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February 2004 Issue
The economic growth rate slowed in the 4Q but still managed to grow at a 4%
annual rate according to the Commerce Department’s preliminary report in
late January. That followed the red-hot 3Q gain of 8.2% (annual rate).
Some of the economic reports released in January were consistent with the
slowdown in GDP, but overall the data continue to point to a firm economy in
2004. The unemployment rate fell to 5.6% in January, and new jobs created
were the highest in three years. Most economists still expect growth to be
in the 4-5% range for all of 2004.
The Bank Credit Analyst remains very optimistic about the economy for
2004 and even beyond as discussed at length last month, barring any major
negative surprises. They expect that the Fed will have to raise interest
rates at some point this year but only by a modest amount. The Fed paved
the way for a rate increase at the late January FOMC meeting, but such an
increase is not likely until mid-year or later.
BCA continues to forecast higher equity prices this year, but they do not
expect the markets to match their gains in 2003. This seems to be the
prevailing view for stocks in general. While 2004 may not be a repeat of
last year, and will almost certainly be more volatile, we should not rule
out the possibility that stocks will again surprise on the upside this year.
In this issue, I focus on the performance of two of our recommended stock
mutual fund programs - Niemann Capital Management and Potomac Fund
Management. Both of these professionally managed programs had an
outstanding year in 2003, and also beat the S&P 500 Index over the last
three, five and seven-year periods. I also review the performance of
Capital Management Group, our recommended bond fund program.
CMG also had a fantastic year in 2003. Details are on the following pages.
In my weekly E-Letters last year, I predicted that the 2004 election season
would be one of the “ugliest” on record. That prediction
is certainly coming true! This month, I look at some of the prevailing
political issues - the economy, tax cuts, Iraq, WMDs, the War On Terror and
others - and give you my thoughts on those and the election. See pages 7-8.
The professionally managed mutual fund programs I have most recommended over
the last two years had outstanding performance in 2003. The performance
results below are for Niemann Capital Management, Potomac Fund Management
and Capital Management Group (CMG) over various holding periods.
Niemann and Potomac invest in well-known stock mutual funds, while CMG
invests in large, diversified bond funds, as discussed in more detail below.
As you can see, Niemann and CMG have two different programs that we
recommend. I will discuss the differences below.
These are their ACTUAL results in real accounts for 2003 and the three, five
and seven-year averages (net of all fees and expenses), along with the S&P
500 Index and Lehman Brothers T-Bond Index for comparison purposes.
NIEMANN CAPITAL MGT.
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2003
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3-Year*
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5-Year
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7-Year
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DYNAMIC” Program
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47.5%
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11.3%
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24.7%
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N/A
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“RISK-MANAGED” Program
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30.6%
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7.9%
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15.5%
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17.6%
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S&P 500 Index
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28.7%
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-4.1%
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-0.6%
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7.6%
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POTOMAC FUND MGT.
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2003
|
3-Year*
|
5-Year
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7-Year
|
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CONSERVATIVE GROWTH
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21.7%
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6.1%
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7.2%
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12.1%
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S&P 500 Index
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28.7%
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4.1%
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-0.6%
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7.6%
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* 3-Year averages include most of the recent bear market in
stocks.
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CAPITAL MGT. GROUP
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2003
|
3-Year
|
5-Year
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7-Year
|
|
|
|
|
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“LEVERAGED” Program
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42.9%
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19.8%
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14.8%
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16.2%
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MANAGED” Program
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26.8%
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14.8%
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11.7%
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11.8%
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Lehman Bros. T-Bond Index
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2.5%
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7.7%
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6.6%
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8.8%
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** Central Plains Advisors
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3.2%
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5.1%
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3.3%
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8.1%
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** Central Plains Advisors is another bond fund manager that we
recommended in years past before we found CMG.
Past performance is not necessarily indicative of future results.
The programs shown above are not suitable for all investors. See “Important
Disclosures” below.
Your eyes aren’t fooling you (nor am I)! Again, these are ACTUAL
performance results in real accounts managed by these Advisors, after all
fees and expenses were deducted. Niemann, Potomac and CMG all had a
great year in 2003, and all handily beat the market indexes shown over the
last three, five and seven year holding periods. In the next couple of
pages, I will briefly describe these successful managers and their highly
recommended programs.
