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The Only Constant… is Change The second quarter of 2006 was not for the faint of heart. Stocks declined precipitously during the quarter amid investor concerns over inflationary pressure and the continuation of the Fed tightening policy. We hit multi year highs in a few of the major averages. The Dow Jones Industrial Average (DJIA) declined over 4% in May from hitting its near record high on May 10th. The NASDAQ which had a near term top in February declined 6% during May and -.31% in June. Higher global interest rates, higher inflationary pressures and a variety of geopolitical risks led to a widespread correction across the world financial markets. In this installment of Karp Capital Focus we will address what has changed and why we continue to focus on our investment themes that were established 8 months ago. In addition, we ask our clients and potential investors to evaluate their goals for the second half of 2006. Here are the performance numbers for the second quarter of 2006 and year to date as of 6/30/06.
Over the last month, investors have been planning for the worst from the Federal Reserve statement on future interest rate hikes. The statement released on June 29th did not have the firm stance on inflation investors were expecting. Stocks rallied to end the quarter with the Dow surging 217 points (1.98%), the NASDAQ 62 points (2.96%) and the S&P 500 26 points (21.60%). This was the biggest one day point gain for the Dow since April 2, 2003. |
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What has changed? The Fed said “inflation expectations remain contained” in its statement at the June 29th meeting. The tone of the statement played down the Fed's concern over inflation pressures. The statement calmed investors and sent stocks soaring, but is it true? The statement seems to contradict what Fed Governors were saying during the last month. We believe the Fed has lost a little credibility in fighting inflation. We have seen three consecutive .3% increases in the consumer price indexes core component. Prices are rising. It appears the Fed is trying to balance price stability with the fear of a sharp downturn in the economy. The current stance by the Fed and the unanswered question of when the Fed will pause is one of the reasons for the current market volatility. The Fed has set up further Fed policy as being “data dependent”. We think the markets have it wrong and the knee jerk response to the Fed statement will be short lived. The soft inflation language by the Fed is a set up to a 25 basis point rise in August. The Fed Funds future as of June 29th had priced a 62% chance of another rate hike. The Fed Funds rate stands at 5.25%, the highest in 5 years. We believe there will be 2 more rate hikes this year. The Economy – No Change – The U.S. economy continues to be strong. The consumer, who accounts for 70% of GDP, continues to spend. For June, the Consumer Confidence Index rose one point to 105.7. The University of Michigan Consumer Sentiment Index climbed 5.8 points to 84.9. This shows amazing strength by the consumer. Corporate balance sheets add to the good news. We are looking forward to the 17th consecutive quarter of double digit earnings growth for the overall stock market. In addition, stocks are trading at a forward price to earnings of 14.1 times. This is the level stocks were trading in 1995. I specifically like the buy backs and recent mergers in our favorite investment sectors. This year over $100 billion in stock buy backs have been announced. This is a 22% increase over last year. On the merger front it was one of the largest and most diverse corporate buying sprees in history. Deals were being done around the world. The NYSE Group, owner of the New York Stock Exchange bought Euronext Exchange in Amsterdam . Phelps Dodge, a Phoenix Mining Company, bought Inco and Falconbridge in the commodity sector. Anadarko Petroleum, the biggest independent oil and gas producer in the U.S. offered to buy Kerr McGee and Western Resources in cash. Wachovia Bank bought Golden West Financial just to name a few of the mergers. Merger activity is an excellent measure of a company's valuation; who is a better judge of stock values than companies in the same line of business? All this positive economic activity is backed up with revised first quarter Gross Domestic Product (GDP) of 5.6%. This is the fastest GDP growth in 2 ½ years. Even though the economy is strong, there is contradiction in the slow housing sector and higher trending energy prices. Real estate inventories sit at a 6 ½ month supply; this is the highest in 9 years. As interest rates rise, housing will continue to moderate. We believe we are in the middle of the residential real estate cycle where sellers will have to adjust their price to the market. Given the good news in the economy, there is still daily volatility, the noise that needs to be put into perspective given your investment goals. This also pertains to personal and professional goals. Two weeks ago billionaire Warren Buffet announced his intention to start giving the bulk of his personal wealth to the Bill & Melinda Gates Foundation. Also, Bill Gates announced he's stepping down from his position as CEO of Microsoft to dedicate more time to the deeds of the foundation. Gates and Buffet want to see the results of their philanthropy, rather than funding large foundations at the time of their death. This should trigger something in the minds of all people. As we are at the halfway point of the year, it gives us the opportunity to think strategically about what we want to accomplish, making decisions and evaluating the results of those decisions so we can be better citizens and investors. Goal setting