Baldwin Investment Management, LLC

 

 

MANICDEPRESSIVE MARKETS

 

The second quarter of 2004 was a tough slog for most markets around the world.  The ebullience exhibited by investors late in 2003 and the very early part of 2004 all but evaporated.  Risk taking was no longer a part of the investment formula discussed at fashionable cocktail parties.  Simply put, a chill gripped investor’s psyche and as a result markets went sideways or down for the second three months of this year.

 

            It is hard to explain why it happened except that there seemed to be a big mood swing.  For so long, investors fretted about a jobless recovery in the U.S.  When two data points of strong job creation occurred in the months of April and May, the market preferred to worry about too strong a job creation, which would inevitably lead to higher interest rates.  This became the “worry of the month”.  In spite of the fact that the Fed was quite unified in its message that inflation was not a particular worry at this juncture and that interest rates would be increased at a “measured pace”, the markets were nevertheless rattled by the prospect of more expensive money.  It would be well for all of us to remember that interest rates are still at historic lows.  At the June 30th Fed Open Market Committee meeting, the Federal Reserve did do what it had alerted the market that is was going to do and what the market expected - the Fed raised interest rates by 25 basis points, a quarter of 1%, or if you like by .25%.  As a result of this move, numerous banks immediately raised their prime rates by 25 basis points from 4% to 4 ¼%.  The Federal Reserve took these actions because it felt that the U.S. economy was indeed growing stronger and that employment had started up.  It felt confident that the American economy was strong enough to withstand slightly more expensive money and that profits would be very strong notwithstanding the increase.  This all seems quite reasonable to us and we are perplexed as to why in the face of strong economic numbers, low inflation, still extraordinarily low interest rates and strong corporate profits the markets around the world have not behaved better.

 

In the immediate future, the markets will hear reports from corporate America on second quarter results.  We expect them to be quite strong across the board.  Already a number of companies have hinted strongly that the second quarter will be stronger than earlier expected and have in fact increased guidance to Wall Street analysts for the rest of 2004.  In short, business seems to be quite brisk whether it be in semi-conductors, mobile phones, steel, oil and natural gas, banking or investment banking.

 

            An incessant nag for the markets has been the situation in Iraq and the swirl of politics around it.  In a surprise move two days before the announced hand over date, the Collation Provisional Authority handed sovereignty to the interim Iraqi government.  Those who are steeped in the red of the Republican Party declared that this was an important step on the way to nation transformation and regional democratization of the Middle East.  Those who are less positive describe the hand over made without any fanfare as indicative of a failed policy.  Nevertheless, the deed has been done and it is now, if not entirely an Iraqi face on the government of Iraq, it is certainly a more Iraqi complexion.  We would expect that slowly but surely over the next several months things will get better in Iraq and this should remove this particular worry from investor’s minds.

 

Below you will find our score card of predictions for the year.  We still feel quite good about most of them.  Obviously, we were wrong with regard to the timing of the initial hike in interest rates, which we had expected to happen after the November elections.  However, the increase in interest rates was because of an even stronger economy than we had projected.  So, that should be a good thing.

 

 

PREDICTIONS 2004

 

 

PREDICTIONS                                                                                                                     COMMENTS

 

 

 

 1)  The dollar will regain some of its former glory, trading closer to $1.15/Euro             Happening

 

 2)  President George W. Bush will be re-elected to office by a landslide                        Still Believe

 

 3)  Economic growth in the U.S. will top 4% year over year                                         Indicators Look Good

 

 4)  In spite of strong economic growth, inflation will remain quiescent                            Little Pricing Pressure, Except on Commodities

 

 5)  Interest rates will stay low at least until the 4th quarter & will rise                              Wrong- rates lifted by .25% & expected to go

           after November 8th                                                                                                                    Higher

 

 6)  Osama will be sold out and captured (we’re sticking with this!)                                The Cynic in Me Says Yes

 

 7)  Progress will be made in North Korea with difficulty                                                A Boring Process

 

 8)  There will be additional but fewer corporate scandals than during 2003                    Already an Example in Italy (Parmalat)

 

 9)  Commodity prices will be strong throughout 2004                                                   Some were Blazing Hot, but have cooled a bit

 

 10)  The Japanese economy will improve, strengthening world economic growth           Getting Better

 

 

A FINAL THOUGHT

 

 

 

 

 

 

 

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The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC.  These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.

 

The reported numbers enclosed are derived from sources believed to be reliable, however, we cannot guarantee their accuracy.  Past performance does not guarantee future results.

 

A list of our Proxy voting procedures is available upon request.

 

A current copy of our ADV Part II is available upon request or at www.baldwinim.com/disclosure.htm                                                                                  6//30/04