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February 2003 Issue
The US economy slowed more than expected in the 4Q. The government reported
4Q GDP rose only at an annual rate of .7%. For the year, that means GDP rose
only 2.4%, subject to subsequent revisions, and as compared to only .3% in
2001. Consumer confidence continues to fall amidst several encouraging
economic indicators. Most of my sources, including The Bank Credit
Analyst, believe the economy will rebound slowly in 2003 with growth
back to a 3% rate by year-end. This outlook assumes that there are no
serious negative surprises, and that if there is a war with Iraq, it will be
won relatively easily and decisively. More analysis of the economy is
included in the following pages.
Stocks declined in January as “war worries” intensified, with the Dow
falling below 8,000 late in the month. Investor confidence is waning, and
money continues to flow out of mutual funds. The current decline could
continue until the US attacks Iraq, which looks very likely, but that could
present perhaps the best buying opportunity of the year. I don’t expect
stocks to fall below their October lows. Should the US have some early
success in the war, stocks should begin to trend higher as in the past.
Bonds have been in a narrow trading range recently, but it looks
increasingly likely that the low in rates has been seen, and that bond
yields will begin to trend higher later this year. With $300+ billion
deficits staring at us for the next two years, I believe the bull market in
bonds is over. I strongly recommend you consider Capital Management
Group to direct your bond investments given the outlook for higher rates.
Gold, oil and commodities have been the big winners recently. Gold hit a
seven year high of $380 this week. Oil prices topped $34 dollars a barrel,
and several other traditional commodities are trending higher. 2003 may be
another good year for well-managed futures funds. If you are an
accredited investor, call us to find out how to get onboard these markets.
In this issue, we cover a variety of topics: the economy; where to invest
now; why investors under-perform the markets; Bush’s new saving/retirement
accounts; and a great editorial slamming the Clintons, rightly so.
People Are Too Negative
In their February issue, the editors at The Bank Credit Analyst state
that they feel the public is simply too negative about the economy and about
stocks. They believe the media has generated unwarranted worry about the
economy, the war with Iraq, the equity risks, deflation, consumer balance
sheets and the corporate sector in general. They state:
“There is still pervasive gloom about the economy on the grounds that
the post-bubble adjustment still has much further to run. We believe that
the pessimism is overdone, and that the economy has a good chance of
surprising on the upside once the geopolitical [Iraq] clouds
lift. Thus, we are sticking to our view that risky assets will
outperform over the course of this year. This means favoring stocks over
bonds and corporate bonds over Treasurys on a 6-to12-month view...
Presumably, there will be a healthy relief rally in equity prices and a
selloff in Treasurys when the conflict with Iraq is no longer a major
issue.”
If BCA’s view is correct, then investors should consider buying stocks and
selling bonds just ahead, or at least moving bonds into the hands of a
market timer like Capital Management Group. CMG, by the way,
went to cash on January 28, an indication that they believe rates will move
higher. More on this later.
What Good Economic Signs?
Retail sales rose 1.2% in December and were up 4.6% over the last 12
months. Consumer spending increased 3% in 2002. Durable goods orders and
factory orders were both up in December and above 2001 levels for the year.
ISM manufacturing index rose in January for the third consecutive month.
The housing sector broke all records in 2002 in housing starts and sales
of new and existing homes.
We have all heard that it is business investment spending that needs to
kick-in, along with consumer spending to get the economy back on a 3% path.
According to the Commerce Department, business investment spending increased
1.5% in the 4Q after plunging ever since 911. This news was a surprise to
most analysts. While the 4Q increase was modest, it was at least a start,
and it could rapidly increase significantly if there are further signs that
the economy is accelerating. Along the same line, business inventories are
very low and will have to be replenished if the economy strengthens.
The main negative in the economy at this point is consumer confidence which
has declined in seven of the last eight months and is at the lowest level
since November 1993. This is despite the fact that the economy grew 2.4% in
2002. The media and the gloom-and-doom crowd have been very effective.
When the government reported that 4Q GDP rose only .7%, we were told that
had it not been for increased defense spending, the economy would have been
negative for the period. But what they didn’t say was that the
longshoremen’s strike on the West Coast cost the economy tens of billions of
dollars in the 4Q.
