Forecasts & Trends

Are We Sure the Recession is Really Over?

Gary D. Halbert — Tue, 10 Nov 2009 21:46:00 GMT

IN THIS ISSUE:

3Q GDP Report - Was It Really Better Than Expected?
What Else Was Missing in the 3Q GDP Report?
Worker Productivity Surges to Six-Year High
Latest Unemployment Numbers Not Encouraging
Roubini - Too Many People Are "Short" the Dollar

Introduction

When the government announced on October 29 that 3Q Gross Domestic Product surged 3.5% (annual rate), there was a collective sigh of relief around the world that the US economy had finally emerged from the most serious recession since the Great Depression. After all, the 3.5% number outpaced the pre-report consensus of around 3%.

On closer inspection, however, the latest GDP report was not nearly as rosy as the headline number of 3.5% seems to suggest. For example, if you consider all of the government's incentives for consumers to spend (think "cash-for-clunkers" which ended in August, the $8,000 first-time homebuyer tax credit, and huge stimulus spending), GDP growth in the 3Q would have been significantly lower.

These and other caveats from the latest GDP report suggest that while we have turned the corner on the recession - barring any big negative surprises - economic growth over at least the next several quarters is likely to be disappointing. For example, most estimates I see for 4Q GDP growth are in the 1-2% range.

Last Thursday, the Labor Department reported that US worker productivity soared to a six-year high in the 3Q, well above expectations. Rising productivity is a good thing, right? Not necessarily, especially when it means that companies are laying off their best and brightest, such as scientists and engineers, that are focused on new product development (R&D).

On Friday, the Labor Department reported that the unemployment rate surged from 9.8% to 10.2% in October, well above the pre-report consensus of 9.9%. 10.2% is the highest unemployment rate since 1983. 15.7 million Americans are officially out of work, and that does not include those who are working part-time by necessity and those who have given up looking for work.

This week, we will examine the latest 3Q GDP report in detail and what that means for the future of the economy. We'll also take a look at some subsequent economic reports which seem to suggest that 4Q growth will be tepid. Next, we'll delve into the latest worker productivity report and what that may mean for the economy and the markets. Also, we will dissect the latest unemployment figures.

Finally, I will bring you the latest dire warning from noted forecaster Nouriel Roubini. You may recall that he predicted the housing/credit crisis back in 2005. Now he warns that too many people around the world are "short" the US dollar, and this could spark a second credit crisis.

3Q GDP Report - Was It Really Better Than Expected?

As noted above, the Commerce Department reported on October 29 that US GDP grew at an annual rate of 3.5% in the 3Q. Pre-report estimates varied widely with a consensus of 3%, so the actual report was better than expected. Stocks rallied sharply and closed 200 points higher following the report's release. In the Commerce Department's report, it stated: "The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment." The 3Q boost in the economy followed four consecutive losing quarters, including the 2Q that saw a drop of 0.7%. The 3Q GDP report, the so-called "advance" report, will be revised two more times before it goes "final", and the next revision will be released on November 24.

While stocks rallied strongly just after the report, it did not take long for analysts to see that the number was artificially pumped up. For example, if you take out surging auto sales ("cash-for-clunkers" which ended in August), GDP rose only apprx. 1.5% in the 3Q. Take away the government's $8,000 tax credit for first-time homebuyers, which is scheduled to end on December 1, and economic growth was even weaker.

Consider also the fact that GDP was boosted by the federal "stimulus package" spending, which unlike cash-for-clunkers and home tax credits, is not going away anytime soon. But the point is, the GDP number would have been much lower without these artificial incentives. Actually, the White House admitted as much just after the report. Christina Romer, chairwoman of the White House Council of Economic Advisors, acknowledged that without all these government incentives, "real GDP would have risen little, if at all, this past quarter."

Looked at differently, the 3.5% GDP report noted that the overall economy rose to a seasonally adjusted $13.014 trillion (annual) in the 3Q, up from $12.901 trillion in the 2Q. In other words, the economy added apprx. $112 billion dollars in output quarter-over-quarter. Yet we have spent an estimated $173 billion worth of the $787 billion stimulus plan so far. This shows how heavily dependent the economy is on government spending.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

What Else Was Missing in the 3Q GDP Report?

There are a number of factors and trends that the government's GDP reports do not consider. For example, the official GDP statistics are not designed to pick up cutbacks in "intangible investments" such as business spending on research and development, product design, worker training, etc. There's plenty of evidence which indicates that companies are slashing this kind of spending, which is essential for innovation, in an effort to cut costs.

Without investment in intangibles, the U.S. can't compete in a knowledge-based global economy over the long-run. Yet we don't see that plunge reflected in the GDP numbers which are still too focused on more traditional sectors, such as motor vehicles, construction, housing, etc.

There are more signs that companies are robbing the future to cut costs and improve profits. For example, over the past year, US employment of scientists and engineers has fallen by 6.3% according to BusinessWeek. For the most part, these are the people who create the next generation of products and make the US more competitive over the long-term. Again, this trend is not considered in the GDP reports.

Another clear-cut sign that GDP growth is being overestimated is the sharp drop in venture capital investment, which goes directly to new businesses. Venture capital firms invested about $12 billion in the first three quarters of 2009, barely half the $22 billion invested during the first three quarters of 2008. Some of this shortfall would have been spent on computers and other physical equipment, which would have been picked up in GDP. But most of the drop in VC money would have gone to pay for scientists, engineers, and new product development - all valuable intangible investments that don't show up in the GDP reports.

Similarly, many companies have slashed their reported R&D spending, which also doesn't show up in GDP. Just to cite a couple of examples, Alcoa announced recently that it cut its 3Q R&D spending by 36% from the year before. Johnson & Johnson has reduced its R&D by 13% over the past year. Such cuts are going on across industry sectors, with few exceptions. Again, these significant cutbacks are not reflected in the GDP data.

Another big problem not reflected in the GDP statistics is that many companies are retreating from development of new products, especially in stressed industries. In many sectors of the economy, companies have not only cut back on new products, but in many cases are reducing the number of models or options they currently offer.

Likewise, US companies are significantly cutting their spending on worker training. The drop started in 2008, when employers reduced their per-worker "learning expenditures" by 3.8% on average, according to the American Society for Training & Development. No data are available for 2009, but "from anecdotal evidence, obviously there's a lot of cutback," says Pat Galagan, executive editor of publications.

Ideally, a big burst of training would occur during a severe recession such as this so that people can acquire the skills needed for the jobs of the future. The problem is how to pay for that training, since unemployed people rarely spend money on long-term training when they're worried about short-term survival.

Worker Productivity Surges to Six-Year High

Last Thursday, the Labor Department announced that worker productivity surged to the highest level in six years in the 3Q. Productivity nationally rose 9.5% on average, well above the pre-report consensus of 6.5%. Non-farm productivity and costs provide measures of the productivity of workers and the costs associated with producing a unit of output.

The report also noted that overall output rose 4.0% in the 3Q, while hours worked fell 5.0%. Non-farm businesses continued to get lean and mean, finding ways to squeeze more output out of fewer workers (more on this below). Unit labor costs also fell 5.2%, which will help keep inflation contained.

Productivity growth has risen at an 8.2% average annualized pace during the last two quarters, the fastest two-quarter surge off a recession trough since 1961. Unit labor costs, typically the flip side of the productivity numbers, collapsed at nearly a 6% annualized rate during the last two quarters - the largest two-quarter decline off a recession trough on record. Since corporate profits are directly related to productivity growth and inversely related to unit cost growth, this data is good news for earnings.

Normally, it is considered a good thing for productivity to go up but the question is, why so much? With the unemployment rate continuing to go up every month, we know that companies continue to terminate and/or lay off workers. In doing so, they are demanding more productivity from those employees that remain on the job.

Actually, it is not unusual for productivity to rise in the early stages of a recovery as businesses continue to aggressively cut costs even as output begins to rebound. Companies are reluctant to hire near the end of recessions and even in the early stages of a recovery, as they are not sure the economy has really turned the corner, especially with the unemployment rate rising month after month.

On a related note, the Labor Department also published monthly data on the "average work week." The average work week shrank to a new all-time low of 33 hours in June, and it remained the same in October, as reported in last Friday's unemployment data (more on that report below). While the manufacturing sectors are averaging well above 33 work hours per week, the much larger service/retail sectors are averaging less than 33 work hours per week.

Many economists believe, however, that the recent productivity gains and the shrinking of the average work week are not sustainable. At some point, hours worked and payrolls will have to rise in order to meet stepped-up production schedules. As this occurs, income growth should recover, allowing households to spend more even if they are setting aside a larger fraction of their income in savings. Of course, the question is, when?

Latest Unemployment Numbers Not Encouraging

On Friday, the Labor Department reported that the US unemployment rate rose from 9.8% to 10.2% in October, the highest level since April 1983. The report noted that in October, the number of unemployed persons increased by 558,000 to 15.7 million, a record high. The largest job losses over the month were in construction, manufacturing, and retail trade.

Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points. Keep in mind that the official unemployment rate does not include those who are working part-time out of necessity, and does not include those who have given up on looking for a job.

The number of long-term unemployed, jobless for 27 weeks or more, and assumed to have given up on looking for work, was 5.6 million in October according to the latest report. The Labor Department estimates that 35.6% of unemployed persons were jobless for 27 weeks or more. Yet these people are not counted in the official unemployment rate.

The number of persons working part-time for economic reasons (sometimes referred to as "involuntary part-time workers") was 9.3 million. These individuals were working part-time because their hours had been cut back or because they were unable to find a full-time job. Here too, these people are not counted in the official unemployment rate.

If we include discouraged workers and those forced to work part-time, the unemployment rate surged to 17.5%, the highest on record.

The latest unemployment rate was considerably worse than expected. The pre-report consensus was for a rise from 9.8% in September to 9.9% in October. While many in the media have led us to believe in recent weeks that job losses were falling, the latest report clearly muzzles such optimism.

Most economists believe that the unemployment rate will continue to rise for at least a few more months. A Bloomberg survey of leading economists concludes that the unemployment rate will remain high for at least another year. The average forecast among the dozens of economists surveyed indicates that unemployment will average 9.7% for all of 2010.

If true, this is very bad news for the Obama administration and for Democrats who will be seeking re-election in 2010.

Is the World Too Bearish on the US Dollar?

There is now near-universal agreement that the US dollar will continue to fall for the foreseeable future. While not admitting to it, the Obama administration favors a weaker dollar as it is good for exports, just as the Bush administration did. The Fed is encouraging a weaker dollar by keeping short-term interest rates near zero for "an extended period."

As the dollar has fallen sharply since March, investors around the world have taken to "shorting" the dollar in various ways. Yet the US dollar is a commodity, after all, and commodities of all stripes have a way of not doing what the crowd expects. There is no way to know when the dollar will reverse higher, but when it does, it could well be explosive at least for a time.

Nouriel Roubini is a well-known professor of economics at the Stern School of Business at New York University and is chairman of RGE Monitor, an economic consulting firm. Roubini is best known for his public warnings in 2005 that we were in a housing bubble that was about to burst, and that it would lead to a financial crisis. At the time, he was called "Doctor Doom."

Last week, Roubini issued a serious warning that too many people around the world are "short" the US dollar, especially via so-called "carry trades" where investors borrow cheap dollars and then invest in other "risk assets" (stocks, etc.) that earn higher returns. Roubini believes that, at some point, the short dollar carry trade is going to blow up.

I have taken the liberty of reprinting his latest warning in the Financial Times (of London).

QUOTE:

Mother of all carry trades faces an inevitable bust

By Nouriel Roubini
November 1 2009

Since March there has been a massive rally in all sorts of risky assets - equities, oil, energy and commodity prices - a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.

The dollar and the sterling have weakened against a host of other currencies since the summer, promoting speculation that they could become the next carry trade currencies and supplant the yen as the ‘funding currency' of choice.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anemic as I have argued, asset prices should be moving gradually higher.

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates - as low as negative 10 or 20 per cent annualised - as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius - even if they are just riding a huge bubble financed by a large negative cost of borrowing - as the total returns have been in the 50-70 per cent range since March.

People's sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade - you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed's policy of buying everything in sight - witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets - the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe - for now - for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest coordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate - as was seen in previous reversals, such as the yen-funded carry trade - the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a coordinated collapse of all those risky assets - equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever - its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

I titled this E-Letter "Are We Sure the Recession is Really Over" because I think this concern is still heavy on the minds of most Americans. Certainly, the latest 3Q GDP report is a welcome sign that we have turned a corner, at least for now. But as I have also pointed out above, the reported gain of 3.5% in the 3Q leaves many questions we should be concerned about.

There are still many weak spots in our economy. Most notable, the unemployment rate weakened even more than almost anyone expected in October, reaching the highest level in a quarter century, and is very likely headed even higher for a few more months at least. It will almost certainly remain high throughout 2010.

The worst of the housing and credit crisis appears to be behind us, but bank lending remains substantially below pre-crisis levels, even as short-term interest rates are at historical lows. The Fed continues to buy up toxic assets at unprecedented levels. At some point, this will have to stop and reverse itself, just as interest rates will have to be increased at some point.

The point is, while we may have emerged from the recession, there are many risks that could throw us right back into a further economic contraction in the next year or two. Nouriel Roubini's analysis just above regarding the US dollar is just one of several scenarios that could result in a "double-dip" recession in the next year or two.

As I discussed at length in my September 29 E-Letter, we are in the early stages of a commercial real estate bust that could very well be the next shoe to drop in the credit crisis. I will have a lot more to say about that next week, unless something more pressing comes about. In any event, we will be hearing a lot more about the commercial real estate problems in the weeks and months ahead.

While we all welcomed the latest GDP report, conflicted as it was, there are few indications that economic growth will continue at that rate going forward. As mentioned earlier, most estimates I am seeing on 4Q GDP growth are in the 1-2% range. Forecasts for 2010 are only marginally better.

Finally, the stock market overshoot since early March has surprised even the most optimistic forecasters. All of my most trusted sources believe that the equity markets are overbought and very susceptible to a downside correction, or worse anytime now. If Roubini's concerns about the dollar are realized, it could be much worse than a garden variety correction.

Everything I have discussed this week argues for having actively managed strategies in your investment portfolio, strategies that have the ability to move out of the markets, or hedge long positions, in case any one of the negative scenarios arises. If you agree, give us a call at 800-348-3601, or e-mail us at info@halbertwealth.com.

** If you are wondering just how bad the House healthcare reform bill that passed last Saturday is, be sure to read the link in SPECIAL ARTICLES below. It's awful!

Finally, our thoughts and prayers go out to all of the families of the innocent soldiers who were killed and injured in the tragedy at FortHood that occurred on November 5.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

What the Pelosi Health-Care Bill Really Says
http://online.wsj.com/article/SB10001424052748704795604574519671055918380.html

Dalbar Update: Investors Still Lagging The Market

Gary D. Halbert — Tue, 03 Nov 2009 23:04:00 GMT

IN THIS ISSUE:

Third Quarter GDP Surprises on the Upside
Why Investor Returns Can Trail the Market
The 2009 Dalbar QAIB Study Update
Investor Panic Leads to Poor Decisions
A Chink in Passive Investing’s Armor?
Same Study – Different Conclusions

Introduction

Since late 1994, studies have shown that many investors do not realize the same returns as the mutual funds in which they were investing. The first such study I saw back in the 1990s was one that Martin Zweig commissioned Morningstar to produce. This study analyzed cash flows in and out of stock mutual funds to see how the average investor did. I remember being surprised when I learned that over the period from 1989 through 1994, the average growth mutual fund returned 12.5% but the average investor in those funds actually lost 2.2%.

Soon, the Zweig/Morningstar study was joined by others, the most notable of which was the Quantitative Analysis of Investor Behavior (QAIB) Study conducted by Dalbar, Inc. in 1994. Dalbar confirmed that many investors were not participating in long-term mutual fund returns because of frequent switching among funds.

Until these studies were published, no one worried too much about what kind of returns investors were actually realizing. Everyone just assumed that whatever the large mutual fund firms reported as returns were what investors got. These studies, however, showed that many investors were chasing hot returns in order to get better returns. In other words, they’d jump from one hot fund to the other in hopes of increasing their return. But just the opposite occurred.

To say that these studies had a huge impact on my firm is an understatement, since they were the catalyst for the introduction of our AdvisorLink® Program back in 1995. Fortunately, Dalbar has continued to update its original study each year, and the general trend has remained the same – investors overall are not getting the kind of returns they should because of frequent switching among funds.

This week, I’m going to update you on the latest update of the Dalbar QAIB Study. It’s possible that you might see yourself in these statistics. After that, I’m going to discuss the original conclusion reached in the QAIB Study, and why we chose a different track when developing our AdvisorLink® Program.

First, however, I’m going to briefly discuss the 3Q GDP report that came out last week after my weekly E-Letter had been published. To say the least, the number surprised most analysts by coming in on the high side of economists’ forecasts. I think you’ll find both subjects to be very interesting reading, so let’s get started.

Third Quarter GDP Surprises on the Upside

Last Thursday, the Commerce Department reported that 3Q GDP rose 3.5% (annual rate). This was above pre-report estimates which averaged around 3%. The government noted that the rebound in the 3Q was led by increased consumer spending (think "cash for clunkers"), higher exports and a continued increase in federal spending.

Most analysts concluded that the better than expected 3Q GDP report confirms that the US economy came out of the recession in the July-September quarter. However, the Consumer Confidence Index unexpectedly fell sharply in October, partly due to the continued rise in unemployment, which raises questions about economic growth in the 4Q.

Finally, keep in mind that the 3Q GDP report will be revised two more times in the coming weeks, and it will not surprise me if it is revised downward, what with the unemployment rate on track to top 10% by the end of the year. And for most of us, this economy does not feel like it's growing at the rate of 3.5%.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Why Do Investors’ Returns Trail the Market?

