Enclosed please find your consolidated reports for the quarter. We have dropped some of the older historical data and focused on the last three years. By now, you have seen the older data many times and we believe the new data is more relevant.
Domestic equity returns across the board proved to be lackluster for the quarter. The addition of a commodities position last quarter continues to be a good choice. We are considering additional alternative asset classes for your portfolios including exposure to emerging markets to increase overall returns, as stocks continue to be benign in the domestic arena. So far this year, we see U.S. stocks trading in a very narrow range with volume at sluggish levels. There is a lot of contradictory economic data but much of the information has been positive. So even though the equity markets continue to tread water instead of moving forward eventually the market will get things right. Ultimately, what we want from the economy is reasonable economic growth with subdued inflation. Currently we see higher oil prices and interest rates slowing the economy enough to prevent inflation, but not enough to cause a recession or deflation. Overall, markets seem to reflect investors’ indecision and caution at the moment.
What will be the catalyst necessary to inject growth into the markets? A steady drop in oil prices (which have increased due to speculation not supply/demand), and a clear message from the Fed that they are finished hiking interest rates. This may not happen until the Fed feels we are approaching a recession. Right now U.S. companies have been reporting strong quarterly earnings, and profits continue to increase as corporations continue to grow. It is possible we may see a repeat performance of the previous couple of years in the domestic equity markets when most growth came in the last quarter, as happened in 2003 and 2004.
Real Estate
Recently we have had several questions regarding the Real Estate Bubble. We will confine our comments to points made by Alan Greenspan as well as strong economic evidence, and will try not to be swayed by personal biases. The FDIC (which insures banks) has determined 55 out of 362 metro areas are experiencing booms, defined as an inflation adjusted price increase of +30% or more over three years. Florida is one of these areas. Here are some of the causes: issuance of easy credit, extremely low adjustable rate mortgages, a belief that real estate prices always go up. Here are some logical pitfalls that could affect housing prices: rising interest rates, wages not keeping pace with mortgage payments, over-supply of inventory, lack of buyers, higher real estate taxes, higher insurance costs. The ratio between housing prices and rents is a big red flag (rental rates fell 3.5% last year). This means speculators will be unable to rent units at carrying costs. Condos are most sensitive to price changes. The current estimate is that greater than 65% of the condos being purchased in South Florida are being bought by speculators. Investors and speculators may bail out at the first signs of weakness. This never applies to a personal residence, which you plan to enjoy. If all else fails, you can check with us and we will calculate the capitalization rate for you to see if an investment makes sense.
Portfolio Update
Fears of inflation were an important determinant of the performance of financial markets in the second quarter. Despite oil prices falling consistently from their highs at the beginning of April of $58.20 until the end of May, it was not until we had a lower than expected inflation number for April that the equity markets decided to follow suit. Slower economic growth was also a concern at the beginning of the quarter. However, such concerns were alleviated by quarter end due to better retail sales and better than expected personal expenditures.
Foreign markets were in focus in the second quarter. Voters in a few European countries rejected the European Constitution. This will cause headaches for the EEC member countries trying to find a workable solution to further remove political and economic barriers within the Union. Fears of political turmoil and slowing economic growth caused the Euro to weaken, and the quarter concluded with the dollar registering a 12% gain relative to the European currency for the first six months of 2005. Your portfolios were immune from such effects due to the excellent performance of your international managers. All of your international funds recorded positive returns for the first six months despite the dollar denominated index being down 2.7%. The Artisan International Small Cap Fund was up 2.6%, the Laudus Rosenberg International Small Cap Fund 2.18% and the Tweedy Browne Global Value fund (which is hedged) registered a gain of 5.05%.
Just as last quarter, we continue to see value in the international markets, and particularly so now that the various currencies have suffered so much. In light of this we increased our international exposure at the end of the quarter, and reduced our domestic mid-cap and small cap weighting where we took profits having experienced tremendous returns over the last couple of years.
The slowing growth environment helped the bond markets this quarter. We still see robustness in the investor’s appetite for risk. In early May GMs debt was down-rated to junk status by Standard and Poors. This coincided with the bid for a stake in the company by Kirk Kerkorian. Such events saw a sell-off in the corporate bond market and fears of liquidity problems. These problems were short-lived however, and both the corporate and yield markets bounced back.
News at Singer Xenos
We are pleased to announce that we have a new Senior Portfolio Analyst/Economist. Her name is Margaret Coughtrie. Maggie comes to us from the U.K. and has vast investment knowledge and expertise. Her background includes 18 years experience in investment management, and she is a member of the prestigious U.K. Society of Investment Professionals. Prior to that she managed pension and mutual fund money with Canada and Britain’s largest institutional investors. Recently Business Week came out with their annual list of the Best Fund Managers. Three of our long-term core holdings made the list. A reprint is enclosed for your review.
/Singer Xenos Wealth Management
