Chris Davis : Davis Financial Fund Annual Review 2007

Currently, Chris and Ken of Davis Financial fund see several negative as well as several positive trends affecting the various financial sectors. On the negative side, today's inverted yield curve is providing a formidable headwind for the earnings of banks and other spread lenders by compressing their net interest margin. On the positive side, America continues to be an adaptable and dynamic economic powerhouse with a GDP approaching $12 trillion or almost 25% of global GDP. One critical economic indicator to monitor closely is job creation and over the past three years more than five million new jobs have been created. Significantly, there are approximately 146 million Americans working today and 70% of Americans own their homes. Also, U.S. household net worth is now approximately $54 trillion, up from $25 trillion just 10 years ago. These are just a few of many enormously important factors behind the long-term robustness of the American economy.

Another positive is the continuing health of corporate and consumer credit. After the spike in bankruptcies related to the stampede of filers prior to the tougher law that took effect in October, 2005, credit trends remain at or near their most favorable level in many years.

Overall, Chris and Ken believe that job creation and wage growth remain two critical economic statistics to monitor in assessing the health of the consumer. However, they also believe that the wealth effect created by the robust increases in housing prices over the past few years almost certainly intensified consumers' propensity to spend. This catalyst is now reversing, at least in several overheated housing markets where home prices have begun to decline. Furthermore, higher short-term interest rates and stubbornly high energy prices tend to slow GDP growth and consumer discretionary spending, albeit with a lagging impact. While no one knows precisely how the American economy will hold up given these stresses, Chris and Ken will do our best to stay focused on the dynamic changes that may be occurring.

Read the full 2006 annual review of Davis Financial Fund.