Outside the Box

Quarterly Review and Outlook - Fourth Quarter 2006

John Mauldin

January 8, 2007

On Friday, I wrote my annual forecast, "The Goldilocks Recession," on what investment themes I expect in the coming year. This week's Outside the Box will follow up on the subject with an excellent piece written by Van Hoisington and Dr. Lacy Hunt. In their fourth quarter review of 2006, they address how the current status of the bond market measures up against historical interest rates and inflation. From there, each of the six major sectors of the economy, Personal Consumption Expenditures (PCE), Residential Investment, Nonresidential Fixed Investment, Government Expenditures, Inventory Investment, and Net Exports, are covered specifically and analyzed to depict the trends for 2007.

This letter is one of the more in-depth and fundamentally heavy articles I've featured as it is chock-full of data, or what I like to call the "hard facts." Van Hoisington and Dr. Lacy Hunt have done a stellar job collecting a great deal of information and dissecting it to form some well-thought investment conclusions. For those of you unfamiliar with Hoisington Investment Management, the firm is a registered investment advisor specializing in fixed income portfolios for large institutional clients. Located in Austin, Texas, the company has over $3.5-billion under management, composed of corporate and public funds, foundations, endowments, Taft-Hartley funds, and insurance companies.

Each year presents its own set of both opportunities and risks for us investors. I trust that you will find value in this Outside the Box and use it to form your own independent investment conclusions.

John Mauldin, Editor
Outside the Box

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Quarterly Review and Outlook - Fourth Quarter 2006

By Van R. Hoisington and Lacy H. Hunt, Ph.D., Hoisington Investment Management Company

DOLLAR BILLS

In the fourth quarter of 2006, nominal GDP expanded at an estimated 2.5% annual rate. A quarterly growth rate this low has occurred only five times in the past twenty years, four of which were during recessionary periods. The significant downshifting in nominal GDP growth from 9% in the first quarter…

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