Things Could Look A Lot Better Soon
The next 60 days could bring a significant change in the pessimistic view
that prevails today. This newsletter is written on the day that Secretary
of State Colin Powell addressed the United Nations with his evidence that
Iraq has weapons of mass destruction. I watched his speech and found it
very compelling. This suggests that the US will initiate the war on Iraq
very soon. The military sources I read believe that within the first 2-3
weeks of the war, it will be clear that the US will succeed in bringing
regime change to Iraq.
If this proves to be the case, consumer confidence should shoot higher,
giving a significant boost to the economy. If stock prices hold above their
October lows, and the war goes well, we could see a new uptrend develop
quickly in equities. Let us not forget that there is a sea of cash out
there that could drive equities significantly higher if the public decides
things aren’t so bad after all.
Falling oil prices would be another positive development. Oil prices have
spiked not only because of the supply problems in Venezuela, but also
because of war worries. If the US is successful in Iraq, oil prices should
begin to fall, and especially if it turns out that a new Iraq could begin
producing and exporting at full capacity before long.
The point is, while sentiment and confidence are low at this point, that
could change quickly. US success in Iraq this time around will be far more
uplifting than in the Gulf War because this is part of the War On Terror. I
could see the public turning euphoric over a victory in Iraq. If so, the
economy could indeed “surprise on the upside” as BCA suggests.
What About Negative Surprises?
While I have suggested a better economy and rising equity prices in the
scenario above, there is certainly the threat of negative surprises. That
could come in the form of more major terrorist attacks in the US. Some
believe that if we go to war with Iraq, that may be the trigger for more
terrorist attacks in the US. Obviously, if there are more major attacks,
that would send confidence into a black hole, and my optimistic scenario out
the window.
Certainly, if the war on Iraq goes badly, then all bets are off. While most
military sources believe it will go very well, there is always the threat
that the unexpected could happen. While it is thought to be doubtful that
Saddam Hussein will use weapons of mass destruction against our troops, it
can’t be categorically ruled out. If there are large casualties, morale in
the US will sink like a rock.
Others believe that the war in Iraq will spark chaos all across the Middle
East. Some feel that the presence of US troops in the heart of the region
will spark a major new Mid-East war involving Saudi Arabia, Egypt, Syria,
Iran and, of course, Israel. While this cannot be ruled out, it does not
seem likely.
Finally, there’s the North Korea/China question. Might North Korea take
military action against South Korea while the US is tied-up in Iraq? Might
China move against Taiwan? Some think that N. Korea feels it doesn’t have
anything to lose since it is a member of the Axis of Evil and may be next in
the War On Terror. Then again, a move against S. Korea would insure that N.
Korea is next on the list. So, while these things can’t be ruled out, they
seem very unlikely.
How To Invest Now
As suggested earlier, the best buying opportunity of the year may occur just
ahead in equities. The question is when. That depends on the war. If the
markets react as they have in the past, you will want to get onboard before
it is clear that the US is in full control. I suggest you use one
of our recommended market timers to make that decision. All of our
recommended Advisors beat the equities market in 2002. Consider
Hallman &McQuinn, Niemann and Potomac.
As for bonds, BCA believes that Treasury bonds will go down this year,
especially when (and if) it is clear that the US has prevailed in Iraq. BCA
believes that corporate bonds are the place to be this year. This is why I
believe that Capital Management Group (CMG) is a great choice. CMG
invests in high-yield bond funds that are highly diversified. High-yield
bonds historically benefit during economic recoveries. CMG has an
outstanding 10-year record, averaging 10.5% with a worst-ever losing period
of only 3.3% (non-leveraged program). This could be a very
good time to invest, especially if you are in Treasury bonds.
Our futures funds are off to a great start so far this year, following a
very good year in 2002. All of our funds are up 7-8% so far this year.
Unfortunately, our older funds are no longer open to new investment.
We do have one fund that is open to accredited investors. You can call us
for more information.
