Chapin Hill Advisors Market Comment

Kathy

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Chapin Hill Advisors, Inc. Market Comment June 30, 2006 Fed raises, market rallies ….what’s next? As expected the Fed raised overnight rates by 25 basis points or one quarter of a percent. This thwas the 17 time rates were raised since June 2004. The post-meeting communiqué removed the word “vigilance” which was interpreted as dovish rather than hawkish. The Fed indicated that while inflation was a concern, growth in the economy was moderating and housing was slowing therefore rates only needed to be raised by 25 basis points. This immediately brought speculation that the Fed was “done”. Wall Street jumped for joy and rapidly ran the markets up with heavy volume. The markets had their biggest one day rally in three years. Volume was strong and indices were up anywhere from 2% on the S&P to almost 4% on the Russell 2000. However, even with the rally, most indices are thdown for the quarter. As of the close on June 29 , Nasdaq leads with a (7)%, Russell 2000 with a (6.4)% and S&P (1.7)% decline. The dollar fell and international markets were up even more than the US indices. EEM is an exchange traded fund which we use to track the emerging markets. This rallied 7%. Investors have poured money into international markets and especially emerging markets earlier in the year. But as markets tumbled over the last 6 weeks, they exited and the emerging markets fell – most down double digits. Saudi Arabia’s market was one of the hardest hit and dropped ...

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• Publié par: Sojiz
• Nombre de lectures: 71
• Langue: English

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Chapin Hill Advisors, Inc. Market Comment

June 30, 2006

Fed raises, market rallies ….what’s next?

As expected the Fed raised overnight rates by 25 basis points or one quarter of a percent. This

was the 17

th

time rates were raised since June 2004. The post-meeting communiqué removed

the word “vigilance” which was interpreted as dovish rather than hawkish. The Fed indicated that

while inflation was a concern, growth in the economy was moderating and housing was slowing

therefore rates only needed to be raised by 25 basis points. This immediately brought speculation

that the Fed was “done”.

Wall Street jumped for joy and rapidly ran the markets up with heavy volume. The markets had

their biggest one day rally in three years. Volume was strong and indices were up anywhere from

2% on the S&P to almost 4% on the Russell 2000. However, even with the rally, most indices are

down for the quarter. As of the close on June 29

th

, Nasdaq leads with a (7)%, Russell 2000 with a

(6.4)% and S&P (1.7)% decline.

The dollar fell and international markets were up even more than the US indices. EEM is an

exchange traded fund which we use to track the emerging markets. This rallied 7%.

Investors have poured money into international markets and especially emerging markets earlier

in the year. But as markets tumbled over the last 6 weeks, they exited and the emerging markets

fell – most down double digits. Saudi Arabia’s market was one of the hardest hit and dropped

over 50% in the last 6 weeks. So a rally was overdue but our feeling is it is not to be trusted and

should be used to sell positions you are not comfortable holding long term.

We still feel we are in a secular bear market and will get bear and bull rallies throughout the

secular trend. If we can use history as a guideline, we are only 5 years into what could be a long

term period. After 3 years of going practically straight down from April 2000 through early March

2003, the US markets have given us mediocre returns since. However, there have been big

rallies and declines within each year. We believe this will continue and frustrate investors

especially baby boomers who are nearing retirement and counting on stock market gains to bail

them out of poor saving habits.

The quarter ends tonight and while Monday is not an official Holiday Tuesday is the Fourth of July

and many businesses will be closed. Many traders will take advantage of the slow environment

and take the day off as well. They will be hesitant to leave positions open and carry them through

Monday since the markets will be open. International markets will, of course, be open throughout

and traders will likely close positions out to minimize their risk of leaving these open for two days.

Personal consumption was reported Friday morning and gave the market some hope initially.

Spending and incomes rose. This was immediately interpreted positively in that the consumer will

continue to spend and support the economy. This past week we saw new home sales numbers

come in with a surprise to the upside but the following day existing home sales were reported and

as expected were sluggish.

A big part of the reason that new home sales surged is incentives! Builders are trying all sorts of

techniques from offering reduced mortgage rates, country club memberships, health club

memberships,

and more to move their inventory. Existing homes continue to pile up. This week,

a neighbor mentioned that he picked up the local real estate listing book and he thought he had

pulled two by mistake as it was so thick. Story after story is now being told of homes that are

sitting, prices being reduced. We have several clients who have had trouble selling their homes

despite aggressive price reductions.

We are worried about the consumer and their homes which have been used as ATM’s and

piggybanks for additional spending. Over 1.3 Trillion ARM’s (adjustable rate mortgages) come off

their 5 year fixed period this year. These mortgage holders are in for sticker shock as their

monthly payments ratchet up. Our feeling is that many will not be able to afford the increased

payments and will rush to add their home to the ever-growing supply of listings.

The prime selling season is rapidly closing in for anyone in the suburbs. To get the home closed

by school sessions, a buyer need to purchase their new home within the next few weeks. Once

you lose that window, buyers are less likely to act quickly unless they must move or find an

irresistible deal.

Over 20% of jobs created in the last two years are attached to the real estate market. The ranks

of residential realtors have swelled and they can’t all make money in a falling market. KB Homes

recently started to lay off employees. GM announced that 35,000 employees accepted their

packages. This will help GM but add more early retirees to the market.

A person born in 1944 is eligible for full Social Security retirement benefits at age 66 or in 2010. If

they choose to take benefits early at age 62 or in 2006, the monthly check will permanently be

reduced by 25%.

Yet 73% of all Social Security beneficiaries are taking a reduced benefit as

they face early retirement

. Add to this

the fact that the Pension Benefit Guaranty Corporation is

currently sending a monthly check to 683,000 retired workers who were participants in 3600 failed

defined benefit plans adds to our unease. As GM and Delphi problems have demonstrated

vividly, there are many corporations who are struggling with under-funded pension plans. How

many more can fail and have the PBGC guarantee them? Is their more risk we are not

recognizing?

In a recent study published by Boston College’s retirement research center, 45% of 45-54 year

olds have zero saved for retirement. Baby boomers and generation X’ers

of all income levels are

in danger of not being able to retire at age 65.

As you can see, we have many concerns for both home owners and early retirees.

This will

continue to affect the market and our outlook. You must have inflation protection and if US

equities continue to deliver mediocre returns, you will have to look elsewhere to protect your

retirement and spending power. Look to diversify your portfolio over alternative investments. Seek

expert advice to help you properly structure your investments and seek negative correlation with

traditional investments.

As always, feel free to call us with questions, concerns and comments.

Securities offered through Linsco/Private Ledger

Member NASD/SIPC

The opinions voiced in this material are for general information only and are not intended to

provide specific investment advice or recommendations for any individual. Indices are

unmanaged and cannot be invested into directly. Past performance is no guarantee of future

results.