Before going into the most recent update of the Dalbar QAIB study, it is probably worthwhile to provide some background on exactly how investor returns and fund returns can differ. I would bet that many readers just assume that investors always earn returns in line with those of the equity and bond mutual funds they hold, but this is definitely not always the case.

In a nutshell, fund returns represent what someone buying and holding a particular mutual fund would have earned over a specific time period. Returns for the “average investor,” on the other hand, factor in behavioral measures that can (and do) affect the actual returns earned by investors in these funds. Dalbar explains it this way:

“…the [QAIB] study utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. These behaviors are then used to simulate the ‘average investor.’ Based on this behavior, the analysis calculates ‘average investor return’ …”

In other words, switching among investments has an effect on the eventual return received, both on a long-term and short-term basis. Dalbar and others have found that investors who tend to hop from one hot mutual fund to another not only fail to enhance their performance over industry benchmarks, but have been shown to actually end up earning a far smaller return because of their periodic switching among funds.

Why do investors hop from fund to fund so much? The reasons vary, but my experience has been that some investors panic when losses occur and get out of the market. Others frequently change their investments to chase the hottest returns. Unfortunately, this hot performance mindset is aided by financial publications that routinely list the top five or 10 or 20 best funds for the previous year. Investors often look at their own return during the year compared with the “hot” funds, and decide to switch and get in on some of that high-powered performance.

Unfortunately, the mass migration of investors to funds with the best previous performance often guarantees that those funds will not repeat as a top performer the next year. The end result is that funds with hot performance one year often lag behind other funds in subsequent years. Thus, those investors who flocked into these funds after their best performance often find that they would have been better off had they stayed in their old funds.

So, do investors learn their lesson and look for funds with consistent long-term performance? The answer for many of them is “no,” and they continue hopping to the next hot fund and hoping for a repeat performance that seldom happens. This is what we like to call becoming a “Dalbar statistic.”

The 2009 QAIB Study Update

The 2009 update of the original QAIB Study measures performance over the 20-year period extending from January 1, 1989 through December 31, 2008. Considering that this period includes both the 2000 – 2002 and 2007 – 2008 bear markets, one might conclude that investors who frequently switch among mutual funds on their own might have had better results than those of the actual mutual funds, but you’d be wrong.

Here’s what the most recent update to the Dalbar QAIB Study found:

Over the 20 years ending December 31, 2008, equity mutual fund investors had average annual returns of only +1.87% while the S&P 500 Index averaged +8. 35% over the same time period.
Fixed income fund investors had average annual returns of +0.77% over the same 20-year period, while the benchmark Barclays Aggregate Bond Index averaged +7.43%.
Note that both the equity and fixed income fund investors’ average returns were less than inflation, which clocked in at 2.89% over this 20-year period of time.
Confirming the “lost decade” concept, Dalbar’s study showed that the S&P 500 Index had negative returns over 10, 5, 3 and 1-year time windows. Fixed income investors, however, fared better with the Barclay’s Aggregate Bond Index averaging positive returns ranging from +4.65% to +5.63% over this period of time. However, neither the average equity fund investor nor average bond fund investor beat the benchmark returns over any of the 1 to 10-year time windows.

Thus, the QAIB Study again shows that investors’ own behavior is detrimental to their long-term investment goals. Following are graphic representations of the study’s findings. The first graph shows the performance of the various benchmarks used in the QAIB Study during various time windows:

The next graph shows the performance of the average equity, fixed income and asset allocation mutual fund investor over the same time windows:

To sum it all up, many mutual fund investors have been their own worst enemies over the last 20 years. The only bright spot, if you can call it that, was a statistic showing that the average asset allocation fund investor fared better than both the S&P 500 Index benchmark and average equity fund investors in 2008, losing “only” 30%. In fact, the average asset allocation investor lost less than the average equity fund investor in most time periods. Obviously, this is a function of having both equity and fixed income mutual funds in the typical asset allocation portfolio.

However, something even more interesting is that asset allocation did not enhance performance over the long haul. Note that the average asset allocation investor had an average annual gain of only 1.67% over 20 years, versus 1.87% for the average equity mutual fund investor.

News Flash – Investors Panic in Down Markets!

Another, rather obvious finding in this year’s QAIB Study update was the fact that “When the going gets tough, investors panic.” In all previous updates of the QAIB Study, Dalbar has pointed out that investors’ emotional behavior can significantly affect their returns. However, their advice has been to simply suppress this emotional behavior and stay in the market.

This advice tends to ring hollow in bear markets like we had in 2000 – 2002 and 2007 – 2009. It’s like being on the Titanic and Dalbar saying “please remain calm and proceed in an orderly fashion to the lifeboats.” Some may heed the call, but the average passenger, like the average investor, is likely going to panic.

Thus, Dalbar has finally realized that investors engage in irrational behavior despite scholarly advice to the contrary. To illustrate this behavior, Dalbar has developed a “Guess Right Ratio” that measures how often the average equity fund investor makes an accurate investment decision based on the market environment. In other words, this ratio measures how often the average investor buys low and sells high. Over the 20-year period covered in the study, Dalbar found that “Market declines caused panic and panic led to bad decisions. And bad decisions combined with declining markets resulted in exacerbated losses.”

What I find disappointing in all of this is why it took Dalbar so long to figure out that investors won’t necessarily heed a call to ignore losses and stay invested during bear markets and major corrections. When I read the first QAIB Study back in 1995, my initial reaction was that investors need professional management because they were not likely to have the discipline to remain invested in losing markets, no matter how many times their broker tells them to “stay the course.” After only 15 years, Dalbar finally sees the light.

A Chink in Passive Investing’s Armor?

Perhaps the most surprising revelation in the 2009 QAIB update compared to all previous years is that traditional passive buy-and-hold strategies are not seen as a solution to the problem. Not only did Dalbar decide against endorsing traditional asset allocation as a solution, they actually came to the realization that such strategies don’t work. Here’s how Dalbar put it in this year’s update:

“This year’s report … also demonstrates that simply adopting a one-size-fits-all asset allocation strategy will not suffice in the new investment paradigm.” [Dalbar QAIB, Page 2] “Portfolio performance during the market meltdown of 2008 is clear evidence that the current methods are ineffective, even independent of investor behavior. Current asset allocation and diversifi-cation strategies are based on uncorrelated asset classes that in 2008 became highly correlated, thus rendering all such strategies moot.” [Dalbar QAIB, Page 11, Emphasis added]

For a while, I thought that Dalbar may have been reading my E-Letters. After all, I have been making similar observations about buy-and-hold strategies for a very long time. However, I soon learned that they are not running plays from my playbook when I began reading their new recommendations to help investors keep from being their own worst enemies.

While space does not permit me to go into detail about each of Dalbar’s recommended solutions to inferior investment returns, I’ll discuss each of them briefly below:

1. Dalbar’s first suggestion to help investors get better returns was to consider using Dollar Cost Averaging (DCA) to ease back into the market. I have written about DCA in the past in the E-Letter, and it is essentially a method of investing where you gradually invest your portfolio in increments over time. This means that you buy into the market at different price levels and are somewhat less susceptible to a major market downturn. In fact, investing during these market downturns can result in buying at bargain prices, which should be good for your portfolio in the long run.

Of course, this only works if you have moved your money to the sidelines or are making periodic contributions to a retirement plan. I think that DCA can be a good idea if you are in a 401(k) or other type of plan where you have only mutual fund options and cannot access actively managed investment strategies. Obviously, this technique is not available for anyone who is already fully invested in the market. For those investors, Dalbar had other alternatives as discussed below.

2. The second strategy that Dalbar suggested was to consider a portfolio management technique known as Purpose-Based Asset Management, or PBAM. This strategy has the benefit of being available to both investors on the sidelines and those already fully invested. That’s the good news. The bad news is that this approach is little more than buy-and-hold “lite.”

According to Dalbar, traditional asset allocation strategies often assume only one level of risk tolerance for the entire portfolio. The main premise behind PBAM is that investors actually have multiple risk tolerances depending upon the particular investment goal. Investors may be more comfortable with higher risk on investments held for longer periods, such as for retirement, than they are for investments held for shorter-term goals.

Thus, investors are encouraged to allocate assets into separate strategic “compartments” based on the ultimate goal for that part of the portfolio, and then design an asset allocation strategy based on the appropriate risk level for each compartment. The hope is that money allocated more conservatively will lose less in down markets than the more aggressive compartments, resulting in less panic on the part of the investor.

In reality, this simply means that instead of having one big asset allocation portfolio, they will have multiple small buy-and-hold portfolios that will be subject to the same limitations as any other passive asset allocation strategy. My personal opinion is that PBAM is simply a marketing gimmick that will result in little difference in overall performance or emotional decision making.

3. A final recommendation from the Dalbar report is to explore the use of leverage within portfolio holdings, both at the portfolio and individual holding level. In essence, Dalbar is acknowledging that leverage, especially in the credit markets, played a big part in the subprime meltdown and resulting credit crisis.

Since this leverage can occur in the private sector, government and international markets, Dalbar suggests that investment experts begin requiring issuers of securities to compute and disclose their true leverage. Once disclosed, Dalbar suggests that leverage should be incorporated into computer models that screen investments as well as asset allocation models.

Same Study, Very Different Conclusions

While the conclusion reached by this most recent update of the QAIB Study pretends to offer a new approach to investing, it’s really just a tweak of traditional buy-and-hold. This really isn’t all that different than the findings in prior years when Dalbar recommended investors follow buy-and-hold strategies and suppress the emotional desire to exit mutual fund investments when (not if) they begin to lose money.

I noted above that the Dalbar and Zweig studies were the catalyst for the development of my firm’s AdvisorLink® Program. Yet, AdvisorLink® is anything but a buy-and-hold investment program, so how did we get from Dalbar’s recommendation to an innovative collection of active management strategies?

It happened this way: I reported the findings of these studies in my monthly client newsletter (remember when publications were actually printed on paper?), but pretty much dismissed its applicability to my audience since most were experienced investors in my managed futures funds. Anyone sophisticated enough to invest in futures funds must be able to handle their own mutual fund investments, right?

Wrong! Imagine my surprise when a very large percentage of my futures funds’ investors responded to my newsletter saying that the Dalbar QAIB Study described their own behavior. They resoundingly supported our research into a way to keep from becoming a “Dalbar statistic.”

We then had to develop a strategy to try to get investors to avoid emotional decisions in down markets. While Dalbar suggested just saying “no” to switching among funds, we knew that investor psychology would dictate moving away from equities when the pain became too great. As a result, we took a different track in addressing investor psychology.

First, we reasoned that investors who are doing everything on their own were becoming confused with all of the conflicting information in the marketplace. We called this “information overload,” and this was just the early days of the Internet. Thus, our first principle was that investors should seek out the help of professional money managers rather than trying to do everything themselves. This helps take some of the emotion out of the equation, since a third party is responsible for investment decisions. This first principle was the genesis of our AdvisorLink® name, since we were linking investors to qualified Investment Advisors.

The next principle we adopted was that all of the strategies in our AdvisorLink® Program had to be actively managed. We saw no benefit in strategies that would stay fully invested in the face of a bear market or major correction. It just makes sense to move to cash or hedge long positions when the markets are going against you. This, too, helped to reduce the emotional impulse to sell during bad markets. We even included more aggressive programs that were able to “short” the market with the potential to actually make money during down markets.

A final principle in the establishment of our AdvisorLink® Program was that it needed to be mutual fund based. While we were aware of active money managers using individual stocks and bonds, many had minimum investments in the hundreds of thousands of dollars, and some required over a million. By concentrating on Advisors who used mutual funds, we were able to bring the advantage of professional money management to our clients at reasonable minimum investment levels.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

The Dalbar QAIB Study has been a valuable tool in educating both investors and Advisors about the dangers of emotional trading. While QAIB is instructive in showing weaknesses of the average investor’s actions, it falls short on solutions. I predict that you’ll be hearing more about Purpose-Based Asset Management in the future as this marketing gimmick catches on with brokers who want their asset allocation programs to sound like something other than what they are. Just remember that PBAM is nothing more than buy-and-hold lite.

The purpose of my short history lesson about our AdvisorLink® Program is to give you some insight as to why it is structured the way it is and why we feel it’s important to have active management represented in your portfolio. These strategies not only address the issue of investor panic and emotional trading, but also offer additional strategic diversification over buy-and-hold.

If you would like more information about AdvisorLink® or the various strategies offered within that program, you can learn more by going to our website at www.halbertwealth.com. Or, feel free to give one of our Investment Consultants a call at 800-348-3601. I think you’ll be glad you did.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

How the Economic Crisis Changed Us
http://www.parade.com/news/2009/11/01-how-the-economic-crisis-changed-us.html

Election results today could signal political trends
http://www.nytimes.com/2009/11/04/us/politics/04nagourney.html?_r=2&ref=politics

Republicans to announce alternative healthcare reform
http://online.wsj.com/article/SB125711811707721639.html

Economic Recovery vs. Rising Unemployment

Gary D. Halbert — Tue, 27 Oct 2009 21:28:00 GMT

IN THIS ISSUE:

Overview of Recent US Economic Trends
Snapshot of the Latest Economic Data
Fed's "Beige Book" Sees Modest Improvement
Unemployment: The 800-Pound Gorilla in the Room
Conclusions - Storm Clouds on the Horizon

Eyes around the world are intently focused on this Thursday's advance estimate of 3Q GDP in the US. Everyone is anxiously awaiting the report which will signal whether or not the US economy moved into positive territory in the July-September quarter. Pre-report GDP estimates are all over the board, ranging from -1% to +3% or more. I can't recall another quarterly GDP report that was this uncertain in terms of pre-report estimates than this one.

As I have reported over the last couple of months, most economic reports of late have suggested that the US economy is coming out of the recession a little sooner than many of us expected earlier this year. In the pages that follow, we will review the latest economic reports in the hopes of giving us a little more insight as to what we may learn on Thursday with the release of the 3Q "advance" GDP estimate.

While the GDP report on Thursday is generally expected to be positive, we all know that the unemployment rate continues to rise, now at 9.8%, and likely headed even higher just ahead.

While most economists concur that the jobless rate will move even higher for at least several more months, recent data paint a grim picture for the likelihood of the unemployment rate falling significantly anytime soon.

And the truth is, the real unemployment rate in the US is now at 17%, if the government reported all of the people who are out of work and those who are having to work part-time because they can't find a full-time job. This week, I will give you all of the unemployment numbers, not just the official unemployment rate which now stands at 9.8% and rising.

Finally, most forecasters believe the economy will rebound, at least modestly in 2010, and I don't disagree. Yet few are offering forecasts beyond 2010 because no one knows what will happen if President Obama doubles the national debt in the next 5+ years. All I can say is that I don't believe this liberal experiment will end pretty, and I will have more to say about it in the weeks and months ahead.

Overview of US Economic Trends

Global attention will be intently focused on Thursday's 3Q GDP report as it is widely expected to show that the US economy emerged from the worst recession since the Great Depression. As noted above, not all pre-report GDP estimates are positive, but most are as I will discuss below.

But before we get to the latest estimates for Thursday's GDP report, let's quickly review the quarterly GDP data for 2008 and the first half of 2009. Here are the official annualized numbers:

1Q 08	2Q 08	3Q 08	4Q 08	1Q 09	2Q 09
-0.7%	+1.5%	-2.7%	-5.4%	-6.4%	-0.7%

On September 30, the Commerce Department released its third and final GDP report for the 2Q, showing the economy contracted at an annual rate of -0.7%, as compared to its prior estimate of -1.0%

As you can see, the worst of the recent economic slump occurred in the last half of 2008 and the first quarter of this year as the housing/credit crisis played out. But it should also be pointed out that the US economy was already slowing down its growth rate even before the latest recession. GDP growth was only 2.7% in 2006 and 2.1% in 2007 (annual rates).

Most economists agree that apprx. 3% annualized growth in GDP represents the average rate of growth in the US economy in the post-WWII era. Periods of growth below 3% represent "below-trend" time windows, while periods above 3% indicate "above-trend" examples. Clearly, the US economy has been growing at below-trend rates for the last several years.

With that perspective, let's look at the latest economic reports.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Snapshot of the Latest Economic Data

The consensus view based on recent economic and financial data is that the US economy is coming out of the credit crisis and recession. The National Association for Business Economics (NABE) recently surveyed leading economists, and over 80% believe the recession is over and an expansion has begun, but they expect the economic recovery will be slow as worries over unemployment and high federal debt persist.

"The survey found that the vast majority of business economists believe that the recession has ended but that the economic recovery is likely to be more moderate than those typically experienced following steep declines," said NABE President-elect Lynn Reaser, chief economist at Point Loma Nazarene University.

Most of the forecasters surveyed had upgraded their economic outlook for the next several quarters, but cautioned that unemployment rates and the federal deficit are expected to remain high through the next year. On balance, the economists now expect the economy, as measured by GDP, to advance at a 2.9% pace in the second half of 2009, after falling for four straight quarters for the first time in more than 50 years. On average, they expect GDP to gain 3% in 2010. I wish I were so optimistic.

The best news in recent months has been in the Index of Leading Economic Indicators (LEI), which has long been one of my favorite economic benchmarks. The LEI has risen for six consecutive months, with a strong increase of 1.0% in September, following +0.6% in August.

The LEI rise over the last six consecutive months, alone, would suggest - with the benefit of hindsight - that the recession was coming to an end. The six-month rise in the LEI gives credence to positive forecasts for the 3Q GDP number and perhaps the 4Q as well. Beyond that, it is anyone's guess.