We’re getting a lot of questions about gold. Gold has had an exciting
run-up, especially recently. Prices hit $380/ounce this week, the highest
in seven years. Yet I would NOT chase gold at this point.
Part of the reason for the advance is war worries. If the US gains quick
control of Iraq, gold could fall significantly. If you believe in the
bullish case for gold, I would wait to buy it until there is a meaningful
correction, most likely whenever it’s clear the US will prevail in Iraq.
The Dalbar Studies
Since the mid-1990s, I have been writing about the studies published by
Dalbar, Inc., the Boston-based market research firm. If you recall,
Dalbar studies mutual fund inflows and outflows and uses that information to
estimate what the “average investor” made in any
given time period, versus what the funds actually made. The results are not
pretty.
If you buy a mutual fund and hold it for the long-term, you will make
exactly what the fund makes (assuming no additions or withdrawals). If a
fund makes 50% in three years, and you hold it for the same three years, you
will make exactly what the fund made. But most investors don’t do that.
Instead, they jump from fund to fund, hoping for the best performance.
Unfortunately, they often sell their funds when they are under-performing to
buy the latest hot funds, only to see them under-perform. The results are
disturbing!
The latest Dalbar study looks at the results during the period from 1984 to
2000, during the greatest bull market in history. The following numbers
from Dalbar represent investors who bought diversified stock mutual funds,
which tend to track very closely on average with the S&P 500 Index, and
bond/fixed income funds, which tend to track closely with the long-term
Government Bond Index. Read the numbers closely.
In the period from 1984 to 2000, the S&P 500 Index gained 16.3%
on average per year; however, the average investor in stock mutual funds
gained only 5.3% on average during that same period. Surprised??
In the same period, 1984-2000, the long-term Government Bond Index gained
11.8% on average per year; however, the average investor in bond mutual
funds gained only 6.1% on average.
The problem is, most investors jumped around from fund to fund during that
period, often buying high and selling low. Yes, the investors who bought
the average stock fund(s) and/or bond fund(s), and held them for that entire
period, made roughly what the market indexes made: 16.3% on average for
stock funds and 11.8% on average for bond funds. But most investors
didn't. Due to bad timing, they didn't make nearly as much as the average
funds.
In the case of stock mutual funds, the average investor made less than a
third of what the funds made on average. And this was in the hottest stock
market in history! In the case of bond funds, the average investor made
only about half what the funds made.
I don't know about you, but I was shocked when I first began to look at
Dalbar's (and others') numbers on this in the early 1990s! I had no idea
that investors, as a group, were jumping from fund to fund to fund so
frequently, and with such disastrous results.
My observation in dealing with thousands of investors over the last 25 years
is that most people (including me) do not have good timing when it comes to
the markets. We have a tendency to buy things when they are hot, not when
they are cold. In most cases, it should be the other way around. While the
media is certainly a willing accomplice along this line, with the constant
barrage of advice, we are all influenced by greed and fear, at least to some
extent. We want to be in the hot funds or hot sectors. But this strategy
simply doesn’t work for most investors.
The Dalbar numbers have consistently shown that if investors simply picked
the “average” stock mutual funds, and held on for the long-term, they would
have made about what the S&P 500 made. Yet this is very hard for most
investors.
As you know, I am a firm believer that most people would be better off if
they used professional money managers to direct most of their investments.
The Dalbar numbers above, and similar studies, certainly back me up. Today
we have more uncertainties than ever before, especially with the increased
terrorism threat. This is why I have 100% of my investment
portfolio in the hands of professionals. I don’t manage any of it
myself.
Bush Spends With The Best Of ‘Em!
President Bush released his new budget proposal for fiscal 2004 this week,
and it’s a whopper at $2.23 trillion in total. The new budget is 4.2%
higher than the fiscal 2003 budget. The new budget has a projected record
deficit of $307 billion next year (and another $300+ billion in 2005). The
estimate of $307 billion does not include the cost of war with Iraq, which
is estimated to run $50-$100 billion. So the deficit next year could
actually top $400 billion!
