Rate Cuts This Year?

Dr. Ronald Ratajczak of Morgan Keegan & Co. states that he believes "there is virtually no likelihood that rates will be cut this year. Only a recession would do that, and even if one develops, the need for response at the expense of rising core inflation will not be accepted until next year. As I do not have a recession, I also have no need to lower rates. (The argument for a rate decline is that the adjustable rate mortgages are creating so much trouble that relief must come from lower rates. However, the adjustable rate problem is one of availability rather than price and cannot be solved without dramatic reductions in short-term rates, which are inappropriate with core inflation rates pressing higher. There will be no rate reductions.)"

"Can there be a rate increase? Of course!! Increased import prices induced by a weak dollar could add to inflation. Higher earnings abroad also could shift more of our capacity to meeting the needs of export markets, leading to price pressures at home. Even if these do not develop strongly, higher energy and food prices could raise wage pressures, which will be successful because of the tight labor markets. In other words, the odds are shifting towards a possible rate increase, although I still believe holding the line is the most likely outcome."

Strategy update: short-term overbought conditions have taken us out of commodity funds at the moment in the Dynamic Global Macro Strategy and the Dynamic Commodity Strategy. However, we continue to believe longer-term pressures on resource usage will provide positive trading opportunities for commodities and commodity-related stocks.

Credit Card Delinquencies

In the press, Moody’s reported yesterday that credit card delinquencies continued to rise through February. Additionally, UBS reports that "the repayment rate on credit card balances fell to 17.27% in February from 20.03% in January—the lowest repayment rate in over a year and a sign that financial stress is building at the household level." UBS also mentions today’s Wall Street Journal (Pg. A8) discussing "how the Option ARMs market may be the next headline-maker in mortgage space." and how in today’s NY Times, "how China is becoming 'less' reliant on US exports as the value of the Dollar falls. The article highlights the imbalances that could further heat up trade frictions between the two countries. As they say, 'China is still nearly 25 times as dependent on exports to the United States as a percentage of total economic output as the United States is on exports to China. Given that the Chinese economy is less that a quarter of the size of the American economy, it is all the more striking that Chinese exports to the United States are worth more than six times American exports to China.' ”

Fed Meeting Comments

The FOMC minutes continued to state that inflation is the Committee’s “predominant concern.” However, they also emphasized that with “increased uncertainty about the outlook for both growth and inflation, the Committee also agreed that the statement should no longer cite only the possibility of further firming.” According to UBS, the "minutes continued to highlight that Fed officials expect that the economy is likely to expand at a 'moderate pace in coming quarters' but noted: 'additional evidence of sluggish business investment and recent developments in the subprime mortgage market suggested that the downside risks relative to the expectation of moderate growth had increased in the weeks since the January FOMC meeting. At the same time, the prevailing level of inflation remained uncomfortably high, and the latest information cast some doubt on whether core inflation was on the expected downward path. Most participants continued to expect that core inflation would slow gradually, but the recent readings on inflation and productivity growth, along with higher energy prices, had increased the odds that inflation would fail to moderate as expected.' In the end, the minutes reiterated that future policy adjustments will depend on the incoming data. We expect risk perceptions will continue to evolve in coming months as growth data continue to weaken, ultimately leading to Fed easing."

March Performance

All Dynamic Strategies and Equity Strategies were ahead of the 0.6% return of the S&P 500 Index YTD through March 31, paced by Focused 13D up +14.7%; Dynamic Global Macro up +12.7%; Dynamic Commodity up +8.9%; Select Equity up +7.3% and Dynamic U.S. Equity up 5.5%. The chart nearby shows Dynamic Global Macro over the last 6 months.


The best strategies over the past year were Focused International Equity up +22.9%; Select REIT up +21.6%; Dynamic High Yield up 20.8%; Focused Analyst Growth up +20.0%; and Dynamic Commodity up 19.9%. The S&P 500 returned 11.8% over the past year.

Please visit our website for more complete performance details at Wind River Advisors. As always, past returns are no guarantee of future returns. Please see the website for important performance disclaimers.

Business Spending

Business spending on equipment and software continues to be sluggish. The fourth quarter saw its largest drop since 2002. One of the obvious conclusions is that corporations have opted to use to cash to fund stock buybacks. Why? most corporate managers are paid based on stock price performance. In an era of marginal investment options for corporate cash flow, CEO's have come to realize that over the short run the only way to meaningfully impact stock price is to shrink the float. Paying out higher dividends or investing in so-so projects will do little to increase the stock price over the short-term; so they buy-back shares. The WSJ reports that market float was reduced by $548 billion last year through a combination of stock buybacks and private equity deals.

This development has the potential to "surprise" the economy. Should business investment stay sluggish, consumer spending continue to moderate and housing decline much more, the Fed might find itself pushing on a string to rev the economy back up.

We think this provides a floor for bond prices and see longer US treasuries as attractive at these levels.