For the benefit of our many newer readers, the Index of Leading Economic Indicators is, for the most part, a compendium of economic indicators: new orders, jobless claims, money supply, average workweek, building permits, and stock prices. The LEI is maintained and reported by the Conference Board (www.conference-board.org).

Consumer confidence is arguably the next major indicator of the direction of the economy, since consumer spending accounts for roughly 70% of GDP. Since rising sharply in April-May-June, the Consumer Confidence Index has gone basically sideways since then.

The other widely followed measure of consumer confidence is the University of Michigan Consumer Sentiment Index. After reaching a new recent high of 73.5 in September, the UM Consumer Sentiment Index fell to 69.4 earlier this month as announced on October 16.

Consumer spending is generally gauged by two economic reports, both of which are generated by the Commerce Department. One is the monthly retail sales report which dipped slightly in September. However, if we revise this retail sales report to exclude auto sales (which plunged last month due to the end of the "cash-for-clunkers" rebate program in August), retail sales actually increased marginally (+0.5%) in September, following a 2.2% gain in August.

The other widely followed indicator of consumer spending is the Commerce Department's "personal consumption expenditures" (PCE) measure, which is a part of the quarterly GDP reports. Americans increased PCE by 0.6% in the 1Q, only to see it decline by 0.9% in the 2Q. We will get our first look at 3Q PCE on Thursday with the latest GDP report.

Regardless of which report we use to gauge retail sales, the results are not eye-popping. Yes, consumer spending is finally on the rise in the wake of the recession, but we are far from out of the woods.

On the manufacturing front, things continue to improve at least modestly. The ISM Index basically was flat in September at 52.6. Industrial production rose 0.7% in September. The factory operating rate rose to 70.5% in September from 69.9% in August. Construction spending rose 0.8% in August (latest data available). The ISM Services Index rose to 50.9 in September, another indication that the recession may be ending.

And finally, on the housing front, there was more encouraging news last Friday. The National Association of Realtors reported that sales of existing homes rose 9.4% in September. The inventory of existing homes on the market declined slightly last month, and the decrease in home sale prices was somewhat less than was expected.

Fed's "Beige Book" Sees Modest Improvement

The Federal Reserve publishes an economic report eight times per year (roughly every six weeks) that is based on surveys conducted by the Fed's 12 regional banks that continually collect economic data within their respective regions. This periodic economic report is called the Fed's "Beige Book," and the latest report was released last Wednesday.

Basically, the latest Beige Book indicated that the US economy is continuing to improve, albeit very modestly, in most (but not all) regions of the country. The survey indicates that the economy, while gaining momentum, has yet to overcome weaknesses in bank lending and employment. According to the report, unemployment continued to rise last month in 23 US states, giving the Fed additional reasons to hold the main interest rate at a record low to stoke a recovery.

In particular, Federal Reserve district banks identified commercial real estate as the weakest part of the economy, while most saw "stabilization or modest improvements" in areas including housing and manufacturing. All 12 district banks reported a weak or declining commercial real estate market. You may recall that I wrote about the problems in commercial real estate in great detail in my September 29 E-Letter, so my readers should not be surprised.

While the latest Beige Book tried to present a guardedly optimistic outlook for continued economic recovery, it included several prominent caveats, such as: "Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered." The report also demonstrated how heavily many businesses are relying on government spending in the face of huge contractions in the private sector.

Unemployment: The 800-Pound Gorilla in the Room

It is widely estimated that over 7 million jobs have been lost since the recession began in late 2007. The unemployment rate rose to 9.8% in September, with the "official" number of job losses at 263,000 last month. That is the highest unemployment rate since June 1983.

Most forecasters expect the US unemployment rate to continue to climb until sometime in mid-2010 when the rate is expected to peak somewhere north of 10%.

As many of you know, the official Labor Department unemployment rate is quite misleading in several ways. While it is useful as an indication of the trend in the unemployment rate, it actually understates the real percentage of Americans who are out of work.

The official unemployment rate that is announced every month does not include: 1) workers who have had to settle for part-time jobs because they can't find full-time jobs; and 2) Americans who have given up looking for a job.

If laid-off workers who have settled for part-time work or have given up looking for new jobs are included, the true unemployment rate rose to 17% in September. Here is the actual data from the Labor Department:

Table A-12.

Alternative measures of labor underutilization
Seasonally adjusted rates as of September 2009:

U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force	5.4%
U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force	6.8%
U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)	9.8%
U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers	10.2%
U-5 Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers	11.1%
U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers	17.0%
NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. For more information, see "BLS introduces new range of alternative unemployment measures," in the October 1995 issue of the Monthly Labor Review. Updated population controls are introduced annually with the release of January data. (Source: Bureau of Labor Statistics Economic News Release - October 2, 2009)

All told, 15.1 million Americans (17%) are now out of work, the Department said. And an estimated 7.2 million jobs have been eliminated since the recession began in December 2007.

The Labor Department said 571,000 of the unemployed dropped out of the work force last month, presumably out of frustration over the lack of jobs. That sent the so-called "participation rate," or the percentage of the population either not working or looking for work, to a 23-year low. The unemployment rate would have topped 10% if the labor force hadn't shrunk again in September.

Older, laid-off workers are dropping out and requesting Social Security at a faster-than-expected pace, according to government officials. The Social Security Administration reported earlier this month that applications for retirement benefits are 23% higher than last year, while disability claims have risen by about 20%.

Meanwhile, the number of people out of work for six months or longer jumped to a record 5.4 million in September, and they now make up almost 36% of the unemployed, also a record. Making matters worse, weekly wages fell $1.54 to $616.11 in September, according to the Labor Department. Also, the average hourly work week fell back to a record low of 33 hours in September.

Unemployment to Remain High for Years to Come,
Even if the Economic Recovery Gets Stronger

With the unemployment rate so much higher than most expected, and headed higher still, more and more analysts are trying to determine how much job creation will be required to bring us down to 5% unemployment. Many economists and analysts consider that 5% unemployment is the equivalent of "full employment," since there will always be some percentage of the working population that is unemployed at any given time.

The job creation numbers required to get us from the current 9.8% unemployment to 5% unemployment, at this point, are simply staggering. And they are likely to get even worse, since we are likely headed for at least 10% unemployment in the months ahead.

As noted above, well over seven million jobs have been eliminated since late 2007. Most economists agree that most of these jobs have been eliminated permanently. Also as noted above, there are now 15.1 million Americans (17%) who were out of work, or forced to work part-time, as of the end of September.

In addition to the 15.1 million Americans who are out of work, most economists agree that apprx. 1 million new people enter the US job market every year (high school and college grads, legal immigrants, etc.). So not only does the economy need to grow by enough to re-employ 15 million unemployed, it also must create another 1 million jobs each year to provide for new entrants to the labor force.

With 15 million out of work already, and with the labor force expanding by more than 1 million new workers annually, economists Joseph Seneca and James Hughes of Rutgers estimate that even the robust job growth of the 1990s (2.4 million new jobs a year) wouldn't reduce today's 9.8% unemployment to 5% until 2017.

We increasingly hear about the so-called "jobless recovery" that we are likely facing. With the economy still losing over 250,000 jobs per month, it is a real stretch to assume that we will get anywhere near the 1990s pace of adding an average of 200,000 jobs per month (2.4 million annually). For example, the Business Roundtable, a group of CEOs from large corporations, said earlier this month that only 13% of its members expect to increase hiring over the next six months.

As these numbers continue to sink in, we are hearing new calls for more federal aid to state governments, a further extension of unemployment insurance (now up to 79 weeks) and a tax credit for companies that create new jobs. One such proposal would give employers a $7,000 tax credit for each additional worker hired (over some base period).

The W.E. Upjohn Institute for Employment Research thinks such a credit might create two million jobs. Sounds good on paper, perhaps, but the budgetary cost to the government would likely be $40 billion annually or higher.

As you will likely recall, President Obama rammed through his massive $787 billion "stimulus package" back in February, largely on the promise that it would create jobs. What he didn't tell us was that most of the money would not be spent this year, and that much of the money would go for pork-barrel spending programs over the next few years that won't create large numbers of jobs in the first place.

Supporters of the stimulus argue that without it, unemployment would be even worse than it is now and suggest that the stimulus spending in 2010 and 2011 will boost the economic recovery significantly. That remains to be seen, of course. I tend to doubt it.

Conclusions - Storm Clouds on the Horizon

Economic and financial reports continue to support the idea that we have seen the worst of the economic recession and the credit crisis, as I have suggested in recent weeks. Most estimates suggest that the economy, as measured by GDP, will show a positive number for the first time in over a year with this Thursday's advance 3Q GDP report.

Pre-report estimates are all over the board, and some analysts believe the report could show 3Q growth of 3% or more. Of course, we must all keep in mind that year-over-year comparisons of 3Q 2009 to last year's 3Q should make this year look pretty darned good in any event.

But the bigger problem is that unemployment continues to rise and is likely to do so until at least sometime in the first half of 2010, reaching well over 10% in the official number. As I have explained in detail above, the official unemployment rate significantly understates the real unemployment rate, which is now at 17%, as admitted by the Labor Department.

Despite the continuing unemployment trend, most forecasters believe that the US economy came out of the recession in the 3Q. Likewise, most mainstream forecasters believe that 2010 will be a year with at least modestly higher growth rates. Most estimates I read suggest the US economy will grow by 1.5%-3% in GDP next year. That remains to be seen, however.

Yet the most interesting thing for me is that we are seeing very few forecasts for 2011 and beyond. Usually, forecasters are more than happy to provide multi-year economic projections, so why not now? The reason is, in my opinion, that no one has a clue what the long-term effects will be as a result of President Obama's plans to run trillion-dollar deficits for the next several years at least and double the national debt in possibly the next five years.

The US dollar continues to fall as I discussed in detail last week. While I don't believe the dollar will be replaced as the world's "reserve currency" in the near-term, the long-term prospects for the dollar are questionable at best, especially if Obama doubles the national debt over the next 5-plus years. At some point, foreigners who buy our massive debt may decide to stop buying dollars, or worst case, begin to unload dollars.

If that were to happen, the implications for the US financial markets would be enormous. That could cause a financial crisis that dwarfs the one we've just been through. Maybe we do see an economic recovery in 2010 as most economists predict. But I want to go on record in predicting a "double-dip recession" in 2011 and perhaps beyond, especially if the dollar accelerates its decline. Space does not allow me to go into my reasons for this prediction this week, but I will be writing more about it in the weeks and months ahead.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Stocks Up 60% - Now What?

If the current troubling economic forecast doesn't call for a defensive investment approach, I don't know what does. Stocks have exploded since the March lows, with the S&P 500 Index up almost 60%. Now, more than ever, you may want to consider active management strategies that can move to cash or hedge long positions should stocks switch direction just ahead.

We recently sponsored live webinars featuring two of our recommended Investment Advisors. The overwhelming response we received shows us that investors are beginning to realize that the market can't continue to go up forever, and that market euphoria will run into economic reality at some point.

Increasingly, sophisticated investors are increasingly turning to professional money managers that can take advantage of whatever remains of the stock market upside, but that also have the ability to move to cash, or hedge long positions, when the current bull market rally plays out.

Fortunately, we recorded both of these webinars and have placed them on our website. I urge you to check out both the Potomac Fund Management and Niemann Capital Management webinars. Both of these Advisors have actual track records going back well over a decade, so they are not recent entrants in the field of active money management. Click on the following links to learn more about how these professional money managers add value to their clients' investments.

Potomac Fund Management Webinar

Niemann Capital Management Webinar

If you would like to discuss either of these managers, or learn more about our other actively managed investment programs, feel free to call one of our Investment Consultants at 800-348-3601 or send an e-mail to info@halbertwealth.com. We look forward to hearing from you!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Why Government Health Care Keeps Falling in the Polls
http://online.wsj.com/article/SB10001424052748704335904574495131591949574.html

Is the healthcare "public option" really back?
http://www.realclearpolitics.com/articles/2009/10/27/if_public_option_is_really_back_why_such_a_heavy_lift_98890.html

The Dethroning of King Dollar (an interesting read)
http://www.weeklystandard.com/Content/Public/Articles/000/000/017/124jwyuq.asp?pg=1

Will the US Dollar Lose "Reserve Currency" Status?

Gary D. Halbert — Tue, 20 Oct 2009 20:33:00 GMT

IN THIS ISSUE:

Most Americans Are Dollar Indifferent/Oblivious
How the Dollar Became the Reserve Currency
Long-term Swings in the US Dollar's Value
Global Calls for Reserve Currency Replacement
Editorial: The "Dump-the-Dollar" Conspiracy
Conclusions – No Change Likely Anytime Soon

Introduction

The US dollar became the global "reserve currency" in 1944 near the end of World War II and continues as such. There have been numerous reserve currencies over the centuries, but none more widely accepted than the US dollar since 1944. While the US dollar has fluctuated widely in value over the 65 years since its designation as the reserve currency, its credibility has come under the most intense scrutiny ever in the last few years.

The US dollar peaked in value in 2000-2001 and has been in a significant decline ever since. There was a relatively brief period in 2008 when the dollar rebounded quite sharply due to the worldwide financial crisis and economic meltdown, when there was a global rush to the safety of US Treasury securities. But since then, the dollar has resumed its long-term downtrend.

With President Obama's most unprecedented spending plans in history, with trillion-dollar budget deficits as far as the eye can see, and the potential to more than double the US national debt in the next 5-10 years, there is now widespread speculation that the dollar is headed for new all-time lows and a possible collapse.

As a result, we are seeing and hearing calls around the world to end the dollar's status as the world's reserve currency and replace it with something else. The question is, replace it with what? The US dollar is by far the largest currency in the world; many commodities around the world are priced in dollars; and most international transactions are settled in dollars.

This week, we will look at the debate regarding what to do about the US dollar as the world's reserve currency. I will start by explaining how the US dollar became the global reserve currency. Next, we will look at some of the difficulties the global community will face if the dollar is to be replaced as the reserve currency. And finally, we will explore what may happen if the US doubles the national debt over the next 5-10 years. It should make for an interesting letter.

Most Americans Are Dollar Indifferent/Oblivious

The financial media keeps us constantly aware of what's happening with the US dollar, as it should. But let's face it, most Americans pay little attention to the financial media, much less the value of the US dollar. And why should they? The dollar goes up in value and goes down in value, most often with few obvious effects on the lives of everyday Americans.

In extreme cases, a sharply falling dollar can result in significantly higher inflation and higher prices for the goods and services we consume. The late 1970s, when we had what some called 'hyperinflation,' is one such example. But Americans have come to accept that inflation rises every year, and few correlate rising consumer prices to fluctuations in the US dollar.

Likewise, a falling dollar can make US exports more competitively priced in foreign countries, and this can be a positive factor for the economy and job creation here at home. Yet a falling dollar can also make foreign imports more expensive to US consumers. But the point is, when it comes to a rising or falling dollar, most Americans are indifferent if not oblivious.

Most Americans, as far as I can tell, are likewise indifferent or oblivious as to the significance of the US dollar being the world's reserve currency. I would similarly suggest that most Americans don't even know what it means to be the world's reserve currency. Yet that may be about to change in a big way, what with increasing calls for the replacement of the US dollar as the world's reserve currency.

Sophisticated investors need to understand the importance of these issues as the future of the US dollar can significantly affect the value of our investments, as well as the prices we pay for the goods and services we all consume. In that regard, let's start with a brief discussion of how the US dollar came to be the world's reserve currency and what that means.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

How the Dollar Became the Reserve Currency

In July 1944, with World War II still raging and the international economic and financial systems in near shambles, delegates from all 44 Allied nations gathered in Bretton Woods, New Hampshire for the 'United Nations Monetary and Financial Conference.' The goal was to set up a system of rules, procedures and institutions to regulate the international monetary system. After three weeks of deliberating, the delegates agreed upon and signed the Bretton Woods Agreements.

The planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the Bretton Woods Agreements.

One of the chief features of the Bretton Woods system was an obligation for each country to adopt monetary policies that maintained the exchange rate of its currency within a fixed value (plus or minus 1%). The US dollar was established as the world's "reserve currency," which is typically defined as theforeign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, and/or to influence their domestic currency exchange rates.

At the same time, the US agreed separately to link the dollar to gold at the price of $35 per ounce, with the added promise that Allied nations could convert their dollar holdings to gold if they so preferred. This was collectively known as the new "gold standard."

Ultimately, the other Allied nations agreed to "peg" their currencies to the US dollar, and agreed to buy and sell dollars to keep market exchange rates within plus or minus 1% of parity. Thus, the US dollar took over the role that gold had played in the previous international financial system. As the world's reserve currency, most international transactions came to be denominated in US dollars. The US dollar was the currency with the most purchasing power, partly because it was the only currency that was backed by gold. This led to the phrase that "the US dollar is as good as gold."

The gold standard for the US dollar, as the global reserve currency, continued until August 15, 1971 when President Richard Nixon unilaterally closed the so-called "gold window" and ended the option of converting US dollars into gold. Despite that, the US dollar has continued to be the global reserve currency to this day. But that may be changing… or maybe not.

Long-term Swings in US Dollar Value

The decoupling of the US dollar from gold in 1971 meant that the greenback became a "fiat" currency that was supported by nothing more than the full faith and credit of the US government, and thus subject to the whims of the market. The US Dollar Index (as measured in relation to six major foreign currencies) actually fell for several years after Nixon closed the gold window.

Then from 1980 to 1985, the US dollar skyrocketed on the upside, nearly doubling in value by 1985. But then in late 1985, the dollar began a virtual collapse which saw its value cut almost in half by late 1987. From late 1987 to 1995, the dollar moved in a broad sideways trading range.