I am disappointed that Bush didn’t push for lower spending, especially with
Republicans in control of the White House and Congress. This proves that
Bush can spend with the best of ‘em!
The big spending next year will be good for the economy, but I expect it
will be bad news for the bond market. Big deficits usually lead to higher
interest rates and in this case, a lower dollar.
New Savings/Retirement Accounts
There was some good news along with Bush’s new budget. The president is
proposing sweeping new changes that would allow many people to sock away far
more money tax-deferred than before.
Anyone who has tried to accumulate some money for retirement, college
educations for their kids, or for a new home has run into a myriad of
regulations, forms, restrictions and confusion. Should you do a traditional
IRA, 403(b), 401(k), medical savings account, 529 college savings plan, or
just give up and just sock the money away in your mattress?
Along with the new budget, President Bush has proposed new tax-free savings
plans that would not only increase the amount you can put back for various
needs, but would also simplify the maze of different types of accounts and
regulations governing each. The three new plans are called Employer
Retirement Savings Accounts, Lifetime Savings Accounts, and Retirement
Savings Accounts.
Employer Retirement Savings Accounts
One of the major reasons that more employers do not provide retirement
benefits is the current regulatory maze surrounding qualified retirement
plans. It seems that every time Congress meets, new laws are passed that
add another layer of complexity or reporting to these plans. This makes the
administrative costs of providing such a plan prohibitive for many employers.
The Bush proposal would consolidate 401(k), thrift, 403(b), and governmental
457 plans, as well as employer-sponsored SARSEP and SIMPLE IRA programs into
Employer Retirement Savings Accounts, or ERSAs. Contributions to these
plans would still be tax-deductible and earnings would continue to grow
tax-deferred. Withdrawals at retirement would continue to be taxed as
ordinary income.
Administration of the new ERSA plans would be similar to current 401(k)
administrative requirements, but greatly simplified. Like 401(k) plans,
employees would be allowed to contribute up to $12,000, increasing to
$15,000 by 2006. Employers will also be able to continue to match
employees' contributions as in the past.
Lifetime Savings Accounts
Lifetime Savings Accounts (LSAs) could be established for any purpose,
including children's or grandchildren's education, a new home, healthcare
needs, or funds to start a new business. Individuals will be able to make
non-deductible contributions of up to $7,500 per year (indexed for
inflation), or $15,000 per married couple. There is no age or income cap on
the ability to participate in these programs, so many parents may actually
set up LSAs for their children to accumulate funds for college. Best of
all, funds can be withdrawn from an LSA for any purpose at any time with no
penalties or taxes on the earnings.
Retirement Savings Accounts
The final type of new account is called a Retirement Savings Account (RSA).
This will allow individuals to salt away another $7,500 per year ($15,000
per couple) into an account that is set-aside for retirement. RSAs would be
governed by rules similar to those for current Roth IRAs, in that
contributions would not be tax-deductible, but individuals will be able to
participate regardless of their income. Currently, high-income individuals
cannot contribute to a Roth IRA.
Earnings will grow tax-deferred, and can be withdrawn tax-free after age 58,
or upon the death or disability of the account holder. Existing Roth IRAs
would simply be converted into the new RSA. Existing traditional IRAs could
be converted into an RSA, again without any income limitations. Any
traditional IRA not converted to an RSA would not be able to accept new
deductible contributions, but would be able to accept rollovers from another
plan.
Examples Of The New Savings Plans
Here are some examples of how much you can set aside under the new savings
plans proposed by President Bush. For this example, we'll assume a single
taxpayer less than 50 years of age:
Employer Retirement Savings Account:
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$12,000
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*
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Lifetime Savings Account
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$7,500
|
|
Retirement Savings Account
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$7,500
|
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TOTAL:
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$27,000
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*Does not reflect employer matching contribution.
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For a married couple, the amounts could be doubled ($54,000), assuming that
both participate in an Employer Retirement Savings Account. Individuals
over age 50 are permitted to make "catch-up" contributions of $2,000 per
year to an Employer Retirement Savings Account, making the total allowable
contribution $29,000.
