1st Quarter 2006

We’re Moving

Due to the growth of our organization over the years and, in spite of a number of expansions of our building in downtown Glencoe, we have outgrown this facility. In May of this year a portion of the staff currently housed in the downtown bank building that has served our organization since 1935 will be moving to a new facility which is located near the east entrance to Glencoe. The Trust Department will be occupying the second floor. The downtown bank building will continue to operate with all the lending functions, banking, and record keeping for the organization. Our Trust Department phone number and our Post Office box 9 will remain the same, however our street address will change to 2202 11th Street East. We look forward to continuing our service to you and welcome your visits to our new facility starting at the end of May.

A Good Start to the New Year

With three months behind us in a year that equity markets have historically shown poor performance (the second year of a presidential administration) we continue to see signs of optimism with regard to the economy and the equity market. The U.S. Commerce Department recently reported the personal-consumption-expenditure deflator only increased 1.8% for the 12 months ended in February 2006. This inflation indicator, which excludes food and energy prices, is important, as the Federal Reserve tends to use it as a barometer for the decision on interest rates.

For the fourth month in a row consumer spending increased during February. For the first two months of 2006 the consumer spending increase would indicate the U.S. economy is on track to increase by 5% in 2006. Part of what has supported the increase in consumer spending has come from rising home prices. During 2005 homeowners extracted about $718 billion in cash from the equity in their homes. This was in the form of refinancings and home equity loans. This is up from 2004 when the amount was $632 billion. However, at current prices, the overall equity that the American public has in their homes over and above the mortgages is $11 trillion (that’s with a “T”).

The unemployment number continues to decline with the rate at the end of February being 4.8%. This is viewed as full employment in many conventional views. Corporate profits for the fourth quarter of 2005 grew at a rate of 14.4%. This is the largest increase in quarterly profits since 1992. Corporations for the most part are flush with cash and, if the economy keeps growing at a reasonable rate, their dollars will be used to expand, buy back stock and/or distribute to the owners.

So as not to look too optimistic, we need to remember that we still have a horrendously expensive war going on in Iraq. Tension in that part of the World continues to escalate. The World will need to figure out how to deal with Iran and the fact that they have now developed a missile that supposedly cannot be detected by radar. The job of cleaning up and rebuilding the Southeast part of our country is far from complete with the next hurricane season upon us and much concern that the number of hurricanes may increase from last year.

The Stock Market

The stock market started 2006 on a positive trend with both the Dow Jones and the S & P 500 increasing by about 3.7%. This is the best quarterly return since the fourth quarter of 2004. Energy prices continued to increase during the quarter and the cost of borrowing also rose. These are negative effects to the equity market, but optimism following a poor performance by the market in 2005 provided for more buyers than sellers. Although the first quarter provided about one half of our overall expected gain for 2006 of 7% to 8%, we are maintaining that projection for now. 

The Bond Market

The new Federal Reserve Board Chairman Ben Bernenke is now in place. So far under his leadership the Federal Reserve has continued to increase the discount rate in 2006. The most recent increase brought that discount rate to 4.75%, which targets the prime lending rate at 7.75%. Our best guess at this time is that there will be one more increase bringing the discount rate to 5% and the prime rate to 8%, which will take place in May. For the first time in many quarters the 10-year Treasury note has basically followed the increases that have taken place with the Federal Reserve. The current yield on a 10-year treasury is 4.85%. Although the short term rates have tended to increase over the last quarter, the rate on the 30-year treasury only increased .06%. We would anticipate the rate on the 10-year U.S. treasury to be in the neighborhood of 5.3% to 5.4% by the end of the year. Our continued philosophy relative to the investment of fixed income securities is to stay short with laddered maturities out six months to two years with current funds available for investment. There is currently little reward for going out much longer than that. 

Quote of the Day

The following quote comes from Sidney B. Lurie, who wrote the World’s first recurring brokerage house market letter.

“The market usually rings a bell before changing direction, but few people hear it.”