Monday, September 04, 2006

DCM President, Mike Hull, Responds to a Client's Question

Mike -- I came across an interesting article this morning on the market and its prospects. It made a lot of sense to me and, therefore, I'm passing it on to you. To link to the article, click here What do you think? Peace, my friend. Bill ......................................... Bill, We may come at it through a slightly different angle, but our conclusion is pretty much the same -- a soft landing that the stock market will absolutely love. Corporate profit growth has been astounding while the Fed has been raising interest rates. Because the big money in the market never wants to "fight the Fed," we haven't seen stock prices respond to the ever-improving fundamentals of the companies. As the article described, that can happen even as the economy slows. We are already seeing it in our high-quality, dividend-paying companies. The stocks in your accounts have returned twice that of the Dow and five times better than the S&P 500 -- had to get that plug in there. Specific areas to watch: Oil -- the media is making far more of this than what is really going on (surprise). The members of OPEC do not want to see oil prices any higher than they are right now. Already, the US is making a serious effort to reduce our dependency on foreign oil. If you quesiton that, check out the price of corn futures. Housing -- this could be a wild card. It very much appears to be a soft landing for the housing market. And, lower interest rates are helping that. Interest Rates -- again the media doesn't tell the true story. No surprise that the media only shouts the bad news. The truth is that during the last month interest rates on the ten and thirty year treasury notes dove well below 5%. This will keep mortgage rates very attractive and keep the housing market from coming apart. Interest Rates -- these low, long term rates also indicate the bond market has no worry about inflation. Interest Rates -- these low interest rates, and the inverted yield curve, do seem perplexing, however. They also seem to be saying that the bond market is looking for a serious slow down, maybe not a recession, but a much slower economy than the stock market is indicating right now. Seat of the pants -- Money has to go somewhere. Investment decisions are always relative. We have corporate bonds and government agencies yielding right around 5%. We have the steam coming out of the real estate market. And, we have high quality companies with dividend yields running between 3.5% and 4.5% , and those dividends are growing in double digits. Those same companies have been accumulating cash like crazy, buying back their own stock, and bolstering their balance sheets with cheaper debt. Money has to go somewhere. I cannot see the big money ignoring the great values in blue chip stocks, at least until something in this scenario changes. Good to hear from you. I'll try to get with you during the next couple of months on one of my trips to Indy. Take care, Mike Donaldson Capital Management, LLC 800-321-7442 812-421-3200