Niemann Capital Management
Niemann had one of their best years ever in 2003, and they handily beat the
S&P 500 Index in every period shown. They even made very respectable
returns during the bear market in 2000-2002 when they averaged over 8%
annually during that very difficult period.
As shown above, Niemann has two different equity mutual fund programs that
we recommend. Both are based on the same proprietary fund selection
system. Niemann’s “DYNAMIC” program is normally fully invested in selected
mutual funds and moves among funds in various market sectors (“sector
rotation”). Niemann’s “RISK-MANAGED” program is virtually identical to the
Dynamic program, except that Risk-Managed will move partially or fully to
the safety of a money market fund if the system signals that overall market
conditions are too risky.
Obviously, Niemann’s upside returns have been very impressive, but that is
only half of the story. Niemann has also been able to limit its losing
periods (drawdowns) during difficult market periods such as the recent bear
market. In Niemann’s “Risk-Managed” program, the worst-ever losing
period was -17.2%; in the “Dynamic” program, the worst-ever loss was -20.4%.
While these drawdowns occurred during the recent bear market,
compare them to the S&P 500’s worst losing period of -44.7% and -77.1% in
the Nasdaq, which also occurred in 2000-2002.
During sideways or down markets, Niemann can move into mutual funds that
have a more defensive strategy, or they can move 100% to cash. In the last
few years, Niemann has used so-called “short” funds to partially hedge their
long positions during downturns.
Niemann invests in large, well-known mutual funds including Fidelity funds.
Fidelity is where client accounts are established and held. The annual
management fee is 2.3%. The minimum account is $100,000. (See “Important
Disclosures” below.)
Potomac Fund Management
Potomac has been successfully managing mutual fund portfolios for many years
and was one of the first managers we selected in the mid-1990s to recommend
to our clients. Potomac’s “Conservative Growth” program had one of
its best years in 2003, gaining 21.7%. As its name suggests, this
program is not designed to be one of the top performers every year, but
rather seeks to deliver steadier gains without the wild swings so common in
the major market indexes. As noted above, the seven-year average
return was just over 12% with a worst drawdown of only 8%.
Potomac’s system seeks to find the stronger mutual fund sectors during
market uptrends. They select from hundreds of popular funds. During
sideways or down markets, Potomac moves into mutual funds that have
demonstrated the ability to limit losses, or they can move 100% to cash. In
the last few years, Potomac has also begun to use so-called “short” funds to
partially hedge their long positions during downturns.
Potomac can be an excellent choice for more conservative investors who want
a professionally managed program that has the flexibility to hedge against
losses or move fully to cash in a downward market. Potomac is also a good
complement to Niemann which is more aggressive. Client accounts are
established and held at Fidelity. The annual management fee is 2.5%.
The minimum account is $25,000. (See “Important Disclosures” below.)
Capital Management Group
As we entered 2003, I was convinced that the economy would rebound, perhaps
strongly. My best sources agreed. History has shown that long-term bonds
usually suffer during economic recoveries. Yet investors were herding into
Treasury bonds and related mutual funds in the first half of 2003. I warned
repeatedly during this time to lighten up on bonds, especially Treasuries.
Instead, I recommended that investors consider high-yield bond funds.
High-yield bonds historically do well during economic recoveries.
I specifically advised that readers seriously consider Capital Management
Group (CMG), our recommended bond fund manager. CMG specializes in large,
diversified high-yield bond funds offered by several well-known mutual fund
families.
As noted above, CMG has two different high-yield bond programs we recommend.
One is called their “MANAGED” program, and the other is their “LEVERAGED”
program. The Leveraged program is the more aggressive of the two. Both
programs use the same proprietary fund selection system. Both can move
partially or fully to the safety of a money market fund if market conditions
become too risky.
As you can see in the actual performance results above, CMG had another
outstanding year in 2003, at the same time when many investors were
frustrated in Treasury funds. Because of CMG’s active management, their
returns have rivaled those of stock mutual funds over the years. Perhaps
“rivaled” is not the proper word, since CMG’s returns shown above beat the
S&P 500 Index handily over the last several years.
