BLOG

First Quarter 2007

The first quarter of 2007 was characterized by volatility. After a seven month rally we are currently in a consolidation phase which will last into the second quarter, which is normal after such a strong bull market. There exists now more uncertainty in the market, due to a deceleration of economic growth and corporate profits as well as rising longer-term interest rates.

Residential housing and business investment are both slowing. In the fourth quarter of 2006, spending on new homes fell by 19.8 % relative to Q4 2005, while business investment dropped 3.1%, the largest decline in four years, and investments in equipment and software fell 4.8%. The inventory of existing housing stands at nearly seven months, while new housing inventories are at 8.1 months, their highest levels since 1991, the last recession. While real estate prices have been falling since mid-2006, they are likely to continue to weigh on household disposable income; the construction industry is one of the biggest employers in the U.S, and the unquantifiable, but nonetheless real, “wealth effect” will likely be negatively impacted. Considering the sub-prime mortgage fall-out and the likelihood that in the next few months more homes will be foreclosed, questions have arisen as to how long the residential housing market will be a drag on the U.S. economy. As for corporate profits in Q1 2007, this may be the first time we have not seen 10% year-on-year corporate earnings growth in some time; in fact analysts have revised this figure down to 4.4% growth.

The Federal Reserve is now “on hold” and is not likely to lower interest rates in the second quarter. There is conflicting news from the top; Fed Chief Ben Bernanke stated in March that he thought the economy still had room to grow, which seemed like a choreographed response to his predecessor Alan Greenspan’s remarks days earlier that he saw a recession looming by year-end. Longer term rates are edging up because of significant commodity driven inflation risk, which pushed the ten-year bond yield up 20 basis points since mid-December.

But don’t throw out the baby with the bath water; all is not doom and gloom! Equity valuations are not particularly high, and corporate balance sheets are cash rich. Corporate earnings growths, while slowing, are still growing. World economic growth is not slowing either, which helps provide a tailwind for the U.S. economy. A weaker dollar will help U.S. exports, and business investment may be seeing only a temporary drop as managers wait for more signs of stability. The Federal Reserve may begin cutting rates at the end of this year assuming that inflation resumes a downward path, which should create once again favorable conditions for stocks.

For the first quarter of 2007 the major indexes barely moved; the Dow slipped 0.8%, the S&P rose 0.1%, and the Nasdaq gained 0.1%.
Grant Rogers Elizabeth Allen

Global Disclaimer

This report has been prepared by Metis Capital Management LLC. This report is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without notice. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst responsible for the preparation of this report may interact with trading desk personnel, sales personnel, other analysts, journalists, and other constituencies for the purpose of gathering, synthesizing and interpreting market information. Metis Capital Management LLC is under no obligation to update or keep current the information contained herein. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. Metis Capital Management LLC accepts no liability for any loss or damage arising out of the use of all or any part of this report.

CONTACT US

keep in touch

METIS CAPITAL MANAGEMENT LLC

411 Theodore Fremd Avenue, Suite 206 South,
Rye, NY 10580
Phone. 914-315-6850

Click to Login to your account.

Click to Login to your account.