Slowing

Several recent economic reports have confirmed the widespread slowdown currently unfolding. Last week saw declines in total retail sales and consumer confidence and a much bigger than expected rise in inventories. The inventories, in the face slowing sales, should continue to impact overall growth in coming months as end product users order less and attempt to work off backlog.

Existing home sales volumes dropped 1.3% in June versus May. Prices continued their steep momentum descent - slowing to just 0.9% year-over-year in June. It has only been eight months since the momentum peak of 16.8% y/y, quite a dramatic change. It seems likely that with existing higher interest rates and changes in federal mandated mortgage lending practices coming (tighter underwriting standards, improved portfolio management policy, and fuller consumer disclosure of risks) that y/y prices will go negative in the near term.

Strategy Update: Our strategy manager eliminated the long exposure to the US Dollar in the Dynamic Fx Strategy after a favorable two-month move. The strategy is now flat the dollar and invested primarly in intermediate-term bonds. We also booked profits (over 10% since mid-June) in gold and commodities in the Dynamic Commodity Strategy leaving it invested in short/intermediate treasuries. This makes sense in the context of a slowing economy. We continue to favor gold and commodities longer-term yet believe a better entry point will be evident in the next several months. (see BCA's comments on the long-term picture at http://www.bcaresearch.com/public/story.asp?pre=PRE-20060721.GIF