Boats & Stocks

[Francois+Goelo]

>>> WEEKLY UPDATE FOR: January 12, 2002 by Bob Bose...

Prior Week in Review:

Financial Market Highlights:
============================

                        01/11/02     01/04/02     %Change 
  
 S&P 500                 1,145.60     1,172.51      -2.30% 
 Dow Jones               9,987.53    10,250.74      -2.57% 
 NASD Comp               2,022.46     2,059.38      -1.79% 
 Russell 2000              489.94       499.30      -1.88% 
 SOX Index                 568.89       589.89      -3.56% 
 Value Line                369.76       378.37      -2.28% 
 MS Growth                 556.92       562.43       -.98% 
 MS Cyclical               527.86       551.56      -4.30% 
 T - Bill                    1.59%        1.68%      -9 BP 
 Long Bond                   5.36%        5.57%     -21 BP 
 Gold - Oz-Near Month     $287.70      $279.20      +$8.50 
 Silver - Oz-Near Month     $4.70        $4.65       +$.05

Economic News:
==============

Last Week's Economic Reports Were Quite Positive
Chairman Greenspan's Friday Speech Was Important
Best Bet Remains Recovery Underway By Spring


*Factory Orders in November fell -3.3% - Old News

*November Consumer Credit rose at +14.6% annual rate

*Jobless Claims fell -56,000 to 395,000 - Four Week
Moving Average fell -250 to 410,500

*November Wholesale Inventories fell -1.1% - Sales
Unchanged - Inventory/Sales Ratio fell to 1.30 months

*December Producer Price Index fell -.7% - Core Index -
Without Food and Energy - fell -.1%


In our view, the economic reports last week were fairly
good, even though some members of the Federal Reserve
Board (FRB) think a recovery won't start until Summer.
We're more optimistic, and believe that the important
driver of economic activity, the consumer, is still in
fairly good shape. So, no change to our view that a
recovery will be underway by Spring.

Last week's Consumer Credit Report was incredibly
strong, and in fact was a record gain in nominal terms,
not too surprising, and a six year high in percentage
terms at a +14.6% annualized growth rate. Some forecasters
are assuming that such rates can't continue (seems kind of
obvious to me), but then drawing a very negative inference
regarding future consumer spending. It isn't that simple.

The problem, of course, is that the debt per se, is not
the issue. What counts is the ability to service the debt.
Obviously more debt requires more servicing, but in the real
world everything is not held constant like an economic
model. And, in the current real world, there are some
offsets that make servicing the debt easier.

First, with the start of the year, the Bush Administration
tax cuts are kicking in to lower withholding taxes. For
instance, someone earning $20,000/year would see their take
home pay increase by $30/month. That is not an insignificant
amount given the salary level.

Second, as we have noted before, the drop in energy prices
has had the same impact as a significant tax cut. And,
while our location in Northern Vermont may make us
overly sensitive to the issue, to date winter weather
nationwide has been quite mild, so the savings on heating
costs to date are significant.

And, a third factor is simply the ongoing shift to the
use of credit cards as a preferred means of payment. We
have mentioned this before, and the data simply can not
capture the shift - whether the driving factor is simply
for benefits such as frequent flyer miles, rebates, etc...
or to purchase something online - a rapidly growing
practice this past holiday season. These balances could
all be paid in full, on time, but yet they still are
counted in the month end data.

My point is not to ignore the potential deterioration in
the consumer's balance sheet - it is real, and meaningful.
But, there are mitigating factors in my opinion. And,
while the increased debt servicing costs may dampen
an acceleration in consumer spending, in our view they
will not prevent, or delay, the recovery.

But, some members of the FRB disagree, and believe
that the recovery won't begin for six months, or so. And,
even Chairman Greenspan in his speech Friday was not
particularly upbeat about near term economic prospects.
Again, though, this misses the point for all but the very,
very short term "investor".

More importantly, Chairman Greenspan was, in my opinion,
very upbeat about the outlook for productivity growth,
which is clearly of much greater importance to the investor
than whether the recovery starts in the Spring or the Summer
- more or less irrespective of whether or not he is right
or wrong, although we obviously hope he is right.

This rather long quote from his speech is important.
"Until last year, the hypothesis of an accelerated productivity
trend had not been tested in the contracting phase of a
business cycle. Recent developments have provided that test,
and the early returns certainly look favorable to the
hypothesis." That folks, is about as clear as Chairman
Greenspan gets.

The implications are a) the FRB will be slow to raise rates
meaningfully as the economy recovers, and assuming he is
right b) inflationary pressures will not build, and
higher long term growth rates can be maintained. In short,
the return of Goldilocks - not too hot, not too cold,
but just right could be upon us, with favorable implications
for financial assets.

Obviously we've got a ways to go to get there, but if
productivity trends remain positive, the outlook is indeed
favorable. Stay tuned !


Current Weekly Calendar of Economic Data:
=========================================

Tuesday: Retail Sales

Wednesday: Consumer Price Index, Industrial Production Capacity Utilization, Business Inventories

Thursday: Jobless Claims, Housing Starts/Permits
Friday: International Trade