But even more impressive than CMG’s returns on the upside is their
remarkable ability to limit downside risk. In CMG’s “Managed” program,
the worst-ever losing period (drawdown) was only -3.3%. In the “Leveraged”
program, the worst-ever loss was only -7.3%. Again, these are the
worst periods in CMG’s history of managing these programs.
Treasury bonds have exhibited far greater volatility than CMG. The
worst-ever losing period in the Lehman Brothers Treasury Bond Index was
-19.2% in 1980/81, along with losses of -11.7% in 1994 and -13.7% in 1987.
While not devastating, these significantly greater losses must be weighed
against the disappointing returns in T-bonds in recent years.
It is rare to find upside returns like CMG’s (+11.7% and +14.8% average
over the last five years) in a bond program. It is even more unusual to
find a bond program with such limited losing periods. In fact, we’ve never
seen another one like it.
Yet despite CMG’s outstanding performance record, many investors are still
hesitant to invest in high-yield bonds, also known as “junk bonds.” Even
though CMG invests in large, highly diversified and well-known mutual funds,
some investors won’t consider them seriously. It is true that high-yield
bond funds have greater risks than certain other mutual funds and are
therefore not appropriate for all investors. But for investors who
understand the risks (and are suitable), CMG can add some real octane to
their investment portfolios.
Finally, it is not too late to get started with CMG, even after the
outstanding year they had in 2003. The economy is still growing and as a
result, high-yield bond funds should still have upside potential. CMG is
off to another strong start this year, with nice gains in both programs in
January. CMG accounts are held at Trust Company of America. The annual
management fee is 2.25%. The minimum account is $25,000. (See “Important
Disclosures” below.)
How To Invest Following A Hot Year Like 2003
The bull market in equities in 2003 was typical of what happens following
bear markets. There have been nine bear markets since WWII. According to
a study by BCA, the S&P500 Index rose an average of 36.1% in the
first year following the end of those bear markets. In 2003, the S&P500
Index rose 28.7%, consistent with historical standards. Just as important,
in the second year following bear markets, the S&P 500 gained an
average of only 8% (not including 2004 since we don’t know yet)
. This doesn’t mean stocks can only go up 8% in 2004; it just
means the risks are higher now after following the big year in 2003.
What this says to me is that it is now more important than ever to have
at least a portion of your equity portfolio invested with professional
managers who can either hedge their positions or move partly or fully to
cash if market conditions warrant.
The same goes for bonds, in my opinion. With the economy continuing to
improve, Treasury bonds and other high-grade bonds may struggle again this
year. Yet high-yield bonds, which tend to do well during economic
recoveries, could have another strong year. This is why I continue to
recommend CMG.
If you have not taken a serious look at the professionally managed programs
featured in the previous pages, maybe now is the time to do so. Call us at
800-348-3601 or visit our website at
www.profutures.com.
Time To Add To Your Accounts
For those of you who had accounts with Niemann, Potomac and/or CMG last
year, Irealize I am “preaching to the choir.” You saw your accounts jump in
2003 as shown on the previous pages. You know the value of having
professionals manage a part of your money. Given that, let me suggest that
now may be a good time to consider adding to your accounts.
If BCA is correct, we probably have another year or two when the stock
markets have a good chance to make some additional gains, and could even
surprise on the upside yet again. If the economy continues to grow,
high-yield bonds also have the potential to do well over the same time.
Even if these forecasts are too optimistic, keep in mind that Niemann and
Potomac have implemented “hedging” strategies using short
funds in the last couple of years to help control the downside risks. CMG,
of course, could hardly improve on its downside record! For these reasons
and others, you may want to add to your accounts.
Money Floods Into Mutual Funds, Chasing The Hot Returns In 2003
It never seems to fail. Investors herd into stock mutual funds after the
market goes up and its performance is hot. They dump them when the market
is down, often selling near the lows. Purchases of stock mutual funds have
exploded again in recent months as investors became aware of the hot returns
most equity funds posted last year.
