TREES INVESTMENT COUNSEL VIEWPOINT (Q1 2006)

 The world is full of paradoxes, and the investment world is no exception.  As an example, let's look at the supposed outflow of US jobs.  Everyday while watching the 5 o'clock news or listening to NPR, our ears are flooded with reports of closing manufacturing plants and the outsourcing of jobs to China and India.  With the verbiage that touches our ears one would think that the American worker is in great distress.  Yet when we peel back the details, we find some conspicuous facts that lead us at TIC to believe the American worker is actually in very good shape.  Unemployment is at the exceedingly low rate of 4.7% (down from 5.4% in March 2005) - a number that is extremely low on a historical basis and also low in comparison to other nations across the globe.  Many countries in Europe are experiencing jobless rates of over 10% and have been for years.  Furthermore, the US has been able to CREATE jobs (approximately 211,000 in the month of March alone), despite increasing worker productivity.  Sounds like a healthy labor force to us.

Another interesting disparity is the difference between US corporate earnings growth and returns on the S&P 500 - especially when compared to foreign earnings growth and returns.  Here are a few interesting facts.  The return on the S&P 500 Index was a paltry 4.9% last year (1.8% of which was from dividends), and has gone essentially nowhere in five years.  The MSCI EAFE Index, the Morgan Stanley index used as a benchmark for International equities, increased 29% in 2005.  These numbers are in contrast to EARNINGS growth of approximately 20% in the US and still strong, but clearly less robust growth of 14% for the MSCI EAFE Index.  The upshot of such results has been contracting P/E multiples for US stocks (especially large cap, which have underperformed mid-cap and small-cap) and expanding P/E multiples for International securities.

Here are a few other juicy tidbits.  The US economy grew 4% last year vs. less than 2% in Europe and less than 1% in Japan.  The US population is growing.  This compares to flat population in Europe, and a declining population in Japan.  These facts do not bode well for social security issues more substantial than what we face here.  Moreover, the budget deficits of France, Germany, Italy, and Japan are all greater than the US budget deficit as a percentage of GDP.  The civilized world has reason to be concerned.

What we have now is convergence.  Foreign stocks and US stocks seem more or less evenly valued given their prospects.  Likewise over the last six years the stocks called "value" and the stocks called "growth" have converged in attractiveness, as have small caps and large caps.  The big question is, are they all undervalued, overvalued, or just about right? We are not smart enough to know the answer, but it has been a long time since the stock markets around the world have had a hiccup.

M. Jay Trees                                                                                                                                                    Jackie E. Moss                                                                                                                                                      April 21, 2006