food, core inflation rose by 0.3 percent in March, the biggest gain since a similar increase in March 2005. This acceleration reflected higher prices paid by renters, the biggest jump in clothing costs in seven years and a large increase in airline ticket prices. Let’s think about that last part; airline ticket prices. Other than labor, an airline’s single largest operating expense is fuel costs, and many of them have finally decided that passing some of the increase in jet fuel costs along to consumers in the form of higher ticket prices sure beats the alternative—which is to go out of business. But crude oil futures have declined since mid-May. The increase in rents also doesn't trouble me and was really expected. As I wrote in this column last November, rental prices have always tracked home sale prices. This is due to the fact that that people have always had the option to rent rather than buy if home prices were out of line. But since 1995, rents have risen by just 8 percent adjusted for inflation compared to a 44 percent rise nationally in the cost of homes. So it was just a matter of time before rental rates started rising; if only modestly. None of this is meant to suggest that the Fed is done raising rates; just that the market fears that there may be no end to the increases seems to be unfounded. A target fed funds rate of 5.5 percent, which would necessitate only two more hikes, seems reasonable and would hardly be enough to derail the current expansion.▲

Attempting to read the tea leaves...

Volume 17, Issue 11

May 22, 2006

Is the Bull Market Out of Steam?