From 1996 to 2001, the dollar staged another strong rally which moved the Index up to 120 as you can see in the chart below. From 2001 to the present, the Dollar Index fell sharply, reaching a new low in early 2008. Yet as the recession and the credit crisis unfolded in earnest in 2008, the dollar saw a fairly significant bounce, which was driven almost entirely by the global rush to safety in US Treasuries.

As you can clearly see, the credit crisis rally in the dollar ended early this year, and the long-term downtrend has resumed. The question now is whether or not the US dollar is headed for new all-time lows. With Obama's plans to run trillion-dollar annual budget deficits as far as the eye can see, and double the national debt in the next 5-10 years, it would seem almost certain that the dollar is headed for new lows.

This is precisely why we are hearing calls from around the world to replace the US dollar as the global reserve currency. But again, the question is with what?

Global Calls for Reserve Currency Replacement

As the US dollar has resumed its long-term downtrend this year, a growing international chorus is suggesting that the dollar be replaced as the world's reserve currency, a move that could theoretically end the greenback's six decades of global dominance.

China was the first major power to call in March for the dollar to be replaced as the world's reserve currency. China holds more US debt than any other country - about $800 billion - and the further the dollar drops, the less the value of the US debt owed to China. Never mind that China has been roundly criticized for its handling of its own currency, the yuan, which I might add is pegged to the US dollar.

Reportedly, there were informal talks on the dollar continuing as the reserve currency at the G-20 summit in London in early April. Since then other nations such as Russia, France and Brazil have suggested that the US dollar should be "supplemented" by other major currencies as a shared reserve currency.

The US was again criticized at the latest G-20 summit in Pittsburgh at the end of September, to the point that Treasury Secretary Geithner felt obligated to say the following at the opening of the conference: "A strong dollar is very important to the United States." Given the massive spending by the Obama administration, and plans to double the national debt in 5-10 years, it is no wonder that no one believed Geithner's remarks.

Regardless of whether the dollar would be replaced or supplemented, it would be a very complicated matter. The technical and political hurdles are enormous. For one thing, central banks around the world hold far more US dollars and dollar-denominated securities than they do assets denominated in any other individual foreign currency. Such reserves are frequently used to stabilize the value of the central banks' domestic currencies.

Most finance ministers around the world, including China's, know this and their comments in regard to replacing or supplementing the dollar as the world's reserve currency are just so much lip-service, which is really aimed at threatening the Obama administration over its out-of-control spending.

China says, for example, that it would prefer to hold its apprx. $2 trillion in reserves in something other than US dollars, but the fact is that Beijing has few alternatives. With more US dollars continuing to pour into China from trade and investment, Beijing has no realistic option other than storing them in US debt.

Some Argue "SDRs" are the Solution

So-called "Special Drawing Rights" (SDRs) are a synthetic currency created by the International Monetary Fund (IMF) in 1969 in an effort to stabilize the international foreign exchange system. The IMF defines SDRs as follows: The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies..."

Basically, SDRs are a combination of four currencies - US dollar, the Euro, the Yen and the British Pound. The US dollar alone makes up almost half of the value of a SDR. The amounts of each currency making up SDRs are determined by the IMF Executive Board in accordance with the relative importance of the currency in international trade and finance every five years.

SDRs were originally created to replace gold and silver in large international transactions. Since the quantity of gold and silver worldwide is finite, and the economies of all participating IMF members as an aggregate are growing, a purported need arose to increase the supply of international reserves. Thus, SDRs (also called "paper gold") are credits that nations with balance of trade surpluses can 'draw' upon from nations with balance of trade deficits.

In short, SDRs are little more than an accounting transaction within a ledger of accounts, which eliminates the logistical and security problems of shipping gold back and forth across borders to settle national accounts.

When SDRs were created, the IMF also suggested that member nations could convert their US dollar holdings into SDRs to diversify away from the dollar without driving the value of the dollar down. However, since US dollars account for almost half the value of SDRs, this diversification argument never made very much sense.

Despite the IMF's initial desires, SDRs never became the currency of choice for any countries. Even today, SDRs are primarily used only to settle accounts between the IMF and its members' treasury departments/foreign exchange ministries. Frankly, this is a good thing, in my opinion.

Still, there are continued calls for the SDR to replace the US dollar as the world's reserve currency. There are even a few voices out there that seem to believe we should adopt the SDR as a single global currency. In either case, the logic is flawed because of the limited size of the SDR market. Plus, if SDRs were instated as the global currency, every country with its own currency would lose a significant measure of national sovereignty.

Other arguments against making SDRs the world's reserve currency include the fact that the US dollar, the Euro and the Pound – which make up the large majority of SDRs – have all lost value since late 2007 when the recession began. Why replace a falling dollar by an index which so heavily includes the dollar? Also, SDRs do not contain the Chinese Yuan, Indian Rupee, Australian Dollar or Canadian Dollar, all of which are important benchmark or secondary global reserve currencies.

These are just some of the reasons that the SDR is not likely to become the global reserve currency.

EDITORIAL REPRINT

What follows is one of the more interesting analyses on the US dollar that I have read in some time about the so-called "Dump the Dollar" conspiracy. The piece is written by Dean Baker, a senior correspondent for Foreign Policy magazine (www.foreignpolicy.com), a leading non-partisan foreign policy think-tank in Washington.

QUOTE:

Debunking the "Dumping-the-Dollar" Conspiracy

For at least the last decade, a persistent, recurring conspiracy theory has held that major oil exporters will stop pricing oil in dollars, which will then lead to a collapse in the U.S. economy as the dollar becomes worthless. According to some accounts, Iraq's decision to price its oil in euros rather than dollars precipitated the U.S. overthrow of Saddam Hussein, and Iran's threats to move away from the dollar is the real reason the U.S. government is raising the alarm over the country's nuclear program.

The latest item in this tradition was an article by Robert Fisk, a longtime Middle East correspondent, in the London-based Independent. The article warns of a grand conspiracy between the Arab oil states, China, Japan, Russia, and France to stop pricing oil in dollars by 2018. When this happens, Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil. The article apparently caused a shudder in the currency markets yesterday [October 6], as panicked investors unloaded dollars in reaction to the terrifying prospect of this alleged international oil conspiracy.

But they really shouldn't be concerned. Fisk's theory would make a good plot for a Hollywood movie, but it doesn't make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States.

With the United States' ascendancy as the pre-eminent economic power after World War II, the dollar became the world's reserve currency: Most countries held dollars in reserve in the event that they suddenly needed an asset other than their own currency to pay for imports, or to support their own currency. Much international trade, including trade not involving the United States, was carried through in dollars. In addition, most internationally traded commodities became priced in dollars on exchanges. However, the dollar was never universally used to carry through trade (even trade in oil), and the pricing of commodities in dollars is primarily just a convention.

Any market -- a stock market, a wheat market, or the oil market -- requires a unit of measure. The importance of the U.S. economy made the dollar the obvious choice for most markets. But there would be no real difference if the euro, the yen, or even bushels of wheat were selected as the unit of account for the oil market. It's simply an accounting issue.

Suppose that prices in the oil market were quoted in yen or bushels of wheat. Currently, oil is priced at about $70 a barrel. A dollar today is worth about 90 yen. A bushel of wheat sells for about $3.50. If oil were priced in yen, then the current price of a barrel of oil in yen would [be] 6,300 yen. If oil were priced in wheat, then the price of a barrel of oil would be 20 bushels. If oil were priced in either yen or wheat it would have no direct consequence for the dollar. If the dollar were still the preferred asset among oil sellers, then they would ask for the dollar equivalents of the yen or wheat price of oil. The calculation would take a billionth of a second on modern computers, and business would proceed exactly as it does today.

It does matter slightly that the trade typically takes place in dollars. This means that those wishing to buy oil must acquire dollars to buy the oil, which increases the demand for dollars in world financial markets. However, the impact of the oil trade is likely to be a very small factor affecting the value of the dollar. Even today, not all oil is sold for dollars. Oil producers are free to construct whatever terms they wish for selling their oil, and many often agree to payment in other currencies. There is absolutely nothing to prevent Saudi Arabia, Venezuela, or any other oil producer -- whether a member of OPEC or not -- from signing contracts selling their oil for whatever currency is convenient for them to acquire.

Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic. World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.

By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil.

This raises a more serious issue affecting the demand for dollars, which is the dollar's status as an international reserve currency. Currently the dollar is by far the preferred currency, but others, notably the euro, are gaining ground. A switch away from the dollar will lower its value, but this is hardly anything to fear: In actuality, it was and is an official policy goal of both the George W. Bush and Barack Obama administrations [to have a weaker dollar].

Both administrations are on record complaining about China's 'manipulation' of its currency. China does this by buying up vast amounts of dollars to hold as foreign reserves, suppressing the value of the yuan against the dollar. This, in turn, makes Chinese goods cheaper in the United States and bolsters China's exports.

If China stopped buying up huge amounts of dollars, as the United States wishes, then the dollar would fall in value against the yuan, thereby making Chinese imports more expensive. The result would be that the United States would buy fewer imports from China, improving its trade balance. Not too many people would be frightened by this prospect.

To summarize, the dollars needed to finance the international oil trade are trivial compared with other sources of demand for dollars. The currency chosen for foreign reserve holdings can have an impact on demand for dollars, but this has nothing to do with the currency chosen to conduct the oil trade. If Saudi Arabia wanted to hold euros rather than dollars, it could almost instantly offload as many dollars as it desired. Plus, the White House wants the dollar to decline anyway because it would improve the United States' trade balance.

Thus, the conspiracy theory Fisk resurrected might have spooked the markets, but the reality is that there is nothing to fear. The dollar's value will likely fall over time (as it has been doing against the euro for the last nine years). But there is nothing in the cards to suggest a collapse, even if Saudi Arabia starts selling its oil for euros or yuan.
END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

The US dollar is not likely to lose it reserve currency status anytime soon, unless it were to collapse for some unexpected reason. As illustrated in the chart above, the dollar has been losing value for almost a decade, yet no major countries have switched to some other currency to settle international transactions. As discussed earlier, there is no other currency that is large enough to replace the dollar as the world currency.

Longer-term, however, the prospects don't look very bright. With President Obama's plans to run trillion-dollar annual budget deficits for at least the next five years (and possibly longer) and double the national debt in 5-10 years, the dollar could find itself in real trouble as the reserve currency. The dollar could fall so low that foreign nations decide to dump their dollars in favor of euros, yen or whatever. If that day comes, I (and many others) believe we will see an even greater financial crisis and another depression.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Why the euro is not the next global currency
http://www.ft.com/cms/s/0/1e661b42-bcdb-11de-a7ec-00144feab49a.html?nclick_check=1

Deficit Dilemma: How to Dig Out
http://online.wsj.com/article/SB125554787267585505.html

Excuses wearing thin for Obama
http://www.suntimes.com/news/huntley/1834209,CST-EDT-HUNT20.article

Stratfor: Odds of War with Iran Spiking

Gary D. Halbert — Tue, 13 Oct 2009 20:19:00 GMT

IN THIS ISSUE:

West Discovers Secret Nuclear Facility in Iran
Iran Much Closer to Nukes than Previously Thought
Russian Scientists Said to be Helping Iran Build Nukes

Introduction

Several very disturbing geopolitical revelations over the last two weeks regarding Iran and its possible nuclear weapons ambitions and capabilities have dramatically changed how the US and the international community are thinking in terms of the nuclear threat we face from Iran.

First, there was the announcement by President Obama, Britain's Prime Minister Gordon Brown and French President Nicholas Sarkozy on September 25 at the G20 summit in Pittsburgh that joint intelligence had proven that Iran has a secret uranium enrichment facility inside a mountain near Qom, a city south of Tehran. The Iranians quickly admitted to the existence of this massive compound but claimed, as usual, that it is solely for domestic energy purposes.

Second, shortly thereafter, The New York Times published an article reporting that staff at the International Atomic Energy Agency (IAEA), the U.N. nuclear oversight group, had produced an unreleased report saying that Iran was much more advanced in its nuclear program than the IAEA had thought previously. According to the report, Iran now has all the data needed to design a nuclear weapon.

Third, was a revelation in the first days of October by the Times of London which reported that Israeli Prime Minister Benjamin Netanyahu traveled to Moscow on September 7 to charge that Russian scientists and engineers are working directly with Iran on its nuclear weapons program. This intelligence suggests that Iran may be much further along in developing nuclear weapons than the international community previously believed.

Obviously, these very latest developments are hugely important and very alarming, especially if it is proven that the Russians are actively assisting Iran in developing nuclear weapons, possibly years ahead of previous intelligence reports. (And don't be surprised that you have not heard about all of this in the mainstream media.)

Whenever it comes to such matters of grave geopolitical importance, I always turn to our good friends at Stratfor.com to get the real story. As long-time readers know, Stratfor is an internationally respected source on geopolitical intelligence. I have quoted Stratfor and its founder Dr. George Friedman many times in the past.

In the pages that follow, I will again quote liberally from Stratfor's latest analysis on the disturbing situation with Iran, the possible Russian involvement in Iran's nuclear program, etc., etc. Suffice it to say that Stratfor now believes the odds of the US going to war with Iran have recently increased exponentially. This is very scary stuff!

I will start with Stratfor's new Forecast for the 4Q, which is most insightful in light of the latest news on Iran. I will follow that with their latest analysis of the very real possibility that Russia is assisting Iran in the development of nuclear weapons, and the likelihood that Iran may be much further ahead than the world has been led to believe.

No conclusion section is needed as the Stratfor articles below are most comprehensive and self-concluding. Let's get right to them, read carefully.

* Note that the bracketed comments within the Stratfor text are mine.

** You have my permission to reprint and/or forward this E-Letter
as you may wish, with proper credit to Stratfor and my company.

STRATFOR QUOTE:

Setting the Stage

Events are taking the fourth quarter of 2009 into new territory. The rising confrontation with Iran has taken center stage as a conflict with global participants and global consequences. As the final quarter of the year dawns, representatives from the world's major countries are meeting in Geneva with their Iranian counterparts. The official goal is to see if sufficient international safeguards can be placed on the Iranian nuclear program. Failure could well lead first to sanctions against Iran, and should those fail, possibly a U.S.-Iranian military confrontation.

At its core, the brewing crisis is this: Israel is too small a territory to tolerate a nuclear-armed Iran, and too militarily weak to guarantee that it can deal with the problem on its own. However, an Israeli strike would certainly generate Iranian retaliation against shipping in the Persian Gulf, which in turn would force the United States to act against Iran directly. So the question in STRATFOR's collective mind is whether or not any concessions Iran grants on its nuclear programs will be sufficient to satisfy Israel's security concerns. The Obama administration is obviously a player, and the onus is on the Americans to act, but the decisions that truly matter will be made in Israel, not the United States.

As goes this crisis, so goes the world.

Russia is attempting to lock down the United States in the Middle East so that Moscow can extend and deepen its efforts to re-create its Soviet-era sphere of influence, particularly in the former Soviet Union. Thus Russia is funneling various forms of assistance, primarily technical cooperation on weapons, energy and nuclear industries, to Iran. It is also making apparent its intent to do an end run around any sanctions the West might impose on Iran. An Iran strong enough and independent enough to keep the United States preoccupied is just what Russia wants.

After the worst recession in a generation, the global economy is on the mend. The ending recession was primarily financial in nature, meaning that it evolved primarily into a crisis of confidence. Confidence requires time to rebuild, and as such the recovery is both shallow and extremely uneven, with some regions as likely to descend back into recession as return to real growth. It is a recovery very vulnerable to disruption. A military confrontation in the Persian Gulf would send shock waves through the system, at a minimum interrupting the flow of Iran's 2.4 million barrels of daily oil exports. That alone would be more than enough to break the recovery's back.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Global Trend: The Iranian Nuclear Crisis

A new topic has rocketed to the top of STRATFOR's international concerns: the possibility of a war between the United States and Iran. There has been much discussion of this topic for years now, and STRATFOR has tended to dismiss it; there is a great chasm between remedial uranium enrichment programs and having a deliverable nuclear weapon. But events in the third quarter added credibility to the scenario. Primarily this is because of Israel. As a small state, Israel is not comfortable pinning its survival on Iran's choices. As Iran's nuclear program matures, Israel is feeling forced to eliminate the threat before it can manifest.

Israel does not have high confidence in the United States' ability to unilaterally remove the threat, but Israel does have the ability to rope the United States into an attack against Iran. Even an ineffectual Israeli strike against Iran would force Iran to respond. Since Iran lacks the ability to respond with a direct attack on Israel, it would likely need to settle for activating Hezbollah in Lebanon, various Shiite factions in Iraq and militant assets in Afghanistan, and attacking energy shipping in the Persian Gulf. This last action in particular would force an American response — perhaps even a pre-emptive one. And if the United States found itself engaging the Iranian military over maritime [Persian Gulf] issues, it would be illogical for the United States to not extend the conflict to Iran's nuclear assets.

The United States would prefer to avoid a war — in fact it would prefer a more cooperative arrangement with Iran in order to ease its exit from Iraq — but Washington understands the inevitability of conflict should Israel feel direly threatened. The opening weeks of the fourth quarter will be dominated by 11th-hour negotiations primarily between but not limited to Washington and Tehran to see if war can be avoided. Washington and its allies will seek formal, transparent oversight for the entire Iranian nuclear program, and failing that, sanctions on the Iranian sector that is most vulnerable to foreign pressure: gasoline imports.

Tehran, thinking (correctly) that the West in general — and U.S. President Barack Obama in particular — does not want a war and that its own retaliatory options are formidable deterrents, will equivocate. Russia, also thinking (correctly) that the West does not want a war and thinking little of Obama, has the option of bolstering Iran in the hopes of keeping U.S. forces tied down in the Middle East. Primarily STRATFOR expects this to take the form of circumventing Western gasoline sanctions — Russia and its allies have plenty of spare refining capacity and sufficient rail connections to backfill Iran's gasoline supply [if the US were to cut it off]. The Russians also retain the critical leverage of following through with a sale of S-300 strategic air defense systems to Iran — though such an action, if discovered in time, also runs the risk of precipitating an Israeli attack.

