They say, “So goes January, so goes the rest of the year.” Let’s hope so! The Dow Jones Industrials (+1.3%), Nasdaq Composite (+4.5%) and Standard & Poors 500 (+2.6%) eclipsed the returns posted for all of last year in the month of January. Energy once again led sector performance, posting a gain of 13.8%, while consumer discretionary was the worst performing sector with a loss of .45%.

Bad news for the economy translated into good news for the stock market, as investors anticipated an end to interest rate increases by the Federal Reserve. There was a very weak jobs report with only 108,000 new jobs in December, which was about half the increase expected by economists. Consumer confidence fell to the lowest level in three months. Consumer borrowing fell for a second month in row in November — the first time that has happened in more than 13 years. We have now seen the first quarterly contraction in consumer borrowing since the recession of 1991. Retail sales in December, expected to increase 1%, rose only a disappointing .7%. The exclamation point to all the weak economic news was an unexpected decline in 4th quarter GDP. The economy grew by just 1.1% — the slowest pace in three years.

The housing market continued to cool, with new home starts (-8.8%) and building permits (-4.4%) both declining in December. The median sale price of an existing home also fell to $211,000 in December, which is down 3.4% year-over-year. Signs of a slowdown in housing can be found in a variety of markets. Apartment sales in Manhattan declined 27% to a 10-year low in the last quarter of 2005. Another example is in Phoenix, where a year ago there were approximately 145 homes for sale priced over $500k. Today there are over 1,300 Phoenix homes on the market priced over $500k. The housing slowdown will continue to weigh on consumer spending and GDP growth in 2006.

Energy prices recovered, with crude oil rallying back above $68/barrel and natural gas approaching $10/btu. We are in the midst of an energy crisis. It is more likely that the price of oil will rise to $100/barrel before it returns to $40/barrel. Why? In a word, China. In the US we consume 27 barrels of oil per capita per year and there are approximately 740 vehicles for every 1000 people. China currently consumes 1.7 barrels of oil per capita per year, and there are approximately 3 vehicles for every 1000 people. China’s economy grew nearly 10% last year. The demand for energy will continue to outstrip supply for the foreseeable future. In our opinion, the best hedge to rising energy costs is to own energy stocks with a focus on exploration and production companies.

We are in the minority (usually a good place to be) when we say we think today’s (Jan. 31st) increase in short-term interest rates was the last. Alan Greenspan retires today and Ben Bernanke takes the reigns as Chairman of the Federal Reserve. History has shown that in past Fed cycles, the Fed stopped raising interest rates when growth slowed rather than when inflation peaked. Economic growth will likely pick up in the first quarter, but the trend is clearly toward a slowing economy. Core inflation (minus food and energy) was up a modest 1.7% in 2005, well within the Fed’s target of 1-2%. Core inflation should remain contained as a result of the increasingly powerful forces of globalization. The traditional determinant of core inflation - labor costs - no longer carries the same weight it once did, due to the dis-inflationary impact of globalization. Regardless, today’s employment cost index report revealed that labor costs are hovering near a six-year low. We also think this new Federal Reserve Board will be particularly market friendly as we approach the mid-term elections, considering that Bernanke and all but one board member are Bush appointees. This lays a solid foundation in the months ahead for equity returns to play catch-up with the phenomenal corporate earnings growth we have seen over the past three years.

We remain fully invested in our model equity asset allocation and model equity portfolio. Energy continues to be our most significant overweight. Japan remains an overweight in our international allocation. We believe the financials could be one of the best sector plays in 2006, with a focus on the brokers and large money-center banks. Bank earnings were hurt in the fourth quarter both by rising short-term interest rates, and the huge increase in consumer bankruptcy filings completed before the new, more stringent bankruptcy law took effect on October 17th. The dividend yields of many money-center banks, taxed at 15%, are in some cases higher than that of the yield on the 10-year treasury. Investment banking is on the rise as mergers and acquisition activity continues to increase. This sector has also outperformed in past Fed cycles just as the Fed has ended its rate hikes. We think this is a sector to watch!

Fuller Asset Management, LLC (FAM) is a registered investment adviser located in the states of Arizona and Maryland. FAM and its representatives are in compliance with the current registration requirements imposed upon registered investment advisers by those states in which FAM maintains clients. FAM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.
This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by FAM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.
For additional information about FAM, including fees and services, send for our disclosure statement as set forth on Form ADV from FAM using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

Fuller Asset Management, LLC (FAM) is an SEC registered investment advisor. FAM and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which FAM maintains clients. FAM may only transact business in those states in which it is noticed filed, or qualifies for an exemption or exclusion from registration requirements. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by FAM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

For additional information about FAM, including fees and services, send for our disclosure statement as set forth on Form ADV from FAM using the contact information herein. Please read the disclosure statement carefully before you invest or send money.