The Capital Advisor

July 2008 - CEO's Monthly Letter

The Argument for Independence

In light of the difficult credit market of late and the recent emergence of a small yet hopeful glow at the end of the tunnel, this month we wanted to cover a topic that can help with a question that may be on the mind of many corporate treasurers: How do we get back on track? 
 
Over the course of the past nine months, investors’ sense of security and trust may have been battered by the implosion of auction rate securities, CDOs and SIVs as well as the bail out of several money funds. So, needless to say, many corporate treasurers may now be reassessing their options with respect to how to best manage their cash balances.
 
Prior to this credit debacle, many corporate treasurers were under the assumption that there were plenty of safe havens for stowing their cash. From money funds to brokerage/bank accounts to investment advisory accounts, all options were generally considered highly trusted and it was assumed that cash balances would most assuredly be handled with steadfast care by all. Therefore, the ultimate destination for corporate cash sometimes depended more on personal relationships than the actual structure of the professional arrangement. However, following the tribulations of the past year, it’s become abundantly clear that the decision of who oversees corporate cash is not one to be taken lightly. 
 
The good news is that you do still have options; although, some of them may have lost their luster, so to speak. This month we plan to focus specifically on the differing structures and regulatory requirements that govern both investment advisors and broker/dealers. We believe the differences between these options can significantly affect the cash investment objectives sought by all corporate treasurers.

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July 2008

June Economic Recap

The FOMC left interest rates unchanged at the end of June after dropping overnight lending rates 325 basis points in seven months.  They recognized the weakness in the economy while attempting to assuage those concerned with elevated inflation levels.  One voting member felt a rate increase was in order due to inflation concerns.  A rate increase appears to be the most likely next step, the question being whether that step is taken before or after the November elections.

Labor Market
Weekly jobless claims climbed throughout June, rising above 375,000 several weeks, and the less-volatile four-week moving average finished the month at 378,250.  The Labor Department’s May Employment Report revealed further bad news as the labor market shed jobs for a fifth consecutive month and the unemployment rate surged.  May’s loss of 49,000 payrolls, combined with upward revisions to previous months’, brought the total so far this year to 324,000.  The unemployment rate increased half of one percent to 5.5%.  Personal incomes surged 1.9% in May as the Treasury Department’s tax rebate checks finally reached consumers.  

Residential Housing
Most housing data released in June beat economists’ expectations, but the positive results do not necessarily signal an imminent rebound in residential housing.  Building permits, a leading indicator, fell by 1.3% in May, and housing starts also declined by 3.3% with much of the weakness was attributable to a drop in multifamily housing.  However, new construction of single-family homes remains at the lowest level in 17 years.  Existing home sales climbed 2.0% in May, recovering from April’s nine-year low, while the median sale price dropped 6.3% over the last 12 months.  New home sales declined last month by 2.5%.  The market currently carries a 10.8 month inventory of existing homes and a 10.7 month inventory of new homes, a slight decrease from the previous month.

Spending
The final reading of first quarter GDP growth expanded to 1.0% from the preliminary reading of 0.9% on stronger trade numbers.  While GDP has remained positive and the US economy has avoided an official label of “recession” to date, GDP growth in back-to-back quarters has not been this weak in five years.  Spending by the business sector sent another set of mixed signals this month as durable goods orders less transportation was unchanged in May from April, exceeding forecasts of a 1.0% decline.  But in the same period, manufacturing activity, as measured by the ISM Manufacturing index and the Philadelphia Fed index, contracted for the fourth and seventh straight months, respectively.  The combination of falling home values and record-high oil prices appears to be eroding consumer confidence and spending power.  The Conference Board’s consumer confidence index fell to a 16-year low in June with the expectations gauge reaching an all time low, though retail sales climbed 1.0% in May.  Overall, personal spending rose 0.8% in May; after adjustments for inflation, spending was up only 0.4% marking the largest increase since December 2006.

Inflation
Energy prices continued their record run as oil traded above $142 per barrel in late June -  the first time ever.  At the wholesale level, the Producer Price Index climbed 1.4% in May, while core PPI increased a moderate 0.2%.  Year-over-year, core PPI is running at 3.0% while headline PPI is up 12.6%.  The Consumer Price Index rose 0.6% in May as gasoline surged 5.7%.  Consumer prices have jumped 4.2% year-over-year, and subtracting food and energy, core CPI has climbed 2.3% in the same period.  Finally, the price gauge tied most closely to consumer spending and a rumored favorite of the Fed, the core personal consumption expenditures gauge, has risen 2.1% over the 12-month period.

The Fed is not scheduled to meet again until August 5th, though the release of the June minutes, on July 16th, will draw close scrutiny for a more in-depth look at the Committee’s inflation concerns.

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