There is little but diplomacy preventing this conflict from happening. Between the Iraq and Afghan conflicts, the United States has the naval and air assets in the region that would be required for extensive and sustained air strikes against Iran. But both Iran and Russia feel they have the upper hand and both doubt Obama's nerve. Any of the sides could back down — Obama or Iran could flinch, Russia and the United States could strike a deal on sanctions, Israel could decide that Iran is not so far along in its nuclear program — to avert a war. But any of these options would clearly harm the national interests of one of the other players. War is not yet inevitable, but it is looking increasingly likely. [Emphasis added]

Global Trend: The Russian Resurgence

Moscow has been attempting for some time to consolidate its near abroad [Stratfor's term for expanding its sphere of influence] in preparation for the time when the United States is no longer distracted by events in the Middle East. The challenge has been simple: Either convince the Americans that they cannot achieve their ends in the Middle East without Russian assistance (and that the Russians must be amply compensated for their trouble), or ensure that the Americans remain locked down in the Middle East so that Russia can simply impose its will on the former Soviet territory without the threat of U.S. intervention.

The third quarter was when Russia got things done, using a mixture of diplomatic, military, intelligence and economic tools. Russia has managed to soften Azerbaijan, Turkey and Germany's pro-U.S. positions and, if it has not formally added them to the list of countries where Russian power is preeminent, it has at least made them neutral in the competition between Russia and the United States. Russia has persuaded nearly all factions in the Ukrainian political spectrum to favor a Russian-leaning (as opposed to Western-leaning) future and will cement that achievement in the country's January 2010 elections.

Georgia is now isolated, even from the United States. Poland might even be in play now; the American attempt to trade portions of its ballistic missile defense plans for concessions in Iran succeeded only in scaring Poland into believing that the U.S.-Polish alliance was not as strong as it had hoped, forcing Warsaw to re-evaluate its traditional hostility toward Russia and to consider closer integration into the European Union.

So Russia enters the fourth quarter feeling quite confident, if not downright smug. It sees the American [Obama] administration as overconfident, inept and simultaneously unwilling to make any geopolitical trades or commit to a military operation that could force Iran to capitulate. With such a geopolitical position, Russia has a threefold plan.

First, the Russians intend to do anything to ensure that the Americans remain locked in a conflict with Iran — that is, anything that will not cause more problems for Russia in the long run. Dangling nuclear and advanced military technology in front of Tehran without actually delivering it remains a cornerstone of this policy. But more concretely, the Russians are working to undermine any U.S.-led sanctions on Iran before they can get off the ground, and are highly likely to circumvent them directly should the sanctions materialize.

Russia and its near-proxy states of Azerbaijan and Turkmenistan each possess the ability to completely replace all sea-borne gasoline shipments to Iran, and to do so in a way that not even a full naval blockade of the Persian Gulf could stop. The only place where the Russians are likely to take a stance that is not obstructionist will be in Afghanistan, as the Russians do not wish to see the chaos there spread (that the Americans are the bulwark there is simply the icing on the cake). Of course, Moscow is willing to abandon all its plans for Iran in a heartbeat should Washington pay the right price to Russia.

Second, the Russians are putting the finishing touches on wrapping up their near abroad [expanding its sphere of influence]. Ukraine will remain chaotic (as always) but Russia is working to break up and perhaps even excise any remaining pro-Western power centers there. Pressure on Georgia is once again intensifying from "merely" economic and political to military, with naval forces now actively patrolling the coast of Abkhazia, one of Georgia's Russian-backed breakaway provinces. Russian troops will also be inserted into strategic locations in the former Soviet Central Asian states to limit American access, to lock down the allegiance of those states and also to prevent the region's would-be hegemon — Uzbekistan — from trying anything…

Two Leaks and the Deepening Iran Crisis

Two major leaks occurred this weekend [the weekend of October 2-4] over the Iran matter.

In the first, The New York Times published an article reporting that staff at the International Atomic Energy Agency (IAEA), the U.N. nuclear oversight group, had produced an unreleased report saying that Iran was much more advanced in its nuclear program than the IAEA had thought previously. According to the report, Iran now has all the data needed to design a nuclear weapon. [Emphasis added.] The New York Times article added that U.S. intelligence was re-examining the National Intelligence Estimate (NIE) of 2007, which had stated that Iran was not actively pursuing a nuclear weapon.

The second leak occurred in the British daily The Times, which reported that the purpose of Israeli Prime Minister Benjamin Netanyahu's highly publicized secret visit to Moscow on Sept. 7 was to provide the Russians with a list of Russian scientists and engineers working on Iran's nuclear weapons program.

The second revelation was directly tied to the first. There were many, including STRATFOR, who felt that Iran did not have the non-nuclear disciplines needed for rapid progress toward a nuclear device. Putting the two pieces together, the presence of Russian personnel in Iran would mean that the Iranians had obtained the needed expertise from the Russians. It would also mean that the Russians were not merely a factor in whether there would be effective sanctions but also in whether and when the Iranians would obtain a nuclear weapon.

We would guess that the leak to The New York Times came from U.S. government sources, because that seems to be a prime vector of leaks from the Obama administration and because the article contained information on the NIE review. Given that National Security Adviser James Jones tended to dismiss the report on Sunday television, we would guess the report leaked from elsewhere in the administration.

The Times [of London] leak could have come from multiple sources, but we have noted a tendency of the Israelis to leak through the British daily on national security issues. (The article contained substantial details on the visit [Netanyahu visit to Moscow on September 7] and appeared written from the Israeli point of view.) Neither leak can be taken at face value, of course. But it is clear that these were deliberate leaks — people rarely risk felony charges leaking such highly classified material — and even if they were not coordinated, they delivered the same message, true or not.

The Iranian Time Frame and the Russian Role

The message was twofold. First, previous assumptions on time frames on Iran are no longer valid, and worst-case assumptions must now be assumed. The Iranians are in fact moving rapidly toward a weapon; have been extremely effective at deceiving U.S. intelligence (read, they deceived the Bush administration, but the Obama administration has figured it out); and therefore, we are moving toward a decisive moment with Iran.

Second, this situation is the direct responsibility of Russian nuclear expertise. Whether this expertise came from former employees of the Russian nuclear establishment now looking for work, Russian officials assigned to Iran or unemployed scientists sent to Iran by the Russians is immaterial. The Israelis — and the Obama administration — must hold the Russians responsible for the current state of Iran's weapons program, and by extension, Moscow bears responsibility for any actions that Israel or the United States might take to solve the problem.

We would suspect that the leaks were coordinated. From the Israeli point of view, having said publicly that they are prepared to follow the American lead and allow this phase of diplomacy to play out, there clearly had to be more going on than just last week's Geneva talks. From the American point of view, while the Russians have indicated that participating in sanctions on gasoline imports by Iran is not out of the question, Russian President Dmitri Medvedev did not clearly state that Russia would cooperate, nor has anything been heard from Russian Prime Minister Vladimir Putin on the subject. The Russian leadership appears to be playing "good cop, bad cop" on the matter, and the credibility of anything they say on Iran has little weight in Washington.

It would seem to us that the United States and Israel decided to up the ante fairly dramatically in the wake of the Oct. 1 meeting with Iran in Geneva. As IAEA head Mohamed ElBaradei visits Iran, massive new urgency has now been added to the issue. But we must remember that Iran knows whether it has had help from Russian scientists; that is something that can't be bluffed.

Given that this specific charge has been made — and as of Monday not challenged by Iran or Russia — indicates to us more is going on than an attempt to bluff the Iranians into concessions. Unless the two leaks together are completely bogus, and we doubt that, the United States and Israel are leaking information already well known to the Iranians. They are telling Tehran that its deception campaign has been penetrated, and by extension are telling it that it faces military action — particularly if massive sanctions are impractical because of more Russian obstruction.

If Netanyahu went to Moscow to deliver this intelligence to the Russians, the only surprise would have been the degree to which the Israelis had penetrated the program, not that the Russians were there. The Russian intelligence services are superbly competent, and keep track of stray nuclear scientists carefully. They would not be surprised by the charge, only by Israel's knowledge of it.

This, of course leaves open an enormous question. Certainly, the Russians appear to have worked with the Iranians on some security issues and have played with the idea of providing the Iranians more substantial military equipment. But deliberately aiding Iran in building a nuclear device seems beyond Russia's interests in two ways. First, while Russia wants to goad the United States, it does not itself really want a nuclear Iran. Second, in goading the United States, the Russians know not to go too far; helping Iran build a nuclear weapon would clearly cross a redline, triggering reactions.

A number of possible explanations present themselves. The leak to The Times might be wrong. But The Times is not a careless newspaper: It accepts leaks only from certified sources. The Russian scientists might be private citizens accepting Iranian employment. But while this is possible, Moscow is very careful about what Russian nuclear engineers do with their time. Or the Russians might be providing enough help to goad the United States but not enough to ever complete the job. Whatever the explanation, the leaks paint the Russians as more reckless than they have appeared, assuming the leaks are true.

And whatever their veracity, the leaks — the content of which clearly was discussed in detail among the P-5+1 [US, UK, France, Germany, Russia, China] prior to and during the Geneva meetings, regardless of how long they have been known by Western intelligence — were made for two reasons. The first was to tell the Iranians that the nuclear situation is now about to get out of hand, and that attempting to manage the negotiations through endless delays will fail because the United Nations is aware of just how far Tehran has come with its weapons program.

The second was to tell Moscow that the issue is no longer whether the Russians will cooperate on sanctions, but the consequence to Russia's relations with the United States and at least the United Kingdom, France and, most important, possibly Germany. If these leaks are true, they are game changers. [Emphasis added.]

We have focused on the Iranian situation not because it is significant in itself, but because it touches on a great number of other crucial international issues. It is now entangled in the Iraqi, Afghan, Israeli, Palestinian, Syrian and Lebanese issues, all of them high-stakes matters. It is entangled in Russian relations with Europe and the United States. It is entangled in U.S.-European relationships and with relationships within Europe. It touches on the U.S.-Chinese relationship. It even touches on U.S. relations with Venezuela and some other Latin American countries. It is becoming the Gordian knot of international relations.

STRATFOR first focused on the Russian connection with Iran in the wake of the Iranian elections and resulting unrest, when a crowd of Rafsanjani supporters began chanting "Death to Russia," not one of the top-10 chants in Iran. That caused us to focus on the cooperation between Russia and Iranian President Mahmoud Ahmadinejad and Supreme Leader Ayatollah Ali Khamenei on security matters.

We were aware of some degree of technical cooperation on military hardware, and of course on Russian involvement in Iran's civilian nuclear program. We were also of the view that the Iranians were unlikely to progress quickly with their nuclear program. We were not aware that Russian scientists were directly involved in Iran's military nuclear project, which is not surprising, given that such involvement would be Iran's single-most important state secret — and Russia's, too.

A Question of Timing

But there is a mystery here as well. To have any impact, the Russian involvement must have been under way for years. The United States has tried to track rogue nuclear scientists and engineers — anyone who could contribute to nuclear proliferation — since the 1990s. The Israelis must have had their own program on this, too. Both countries, as well as European intelligence services, were focused on Iran's program and the whereabouts of Russian scientists. It is hard to believe that they only just now found out. If we were to guess, we would say Russian involvement has been under way since just after the Orange Revolution in Ukraine [late 2004-early 2005], when the Russians decided that the United States was a direct threat to its national security.

Therefore, the decision suddenly to confront the Russians, and suddenly to leak U.N. reports — much more valuable than U.S. reports, which are easier for the Europeans to ignore — cannot simply be because the United States and Israel just obtained this information. The IAEA, hostile to the United States since the invasion of Iraq and very much under the influence of the Europeans, must have decided to shift its evaluation of Iran. But far more significant is the willingness of the Israelis first to confront the Russians and then leak about Russian involvement, something that obviously compromises Israeli sources and methods. And that means the Israelis no longer consider the preservation of their intelligence operation in Iran (or wherever it was carried out) as of the essence.

Two conclusions can be drawn. First, the Israelis no longer need to add to their knowledge of Russian involvement; they know what they need to know. And second, the Israelis do not expect Iranian development to continue much longer; otherwise, maintaining the intelligence capability would take precedence over anything else.

It follows from this that the use of this intelligence in diplomatic confrontations with Russians and in a British newspaper serves a greater purpose than the integrity of the source system. And that means that the Israelis expect a resolution in the very near future — the only reason they would have blown their penetration of the Russian-Iranian system.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Possible Outcomes

There are two possible outcomes here. The first is that having revealed the extent of the Iranian program and having revealed the Russian role in a credible British newspaper, the Israelis and the Americans (whose own leak in The New York Times underlined the growing urgency of action) are hoping that the Iranians realize that they are facing war and that the Russians realize that they are facing a massive crisis in their relations with the West. If that happens, then the Russians might pull their scientists and engineers, join in the sanctions and force the Iranians to abandon their program.

The second possibility is that the Russians will continue to play the spoiler on sanctions and will insist that they are not giving support to the Iranians. This leaves the military option, which would mean broad-based action, primarily by the United States, against Iran's nuclear facilities. Any military operation would involve keeping the Strait of Hormuz clear, meaning naval action, and we now know that there are more nuclear facilities [in Iran] than previously discussed. So while the war for the most part would be confined to the air and sea, it would be extensive nonetheless.

Sanctions or war remain the two options, and which one is chosen depends on Moscow's actions. The leaks this weekend have made clear that the United States and Israel have positioned themselves such that not much time remains. We [STRATFOR] have now moved from a view of Iran as a long-term threat to Iran as a much more immediate threat thanks to the Russians. [Emphasis added]

The least that can be said about this is that the Obama administration and Israel are trying to reshape the negotiations with the Iranians and Russians. The most that can be said is that the Americans and Israelis are preparing the public for war. Polls now indicate that more than 60 percent of the U.S. public now favors military action against Iran. From a political point of view, it has become easier for U.S. President Barack Obama to act than to not act. This, too, is being transmitted to the Iranians and Russians.

It is not clear to us that the Russians or Iranians are getting the message yet. They have convinced themselves that Obama is unlikely to act because he is weak at home and already has too many issues to juggle. This is a case where a reputation for being conciliatory actually increases the chances for war. But the leaks this weekend have strikingly limited the options and timelines of the United States and Israel. They also have put the spotlight on Obama at a time when he already is struggling with health care and Afghanistan. History is rarely considerate of presidential plans, and in this case, the leaks have started to force Obama's hand.

END QUOTE

This is quite a LOT to think about, but think about it we must. It will not go away anytime soon, so I will revisit this issue in upcoming E-Letters. Sorry to add something else to our worry list.

As always, my personal thanks extend to Dr. George Friedman and Stratfor for allowing us to reprint their always insightful analyses from time to time. Be sure to visit their website at www.stratfor.com and consider subscribing.

Very best regards,

Gary D. Halbert

The Stock Market Conundrum

Gary D. Halbert — Tue, 06 Oct 2009 19:14:00 GMT

IN THIS ISSUE:

Ball of Confusion
The Gloom-and-Doom Argument
Damn the Torpedoes, Full Speed Ahead!
Is the Market Defying Gravity?
What You Should be Doing

Introduction

The cover of the October 5, 2009 issue of Business Week magazine summed up the current dilemma for stock market investors perfectly. It had a staircase running diagonally across the page, with one figure climbing up the stairs, and the other going down the stairs. The "upstairs" view had the caption, "Why the Market Will Keep Going Up," while the downstairs view was labeled, "Why the Market is Going Nowhere."

The fact that both cases can be made in a single magazine article shows that there are good reasons for the market to go up, and equally good reasons for it to go sideways, or even down. The fact that the S&P 500 Index has risen over 50% since the March lows has both bulls and bears scratching their heads. And nobody knows what lies ahead.

There's little wonder why $3-$4 trillion of investor assets are reportedly still sitting on the sidelines in cash, even though the market's rally since the March 9th lows has been nothing short of spectacular. You would think that even hesitant investors would now be piling into the market. Some have, but much of this sideline money is staying put where it won't be subject to another round of losses, should the market rally suddenly reverse.

This week, I'm going to discuss both the upside and downside potential in the stock markets. In doing so, I'm going to lean upon the opinions of various market forecasters as well as my best economic resources. I warn you, however, that there is no single oracle of truth and light that has all the answers. George Bernard Shaw reportedly said if all the economists were laid end to end, they'd never reach a conclusion, and I'm beginning to get the same feeling about today's stock market analysts.

Ball of Confusion

The term "uncharted waters" as it relates to the stock and bond markets has probably never been as apt as in today's environment. Unprecedented federal government intervention in the markets has created a playing field that is, at best, significantly different than past market environments. The Fed and Treasury have primed the pump, and we seem to be coming out of the worst recession since the Great Depression. But no one knows whether the economy will continue on a path of sustained growth once these trillions of dollars are no longer flowing.

As we all know, however, the stock market and the economy are two different things and they sometimes move independently. As a result, some feel that the stock market is giving the "all clear" signal for investors with its 50%+ run-up since the March lows. Others, however, point to the fact that stocks haven't risen this far this fast since 1933, and we all know what happened after that. Plus, while this rally is impressive, it's important to realize that the S&P 500 Index is still over 32% below its October 2007 peak value as of the end of September, so many buy-and-hold investors are still under water.

Some analysts point to the fact that the market hasn't experienced even a 10% downward correction since March as a reason for caution, thinking that such a correction could be in the cards in the near future. Others, however, actually think that the market's lack of a significant correction is a sign of the superior strength of this run-up in prices.

