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Portfolio strategy update CURRENT MARKET NEWS David Gottstein
Editor’s Note: The following portfolio update is from David Gottstein’s monthly Dynamic Research Group’s newsletter. It was compiled in early June. Happy days are here again?
The economy is swinging again.
Unemployment is low, inflation is low, interest rates are still low, incomes are rising, corporate profits are coming in strong, consumers are confident, the economy is still growing strong, the dollar is stable, money continues to pour into stock mutual funds and a solution in Yugoslavia is probably only a matter of time.
With all this, tremendous wealth has been generated in the stock market in recent years. Sounds like a pretty glorious time to be an American investor. It seems as if wave after wave of financial sinkholes, from Russia, to Southeast Asia, to Mexico and Latin America, get absorbed in our rising tide.
For the first time in many, many years, the U.S. Treasury is paying off more debt than it is issuing. Much of this is fueled by advances in productivity and technology, but has also been somewhat orchestrated, or rather facilitated, by lax monetary policies, especially in the United States.
These “easy money” programs have been necessary to forestall any continuing major financial calamity brought on by economic weakness and flight of capital in the developing world.
So far Messrs. Greenspan and Rubin have successfully traversed a course of global lifeboat economics in a sea free of inflation storms.
Month after month we see that corporate earnings continue to be robust, with no recession in sight, while our large balance of payment deficits continues unabated.
There is talk of a $200 billion trade deficit this year. We are importing our trading partners’ economies back to health — or at least helping them maintain stability until they can chart a new course for growth.
As we said, so far it seems to be working. And the U.S. economy is roaring ahead of the G-7 pack in growth. Beware of a bubbly hangover We believe that although the American economic engine seems unstoppable, there are still reasons to be less than fully invested.
A growth spurt in the money supply supplied by Greenspan & Co. earlier in the crisis provided a bridge for the momentum of the economy to move us forward.
However, that extra stimulus has come to an end. In fact, tightening is the new official prejudice of the Federal Open Market Committee.
We are concerned that if other economies recover, inflation is likely to tick up, especially since oil prices have come full circle and are currently trading at more than $17 a barrel.
If the foreign economies don’t recover, then we will have to continue to absorb their imports.
This will flood the world with more dollars, and put pressure on interest rates in the future as the demand for dollars has trouble keeping up with supply.
How long will this bubble that has fueled unheard-of prices for Internet and technology stocks last?
For quite some time, albeit with constant risks. Hence, it is still logical to maintain healthy investment postures even at these price levels.
However, even though we think the power of earnings will continue to overwhelm interest rate pressures, and fair stock values will continue to rise, the market is still a bit ahead of itself in some sectors, and the market continues to rotate into issues with more reasonable valuations.
We maintain a 15 percent money market position this month, keeping a healthy equity engagement with the reserves available for defensive or more advantageous redeployment purposes at lower prices.
Good luck this month!
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