Late cycle thoughts
Our friend at UBS, economist Maury Harris, commented in a recent edition of Global Economic & Strategy Research that:
"the upbeat nature of the latest consumer sentiment and regional manufacturing surveys for March was consistent with good Q1(06) growth in the neighborhood of our 4.4% forecast. However, the economy has yet to absorb the likely imminent blow from the projected end of the residential real estate boom. Meanwhile, recently muted price inflation reports suggest that still strong demand apparently has not been racing much ahead of supply. That should make the Fed more willing to stop tightening soon after viewing still likely upcoming softer economic data."
We agree. The stress on consumers is piling up: a doubling of the minimum payment on credit cards, upward resets on interest rates for adjustable rate mortgages, relatively slow wage growth and flat/declining home values, among other things. This puts an upward probability on seeing some unusual economic reports as we enter the summer months. Anecdotally, while out walking recently we overheard a mobile phone call from someone to their mortgage broker: "this monthly increase in my mortgage payment is killing me - please give me a call back with some ideas on creative financing into a fixed payment!" Not only should this call have been made 18 months ago but the thinking is a little backwards on which mortgage is the creative one.
Strategy update: We raised 5-7% cash (versus a 0-20% permitted range) in the Equity Opportunity and Small Cap Value equity models, primarily from several retailing stocks that have done very well. This makes sense in an intermediate-term overbought market. In addition, today's semi-reversal day performance (to the downside) is worth noting. Our Dynamic Beta Strategy, which targets an overall beta, is about 25% committed for a beta of .35-.40.
"the upbeat nature of the latest consumer sentiment and regional manufacturing surveys for March was consistent with good Q1(06) growth in the neighborhood of our 4.4% forecast. However, the economy has yet to absorb the likely imminent blow from the projected end of the residential real estate boom. Meanwhile, recently muted price inflation reports suggest that still strong demand apparently has not been racing much ahead of supply. That should make the Fed more willing to stop tightening soon after viewing still likely upcoming softer economic data."
We agree. The stress on consumers is piling up: a doubling of the minimum payment on credit cards, upward resets on interest rates for adjustable rate mortgages, relatively slow wage growth and flat/declining home values, among other things. This puts an upward probability on seeing some unusual economic reports as we enter the summer months. Anecdotally, while out walking recently we overheard a mobile phone call from someone to their mortgage broker: "this monthly increase in my mortgage payment is killing me - please give me a call back with some ideas on creative financing into a fixed payment!" Not only should this call have been made 18 months ago but the thinking is a little backwards on which mortgage is the creative one.
Strategy update: We raised 5-7% cash (versus a 0-20% permitted range) in the Equity Opportunity and Small Cap Value equity models, primarily from several retailing stocks that have done very well. This makes sense in an intermediate-term overbought market. In addition, today's semi-reversal day performance (to the downside) is worth noting. Our Dynamic Beta Strategy, which targets an overall beta, is about 25% committed for a beta of .35-.40.
posted by WRA Strategy Group at 5:23 PM
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