The Subprime Correction

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					April 2007                                              Ulland Investment Advisors, Inc.

                        The Subprime Correction
                                         Market Update from Jim Ulland

           as the correction at the end of the first
          quarter all about the impact of subprime                                         3-Year Performance
          mortgage default rates going up? Let’s
look at a series of economic factors and you can
make up your own mind. The quick answer is                                         35
“sort of.” Is the correction over? “It seems so.”

                                                                 Performance (%)
    Corporate earnings have been very good and                                                  29.63
    above expectations for the past three years.
    However, stock prices lagged earnings’
    growth rates. Most expect the growth in                                                                          23.27
    earnings to slow in 2007 with the economy.                                     20
    The decline in housing will reduce economic
    growth a full percentage point from about                                      15
    3.5% to 2.5%. The decline in housing was                                               Intelligent Blend     Russell 3000®
    caused by both speculation in condos and the                                                                 Growth Index
    sale of high risk mortgages to people with
    poor credit (subprime). Mortgages to high                In the last 3 years (ending 3/31/07), Intelligent Blend
    risk home buyers now are very limited and                was up 29.63% compared to 23.27% for the Russell
    speculation has all but ended. High default              3000® Growth Index. In Q107, Intelligent performance
    rates will continue for the next year.                   was flat, -0.08% vs. 1.29% for the Russell 3000®
    As expected, when borrowers default on
    mortgages, it hurts companies that issue the
    mortgages and those that invest in mortgages.                                  40.00           42.44
    New Century, whose business was almost
                                                                 Performance (%)

    entirely subprime, declared bankruptcy last                                    35.00
    month. Banks will have some manageable
    losses from this line of business.                                             30.00                             30.97

    As demand for new homes fell, the builders                                     25.00
    were late to react. They kept adding supply
    as buying interest slowed, which has resulted                                  20.00
    in a larger than normal inventory of unsold                                             Intelligent Growth   Russell 2000®
    homes. This inventory will take some time                                                                    Growth Index
    to come back into balance.         The high
    inventory will slow housing’s recovery.                  For the last 3 years (ending 3/31/07), Intelligent Growth
                                                             was up 42.44% compared to 30.97% for the Russell
                                                             2000® Growth Index. In Q107, Intelligent Growth was
                                                             flat, 0.24% vs. 2.48% for the Russell 2000® Growth.

                        4550 IDS Center • Eighty South Eighth Street • Minneapolis, MN 55402
                           612.312.1400 • 612.204.3464 Fax •
April 2007                                             Ulland Investment Advisors, Inc.
    Job creation remains steady and sufficient to           Financial Services:        Most financial service
    support solid retail sales as well as giving            companies had a strong fourth quarter. However,
    some support to home demand. 180,000 net                since many financial companies deal in
    new jobs were created in March. Both                    mortgages, the sector was hard hit by investor
    January and February job totals were revised            fear of subprime exposure in Q1 of 2007. For
    higher in the March announcement.                       instance, Bank of America, which is in some of
                                                            our Intelligent Blend and Defensive Growth
    The cold February and early April reduced               portfolios, dropped 8% in two weeks and has
    energy inventories, which helped energy                 recovered only 2% since. Other major banks,
    stocks. The resultant price increases did               Wall Street firms, and money managers showed
    renew inflation concerns at the Fed.                    similar declines. Bank of America now pays a
                                                            4.4% dividend as a result of the decline. As
    The market correction started in China. The             subprime fears are reduced by reality, we feel
    Chinese market had gone up 130% in 2006.                that financial stocks will recover steadily.
    All of the international markets declined
                                                            Technology:       The large amount of cash in
    sharply, some more than 10%. This decline
                                                            corporate bank accounts and in private equity
    flowed into the U.S. market adding to the
                                                            firms will result in more buyouts. Cash buyouts
    already abundant subprime fears. Now,
                                                            have the beneficial impact of reducing the
    several weeks later, the fears appear to have
                                                            number of shares available for purchase and also
    been worse than the subprime reality. Thus,
                                                            raising the amount of cash seeking stocks to buy.
    a recovery in stock prices has begun.
                                                            Clean Energy & Environment: Although we are
    During February the U.S. market was talking             avoiding ethanol, other companies with clean
    itself into a correction. Virtually every               fuel, air, and water technologies have become of
    financial publication ran articles on how long          increased interest to us. More news will come
    the market had gone without a 10% pullback              from our research efforts.
    during the last four years. Well, we seem to
    have had the correction, although it wasn’t             Index Funds: Exchange Traded Funds, or ETFs,
    quite 10%.                                              which we use to get cheap foreign exposure, had
                                                            excellent performance in Q4. That performance
              Portfolio Sectors                             was interrupted in March when the Chinese
                                                            market corrected and put a scare into all foreign
Oil & Natural Gas: This winter started with a               markets. With the exception of India, foreign
high inventory of crude oil and natural gas. Until          markets have recovered all of the correction
mid-December, it looked like the inventory                  triggered declines.
would be burned up with heating demand.
Unfortunately, from mid-December through mid-                              Your Opportunity
January there was a national heat wave only to be
followed by the coldest February since 1979.                We would like the opportunity to work with you
Early April set record lows as well. The                    and are happy to respond to any questions.
uncertainty caused by Iran, normalized                      Investors can transfer entire portfolios to us for
inventories, and falling natural gas production             management. A new portfolio also can be started
point toward a strong energy market for ’07.                with cash. Our minimum new account size is
Healthcare: This sector is attracting more
investor interest as part of a defensive strategy           If you would like to meet with us to review your
during the unsettled market. However, because of            situation, please call Keith Wolter at
the negative mood in Congress toward healthcare             612.312.1407       or     email       him     at
companies, individual stock performance varies    

                       4550 IDS Center • Eighty South Eighth Street • Minneapolis, MN 55402
                          612.312.1400 • 612.204.3464 Fax •

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