There is also a wide range of interpretations of the stock market's current pricing. Some say that the market is pricing in continued economic growth and, if such growth doesn't happen, the market will fall again, possibly even re-testing the March lows. Others, however, claim that the stock market is priced fairly at this point in time and investors need not be concerned.

A number of analysts pin responsibility for the market rally on corporate profits, especially as they continue to beat expectations. Others, however, claim that expectations were so low that they were almost impossible not to beat. Since we don't track or recommend individual stocks, I can't offer an opinion on this earnings discussion. However, I do know that if you lower your expectations enough, earnings are bound to beat them sooner or later.

The end result is that investors are now justifiably confused and there is no single authoritative source for market action going forward. For every positive argument, there's a negative opinion. For every cheerleader, there's a gloom-and-doomer and most are backed up with sophisticated statistical analyses supporting their predictions. As always, the future is unknowable, but in this case it doesn't even seem to be giving us the slightest hint of what might happen.

The Gloom-and-Doom Argument

I am always a little hard on the gloom-and-doom crowd, possibly because I have been exposed to them for so long that I know how wrong they have been over the years. Many in this negative camp missed out on the greatest bull market in history in the 1980s and ‘90s because of their deep-seated fears that the sky was always falling. At best, the old adage about even a stopped clock being right twice a day seems to be appropriate for this group.

However, it's not just the usual suspects who are sounding warnings about the current state of the stock market. Bill Gross and Mohamed A. El-Erian, both with the PIMCO family of mutual funds, are touting a "new normal" where stock market returns will be less than the long-term averages as economic growth is likely to be below-trend (3% or less in GDP) for at least the next couple of years. El-Erian expresses his skepticism of the stock market's recent rally, saying "Interest rates are at zero, there's $2 trillion plus on the Federal Reserve's balance sheet, and yet the economy is still losing jobs. What exactly is the stock market romancing?"

Of course, El-Erian and Bill Gross are well-known bond guys, so it is not unusual for them to be a bit biased against stocks. However, many of my best sources over the years share the view that stocks are likely to under-perform their historical averages over the next several years.

Ned Davis Research recently issued a report noting that all previous rallies of the magnitude we've seen over the past six months or so took place in the 1930s and the 1970s. Davis notes that none of those rallies were sustained over the long haul. In essence, Davis points out that anyone who missed out on the first six months of such powerful rallies, and then jumped back in the market, would have been subjected to losses as the bull market ran out of steam and started falling. This data suggests that the current rally will run out of steam later on this year, but that remains to be seen.

A recent Wall Street Journal article noted that Tim Hayes, chief strategist for Ned Davis Research, believes that there is a good chance that the stock market could have another big decline in 2010. Mr. Hayes is known for having forecast the current market rally, so his opinion does carry some weight. Likewise, Jordan Kotick with Barclays Capital in New York expects a repeat of the 1970s, where the rally fizzles and we end up with an extended range-bound market.

A separate article in the October 5 Business Week noted that high unemployment and low inflation might lead to a decline in pay, which could slow consumer spending in the next year and, in turn, the economic recovery. Mainstream economists downplay the probability of this happening, but it is a possibility, and stock prices could suffer if it comes to pass.

As for consumer spending, a recent Careerbuilder.com survey indicated that 61% of Americans say they are living paycheck to paycheck, up from 49% a year ago. Even among those making over $100,000 per year, 30% say they are just scraping by, compared to 21% a year ago. With a growing number of families strapped for cash and unemployment expected to peak at over 10%, please tell me how consumer spending is going to rebound sharply.

A final cautionary word comes from those analysts who are tracking the massive spending by the federal government. As I have mentioned a number of times, this short-term spending could lead to long-term catastrophe, especially if the Treasury has to raise interest rates paid on its debt to attract foreign buyers. Higher interest rates could stifle an economic recovery already facing headwinds from curtailed consumer spending and high unemployment.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Damn the Torpedoes, Full Speed Ahead!

While there are many reasons to be cautious about the market's recent strong rally, the number of analysts and professional money managers who are cheerleaders for the new bull market is growing. A recent Financial Advisor Magazine article noted that such luminaries as Byron Wien (Chief Investment Strategist for Pequot Capital Management), Barton Biggs (Manager of the Traxis Partners hedge fund), Steve Leuthold (Leuthold mutual funds manager) and Michael Price (billionaire value investor and fund manager) are all now firmly in the bull market camp. Despite the 50+% spike since March, these well-known stock market mavens believe the bull market should continue.

The primary supporters of a continued market rally are those who believe that the market will revert back to its previous long-term mean return. These analysts admit that the last 10 years have been anything but normal, but they believe that long-term stock market fundamentals should regain control as the economy continues to get better.

Of course, when these "normalists" speak of a return to the mean, they are talking about a 12.9% annualized gain like the stock market produced from 1900 to 1999. But some ask how we can return to "normal" when consumer spending is expected to remain suppressed as the rate of savings continues to increase.

Liz Ann Sonders, chief market strategist for Charles Schwab, says that many investors have underestimated the "bounce-back effect," referring to the tendency of the market to rebound from artificially low points such as the March 2009 lows, which were spawned by panic about the ongoing credit crisis. She also predicts that US exports will rise sharply over the next year, which in her view will help to offset slower consumer spending. She, too, is bullish.

Likewise, Neil Hennessy, chief investment officer of Hennessey Funds, not only thinks that the current market rally will continue, but also believes that we are at the start of a 10-year bull market that will see the Dow Jones Industrial Average doubling by the time it's done. He cites low interest rates that make stocks far more attractive than government bonds, and large amounts of cash waiting on the sidelines as the main reasons for his optimism.

Trillions of Dollars Sitting in Cash

The amount of money on the sidelines in cash and money market accounts is a recurring theme when researching stock market analysts with bullish views. As noted earlier, there is reportedly anywhere from $3-$4 trillion sitting on the sidelines, much of it waiting for a signal to jump back into the market. Like Hennessy, many analysts believe that investors will tire of earning little or no return on this money, and then move back into the market, thus leading to higher stock prices.

I have to agree that so much money on the sidelines is a potentially good bullish argument. In fact, some of this money is already flowing back into mutual funds, but industry data show that most is flowing into bond mutual funds, not stock funds. Therefore, it may be a little early to pin too much hope on the herd instinct driving the market up.

Plus, much of this money belongs to Baby Boomers whose retirement funds have already endured two major bear markets in the span of a decade. Many of these individuals may feel that the bulk of the bull market has passed them by, and fear that getting back into the market may expose them to even further losses.

As for government spending and deficits, there is no doubt that much of the economy's growth since the 9-11 terrorist attacks has been fueled by government spending of one kind or another, aided along the way by the housing bubble. As the Fed continues to hold interest rates to near-zero, it is essentially making cash and money market funds unattractive to investors in hopes of driving them to other investments. The question then becomes what happens after the government stops priming the pump?

Fed chairman Bernanke has indicated that interest rates will stay low for a long time. In the past, this liquidity has gone to fuel bubbles – first the tech bubble and then the housing bubble. This time, the bulls believe it will take the form of a stock market bubble, which could send the market much higher in the weeks and months to come. That remains to be seen.

Looking at the Big Picture

As discussed above, there are compelling arguments for both the bullish and bearish cases at this time. However, there is little disagreement that the major stock market averages are "overbought" at this time. As noted earlier, there has not been even a 10% downward correction since the March lows.

The Dow Jones Industrial Average peaked in October 2007 at just over 14,000. It then experienced the largest numerical decline in history over the next 18 months to the low on March 9, 2009. The percentage decline from peak-to-valley was apprx. 54%. From the March low, the Dow spiked up to above 9,800 briefly in late September, marking a recovery of just over 50% without so much as a 10% downward correction along the way.

This is why most market forecasters agree that the stock markets are overbought. From the highs in late September, the Dow retreated to just under 9,500 in early October, but is again rallying so far this week.

One point is clear from the chart, however. Buy-and-hold investors who rode the market all the way down have not recovered even half of their investment losses, despite the latest 50% rebound. And there is no guarantee that the market will continue higher.

Investors that bailed out of the market late last year or early this year, and have not gotten back in, are between a rock and a hard place, as the saying goes. They are understandably reluctant to jump back in the market after a 50% spike up. Yet they are earning next to nothing in cash. I've had plenty of people voice this concern to me: Well, if I get back in now, that means the market is sure to go down again. Those on the sidelines are in a really tough spot right now.

Is the Market Defying Gravity?

As I have mentioned many times, my firm recommends a number of actively managed investment programs that have the flexibility to move to cash or hedge long positions. To provide the most value for our clients, we are also constantly tracking other active money managers to see if their strategies might have a place in our AdvisorLink® Program.

This tracking of current and prospective investment programs allows us to see a lot of daily trading activity generated by a wide variety of systematic approaches, which I believe supports the idea that there are a lot of contradictory signals being given by the market. From our experience, it's not uncommon for the various systems to disagree about the market's direction. After all, they use a variety of technical and statistical data to generate their trading signals, but not all systems use the same data.

However, when we see most of the various programs we track line up on the same side of the market, it usually means there is a good chance the market will move in that direction. Yet as noted above, the current market has been giving numerous contradictory signals, and thus some of the managers we track (and even some we recommend) have been on both sides of the market recently.

This makes it even more difficult to have a strong view of the market's overall direction going forward, other than the consensus that it is currently overbought and overdue for a downward correction. Whether or not we are in such a correction as this is written is uncertain.

The last time something like this happened was back in the late 1990s when the tech bubble was being inflated. Most everyone agreed that the markets were overbought, but stocks, especially tech stocks, continued to soar. New-age market gurus claimed that we were in a "new paradigm" and that the old rules no longer applied. Eventually, the market did collapse under its own weight, but only after an extended period of impressive gains.

We may, again, be dealing with an irrational market that neglects proven technical indicators and, instead, believes that we have entered a new era of government funded gains in the stocks of companies deemed "too big to fail." However, I think there is still a lot of risk for those considering traditional buy-and-hold investment strategies.

It may be that the recent uptrend in stocks continues for a while as it does appear that we are coming out of the recession, and corporate earnings have been surprising on the upside, generally speaking. Consensus opinion has turned significantly higher and, as noted above, there are trillions of dollars looking to get back in that could limit downturns and drive prices even higher.

But with the Obama administration on track to double the national debt in the next 10 years, I don't see things ending pretty at some point, probably soon after all those sidelined trillions jump back in the market.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

As I researched material for this article, I found it interesting that the current opinions about the strength of the current market rally somewhat parallel what was going on back in the late 1990s. Back then, all of the fundamental analysis was showing that the market shouldn't be going up like it was, while the "new paradigm" crowd was saying it's different this time.

Now, we have many of the same arguments. The fundamental analysis camp is saying that the market is fairly priced and should continue to go up based on profit expectations. All the while, those promoting the "new normal" are claiming that even if the market continues higher, it will struggle and will under-perform its historical averages. It seems that the more things change, the more they stay the same.

Of course, there is a third possibility that could prove both camps wrong. There is a distinct possibility that the stock market could get caught up in a broad trading range in which it moves generally sideways for an extended period of time. Maybe we're already in it: the Dow's close at 9,487.67 on Friday, October 2nd was actually lower than the index's closing value of 9,505.96 back on August 21st.

Such a market environment does not mean that stock prices do not change, but rather that short-term upward trends could be followed by similar periods of downward price movement, and vice versa. Over the long haul, the market could grind slowly higher or lower, but any such move could be gradual, at best.

Of course, these arguments don't help investors who are trying to figure out what to do with their money. Have they missed out on most of the market's gain, or is there plenty more to go around? Unfortunately, no one knows for sure, and anyone who tells you they do is either dishonest or delusional or both.

As always, I suggest that you have most of your stock and bond portfolio professionally managed by Advisors that have a proven system, complete with the ability to move to cash or hedge long positions during major market downturns and bear markets. More sophisticated investors may also want to consider a small allocation to investment programs that can go "short" if market conditions warrant.

Two of the programs I have mentioned most often are Niemann Equity Plus and Potomac Guardian. These are managed accounts that invest in a wide variety of mutual funds in up markets, but also have the ability to move to cash or hedge positions during major corrections or bear markets. We recently presented a webinar on the Potomac Guardian Program that featured a member of its Investment Committee explaining their approach to the market. If you would like to learn more about this program, I would strongly suggest that you listen to the recorded version of this seminar at the Potomac Webinar link.

For anyone interested in the Niemann Equity Plus Program, we're having a live webinar tomorrow, October 7th, at 12:00 PM Central Time. In this webinar, Travis Silberman, one of Niemann's co-founders, will discuss the strategy Niemann employs in managing money. If you would like to sit in on this webinar, click on the following link to access the Niemann Webinar Invitation.

And don't forget about the Columbus High-Yield Bond Program that I wrote about in my September 15 E-Letter. This actively managed high-yield bond fund strategy offers a fixed income exposure for your portfolio along with the ability to move to cash in down markets. For a more aggressive fixed income program, you may want to check out the Hg Capital Long/Short Government Bond Program that trades the 30-year Treasury bond both long and short.

These are in addition to our other AdvisorLink® recommended programs like Third Day Advisors and Scotia Partners that I have also written about in the past. If you'd like to find out how these programs could bring additional diversification to your portfolio, check out our website at www.halbertwealth.com. Better yet, give one of our Investment Consultants a call at 800-348-3601 and let them explain our various investment options and how they might fit within a diversified portfolio.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

The New Economic Landscape Will be Grim Unless Policymakers Act to Foster Growth
http://www.economist.com/opinion/displayStory.cfm?story_id=14548881&source=hptextfeature

Democrats Brace for the Hardest Part of Health-Care Reform
http://www.time.com/time/politics/article/0,8599,1927787,00.html

Obama Caves on Iran
http://online.wsj.com/article/SB10001424052748703628304574452933624279114.html

The Economy & the Commercial Real Estate Bust

Gary D. Halbert — Wed, 30 Sep 2009 00:43:00 GMT

In This Issue:

The Economy Continues to Improve Slowly
Plunge in Commercial Real Estate Values
More Trouble Ahead for the Banks
Glut of Commercial Mortgage-Backed Securities
Personal: Thinking Wrong, But Getting It Right

Introduction

There is broad agreement that we have seen the worst of the recession, and that GDP will show a positive gain for the 3Q when we get the first government estimate in late October. Most pre-report GDP estimates I have seen are in the +2 to +3% range for the 3Q. The actual number remains to be seen, of course.

There is also a growing agreement that we have seen the worst of the housing bust, as sales of new and existing homes rose briskly for the four months ended in July; however sales of existing homes unexpectedly fell slightly in August as reported last week.

Yet while the economy appears to be on the mend, at least for a while, and the housing market seems to be recovering, there is another serious threat to the economy and the credit markets just ahead - the continuing commercial real estate bust which is still getting worse.

This week, we will take a brief look at the latest economic reports, most of which are encouraging, and then I will summarize the very troubling situation in US commercial real estate. This problem has led numerous analysts to predict that the commercial real estate may well be the next shoe to drop in the credit crunch.

The Economy Continues to Improve Slowly

As noted above, most forecasters believe the US economy has expanded at healthy rate in the 3Q which officially ends tomorrow. If so, that will be a welcome relief following GDP declines of -6.4% in the 1Q and -1.0% (annual rates) in the 2Q.

The Index of Leading Economic Indicators (LEI) rose 0.6% in August, marketing the sixth consecutive monthly increase. This is perhaps our best indication that growth in the 3Q and the 4Q will be positive and could surprise on the upside, which is not surprising following the worst recession since the Great Depression.

Most analysts that I follow closely believe, however, that the economic recovery in 2010 will be rather anemic with GDP growth at or below 3% on average. Such estimates could prove too rosy, depending on what happens in the huge commercial real estate sector (details to follow).

Consumer confidence improved significantly in August after falling slightly in June and July. The Consumer Confidence Index rose to its highest level (54.1) since the recession began. The improvement continued into September with the University of Michigan Consumer Sentiment Index climbing to a new recent high of 70.2.

Higher confidence resulted in a nice rise in retail sales in August, up 2.7%. Unfortunately, durable goods orders, which were expected to have risen in August, fell 2.7% last month, following the big increase of 4.8% in July.

On the manufacturing front, the ISM Index rose to 54.1 in August, up from a revised 47.4 in July. Industrial production rose 0.8% in August, following a 1.3% gain in July. Factory orders were up 1.3% in July (latest data available). The factory operating rate rose to 69.6% in August.

As noted above, existing home sales dipped slightly in August following four consecutive monthly increases. New home sales in August were up fractionally (0.7%), well below expectations, following the 9.6% jump in July, the highest in almost a year.

Of course, any analysis of the overall economy would be remiss not to point out that, while things are improving on most fronts, the unemployment rate continues to rise - up to 9.7% in August from 9.4% in July - and will almost certainly continue higher for several more months at least.

Overall, it appears clear that the recession will end this year, and it is quite possible that we will see positive growth in GDP in the 3Q and 4Q. Most of the estimates I read for the 2Q are in the +2-3% range; most of the guesses I read for the 4Q are in the +3-4% range, which remains to be seen, especially in light of the potentially dangerous situation in the commercial real estate markets.

Plunge in Commercial Real Estate Values

US commercial real estate, valued at some $3.5 trillion, has experienced a 39% decline in prices on average from the peak in late 2007, according to the MITCenter for Real Estate.

This current drop is considerably worse than the 27% commercial real estate decline associated with the savings and loan crisis of the late '80s and early '90s. You will recall that the S&L crisis precipitated the government-run Resolution Trust Corporation and the resulting seizures and auctions of hundreds S&Ls around the country.

The same conditions that caused the residential housing bubble, including the Fed's easy credit, lax lending standards and booming mortgage-backed securities underwriting on Wall Street, also drove commercial real estate overvaluation.

