Third Quarter 2005

In the third quarter of 2005, news of Hurricane Katrina and Rita overshadowed domestic and international market forces. The stock market’s volatility, however, remained subdued as the economic outcome of these disasters remains to be seen. The economy was in fine shape through June, with GDP growth of 3.3%. Possible negatives in the fourth quarter could be partially displaced by positive economic stimuli associated with rebuilding the New Orleans region; some economists project a cost of $200 billion. However, this puts a strain on the abnormally high Federal deficits, already stretched by the continuing costs of war in Iraq. Furthermore, the run-up in energy prices, though due for a short term pullback, is likely to remain with us for some time due to global demand growth outpacing global supply growth. This acts as a brake on our increasingly consumer-oriented economy, where the “wealth effect” caused by regional housing bubbles has contributed to a negative U.S. savings rate for the first time in over fifty years. Additionally, heating bills may be much higher this winter, and changes in the U.S. bankruptcy law taking place on Oct. 17th will require that minimum monthly credit card payments increase from 2% to 4% of total balances. The consumer accounts for fully two-thirds of American GDP, and all of the above will negatively impact spending. Still, the Federal Reserve Board continues to raise interest rates as it is optimistic regarding the economy’s potential. On September 20th, the Fed raised rates for the 11th time in as many meetings to 3.75%, and will likely continue to do so through 2005.

Meanwhile, global economics are deeply affected by China’s continuing industrial growth. In China today, only 2 barrels of oil per person are consumed, to be compared with 15-17 barrels per person in Korea and Japan, and 25 in the U.S; China’s appetite for oil can only grow. Similarly, demand for metals in China should remain elevated for years to come as it builds its infrastructure and becomes increasingly urban. Also critical this quarter were the elections in the world’s second and third largest economies. In Japan, Junichiro Koizumi’s Liberal Democratic Party won a landslide victory favoring structural and economic reform with an emphasis on privatization. Germany’s September’s national elections, however, the free-market reform minded CDU Party did not receive a much hoped-for clear mandate; which may hinder the European recovery.

We conclude with an investment theme: As the baby boom generation reaches retirement, it will be shifting its investment focus from capital appreciation to income generation. Over the next seven years, the 60-65 year old segment of the population will be growing by more than 5% per year, while the rest of the population remains flat. This will likely favor high quality, high dividend yielding stocks going forward, as this population segment looks toward maintaining its lifestyle.

For the first three quarters of 2005, the Dow fell 2%, the S&P rose 1.4%, and the Nasdaq declined 1.1%.

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.


keep in touch


411 Theodore Fremd Avenue, Suite 206 South,
Rye, NY 10580
Phone. 914-315-6850
Click here for form ADV3/CRS

Click to Login to your account.

Click to Login to your account.