VIEW FROM EDGEWOOD
| Year 2003 | Year 2004 | Year 2005 | Year 2006 | Year 2007 | Year 2008 |
| 1st Quarter | 1st Quarter | 1st Quarter | 1st Quarter | 1st Quarter | 1st Quarter |
| 2nd Quarter | 2nd Quarter | 2nd Quarter | 2nd Quarter | 2nd Quarter | 2nd Quarter |
| 3rd Quarter | 3rd Quarter | 3rd Quarter | 3rd Quarter | 3rd Quarter | 3rd Quarter |
| 4th Quarter | 4th Quarter | 4th Quarter | 4th Quarter | 4th Quarter |
ECONOMENTS
Edgewood Management LLC
July 1, 2008
The View from Edgewood
We are looking forward to the moment when we can write about something other than the credit crisis and stratospheric oil prices, but it looks like that time will not be for a while. Most analysts, including us, thought that the financial sector would be stabilized by now. While we still believe that the low point was the Bear Stearns bailout in March, the group still seems to be oozing bad news. The equity prices of many large financial institutions are down over 50% and some have seen another round of declines in the last two weeks. An ETF that tracks the S&P 500 financial sector is down 25% so far this year. Some large institutions like Merrill Lynch and Citigroup may have to raise additional capital after feeling confident three months ago that they had finished shoring up their balance sheets. In contrast some other large banks have painfully digested most of their bad loans and have at least stabilized their portfolios. The larger question is the long term prognosis for investment and commercial banks. How much increased regulation will be forthcoming and how will it affect the banks ability to take risks to produce interesting returns? We have serious questions whether many of these institutions will be called growth stocks for quite a while.
The price of oil continues to amaze us. Needless to say it is causing pain in the consuming countries. For the first five years of this rise in the oil price it has behaved more like a tax and been a drag on consumer’s spending power. In the last few months the first real signs that energy prices are working their way through the economy in the form of higher prices on other goods are starting to emerge. At these levels (who thought $100 a barrel oil would be attractive?) there is nothing but short-term bad news for the industrialized economies. Longer term we believe the rational thinkers in OPEC have to see oil at these levels as a huge problem for the resource that is the basis for many of their economies. Growing interest in alternative means of powering transportation, which is the primary consumer of petroleum in the industrialized countries, means that a significant number of cars, trucks and buses could be powered by something other than gasoline and diesel within the decade. While petroleum use will not disappear for quite a while it’s not difficult to believe that continued high prices will lead to much lower demand over time.
The Federal Reserve has kept interest rates low even in the face of rising inflationary fears. As we have said before, they want to make sure the economy and the financial system have stabilized. We believe the Federal Funds rate stays at this level for the rest of the year.
In the second quarter we have continued to be underweight financials and have added to our energy exposure with our first investments in alternative energy enterprises. Our portfolio companies have maintained their growth rates in the face of a slowing economy. We believe they will command a premium when the market decides to focus again on earnings growth.
| Back to the top of this page
|
350 Park Avenue, 18th Floor New York, NY 10022 - Phone: (212) 652-9100 - Fax: (212) 652-9101 Legal Disclaimer / Terms of Use |