Recently, MIT reported that commercial real estate prices plunged 18% in the second quarter, which was the largest quarterly drop in the 25 years since MIT first published its Commercial Real Estate Price Index. MIT also reports that most commercial properties bought or refinanced in the last five years are now upside down on their loans, with current property prices having fallen below the finance or purchase price. Real Capital Analytics reports that owners have lost their entire down payments on about $1.3 trillion worth of property.

According to several sources, nearly half of all the commercial real estate mortgage loans in the US are coming due within the next five years. Deutsche Bank, for example, believes that 65% or more of these loans will fail to qualify for refinancing. Existing high vacancy rates will continue or worsen as long as the unemployment rate continues to rise.

We are hearing more and more talk about the plunge in commercial real estate values these days because commercial real estate value trends tend to lag the overall economy. There are many reasons for this - too many in fact that it is impossible to cover them in this short space.

Susan Smith, who is the director of PricewaterhouseCoopers' real estate advisory practice notes: "The biggest problem is that commercial real estate lags what happens in the economy. Companies are looking for ways to cut costs, many are continuing to reduce workers and are continuing to reduce their space needs." As a result, commercial rental rates have taken a nosedive in most markets.

Ms. Smith and her team at PricewaterhouseCoopers conduct surveys each year of the commercial real estate market, and their latest survey concludes that the rise in vacancy rates and the plunge in rental rate are far from over and may well extend into 2011. Office rents in New York and San Francisco may drop 20% in 2010 alone, the survey found.

The National Association of Realtors projects that retail vacancy rates will increase from 11.7% in the 2Q of 2009 to at least 12.9% in the same period of 2010, the highest vacancy rates since 1991. Likewise, NAR projects that office building vacancy rates will rise from 15.5% to at least 18.8% by this time next year.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

More Trouble Ahead for the Banks

All of the above suggests the following: many of the banks that made commercial real estate have only realized a fraction of their losses. And as those losses continue to mount, we're likely to see more and more bank failures. Commercial real estate loans are not just concentrated among the nations largest banks; these loans are widely made by regional banks and even smaller banks.

Of the largest banks, San Francisco-based Wells Fargo has the largest share of the apprx. $3.5 trillion commercial debt securities, reportedly with 16.5% of its $821 billion loan portfolio invested. JPMorgan Chase is reportedly a distant second with 5.4% of its portfolio invested in commercial loans, followed by Citigroup with 3.4%.

However, smaller banks - 92 of which have already folded this year as of mid-September, according to the FDIC, compared to 25 last year - are even more at risk because they will likely have a harder time accessing the crucial capital to offset rising defaults on commercial real estate loans, according to the TARP-inspired Congressional Oversight Panel's August Oversight Report. The Oversight Panel noted:

"Unlike large banks that can sustain a certain number of defaults, even of large commercial loans, smaller banks may have far more difficulty in absorbing more than a few large loan losses. The FDIC's statement that ‘banks have been able to raise capital without having to sell bad assets through the LLP' may not reflect the reality for these banks."

Indeed, the number of smaller banks expected to be seized by the FDIC is forecast to accelerate later this year and next year. The FDIC's "problem list," of banks that run a higher risk of failure, grew to 416 in the 2Q, up from 305 in the 1Q. That's the highest number since the 2Q of 1994, following the S&L crisis, when there were 434 banks on the list.

As noted above, the S&L crisis resulted in a 27% decline in commercial real estate around the country. This time around the losses are even greater (39% so far) because the apprx. $3.5 trillion is over three times what it was during the early 1990s - meaning the potential for losses is steeper than ever before.

Glut of Commercial Mortgage-Backed Securities

Federal Reserve and Treasury officials are scrambling to prevent the commercial real estate sector from delivering another knockout punch to the US economy just as it struggles to get up off the mat. Yet their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. These loans are known as Commercial Mortgage-Backed Securities (CMBS).

As discussed above, many US banks have high exposure to commercial real estate debt that they initiated through their own internal loans. In addition, many banks also bought CMBS and now have additional default risks that I will discuss in more detail as we go along.

Similar mortgage-backed securities (Sub-prime, Alt A, etc.) created out of home loans played a huge role in undoing that sector and triggering the global economic recession and credit crisis. Most sources estimate that there is around $700-$900 billion of CMBS outstanding at this time. These complicated products are being tested for the first time by the massive downturn real estate values discussed above, and so far the outcome so far hasn't been pretty.

A typical CMBS is stuffed with mortgages on a diverse group of properties, often fewer than 100, with loans ranging from a couple of million dollars to more than $100 million. A CMBS servicer, which is usually a large financial institution like Wells Fargo or JPMorgan Chase, collects monthly payments from the borrowers and passes the money on to the institutional investors that buy the securities.

The CMBS sector is suffering from two major problems, which, according to credit rater Realpoint LLC, sent its delinquency rate to 3.14% in July, more than six times the level a year earlier. One is major problem is that many of these mortgages were simply poorly underwritten. In the era of looser credit in recent years, Wall Street's CMBS machine lent owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising. In fact, the opposite has happened. The result is that a growing number of properties aren't generating enough cash to make principal and interest payments.

The other major problem is the growing inability of property owners to refinance loans bundled into CMBS when these loans mature. By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Unfortunately, other sources estimate that twice that many CMBS loans will come due between now and 2012; and double the amount that will be difficult or impossible to refinance.

Even though the cash flows of many of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won't be able to extend existing mortgages or replace them with new debt. That means losses not only to the property owners but also to those who bought CMBS - including hedge funds, pension funds, mutual funds and other financial institutions - thus exacerbating the economic downturn.

Many banks that hold traditional commercial real estate loans have chosen to extend the maturities and/or renegotiate the terms (this is one reason we haven't heard too much about it until recently). Banks have had a strong incentive to refinance because relaxed accounting standards have enabled them to avoid marking the value of the loans down.

Until now, banks have been able to keep a lid on commercial-real-estate losses by extending debt when it has matured as long as the underlying properties are generating enough cash to pay debt service. Unfortunately, CMBS are held by scores of investors, and the servicers of CMBS loans have limited flexibility to extend or restructure troubled loans like banks do.

Mounting foreclosures in the CMBS sector will likely depress values even further as property is dumped on the market. And this, in turn, will likely put pressure on banks to write down the myriad of commercial loans on their books, thereby exacerbating the problem.

The $64 Question: Why Are Bank Stocks Soaring?

At this point, the logical question to ask is, how is it that we have this enormous commercial debt problem, yet bank stocks have been on a tear for the last couple of months? Frankly, I think most bank shares are wildly overbought at this point, but then I'm not a stock picker.

Some of the largest US-based multinational banks saw their share prices plunge to the level of "penny stocks" over the last year. CitiGroup at one point fell to below $1 per share (97¢) on March 5. Yet shares of these mega-banks have rebounded significantly in recent months, albeit from the lowest levels ever recorded for many of the largest banks. In other words, they were due for a significant rebound.

Another reason the large money center banks have seen their shares soar is the widespread belief that President Obama will not allow any of the major financial institutions fail on his watch. The turmoil that erupted after the Lehman failure will not be allowed to happen again, so investors have more confidence in the large bank stocks. The recent spike in bank stocks has also helped the regional bank stocks which, in most cases have seen their share prices rise as well.

None of this, however, makes the commercial real estate debt problem go away, and it will get worse before it gets better. There is virtually no market for CMBS. Potentially hundreds of billions in commercial mortgage loans will not be able to be refinanced over the next couple of years. I fully expect this to weigh heavily on the banks - small and large - in the weeks and months ahead.

If I had very large profits in banks stocks over the last 2-3 months, I would be taking money off the table. But again, I'm not a stock picker.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Thinking Wrong, But Getting It Right

If you have been reading this E-Letter all year, you know that my calls on the economy and the stock market have been off the mark for the most part. Earlier this year, I expected the economy would remain in negative GDP territory all year and not recover until sometime next year. I expected consumer confidence to stay in the dumps pretty much all year.

Despite my forecast, the economy did begin to rebound during the summer, and it now looks reasonable to expect positive growth in the 3Q and 4Q, assuming there are no more big negative surprises. Just how negative the commercial real estate debt problem will be remains to be seen.

In a similar vein, I did not see the recent surge in the stock markets coming. Of course, I don't know anyone else who predicted stocks would spike 50% higher back in March either. Back in early March when the Dow had literally collapsed to 6500, I did feel that the panic was probably over. Yet I never would have imagined that the Dow and other major market indexes would soar over 50% in relatively short order. But they have.

I openly admit to those misgivings to make the following point. I don't manage any of my own money that is in the stock market or in bonds. I haven't made a personal trade in years. I figured out a long time ago that I am too emotional to do it myself.

If I had been managing my own money in stocks or mutual funds, I would probably have bailed out sometime late last year or early this year, as millions of investors did. Given my views of the economy and the stock markets earlier this year, I can all but assure you I would not have jumped back in when the markets turned up in late March and April.

I would still be on the sidelines like millions of other investors, and I would have missed out on the huge gains that followed. By the way, estimates are that there is still $3-$4 trillion in money that bailed out that is still sitting on the sidelines in money market funds, T-bills, etc.

But since almost all of the money I have in the stock markets is managed by professionals, I have been able to participate in this recovery.

If you have read these letters for long, you know that my firm is in the business of finding successful professional money managers to recommend to our clients. As a long-time critic of Wall Street's "buy-and-hold" mantra, I have always preferred "active" or "tactical" money management strategies that have the ability to move to cash (money market) or "hedge" long positions during down periods.

The reality is that my equity managers lost far less than the market during the bear market that began in late 2007, and they have been able to participate in the bull market that began earlier this year. (As always, past performance is no guarantee of future returns.)

My goal has always been to avoid the 40-50% losses that often occur during bear markets. Remember, if you lose 50%, you must make 100% just to get back to breakeven.

If avoiding big losses is a big concern to you, then maybe it's time to checkout some of the active managers I recommend. Hopefully, you read my E-Letter two weeks ago on the Columbus High-Yield Bond Program.

Please feel free to give one of our Investment Consultants a call at 800-348-3601 or click on the following link to complete one of our online request forms. If more convenient, drop us an e-mail at info@halbertwealth.com or visit our website at www.halbertwealth.com to learn more about our actively managed investment strategies.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Healthcare: Doubling Down on a Flawed Model (read this)
http://online.wsj.com/article/SB10001424052970204488304574426872264215790.html

Healthcare Reform or Government Takeover?

Gary D. Halbert — Tue, 22 Sep 2009 20:54:00 GMT

In This Issue:

Reactions to the President's Healthcare Speech
Omissions & Falsehoods In President Obama's Healthcare Speech
A Re-Run of Clinton Nationalized Healthcare?
Conclusions - So What Should We Think Now?

Introduction

President Obama addressed a rare joint session of Congress on September 9 when he spoke at length about his desire to substantially reform America's healthcare system. Whether you are among the apprx. 56% of Americans who now oppose the healthcare reform bill in the House, or you are among the apprx. 43% who support it (latest Rasmussen poll), it is important to know the facts - a number of which the president failed to address or misrepresented in his speech.

With opposition to the House healthcare reform bill rising almost daily over the last month or so, there was great anticipation ahead of the president's speech. Many in the media commented that Mr. Obama needed to "hit it out of the park," and that the speech needed to be a "game-changer." Politicos on both sides of the aisle agreed afterward that the speech was delivered extremely well. Unfortunately, it raised more questions than answers.

Many thought the president would soften his recent healthcare rhetoric and reach out to Republicans and Independents. He didn't. He chose instead to shore up his base. Many thought he would compromise on the so-called "public option." He didn't, exactly. And while President Obama's approval ratings rose a few points just after the speech, opposition to the Democrats' healthcare reform bill has soared to new highs since then.

While I have refrained from writing at length on the healthcare reform debate, I feel the issue is just too important, and too politically charged, not to speak out. In the pages that follow, we will delve into some of the biggest problems and challenges with the House healthcare bill, H.R. 3200 - America's Affordable Health Choices Act of 2009. Given that there is so much misinformation on healthcare reform out there, on both sides, maybe this will help.

Reactions to the President's Speech

As noted above, the immediate reactions to the president's healthcare speech on September 9 were almost unanimously favorable. There is no question that Mr. Obama is a great orator. But the real question is whether the president changed enough minds to breathe new life into the struggling healthcare reform bill stuck in Congress To my surprise, George Stephanopoulos of ABC news (and a former Clinton aide) wrote a column entitled "Obama Speech No Game-Changer" soon after the speech.

Whether you liked or disliked the president's speech, it did change some minds favorably, but for only a few days. A Rasmussen poll released a few days after the speech showed that, for the first time, a slim majority - 51% - of Americans favored the Democrats' healthcare plan, while 46% opposed it. But those approval numbers began to fall significantly last week. This from Rasmussen on September 16, one week after the speech:

One week after President Obama's speech to Congress, opposition to his health care reform plan has reached a new high of 55%. The latest Rasmussen Reports daily tracking poll shows that just 42% now support the plan, matching the low first reached in August. [As noted above, the latest numbers this week are 56% opposed and 43% in favor.]

Just a few days earlier, Rasmussen's poll showed that those who "strongly favor" the plan were at 28%, while those who "strongly oppose" were at 38%. Now, two weeks after President Obama's speech, the latest numbers are only 23% strongly favor the plan and 44% strongly oppose it. This is very bad news for Team Obama.

Conclusion: President Obama gave a great speech, as he is known to do, and it helped the healthcare ratings for a week or so. But the reality is that a majority of Americans do not want this government healthcare plan, and that number is likely to rise even more as people learn more about the Democrats' plan.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Misrepresentations, Omissions & Falsehoods
in President Obama's Healthcare Speech

The number one problem with the Democrats' massive healthcare reform proposal is a simple matter of supply/demand. There is no way to provide healthcare insurance and coverage to 46 million people who do not currently have coverage, with the same number of doctors, nurses and hospitals/clinics, without rationing healthcare. Even if the number is half that, some 23 million people (or even just 15-20 million as some argue), the problem is still the same.

The law of supply and demand also dictates that if we substantially increase the number of Americans covered (demand) with the same number of doctors, nurses and hospitals/clinics (supply), the cost of healthcare will increase, perhaps significantly, unless there is rationing. We must look no further than Canada or Great Britain to see how this will happen.

The question at the end of the day is, why can't the president and the Democrats just admit that there will be rationing and just be straight with the American people? In all of his healthcare speeches, President Obama totally avoids this simple supply/demand fact. The president wants us to believe that we can insure and provide healthcare to at least 15-20 million more Americans and actually spend less. No wonder that millions of Americans are up in arms over this!

Some observers have called this a "convenient fantasy" on the part of President Obama and the Democrats. How are we are going to save money by spending a lot more money - $1 to $2 trillion over the next ten years? How are we are going to solve our exploding fiscal problems with a massive new federal bureaucracy that will control at least one-sixth of the national economy going forward?

President Obama claims that the new government-run healthcare system "won't add one dime to the deficit." Unfortunately, presidential administrations and Congress are notoriously bad at forecasting the costs of their pet projects, especially entitlement programs that are intended to be permanent.

President Bush's Medicare Prescription Drug program is a perfect example. When it was passed in 2003, the White House and the Congressional Budget Office forecast that it would cost apprx. $400 billion over 10 years. Guess what - the CBO now projects it to cost $1.2 trillion over 10 years. Do we really think Congress and Obama's cost forecasts are any better? I doubt it!

Obama says the government will guarantee that you can keep your current insurance, even though his healthcare plan would encourage your employer to stop offering it; and when they do, you will have no option except the government-run plan. The same is true should you get fired or decide to change jobs - the government-run option is the only option in H.R. 3200.

In addition, he says we aren't going to insure any illegal aliens; however, in H.R. 3200 passed by the House Committee on Education and Labor, there were no citizenship verification provisions to assure that illegals can't apply and get benefits. Yet President Obama promises that the new healthcare plan will only cover American citizens. (Maybe he plans to make them all citizens - amnesty - before the new system goes in place - think about it.)

At one point during his healthcare speech to a joint session of Congress, President Obama drew cackles for remarking that "there remain some significant details to be ironed out." No kidding! Here again, Obama delivered a message that was strikingly similar to the one that has failed to resonate with the American people thus far. The reason is that while Obama can paper over political and policy realities by speaking in broad strokes, it's always the specifics that have caused him problems. Healthcare is too big not to nail down the specifics!

As he has done before, Obama pledged to veto any bill that added to the federal deficit. But despite that commitment, the Congressional Budget Office projected that the House Democrats' healthcare reform plan would cost over $1 trillion over the next decade and add a minimum of $239 billion to the deficit.

Obama again touted the cost-saving potential of "preventive care." Here, too, the independent Congressional Budget Office has determined that preventive measures would actually increase health care costs, and that a so-called Medicare Commission that Mr. Obama has suggested would have a negligible impact on curbing government healthcare spending. Why are the president and the Congress ignoring these warnings from the independent CBO?

Back in May, President Obama went before the American Medical Association and declared, "No matter how we reform health care, we will keep this promise to the American people: If you like your doctor, you will be able to keep your doctor, period. If you like your health care plan, you'll be able to keep your health care plan, period. No one will take it away, no matter what." He has made this exact claim in numerous other healthcare speeches.

In his latest speech before Congress on September 9, Obama offered a more nuanced pledge that "nothing in this plan will require you or your employer to change the coverage or the doctor you have." As noted above, this is simply not true if you lose your current coverage for any reason under H.R. 3200.

Regardless of whether or not the proposed healthcare legislation specifically requires that Americans give up their private coverage, there are still many changes to the system that could cause many people to lose it anyway. For instance, one provision Obama backed in his latest speech - to tax expensive health plans - is explicitly aimed at encouraging employers to drop benefit-rich policies in hopes that it would help rein-in medical spending (ie - rationing).

