We use top-down fundamental analysis, starting with an economic forecast, followed by an industry analysis and company analysis.
Economic Forecast – May 2, 2006
C + I + G + (x-i) = GDP
GDP for Q2 2006: 3 percent
Consumption: (-)
Consumer spending increased 0.6% compared to the previous month as a result of higher incomes. Increasing inflationary pressures will result from higher labor costs and commodity prices. Price volatility will still have a moderate effect on consumer spending through this quarter.
Investment: (-)
Investment spending will continue to slow as interest rates come to a peak. A slower housing market turnover will result from a moderate increase in short-term rates. Rising interest rates should also cause foreign investors to increase compensation demand for the exchange risk associated with holding U.S. investments. A slower than expected top-line revenue growth is expected to have an adverse effect on consumer investments. The commercial real estate sector should continue to see moderate growth through this quarter resulting from a strong sellers market carried forward from Q4 2005. Office and industrial real estate vacancy levels should continue to drop by about one percent. The retail real estate market should see the most growth with heavier urban market expansions.
Government: (+)
State and local spending is expected to pickup in structural expenditures, which is typical at this stage of the business cycle. The government will try to scale back its presence in Iraq by year-end. There are many uncertainties in regards to military actions oversees which will be assessed in the near term. Additionally, the Bush administration is expected to overshoot its budgeted deficit target level for fiscal year 2006.
NI: (+)
U.S. export growth volumes should exceed 10% this fiscal year. However, net imports will continue to surpass U.S. exports by a small margin having a minimizing effect on GDP growth.
Other Factors:
We expect the Fed to temporarily suspend target interest rate increases once it reaches 5%, at which time they will allow the economy to adjust to the increases.
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Here is how our fund performed for Spring 2006. |
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