Crummer SunTrust Portfolio Spring 2005 (original) (raw)

CRUMMER GRADUATE SCHOOL OF BUSINESS SUNTRUST BANK Gold and Oil-Gold trades in USD; its price moves counter to the dollar. If the U.S. GDP growth dominates USD valuation, gold will trade off. The same holds true for oil. The sharp increase in oil is a constricted-supply-increased-demand issue, with countries like China and India demanding a lot of oil and not using it efficiently. Demand is outstripping supply but not by levels that should deem 56/barreloilprices.Ifyoulookatoilwithrespecttoanindexofprimarymetals(copper,nickel,magnesium,etc)whichareequallyimportantinindustrialproduction,youseethat,especiallyrecently,oilhasseriouslyoutpacedprimarymetals.Infact,sinceits2001low,oilhasincreased21456/barrel oil prices. If you look at oil with respect to an index of primary metals (copper, nickel, magnesium, etc) which are equally important in industrial production, you see that, especially recently, oil has seriously outpaced primary metals. In fact, since its 2001low, oil has increased 214% and an index of metals has increased 122%. To frame this even more clearly, gold has risen 73% and the S&P 500 had risen 55% over the same period. While we feel oil is overpriced, we feel that it is not likely to decline in the near term. The March 31, 2005 Goldman Sachs estimate of 56/barreloilprices.Ifyoulookatoilwithrespecttoanindexofprimarymetals(copper,nickel,magnesium,etc)whichareequallyimportantinindustrialproduction,youseethat,especiallyrecently,oilhasseriouslyoutpacedprimarymetals.Infact,sinceits2001low,oilhasincreased214105 certainly serves to fuel the frenzy of concern and uncertainty surrounding oil. Moreover, due to the uncertainty in the world regarding terrorism and natural disasters, a cataclysmic incident may likely cause oil prices to increase dramatically. The overall prospects for the US economy in broad terms are good despite the uncertainty introduced by several offsetting factors. However, we feel that these factors serve to cool off the burgeoning economy seen during '03 and '04. Sector Outlook and Concerns We maintain that gains in 2005-2006 will be made through identifying individual companies that should have strong and consistent earnings growth. Consumer Staples-Market Weight-There are concerns that the broad market may be unable to expand increase P /E multiples in the face of rising interest rates and a slowdown in earnings growth uncertainty, so this sector has enjoyed a substantial amount of defensive-minded capital inflows. Although rising energy prices may act to slow consumer spending in general, consumer staples, by definition, will continue to be in demand. We are neutral jn this sector. Consumer Discretionary-Market Weight-The continuing accommodative stance of interest rates and the improving job market are certainly countered by the "taxation" effect caused by rising oil prices. However, recent statistics show that discretionary spending has not waned as expected. We are neutral in this sector. Energy-Market Weight-A great deal of uncertainty is associated with energy commodities and companies, but a constrained oil supply paired with increasing oil demand will mean higher prices for oil and other energy-related commodities. However, the risk of an appreciating dollar will have adverse effects on oil prices, so a neutral position may be prudent. Financials-Underweight-We are reluctant in this sector due to concerns about the earnings impact of a flattening yield curve, a likely slowdown in the housing market, the sector's history of doing poorly after an initial rate hike, the FOMC's intention of returning the fed funds rate to a more neutral level, and the "taxation" effect of rising oil prices on economic activity. We feel that these catalysts are reasons to be underweight in this sector. Healthcare-Market Weight-The demand for healthcare will continue to increase for the next decade, as Baby Boomers age and longevity increases. Certain sub-sectors, such as pharmaceuticals, have seen tremendous losses due to the binary nature of business events.