email:                         phone: (248) 835-9112                            fax:(419) 858-4570                       2139 Brinston Dr. Troy, MI 48083
Katto Financial LLC                                     News Letter 11/10/06  


The Economy:

The economy has slowed down as the GDP growth has slowed down from 5.5% in Q1 of 2006 to 1.6% in Q3. That was the intent of the FED with the series of interest rate hikes to fight inflation. The core inflation rate indicates that inflation has been reined in leading the FED to continue to pause on its policy of interest rate hikes and take a wait and see stance. The latest unemployment rate at 4.4% is at historic lows and was received as good news by the market. On the other hand, housing starts have declined and housing prices have come down reducing consumers' purchasing power. However, consumer confidence is still high as measured by the U of M survey. Gasoline prices have come down from $3/g to $2.15/g and have helped boost consumer confidence. The question going forward is will the economy continue to slow down further or has the decline stabilized at this point? Will oil prices go up or down from current levels of $60/barrel? There are two camps predicting two different scenarios. The optimists argue that corporate profits are at record highs and the economy is doing well and will continue to grow. The pessimists argue that the consumer will be negatively impacted by inflation, lower housing prices, and higher energy prices leading to a recession. It is my view that the positive indicators outweigh the negative indicators at this point and barring any crisis such oil supply disruption, terrorism, or natural disasters, that the economy will continue to grow at the slower pace that has been fabricated by the FED. 


As I predicted the Democrats won both the House and the Senate in the 2006 mid term elections. The political power has shifted to the Democrats. The most significant issue in voters' minds was not the economy! It was the war in Iraq! This was surprising to most economists. The market however did not go down and maintained the current historic highs on the indexes. The market interpreted the recent political change as inconsequential to the economy and the markets. Some market watchers point to a political gridlock which is viewed as status quo and not impacting the economy. The elections in 2008 may be more significant to the markets than the recent elections. President Bush has quickly adapted to the new political establishment and has made changes to appease the Democrats. The President quickly replaced the Secretary of Defense responsible for managing the war in Iraq and has started a dialogue with democratic leaders. The long term effect of this political change will not change the general upward long term trend in stock markets. 


As I indicated in the previous news letter, there is value in technology stocks and funds that invest in technology stocks. Two stocks that I had mentioned in previous news letters have reached new recent highs such as Microsoft and Cisco Systems. Yahoo is coming back as well. Other areas of the market are fairly valued. Drug stocks have reacted negatively to the recent political change as the market is predicting that the Democrats will limit drug company profits. Housing stocks have been decimated as housing prices have gone down and new housing inventories reach unusual high levels. Investors are generally bullish and continue to invest in the market which is a vote of confidence in continued growth in the economy and the market.    

Mike J. Katto

Registered Investment Advisor

email:                         phone: (248) 835-9112                            fax:(419) 858-4570                       2139 Brinston Dr. Troy, MI 48083