February 13, 2003
The majority of publicly traded companies have now released their fourth quarter reports and the results, in most cases, were modestly better than expected. The economy is growing at about a 3% rate, employment is also growing slowly, and the Federal Reserve continues its low interest rate policy.
Company executives generally remain cautious, but business spending is increasing again also at a subdued 3% rate. It takes 5% to accelerate the economy and launch the next bull market.
The difference between the current 3% and the desired 5% is Iraq. Once that uncertainty is removed, and it doesn't seem like we have long to wait, the normal cyclical acceleration should begin, assuming the war is short and decisive. The experts are pretty much agreed it will be and most of the time the consensus is right. Frank Lanza, the CEO of the one pure defense stock in client portfolios - L3 Communications - said on national TV "The air war will take a week, the ground war will take a week, the restructuring to a democratic society will take a decade or more." He also pointed out that Iraq's oil will pay for the nation's restructuring. If we believe President Bush, and I think we can, the war will probably begin shortly after the last UN deadline passes this weekend. So the uncertainty, which is the anchor holding back the economy and the stock market, is about to be removed.
If the experts are wrong and the outcome is not quick and decisive, the economy and the stock market will most likely continue to struggle.
Right or wrong with regard to timing, the ultimate outcome is seemingly inevitable. It is a colossal mismatch and the Hussein regime will be replaced. When that has been accomplished the normal growth process, probably aided by a big decline in oil prices and significant tax relief later this year, should emerge. In the past an accelerating economy following a recession has always launched a bull market.
For long suffering (three years now) investors, that can't come soon enough. Regardless of the timing, our confidence in the principle that patient investors in successful growth companies are ultimately rewarded is undiminished.
As we approach the mid quarter point, we once again encourage you to call anytime to discuss our outlook and any other portfolio questions.
Fred G. Mitchell, CFA