People are hoping for a return of the Goldilocks economy; not too hot and not too cold, but just right. The current US economy is irresolute: the Dollar is weak, high commodity prices have pushed reported CPI inflation up, stock market interest is shifting but not disappearing, general interest rates have risen, and credit markets are becoming more cautious. As for housing, while the spring selling season was better than the housing bears expected, order growth is decidedly down and cancellations are up. Expect to hear an increasing number of grievous housing and mortgage related stories over the next year. As always, rational asset diversification according to well defined risk/return parameters is recommended.

The Fed left rates unchanged at 5.25% for the first time in more than two years, but its policy statement left the door open for more tightening. The Fed’s shift in action did not immediately move the market in a specific direction because of the iffy language. Although growth may slowdown, few people fear the possibility of a recession because there has been so little real economic expansion since the downturn in 2001. If future inflation index readings are benign, then this will be a top for Fed rates.

Commodities were feared to be the next bubble, but mostly retreated in the second quarter before bubble talk became prolific. However, oil and natural gas prices ticked up in July and a scorching heat wave across the US is kicking up agricultural commodity prices and may lead to shortages over the next year. Commodities will continue to be a contentious influence on the markets.

Private equity continues its march across the capital markets with a $33 billion deal to acquire HCA, the nation’s largest for-profit hospital operator, making it the largest leveraged buyout in history. In addition, private equity shareholder activists seeking to extract value have been publicly challenging General Motors, Knight Ridder, Pep Boys, McDonald’s, Time Warner, and HJ Heinz.   Buyouts and corporate challenges will continue to support stock market prices but may eventually flood the high yield market with excessive supply.

The global stage remains turbulent, and in many cases decreases international sentiment and stability and increases inflationary pressures.

  • War flares up between Israel and Hezbollah
  • Oil prices jump on news of war and a corroded Alaskan pipeline
  • Castro takes ill in Cuba
  • Political protests continue in Mexico following Presidential elections
  • The United Kingdom foils a major terrorist plot to against transatlantic flights

Over time, as alternative investment managers assume new risks and try to take advantage of psychological factors and price breaks, the market will come to expect conflicts and try to localize their economic effects.

Michael Ashley Schulman, CFA
Hollencrest Capital Management