Paul Dietrich's Global Investing Trends Report

The Market Is In Turmoil- Is This Different From A Normal Pull Back?

Posted August 23, 2007 · 0 Comments

Dear Paul,

 

Given the recent market turmoil, is this just a typical summer pull back or has there been a fundamental change in the economy?

 

After several days of gains earlier this week, the large swings in the market have begun to settle down as I predicted last week.

 

However….Expect the volatility to return periodically! The markets will not fully understand the banks exposure to the sub-prime lending crisis until the release of third quarter reports by the hedge funds.

 

Once the markets have adjusted to those reports, the markets are likely to rebound and I believe we may see record highs for the DOW and S&P 500 INDEX by the end of the year.

 

THIS WAS A SHORT-TERM MARKET PULL-BACK CAUSED BY HEDGE FUNDS

 

Hedge funds sparked the most recent bout of volatility. Margin calls from banks and brokerage firms plus liquidation demands from jittery investors required the hedge fund managers to sell.. in many cases… “good stocks” to meet the cash requirements. Remember that the mortgage securities associated with the sub prime mortgages were worth little or in many cases, literally nothing because there were no buyers! So the ‘forced sale’ of ‘good stock’ drove stock prices down and resulted in a ‘down market.’

 

BUT THE ECONOMY IS FUNDAMENTALLY SOUND

 

Earnings? Oh, yeah, earnings.

 

Remember just a month ago before the sub-prime loan crisis, the chief investment topic was good second quarter earnings.  Now earnings season is wrapping up and the numbers have stayed extremely strong.

 

Current corporate earnings have been exceedingly good. Until mid July, investors and analysts saw the latest round of corporate earnings as the key to the stock market’s summer and the second half of 2007.

 

With 95% of the S&P 500 companies finished reporting for the second quarter, the median earnings growth rate is 13.5%. That blows away STANDARD & POOR’S late-June prediction that the figure would fall to around 6% and would end the long streak of quarters with double-figure growth.

 

Earnings were very definitely better than we expected and the 13.5% growth rate is higher than most analysts predicted. It is only marginally below the 15% growth rate for all of 2006!

 

The best growth came in healthcare, with a second-quarter growth rate of 19%. Manufacturing and industry followed at 17%, and consumer staples at 16%.

 

Strong earnings are an indicator of a strong economy!

 

GLOBAL PROFITS FOR U.S. COMPANIES HAVE REALLY HELPED

 

How could the analysts estimates have been so far off? While U.S. companies earned about as much as expected at home-meaning not as much as a year ago-their performance in Asia and Europe was stellar.

 

The weaker U.S. dollar also helped with profits because foreign earnings are translated into more dollars. You have to give American companies credit for establishing themselves in countries growing faster than our own.

 

CONCLUSION

 

The last month of stock market ups and downs have been a wild ride, but it is simply a typical “summer pull-back” just like we have seen each summer since 2004. By definition, this was not even a .minor stock market correction. in that the S&P 500

INDEX did not go down 10%.

 

FOXHALL CAPITAL will move client portfolios to bonds or money market funds if there is a “major correction or recession,” but we did not hit our sell-triggers. We generally stay invested during seasonal market pull-backs because of the uncertainty in attempting to try to time the market during typical market pull-backs.

 

I expect to see continued volatility in the markets through the end of October but after that, I expect the stock market will forget this summer’s “sub-prime crisis”  as fast as the market forgot the “high gas price crisis” of last summer. I expect to see stock prices MOVE ABOVE the record DOW and S&P 500 INDEX highs hit last month before the end of the year.

 

As always, feel free to share this information with your clients that might be concerned about the markets.

 

Until next week…

 

-Paul Dietrich

dietrich@foxhallcapital.com

800-416-2053

 

Disclosure:  The opinions and portfolio information provided in the Foxhall Global Outlook are subject to change at any time, and are not to be construed as advice for any individual nor as an offer or solicitation of an offer for purchase or sale of any security.  Client accounts may differ from model allocations due to many reasons.  All investment strategies offer the potential for loss as well as gain.  Individuals should consult with their financial professional to determine an investment strategy appropriate for their objectives, risk level, and time horizon prior to investing.  Past performance is not a guarantee of similar future performance.

 

 


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About Paul Dietrich
Paul Dietrich is the Chairman, CEO and Co-Chief Investment Officer of Foxhall Capital Management, Inc. (Foxhall).  Foxhall currently manages investments for individuals, mutual funds and private institutions throughout the United States. Paul Dietrich is also a portfolio manager to a publicly traded mutual fund, the Foxhall Global Trends Fund.
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