Last month (January), for example, an estimated $40 billion poured
into equity and balanced funds - a monthly inflow level not seen since the
height of the great bull market in February 2000, according to data from
Strategic Insight, a fund researcher. This came immediately after investors
learned that the average “growth” fund gained just over 30% in 2003.
Net inflows to US mutual funds last year rose to almost $300 billion, the
highest amount in seven years as investors flocked back following the stock
market's recovery. Much of this money came in during the last few
months of the year after the market was up significantly. What
else is new?
In this case, there is something new: the mutual fund scandals of 2003
. The mutual fund scandal broke wide open in early September when New York
Attorney General Eliot Spitzer blew the whistle on several prominent mutual
fund families for allegedly allowing after-hours (“late”) trading and other
illegal activities by certain large customers. The scandal continued to
draw increasing attention in the months after Spitzer’s initial
announcement. By late last year, at least 20 mutual fund companies were
under investigation. The final fallout is yet to be determined.
There were widespread fears last year among mutual fund families that
investors might be so disgusted and distrustful that they would pull
enormous amounts of money out of the funds. Yet as you just read in the
paragraphs above, investors poured more money into mutual funds in 2003
than at any time in the last seven years - even including the go-go bull
market years in the late 1990s. While they were fearing the worst just a
few months ago, today most mutual fund families are licking their chops!
Yet as discussed on the previous page, the stock markets maye not repeat the
lofty returns of 2003 this year. If the history of mutual fund inflows of
money is any indicator, the wave of investors who herded in during the last
few months will be greeted with a difficult year in 2004. That is not to
say stocks won’t be higher at the end of this year, but it does suggest it
could well be a rocky ride with some potentially significant downturns along
the way.
This again argues for professional management of at least a part of your
equity portfolio. In my own case, I prefer that most of my equity portfolio
is in the hands of professional Advisors who can either “hedge” their long
positions with short funds, or move partially or fully out of the market if
conditions get too risky.
Important Disclosures For Programs Discussed On Pages 2-4
Whenever I write about the investment programs we recommend and include
specific performance numbers, there are various required disclaimers that
must be included. Please read the following.
ProFutures Capital Management, Inc. (PCM) and the other advisory firms
discussed above are Investment Advisors registered with the SEC and/or their
respective states. Some Advisors are not available in all states, and this
report does not constitute a solicitation to residents of such states.
Information in this report is taken from sources believed reliable but its
accuracy cannot be guaranteed. Any opinions stated are intended as general
observations, not specific or personal investment advice. This publication
is not intended as personal investment advice. Please consult a competent
professional and the appropriate disclosure documents before making any
investment decisions. There is no foolproof way of selecting an Investment
Advisor. Investments mentioned involve risk, and not all investments
mentioned herein are appropriate for all investors. PCM receives
compensation from Niemann (NCM), Potomac Fund Management (PFM) and CMG in
exchange for introducing client accounts. For more information on PCM, NCM,
PFM and/or CMG, please consult PCM Form ADV II, NCM Form ADV II, PFM ADV II
or CMG Form ADV II. at
www.profutures.com or call us at 800-348-3601 for complete
information.
Gary D. Halbert has accounts in each of the programs illustrated above,
and other officers, employees, and/or affiliates of PCM may also have
investments managed by the Advisors discussed herein or others.
Returns illustrated above are net of the maximum Advisor management fees,
custodial fees, mutual fund management fees, and other fund expenses such as
12b-1 fees. Dividends are reinvested. Performance is based on actual
accounts which are considered representative of the majority of client
accounts with similar investment objectives. To the extent possible, PCM has
attempted to verify the performance by examining selected customer account
statements and/or independent custodian statements, and by comparing to the
performance in Gary Halbert’s accounts with each Advisor. However, since
only selected accounts were analyzed there can be no assurance that the
performance in these accounts was consistent with all others. In all cases,
performance histories reflect a limited time period and may not reflect
results in different economic or market cycles.