As discussed above, the $12,000 contribution to the ERSA is tax-deductible,
but contributions to the LSA and RSA are not.
When announcing the new plans, the Treasury Department said that these
accounts would "make saving simple for everyone and for every purpose…No
longer will people have to worry about the endless maze of confusing rules.
The two simple accounts will have one powerful goal making saving for
everyday life and retirement security easier and more attractive."
I'm for anything that makes saving simpler and easier! Of course, it
remains to be seen if these new proposals will be adopted. The Democrats
are likely to attack them as more benefits to the rich.
Who Are "The Rich" Anyway?
The following statistics from the IRS may surprise you. They certainly
surprised a lot of people when I put them in my weekly E-Letter in January.
If you make $28,000 a year, do you consider yourself rich? What if you make
$55,000 a year, are you rich? Okay then, what if you make $92,000 a year,
are you rich? I doubt that many in any of these income brackets consider
themselves rich, especially if they have kids.
However, if you make $28,000 a year, you are in the top 50% of taxpayers;
$55,000 puts you in the top 25%; and $92,000 puts you in the top 10%, the
so-called "super-rich."
The liberals NEVER quote these figures either. They know that most people
making $28,000-$55,000 do NOT consider themselves remotely to be rich, nor
do many who make $92,000. These folks would be appalled if the liberals
were to call them rich people, so they don't.
Also from the IRS, the top 50% of taxpayers pay 96% of all income taxes.
Only 4% of income taxes are paid by the bottom 50%. (This from tax data
for 2000.) You rarely see this data reported by
the media either. Are you surprised?
Editor’s Note
I haven’t written much about politics in the last year. I must admit that
politics has been somewhat less interesting since Bill Clinton left office.
But unlike most presidents before him, Bill Clinton has denied tradition by
openly and shamelessly criticizing President Bush ever since he took
office. Hillary Clinton has also been vocally critical, but this would be
expected of a liberal Democrat Senator. Yet despite my inclinations, I
have not chosen to write about the Clintons in some time.
In the last few weeks, however, the Clintons have made some statements that
I simply can’t ignore. Rather than address those statements in my own
words, I have chosen to reprint a recent editorial by none other than
Dick Morris, the long-time Clinton political advisor. Morris has
undergone a major transition in his life (for the better) in recent years,
and he has come out swinging at the Clintons on numerous occasions. He is a
regular columnist for the New York Post and other media sources, as well as
a popular guest on TV talk shows. Morris knows more about the Clintons
than just about anyone.
The following Morris column appeared on January 29 in The Hill, a
very old, widely-circulated newspaper that focuses on politics in
Washington.
“Even by Clinton Standards, It's Sheer Chutzpah.
When Sen. Hillary Clinton (D-N.Y.) complains that it is a ‘myth’ that
the Bush administration is enhancing homeland security, and her husband says
that he is the reason North Korea does not now have 50 nuclear weapons, they
enter realms of hypocrisy and chutzpah new even by their exalted standards.
Both of their comments smack of killing your parents and then pleading for
clemency on the ground of your orphanhood.
Just why is our homeland security, in particular our air security
system, flawed and vulnerable to terrorists? Because in 1996, her husband,
the president, refused to take tough measures to strengthen it. Instead he
punted by appointing a commission, under Vice President Al Gore, to make
recommendations.
They make pathetic reading after Sept.11. As Sean Hannity notes in his
book Let Freedom Ring, the failure of this commission to embrace
truly important air security measures left America vulnerable and exposed.
The Gore Commission's focus was on making sure that all luggage put
onboard a plane be matched to passengers actually on the flight, a step
which would enhance security only if terrorists were obliging enough never
to commit suicide in their attacks.
Indeed, its only recommendation that might have helped avert Sept.11
was for ‘automated passenger profiling’ which would identify ‘a small
minority of passengers who merit additional attention. … based on
information that is already in computer databases.’’ After civil liberties
groups raised hell and called the idea ‘racial profiling,’ it was dropped by
the politically correct administration.
