The following text explains the firm's views on the current market and economic conditions:
With increased uncertainty in the markets, it is necessary to observe and balance the arduous issues we have at hand. Talk of recession and dwindling corporate earnings have, more recently, put a large damper on equities and a “flight to quality” with the surge in treasury and commodity prices.
In regards to economic growth, projections for 2007 Q4 GDP are low, with consensus ranging from 1.8% to 2.5% depending on who you converse with. Chris Szulc Financial retains the position of a 2.3% GDP growth for the fourth quarter of 2007, and a 2.5% growth for the first quarter of 2008, avoiding a recession in the short term. If the Federal Reserve continues on track lowering interest rates, consumer spending and export demand in agriculture will rise and offset the probability of a recession. After the Federal Open Market Committee meeting at the end of January, we expect the Federal Funds rate to be 4.00% and the Discount Rate to be 4.25%, reflecting 25 and 50 basis point cuts, respectively.
The subprime loan market will remain shut and illiquid. It is and will continue to be extremely difficult for borrowers to get loans. With the highest number of subprime resets coming in the first two quarters this year, we will see continued consolidation among lenders and, possibly, additional bankruptcies of subprime loan lenders. Home sales will continue to decline, pushing home inventories past this 20-year high into worse territory. It is our belief that homebuilders will continue to offer unprofitable incentives in order to move homes and clear inventory out.
Concern over unemployment is continuing to increase. The recent jump to 5% puts a large risk to the US economy. If growth is stagnated in the labor markets, the probability of a recession is extremely increased. Upward trend in unemployment is seen clearly, and are continuing to make highs from the past 2 plus years.
Inflationary risks are increasing. Core inflation rose to 2.2%, above the Fed's so-called “comfort-zone”
It is our observation that certain sectors will continue to do well, while some will have very little strength in the current market conditions. With increased talk of the falling and less-powerful consumer, avoidance of consumer-related equities is recommended. We believe that the defense, technology, and health care sector will increasingly be performing better, and that those should be rated overweight in portfolios. Companies with strong cash balances and a growth in earnings will remain very strong in 2008. We expect that financials will have an extremely difficult time in the beginning of the year, but possibly improving in the 3rd and 4th quarter if writedowns and all consolidations are completed.
Commodities are being seen to increase over the year. Falling inventories and production will cause crude oil to push through $100 per barrel, and remain in the range of $100-$110 for the entire year. Food prices will continue to be volatile and increasing over the entire year. Our projection for corn is $5.40, soybeans $14.00, and wheat $10.50 per bushel. Gold and silver have both rapidly increased over 2007, and will reach $930 and $17 per ounce, respectively, sometime during this year.