Individual account results may vary based on each investor’s unique
situation. No adjustment has been made for income tax liability. Performance
for other programs offered may differ materially (more or less) from the
programs illustrated. Investment returns and principal will fluctuate so
that an investor’s account, when closed, may be worth more or less than the
original investment. Any investment in a mutual fund carries the risk of
loss. Mutual funds carry their own expenses which are outlined in the fund’s
prospectus. An account with any Advisor is not a bank account and is not
guaranteed by FDIC or any other governmental agency. Money market funds are
not bank accounts, do not carry deposit insurance, and do involve risk of
loss. Investments mentioned involve risk, and not all investments mentioned
herein are appropriate for all investors.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
As a benchmark for comparison, the Standard & Poor’s 500 Stock Index
(which includes dividends) and the Lehman Brothers Long Term Treasury
Index repre-sent an unmanaged, passive buy-and-hold approach. The volatility
and investment characteristics of the S&P 500 or other benchmarks cited may
differ materially (more or less) from that of the Advisors.
The individual account performance figures for Capital Management Group
reflect the reinvestment of all dividends and capital gains, and are net of
applicable commissions and/or transaction fees, CMG investment management
fee, and any other account related expenses. In calculating account
performance, CMG has relied on information provided by the account
custodian. The CMG Risk Management Plan is a technically based strategy. The
performance illustrations are based on actual account performance from 2000
to present (Trust Company of America client accounts), and the results from
November 1992 to 2000 are based on actual trade signals applied to the
funds. The above accurately reflects the blended results of an assumed
investment in the funds when applying CMG’s actual trade dates for the
period indicated and under the conditions stipulated when applying the risk
management techniques to the actual price movements of the funds. The
results shown are net of CMG’s 2.85% annual management fee. CMG invests in
various high yield bond funds. High yield bond funds have greater risks
than many other mutual funds and are therefore not suitable for all
investors. This illustration should not be construed as an indication of
future performance which could be better or worse than the period
illustrated.
The “Bush Haters”
During 2003, Iwrote several articles in my weekly E-Letter about the
increasingly ugly trends in national politics, especially among the
Democrats. Late last year, as the presidential campaign was starting to
heat up, I predicted that 2004 would be the meanest, ugliest election
year many of us have ever seen. As the weeks tic by, that prediction is
proving to be true.
Whether it’s a Republican or a Democrat in the White House, there are always
the “fringe” groups on the far right or far left that spew hatred and venom
against the President. Yet the crowd of “Bush Haters”
has expanded to the point that it now includes even many mainstream Democrats.
The Democratic leadership has done nothing to stem this movement, and some
would argue they have even encouraged it.
I remember how many conservatives, including myself, loathed Bill Clinton
during his eight years in office. However, even many conservatives like me
had to acknowledge that Clinton was one of the best pure politicians ever to
come down the pike. We also acknowledged that Clinton veered from his very
liberal leanings to the middle ground on numerous issues in order to deal
with the Republican Congress. The point is, that aside from the
fringe groups, most of us didn’t “hate” Bill Clinton.
Speaking only for myself, there were actually times when I wished the
Republican leadership had been as smart as Clinton.
For whatever reasons, there seems to be almost no acknowledgment on the
Democrat side that Bush has done anything good. Even his leadership just
after 9/11 and his handling of the War On Terror have been attacked
viciously by the Democrats, the media and of course, the Bush Haters. This
has occurred despite the latest polls in January showing that over
two-thirds of Americans support Bush’s handling of the War On Terror and
believe we are “safer” as a result of his leadership.
Yet these public polls have been ignored by the Democratic leadership and
the presidential wannabes. They continue to attack Bush, not only on
national security issues, but also on a very personal level.
Tired, Old Arguments & Lies
Aside from the personal attacks, the Democrats are using the same tired, old
arguments against Bush. Every day, they claim that the economy is in
shambles, and it is all Bush’s fault. They never admit that the recession
unfolded in early 2000 when Clinton was still in office. Likewise, they
never acknowledge that GDP soared 8.2% in the 3Q, the fastest pace in 20
years. And they refuse to mention that unemployment has fallen and job
growth is now on the upswing.
Bush’s tax cuts, of course, were a disaster, and they would have us believe
that only the “rich” got a tax cut. Excuse me, but ALL
Americans who pay taxes got a tax cut! Likewise, the Democrats claim it
was the tax cuts which caused the huge budget deficit. And the Democrats
are even criticizing Bush for being a big spender. On this issue, there is
some merit (see below), but how ironic is it that the Democrats would
criticizing anyone for being a big spender??