After the ValuJet crash in Florida and after TWA 800 plunged into the
Atlantic, there was a clamor for a tough crackdown on air terrorism. I
polled the issue on Aug. 1, 1996, and advised the Clintons and Gore that
voters supported X-ray of luggage by a 90-to-7 margin, federalizing
security personnel by 92-to-6, and requiring photo IDs for all
passengers by 92-to-6. Yet, despite these wide margins of public
approval, none of these key recommendations made their way into the
Gore report. [Emphasis added, GH.]
Both Hillary and Bill have also stepped way over the line on their
criticism of Bush on North Korea. Hillary said Bush had ‘mishandled’ the
matter. President Clinton said that it was his policies that stopped the
rogue nation from having ‘50’ nuclear weapons.
Wait a minute: It was Clinton who negotiated the 1994 Framework
Agreement with Pyongyang in which North Korea agreed to stop diverting
plutonium from its nuclear plant in Yongbyon in return for the delivery of
500,000 metric tons of fuel annually and the construction of two light water
nuclear power plants costing $4 billion.
By mid-August of 1998, newspaper reports indicated that the U.S.
intelligence agencies had detected a ‘huge secret underground complex in
North Korea’ that they suspected was ‘the centerpiece of an effort to revive
the country's … nuclear weapons program.’The United States asked to inspect
the underground caverns. North Korea demanded a cash payment of $300 million
to permit the inspectors to go there and the matter was dropped.
Now, intelligence sources estimate that North Korea has one or two
nuclear weapons and has had them since the mid-'90s. So why didn't Clinton
demand that North Korea disarm? Why didn't he insist on access to the
caverns? Why did he keep funding, fuel and food flowing while Pyongyang
broke its word?
At the time, Clinton assured Congress that North Korea wasn't
violating the deal because the Yongbyon plant had not been reactivated,
whatever was happening in the caverns. In fact, the administration insisted
that the 1994 deal wasn't an agreement at all, but an ‘agreed framework that
does not bind any party to specific actions or hold parties in noncompliance
if given objectives are not met. Failure of the (so-called) agreed
framework, consequently, is very much in the mind of the beholder.’
Presumably the two atomic bombs North Korea is thought to have are in our
minds as well.
When the Senate voted, 80-11, in late 1998 ‘to condition funding (of
the '94 deal) on a presidential certification that North Korea has halted
all nuclear activities,’ Clinton continued to wink at North Korean
noncompliance.
And now, Bill and Hillary are attacking Bush for the twin legacies
they left him: inadequate air security and a broken deal with North Korea
.
It's a good thing those two are sociopaths. Otherwise their
consciences might bother them when they say things like that.”
[Emphasis added, GH.]
Dick Morris is a former consultant to President Clinton, Sen. Trent Lott
(R-Miss.) and other political figures.” ENDQUOTE.
The Clintons Won’t Go Away
While shunned in some venues, Bill Clinton continues to be very popular on
the lecture circuit. He typically packs the house wherever he speaks. In
Austin, for example, they are going to have to move Clinton to a larger
auditorium because he more than sold out the original venue. But then,
Austin is a fairly liberal city, I hate to admit. The media everywhere still
fawn over Clinton, despite the outrageous things he says about Bush and the
Republicans.
Meanwhile, Hillary Clinton is carefully paving the way for her run for the
presidency in 2008. As a matter of fact, she could easily win the Democrat
nomination for president in 2004, based on her poll numbers. Various
recent polls have shown her to be twice as popular with voters than
any of today’s leading contenders for the Democrat nomination. But
apparently, Hillary won’t make a run in 2004 because they fear that
President Bush is unbeatable. Of course, that could change, especially if
the war on Iraq goes badly.
This is bad news for the Republicans. There is no clear leader to succeed
Bush in 2008. Some speculate (and I agree) that Bush needs to choose a new
running mate in 2004, and publicly groom him (or her), since Dick Cheney is
not likely to run for president in 2008.
If things are not going exceedingly well in 2007-2008, we could very well
see the Clintons - at least Hillary - return to the White House.
That’s a chilling thought, at least among conservatives!
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