UP, DOWN, AND SIDEWAYS 5/30/2008

You've got to love this market. It is the very embodiment of the dictum 'the only thing consistent is change'.

Only a few weeks ago the US dollar was gaining ground against foreign currencies, the price of oil and gold was backing off of their recent high's, the national media used the 'R' word - recession - at virtually every opportunity and the domestic stock market was gaining respectable ground - that is all so last week! Current, we're facing daily swings in the DOW, other major market indexes, and the price of oil and gold are either back on the rise or falling sharply - you choose. The US Dollar is facing tremendous pressure and even the national media is recognizing that the US economy may well avoid an actual recession.

The good news though, is that it appears that we have avoided an actual recession. We may be wrong, but the evidence is strongly in our favor. Though there are some pretty important voices that disagree, even they can’t agree on the depth or breadth of a recessionary cycle they suppose us to be. What is certain is that 1st quarter GDP growth was just revised to .9% and domestic inventory levels of manufactured goods fell by 14% - that means there’s not a lot of excess inventory to absorb in coming calendar quarters and jobs are less threatened in the near term. The number of jobless workers is still low in historic terms, and there doesn’t appear to be any meaningful increase in personal income levels; bad news to some, good news to the economy as it relates to thwarting inflationary pressures.

It is critical that US monetary policy makes an aggressive shift to strengthen the dollar and that our federal executive and legislative branches adopt an energy policy that dramatically lessens our dependence on foreign oil, for that matter, fossil fuels of any kind. These policy initiatives, reportedly in the works, would continue to fuel an otherwise healthy US economy. Brian Wesbury, a noted economist and regular contributor to The Wall Street Journal and CNBC, speaking recently at an assembly in Salt Lake City, proclaimed ‘the US economy is in great shape!’ And he’s right, but it may be hard to feel that at home when you’re paying four dollars or more for fuel, or when you see the value of your investment portfolio gyrate daily.

For several months we have felt that investors need to maintain a fairly conservative, or cautious, stance in their various investment accounts. As the markets have advanced well beyond the lows seen earlier this year and recently even tested the 13,000 level in the DOW, some have asked if it is time to take a more assertive posture and increase the equities exposure in their portfolios. For the most part, our response has been 'not quite yet', suggesting that some of the recent gains could well give way to inflation concerns and other economic uncertainties.

We've continued to assert that we'll likely continue to exercise caution until we think the market has digested most of the meaningful economic data gathered and reported for the 1st and 2nd quarters of the year. When it appears that there is little downside risk in the equities markets it will be time to take a more ambitious investment position. That may not signal a dramatic or immediate upswing in market values, but it will allow investors to renter the market and be well poised for the eventual rise in equities.

As daring as it may sound, there are numerous market forecasters, heretofore very ‘bearish’, that are calling for the DOW to ascend to 15,000 by year’s end. If you consider that our nation will have finally completed a long and arduous presidential election, that the Federal Reserve may well have increased short term interest rates by then, and that we’ll have seen the real economic results of the first half of the year, a 15,000 DOW might not be unrealistic. We can only hope!

Rick Haskell – Signature Wealth Management

THE MEDIA AND ECONOMIC EXPECTATIONS 5/2/2008

There’s been a lot of talk in the media lately about economic recession, price inflation, and how the investment markets have and are likely to perform. Unfortunately, more of this comes from unknowledgeable ‘talking heads’ than it does those with a real handle on our economy.

Here’s an example: a USA Today article recently represented that we are in a recession because nearly 80% of the consumer polled had come to that conclusion. Only two business days later Ben Bernanke, the current Federal Reserve Chairman, represented that the US economy had grown by .6% - though nothing to get excited by in terms of growth, it also did not represent shrinkage and clearly reflected that we have yet to dip into a recession. Remember, that a recession is when the US economy shrinks for at least two consecutive calendar quarters. Amazingly, another USA Today survey conducted between April 21st and April 24^th, this time polling 52 of the nations leading economists, concluded that the economy had grown slightly in the first quarter of 2008, was likely to dip slightly in the 2^nd quarter and would then increase at 2.3% and 2% in the 3^rd and 4^th quarters, respectively. Not exactly bad news given where our economy has been lately.

Another example is inflation. I’ll admit that we’re concerned about – as is anyone that has filled their gas tank or purchased groceries lately. Those listening to the major media outlets see inflation as one of the biggest problems in our economy right now. Admittedly, sustained inflation can be a major problem and it typically occurs when commodities prices and wages increase in a cyclical manner, each urging each other on to newer heights. What is largely unreported is that most commodity prices have peaked and have begun to back off and there has been no meaningful increase in wages. Indeed, the Consumer Price Index (CPI) increased at a rate of 4% in the 1^st quarter of 2008, but the same 52 economists polled by USA Today see that as a peak and forecast the CPI rise to gradually decrease to a rate of 2.5% by mid 2009 – keep in mind that our economy has operated with health and vigor for lengthy periods with a rate of approximately 3%.

We’re not suggesting that our economy is operating at maximum efficiency and that everything is rosy. On the contrary, there are issues to be concerned about that must be addressed: continued increase of personal debt, an over reliance on energy consuming lifestyles, tightening credit standards in the face of lowered interest rates, poor savings habits, and longevity and sequence of return issues as they relate to investment accounts.

That last item, longevity and sequence of return is something most people don’t immediately understand and is rarely discussed. It has to do with a combination of our increasing life spans, a desire to retire at an age young enough to enjoy our retirements, an increased likelihood to spend on discretionary items like never before, and common ups and downs in the investment markets. Here’s the example: John and Mary are 63 years of age, newly retired, traveling now that they finally have the time, and being generous with their children and grandchildren. They see large balances in their retirement accounts and in the last 10 years their home value has doubled (even with the correction in the housing market). They presume that since their parents each passed away prior to age 80 they are likely to the same, and though the market returns on their investments have actually been negative over the past several months they’re sure they’ll still get 12% on their accounts like they think they did a few years ago when they finally started to pay attention to those accounts. What they are missing is that 60 is the new 40 (or something like that) and they’re likely to outlive their parents by a good 5 to 8 years, they aren’t likely to see average investment returns of more than 5-8% now that they’re retired and need to invest more appropriately, and they are likely to want to take the same monthly income from those accounts during down months that they are during profitable months. Though their home value may well continue to rise over the years, so will the cost of maintaining, heating and cooling, and insuring it along with an ever increasing desire to tax it.

Many retirees spend more in the first year of retirement than they did in the last year of employment, simply because they think they can. They need to resist the temptation to spend and continue to find ways to save, just as when they were raising their families. They need to moderate their expectations and look for ways to create revenues to bring into the household even though they are technically out of the work force. And they need to seek out ways to protect their investment accounts against too much volatility while at the same time seek out above average returns. These can seem like conflicting tasks, but can be accomplished today with many of the living benefits available in various types of retirement accounts (typically not in a 401k).

Prudence, optimism, self reliance and healthy living are the attributes that have made for great lives – nothing has changed. Taking the time to strengthen both family and professional relationships provides great ongoing resources we can tap in the future. As important financial decisions need to be made, we can rely on those relationships to help guide our actions. Just like relying on our investments and homes to allow us long and comfortable lives.

Rick Haskell – Signature Wealth Management