is a powerful process for personal planning. The process of setting goals helps you choose where you want to go in life. By knowing precisely what you want to achieve, you know where you have to concentrate your efforts. You will also quickly spot the distractions that would otherwise lure you from your course. The penalty for not setting goals and evaluating along the way is not paid today but in the future. For instance, the person who fails to maximize their IRA and 401k accounts pays when they are about to retire. The same can be said for a business owner who does not use the full capabilities of a corporate retirement plan. Start today by asking yourself …what do you want to achieve financially? We at Karp Capital support you in your quest for achieving those financial goals. Let us help you get serious, get focused and achieve.Investment Strategy – It is maddening that the stock market sold off across the board between mid May and mid June. Certain sectors got ahead of themselves but the genesis of the sell off was generated by investor fear. As I stated in my blast email at the end of May, we will use the current correction as an opportunity to add to our favorite positions. The best offense is a good defense. As I have mentioned before, investors are taking on too much risk for the return they are receiving. As interest rates continue to climb and global growth comes into question, our sector focus continues to be: Energy, Utilities and Commodities. We are replacing health care with multi national industrials. Our overweighting in energy stems from our concern about rising geopolitical tensions and serves as an excellent hedge against the risk of rising oil prices. We continue to buy gold and would add to positions on dips. We think the near term rally in the dollar is temporary. The dollar will continue to weaken and foreign economies are awash with cash to buy commodities. In addition, we favor large companies over small companies. The valuation is more attractive with less volatility. Investors can get exposure to these sectors through mutual funds, closed end funds and exchange traded funds (ETFs). Our bond strategy stems from our outlook on interest rates and inflation. We think the current yield curve inversion (short term interest rates higher than long term rates) will continue. We would be a buyer of the one year treasury for short term investors over CDs or other fixed income investments. Taxable accounts should consider locking in yields on the two year bonds through five year maturities in anticipation of lower yields after the Fed stops raising rates. We are holding off on extending maturities past 10 years given the current inflation data. Our new target for buying high quality long term bonds would be when the yield on the 10 year treasury climbs over 5.50%. The most attractive bond sectors are munis and treasury inflation protected securities (TIPS). We think the market has misread the Fed's intentions and so we're adding to our TIPS position. Please call us for our short term bond and balanced muni portfolios. Looking forward, we prefer certain sectors of the market powered by double digit corporate earnings.The Opportunity – Corrections adjust equity prices to their actual value. Prices go down because speculators react to expectations of news, reaction to news and profit taking. At Karp Capital we have an investment strategy for our clients. We act and do not react to short term events and news. We believe the current correction and beginning stages of a market bounce are a great opportunity to add to our favorite sector stocks. There is a large group of institutional investors shorting the market, thinking the market will go lower. Also there are plenty of investors in cash sitting on the sidelines not knowing where to invest. This is a market filled with opportunities. Don't be surprised if the market makes a run at the highs we saw in early May. Additionally, now is the time to adjust your asset allocation and rebalance your portfolio. Proper asset allocation has nothing to do with market expectation. In addition to the traditional asset allocation classes, (stocks, bonds, real estate and cash), we have been adding other asset classes to further reduce risk in our client's portfolios and increase returns. Click here to find out more or call us to see how these alternative strategies can work in your portfolio. The main risk to investors right now is being underweighted in quality stocks. Don't let market volatility scare you out of the market. If you are you currently working with a broker or financial advisor have you ever wondered…
If you don't know the answers to the above questions, you should. It is your money. Make a conscious decision to mange your finances on your terms. Please remember that we appreciate your support at Karp Capital and we are flattered when you refer your family and friends. If you have any questions on the analysis above, or know someone that would benefit from working with us, please call me at 877 900 Karp. Working with Karp Capital, there is only one boss... YOU!
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Karp Capital Management Corporation, and its affiliates, reserve the right to monitor all email in compliance with the rules of the NASD and SEC. Karp Capital does not take responsibility for, or accept, time sensitive instructions sent by email including and not limited to transaction of orders, funds transfer instruction, stop payments on checks, or other similar instructions. All instructions of this nature must be handled via direct communications, not email. The information contained in this e-mail is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. |
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