These are just a few of the arguments and lies the Democrats are using to
advance the hatred of Bush.
The Misguided War & WMDs
Howard Dean vaulted to the head of the pack of Democratic wannabes with his
attack on Bush for the war in Iraq. Dean was outspoken about his opposition
to the war, calling it misguided and unnecessary. He pinned responsibility
for the 500 dead US soldiers solely on Bush’s shoulders, despite the vote in
Congress to approve military action against Iraq. Dean opened the door for
other Dem candidates to openly criticize Bush over the war.
Dean was also among the first to claim that Bush lied to the American public
about weapons of mass destruction in Iraq. This ignored the fact that
many prominent Democrats were on the record that they believed Saddam
Hussein had WMDs. These names include Bill and Hillary Clinton,
John Kerry, Dick Gephardt, Joe Lieberman, Wesley Clark and others.
As we are now coming to learn, at least some of the intelligence Bush relied
on regarding WMDs in Iraq was probably in error. Actually, some of the
critical intelligence Bush relied on came from British sources. Even
British Prime Minister Tony Blair believed there were stockpiles of WMDs in
Iraq. This whole WMD issue is far from resolved, and will remain in the
news for months to come. Yet the Democrats want us to believe that Bush
knew there were no WMDs in Iraq, and that he purposely lied to the American
people. This completely ignores the fact that many prominent Democrats
believed there were WMDs in Iraq.
“Blood For Oil?”
Remember how the Democrats and the media claimed we were only going to war
in Iraq to confiscate the oil fields and the vast underground reserves?
Remember the headlines: “Blood for Oil?” The
story was that Bush was sending US troops to die so that he could “give” the
oil to his cronies at Haliburton and other big corporate sponsors. Some
Americans, especially on the left, actually believed this hogwash.
As should have been obvious all along, the American people paid for the war
in Iraq, just as we have paid for every other war. The Blood For Oil
rhetoric was just another in the string of lies.
The Big Question: Is America Safer?
We can argue honestly about whether the war in Iraq was the right thing or
not. There are intelligent people who genuinely believe it was a mistake,
and there are arguments on that side. We can also argue about whether
America is safer today, now that Saddam Hussein is locked away. Icontinue
to believe that the war was the right thing to do. There is no question
that the Iraqi people are safer today. And I believe America is safer.
So do over two-thirds of Americans based on the latest polls! How
much safer is yet to be known.
There are also those on the left, including some of the Democratic
presidential wannabes, who are arguing that Bush has overblown the threat of
additional terrorism in the US for political purposes. The Dems are being
very cautious so far in advancing this point, but they are pushing it out
there. The truth is, no one knows for sure how great the terrorist threat
is today. Just because there hasn’t been another attack since 9/11,
that in no way suggests that Bush has overblown the threat, and we should
not let down our guard. Will it take another attack to convince
these people?
Bush has certainly made his mistakes, and he has irritated even many within
his conservative base. For political reasons, he tried to capture several
key Democratic issues: steel tariffs, the farm bill, Medicare, etc. The
Bush administration failed in communicating about the war in Iraq and WMDs.
If the intelligence was wrong, they should have emphasized that plenty of
prominent Democrats believed it as well.
Bush has made his mistakes, and some conservatives are disgruntled. Yet I
believe the fundamental election issue will come down to the question: Is
America safer and should we let down our guard? The latest polls show
that over two-thirds of Americans believe America is safer, and that Bush
has done a good job in the War On Terror. I agree. Yet none of the
Democratic wannabes have any use for continuing this war. As far as I can
tell, any of the contenders at this point would bring our troops home as
soon as possible. And the War On Terror would once again become
just so much “talk” as it was under Clinton.
I believe conservatives will vote for Bush in November, despite his
missteps. The Bush Haters will obviously vote for whoever is the
Democratic nominee. The battleground is for those in the middle. They will
decide who wins in November. By default, they will decide whether to
continue the War On Terror. I predict it will be a close election.
For national Security reasons and others, I hope Bush wins.
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