News Releases

Baseball, Gasoline Prices, Inflation and the Stock Market
Investment Implications

Geneva, October 3, 2005: The White Sox open the playoffs versus the Red Sox tomorrow. What you may not know is that the last time Boston defended a title was 1919. In that year, gas cost a mere $0.25 per gallon. Sound cheap? Well it depends on your inflation views over the past 86 years. This morning I paid $2.84 to fill the Suburban. In order for that price to be on par with 1919, inflation would have had to average 2.9% annually. Interestingly, I also went to the BLS web site this morning and plugged $0.25 into their inflation calculator and came up with exactly $2.84 per gallon for their inflation adjusted 2005 gas price. So in real terms, gas prices today are no more expensive than all the way back in 1919. How about that? One can argue that given the advances made in the exploration and production of oil, gas prices should have increased at a rate lower than inflation but that is for another day. Unfortunately, while interesting this analysis does not tell us anything about the Sox' post season chances.

As for the market, equity valuations are attractive for growth oriented long-term investors, especially relative to bonds (with real rates around 1.0%) and real estate. In general, we favor the large cap growth names. The third quarter will be good as far as earnings are concerned, save the consumer discretionary stocks. The preannouncement season is pretty much behind us for September Q companies and it was quite. Retailers are mostly October Q so we could begin to see negative reports here soon. There are some attractive opportunities in the consumer discretionary sector. I like WMT at 15X (e)EPS. The shares are cheap relative to where they have traded historically relative to earnings. I also expect WMT to grow their dividend in the 12%-15% range over the next five years, which is well in excess of our 2.5% expected inflation rate.

The economy will continue to grow. The Fed would not be raising rates if there weren't a very high probability of this occurring. Corporate balance sheets are in good shape and companies have a lot of cash, which is a positive sign for future acquisitions, capital spending and dividends.

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