Commentary and Articles

1st Quarter 2005 Quarterly Synopsis

“Strong Headwinds”

The 1st Quarter of 2005 was much like the 4th Quarter of 2004 in that the final month made the biggest difference. Just as December created much of the upside last quarter, March markets were a drag on the total returns for this quarter. At the beginning of March the Dow Jones Industrial Average had risen to its highest level in three-and-a-half years at 10,940, but pulled back significantly before the end of the quarter. Fears over increasing interest rates and fuel prices shook both stock and bond markets.

The Consumer Price Index (CPI) rose by 3% in the twelve months ending in February, which was the highest increase in the inflation measure since 1993. This increase was enough to worry stock and bond investors that the Federal Reserve may be more aggressive in raising the key short-term interest rate. As a result, bond prices fell in March along with stocks. Indeed, the Fed has been steadily increasing short-term rates and the yield curve has flattened as investors look for long-term rates and inflation to stay more consistent, despite the short-term inflation fears. This interest rate outlook coupled with oil prices rising 2.6% at the end of the quarter to $55.40 per barrel is cause for stock investors to expect less out of the market in the coming months.

One positive in the increase in the CPI is the fact that the gap between Producer Prices and Consumer prices has again leveled. This indicates that producers are in fact able to pass price increases along to consumers. This was a concern in our 4Q 2004 commentary as the PPI was increasing at a higher rate than the CPI. With the gap between the two closing, corporations should have consistent profit margins, which will help with earnings. However, even with the help for corporate earnings, it is unlikely that earnings will continue at the 20% level of growth witnessed in 2004. In fact the consensus outlook for 2005 is just above 10% growth in earnings and the first quarter expectations are closer to 8%.

One noticeable fact that helps to offset the worry in interest rates and fuel prices is the high level of cash on most corporate balance sheets. This level of financial strength can help companies weather the potential storms of higher interest rates as they can finance growth internally without increasing borrowing costs by taking on new debt at the higher rates. In addition, the high cash levels allows for corporate management to create shareholder value through increased dividends, stock buybacks and mergers and acquisitions.

Our focus list screens are designed to take advantage of companies with these high levels of profitability and financial strength. As would be expected, our holdings in the Energy sector faired well. In particular, Apache (APA, NYSE) and Burlington Resources (BR, NYSE) buoyed portfolios against the downward pull. Our shift from Royal Dutch/Shell ADR (RD, NYSE) to Chevron Texaco, (CVX, NYSE) added to our success in the sector. Cheesecake Factory (CAKE, NASDAQ), Goldman Sachs (GS, NYSE) and Dominion Resources (D, NYSE) also were star performers. American International Group (AIG, NYSE) announced that Chairman and CEO Maurice Greenberg would resign and that the firm would restate earnings, and this hurt our portfolios holding the stock, even after we had significantly cut back our holdings in AIG in 2004. We still believe the stock can recover given the overall strength of the company. Qualcomm (QCOM, NASDAQ) and Veritas Software (VRTS, NASDAQ) also pulled back to levels still above our original purchase price. We continue to emphasize our risk management approach to equities.

Our bond composite did not perform as well as in the past as we pushed duration out in certain accounts to meet specific client objectives. However, accounts with short durations in municipal bonds did fairly well in the rising interest rate climate.

WHM Capital Advisors, LLC is a discretionary investment management firm headquartered in South Carolina, which specializes in valuing companies, designing exit strategies and managing portfolios for business owners. In addition, WHM Capital Advisors manages a select number of portfolios for high-net worth individuals, trusts, and foundations. We use a core equity and fixed income strategy specifically designed to meet the individual objectives of each client.