At another point in his recent healthcare speech, Obama said that, "The middle-class will realize greater security, not higher taxes." How does this jibe with the preceding sentence in the paragraph just above? Then, at another point in his latest speech Obama gave an unwavering endorsement of a requirement that individuals either purchase health insurance, or pay a tax.

Under the Senate version of healthcare reform/mandate proposed by Senate Finance Committee Chairman Max Baucus (D-MT), individuals would face a tax of at least $750 annually if they do not purchase health coverage. How is this "greater security, not higher taxes"?

And while the Baucus healthcare proposal would provide subsidies to lower-income Americans, those subsidies would stop at 300% of the federal poverty level. What that means is that a family of four with a household income above $66,150 would face a tax of $3,800 if they do not obtain health insurance, while individuals with income above $32,490 would face a tax of $950. Yet Obama argues that this is not a "tax," if it's something that is good for you. Yeah, right!

This is a problem that Obama himself noted when he was campaigning against Hillary Clinton back when he said he opposed such mandates. In a February 2008 debate referring to healthcare reform, he said, "In some cases, there are people who are paying fines and still can't afford it, so now they're worse off than they were. They don't have health insurance and they're paying a fine." He was referring to conditions under a similar healthcare mandate in Massachusetts.

During his speech two weeks ago, Obama advocated the creation of a plan to be offered on a government-run insurance exchange that would be "administered by the government just like Medicaid or Medicare." He said that the reason we need such an option is that, "by avoiding some of the overhead that gets eaten up at private companies by profits, excessive administrative costs and executive salaries, it could provide a good deal for consumers."

Yet later in the same speech, he argued that he could pay for most of his proposal with cuts to Medicare that would not have any impact on benefits to seniors. Say what? The reason, he explained, is that we could save money by reducing "the hundreds of billions of dollars in waste and fraud…" in Medicare - the very government-run program he touts as a model for the creation of a new government-run healthcare program. Do they really think we are that stupid?

While acknowledging that the new plan would be run by the government, Obama tried to argue that it wouldn't be subsidized by taxpayers, but only funded by the premiums it collects. Sorry, but I must point out that any new government plan would require taxpayer money to fund huge start-up costs - at the least, and should it run into financial trouble, it's hard to believe that lawmakers would allow it to fail without pumping taxpayer money into it, just as they did in the cases of Fannie Mae and Freddie Mac (and those were allegedly private companies).

President Obama speaks in such broad circles and contradictions. You can keep your current plan and doctors, but not really; your taxes will not go up, but they probably will have to; we won't cover illegals, but there's no way not to; etc., etc. No wonder the number of Americans who oppose government-run healthcare is now at a record high - 56%!

A Re-Run of Clinton Nationalized Healthcare?

A recent article on Forbes.com, just after the president's latest speech before Congress, caught my attention and further explained the current healthcare debate as follows:

Before a tense and packed House, the President told Congress:

‘Millions of Americans are just a pink slip away from losing their health insurance, and one serious illness away from losing all their savings... And in spite of all this, our medical bills are growing at over twice the rate of inflation...'

That's President Clinton, sixteen years ago almost to the day, in a speech about a complex health-care plan built on government expansion, with billions in hidden costs. Last night, a President--who was only 32 then--is now in the White House, out to prove that nothing has changed in the minds of the Democratic leadership since the Clinton debacle.

President Clinton's health-care legislation didn't fail in 1994 because people didn't want better health care. The White House plan failed because it was too bureaucratic, too complicated, and too expensive.

Last night, President Obama's response to sixteen years (and one angry August recess) worth of bi-partisan doubt was to double down and bet even more political capital on the same approach. It's as if he expected Americans to tune in, and suddenly realize their mistake.

This was supposed to be the Administration of the post-partisan rational center. Arguments were supposed to work with this White House. While many critics of President Obama's health-care plan have been too extreme, some rational criticism should have broken through. The speech was brilliant--unless you've actually read the [healthcare] legislation behind it, which contradicts many of the President's restated "commitments."

Last night, the President said that, "Nothing in this plan will require you or your employer to change the coverage or the doctor you have." Countless observers have already shown that this is not true, as proposed new regulations mandating a whole range of benefits, setting community rating schemes, and banning individual incentives will radically change many existing plans.

Last night, the President said his reforms would fight rising costs, not add to the deficit, and reduce government waste. Countless observers have already shown that the President is wrong, among them the Congressional Budget Office, which calculates that the plan will increase costs and explode the deficit. And, as I observed in the Washington Examiner, government waste will grow under ObamaCare, since the House bill creates a sea of new Washington-based programs, offices, and bureaucracies (53, by one count) to micro-manage your health insurance, your hospital, and even your family doctor.

Last night, the President said competition from a government-run insurance plan was needed to "give Americans a choice." And the President has been shown to be wrong there, too. Federal employees have over 230 private alternatives to choose from in their existing health exchange…; a public plan would just add one new option (a government financed and price controlled one, at that). [Emphasis added, GDH.]

It's not that President Obama wants to turn the health-care policy clock backwards sixteen years. It's worse than that. It's as though the last sixteen years never even happened. It's like a health-care Groundhog Day where Americans wake up to the same tired arguments for government-run care every morning, simply because Democratic Presidents can't resist testing the same pick-up lines on an unwilling America.

And the lines are wearing thin. The President (yes, Obama this time) told Congress that "our collective failure to meet this challenge--year after year, decade after decade--has led us to a breaking point." Has it really? When President Clinton conjured similar fears about pink slips and millions losing coverage to Congress in 1993, 15.3% of Americans were uninsured. In 2007, the percentage of Americans without insurance was...15.3%. A solution to this problem is needed, but the fact that it hasn't grown worse is a sign that Congress has time to think, and little reason to panic.

Since President Clinton spoke of health inflation in 1993, health costs continued to rise faster than wages, but President Obama refuses to acknowledge years later that the U.S. health inflation rate is almost identical to rates in government-run systems [in other countries]. Rising costs must be attacked, yes, but if rationed health management can't stop health inflation in Britain or Ireland, will a rush to President Obama's version of HillaryCare do any better?

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions - So What Should We Think Now?

Some surveys indicate that a majority of Americans think we need reform of our healthcare system. This explains, in part, why President Obama and the Democrats are so hell-bent on passing a massive overhaul of our healthcare system this year. Yet plenty of other surveys show that appx. 80% of Americans are happy with the healthcare insurance and care they have now. So what gives?

What gives is that liberal presidents dating back to Theodore Roosevelt have tried to nationalize healthcare, and every attempt has failed. The simple fact is that virtually all Americans would favor healthcare that costs less - what else is new? Likewise, a majority of Americans would like to see healthcare insurance available to everyone - somehow.

But as has been consistent for over 100 years, a majority of Americans do not want to see the federal government take over healthcare - doctors, nurses, hospitals, etc. - and be in a position to mandate what care we can and cannot receive.

The problem is, the current president and the Democrats in the majority in Washington feel otherwise. They see government-run healthcare as a giant power grab, as I have discussed previously. They believe that the government is a better arbiter of our healthcare needs than we are. And they see Obama's presidency as the best opportunity they have had in years to ram it down our throats, even if it means by a simple Democrat majority "reconciliation" (51%), which they just might be arrogant enough to pull off. Nancy Pelosi and Harry Reid have all but promised to do this if necessary to pass their healthcare plan.

On most political issues, I would argue that the party in power should go ahead and try to ram it down our throats, and suffer the political backlash in the next election, in this case the 2010 mid-terms and the 2012 general elections. But when it comes to healthcare reform, if it passes, there is almost no chance to roll it back once it is in place. This is precisely why the Democrats don't want their takeover of healthcare to be implemented until 2013!

President Obama and the Democrats in Washington know this. They thought they had it during President Clinton's administration, but the American people fought back and stopped it. Now they see their odds even better with President Obama in office, although public opposition is now growing daily, 56% oppose/43% approve as this is written. So, it remains to be seen what will happen this year.

As it stands now, most of the political observers I read believe that some form of government-run healthcare will pass this year or next under President Obama. Even some moderate to conservative analysts I read have concluded that the time has come to provide some form of health insurance to all Americans. But the question is, as always, how to pay for it?

Sadly, I have not seen a single comprehensive healthcare reform proposal from the Republicans or other non-Democratic groups, and that disappoints me greatly. Streamlining the complex insurance licensing process so that insurance companies can offer policies across all state lines is not being discussed, in what would seem to be a slam-dunk starter for reforming healthcare.

Likewise, letting small businesses band together to buy insurance to cut costs is not on the table. Serious medical malpractice (tort) reform is also AWOL. Providing tax credits/subsidies for low-income Americans to purchase health insurance is not on the table either.

Plus, if we can reform Medicare and trim hundreds of billions in waste, as President Obama suggests, why not do that now and use those savings to subsidize health insurance for low income Americans?

I am also puzzled as to the rush to pass healthcare reform at any cost. We're talking about reforming an industry that makes up 16-17% of the world's largest economy. Doesn't that merit taking the time necessary to do it right? Evidently not, if you're a Democrat.

At the end of the day, I just don't get it. Have we reached the point where there is no alternative to a massive government-run healthcare system? I don't think so. But it remains to be seen if we can derail the Democrats' plans for nationalized healthcare.

Finally, I recognize that this has been a polarizing editorial on my part. I will get roundly criticized for it by my moderate/liberal readers, and those who favor government-run healthcare, which I can handle as always. But the issue of nationalized healthcare is just too important for all of us - and for the economy - for me to remain silent.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Has Obama misread the tea leaves? (excellent read!)
http://www.realclearpolitics.com/articles/2009/09/10/the_goldilocks_principle_in_american_politics_98233.html

Does Obama lie?
http://www.realclearpolitics.com/articles/2009/09/18/does_he_lie_98363.html

Obama omits crucial details on healthcare
http://article.nationalreview.com/?q=ZTI2YmFlYmVkYjgwZmQ0NTk2MjUzNzZhYTgyOTVmMTY=

Federalization of college loans teaches health care lesson
http://washingtontimes.com/news/2009/sep/18/back-door-to-a-public-option/

The Case for High-Yield Bonds

Gary D. Halbert — Tue, 15 Sep 2009 21:34:00 GMT

IN THIS ISSUE:

"Junk Bond" Basics
High-Yield Bond Whitepaper
by Steven D. Landis, CFP
Is the Party Over for 2009?
Introducing the Columbus High-Yield Bond Program
Performance Evaluation
Conclusions

Introduction

High-yield bonds, or "junk bonds" as they are widely known, have become the subject of quite a bit of attention in recent months. That's because, as of August 31st, the Barclays and Merrill Lynch high-yield bond indexes have jumped over 40% in value so far in 2009. This makes the S&P 500 Index's year-to-date return of only 14.97% as of August 31st paltry in comparison.

Returns of that magnitude have not escaped the notice of investors. Inflows into high-yield bond mutual funds have been at or near record levels since March, based on information from AMG Data Services, a mutual fund tracking firm. However, the question is whether the good times in high-yield bonds will last.

I certainly don't pretend to be an expert on high-yield bonds, but I have found that the cyclical trends in the high-yield market often do lend themselves to being traded by an active money manager. Though "junk bonds" carry with them the reputation for being risky (and they are), we have found a professional money manager who has produced an enviable track record with low historical drawdowns.

This week, I'm going to feature Sojourn Financial Strategies, LLC and its co-founder, Steven D. Landis, CFP. I'll begin by reprinting excerpts from a whitepaper on high-yield bonds that Steve has authored. This paper does an excellent job of explaining the opportunities available in high-yield bonds, and whether or not it's too late to participate in the junk bond rally that began earlier this year.

I'll then finish up by presenting Steve's Columbus High-Yield Bond (CHYB) Program. Just to whet your appetite, this actively managed strategy has produced an annualized return of over 10% since its inception in 2002, with a maximum drawdown of only -6.14%. Year-to-date, the CHYB Program is up over 24% as of the end of August. Past performance, however, is not necessarily indicative of future results.

Junk Bonds 101

Most of us realize that high-yield bonds are called "junk bonds" because they carry a much higher risk of default than government or high-grade corporate bonds. As a result, these bonds tend to carry a higher rate of interest in order to compensate investors for taking on a greater risk of default. Like all bonds, high-yield issues tend to be affected by the interest rate climate. However, what you may not know is that the value of a high-yield bond can also be affected by the health of the economy and stock market.

It just makes sense that a better economic environment sometimes reduces a junk bond's default risk, since the issuing corporation may be less likely to default in a good economy. As a result, the spread between the effective junk bond yield and a risk-free (Treasury) rate closes, and the underlying bond becomes more valuable.

Of course, the skill in managing high-yield bonds or junk bond mutual funds comes in knowing when to be in the market and when to move to cash. Since 2002, Steve has shown us that he has the methodology in place to make these decisions with a high degree of accuracy. However, before getting into the details of his program, I want to reprint excerpts from his recent whitepaper on high-yield bond investing.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

QUOTE:

Investors Ready for a New Way to Invest in High Yield Bonds
By Steven D. Landis, CFP®

High yield bonds have been around for longer than most of us can remember. Anybody who was born earlier than 1960 can recall the days of Ivan Boesky and Michael Milken, the highly creative and somewhat dubious creators of "junk bonds" (the more-to-the-point term for high yield bonds). Eventually, their actions, not the junk bonds, landed the boys in jail for a short time. It should be noted that never was there (then or now) anything illegal about the use of the junk bonds, but their criminal activity, in part, contributed to the bad reputation sometimes attributed to high yield bonds.

In this paper, the terms high yield bonds, junk bonds, and "junks" will be used interchangeably and will have the same meaning and reference. These terms apply to loans that are made to higher risk, corporate borrowers of money. High yield bonds had been in existence long before Boesky's and Milken's involvement in the early 1980s. During the early part of the 20th century General Motors, U.S. Steel, and other well-known corporations borrowed money that, at that time, was considered higher-risk debt. If that debt were issued today, it would be considered to be a junk bond.

Fast forward to today and we find that more than $500 billion (a half-trillion dollars) defines the magnitude of the high yield bond market. Its explosive growth is the result of two factors: 1) more companies needing capital; and 2) the availability of investors who are willing to take more risk in return for a higher yield on their investment.

Bond Ratings

Bonds are rated based on the probability of the borrower defaulting on the bond, that is eventually failing to meet the terms of the bond covenant. The highest quality bonds, those with the greatest probability of paying back the loan principle and interest, are rated AAA. As the chances of a bond default increases, the lower the rating on the bond, as illustrated in Table 1 below.

Table 1.
Bond Rating vs. Default Risk

Standard & Poor's Rating	Grade	Default Risk
AAA	Investment	Lowest Risk
AA	Investment	Low Risk
A	Investment	Low Risk
BBB	Investment	Medium Risk
BB, B	Junk	High Risk
CCC, CC, C	Junk	Highest Risk
D	Junk	In Default

So we can see that the two terms used to describe these bonds, high-yield and junk, come from two features of the bonds: 1) High-yield refers to the increased interest rate that accompanies the bonds; and 2) Junk refers to the low quality of the bond.

Risks of investing in high yield bonds

In 2007, investors and the public became intimately familiar with the sub-prime consumer mortgages and their risk to lenders (and ultimately the economy, in general). The results of consumers overextending themselves by borrowing more debt than they could repay, under terms that were unfavorable, eventually resulted in a near-collapse of the consumer mortgage market. Investors in those sub-prime mortgages soon found their investments suffering tremendous losses. Meanwhile, the ability to sell out of those investments became more and more difficult due to a lack of buyers. A similar scenario also played out in the high yield bond market in which holders of low-quality debt saw their investments lose a substantial percentage of its original value.

A fact of life is that consumers with low credit scores must pay high interest rates when they borrow money. This higher interest rate compensates the lender for the increased chance of the borrower defaulting on the loan. Likewise, corporate borrowers with a lower credit rating have an increased probability of defaulting on their loans and pay lenders accordingly. Those who loan money to these corporate borrowers demand to be compensated for the extra risk they take in making these loans. Should a default occur, the bondholders stand in line with all the other creditors of the company, hoping to get back some portion of their money. The lower the quality the bond, the less chance there will be assets that can be used to pay back creditors. The increased interest rate compensates the lender, at least in part, for this additional risk.

The result is that those entities that lend money to higher risk borrowers, via junk bond offerings, receive a higher interest rate than if they had been lending money to higher quality (lower risk) borrowers. To illustrate this difference, consider that over the past twenty or so years, high yield bonds have paid an interest rate of 3-9% (with an average of 6%) per year more than that of U.S. Treasury bonds. This difference is known as the "spread." In early 2008 the average default rate on junk bonds was about 1.1%. However, as the economy continued to sour the default was expected to increase to around 5.2%. Compare this with an average, long-term default rate of about 4.9% (according to John Lonski, chief economist of Moody's.)

An additional risk of junk bonds is their lack of liquidity. Liquidity refers to the ease of trading the instrument in the marketplace. The author of this paper also refers to liquidity as "how quickly one can sell an investment and convert it to cash". Junk bonds are not traded as freely as, say, government bonds. Thus, the liquidity of high yields is significantly lower than that of high quality debt, which leads to higher costs of trading and selling at one's desired price. All of these factors combined result in the higher interest rate that is attached to junks.

Why Invest in High-Yield Bonds?

Unlike normal bonds, that are greatly influenced by fluctuations in interest rates, junk bonds are less affected by interest rate movement. This is because junks generally have higher interest rates and have, generally, shorter maturities. In fact, junk bonds are affected more by overall economic changes (expansion or contraction) than changes (increase or decrease) in prevailing interest rates. This is because the quality of a junk bond is most affected by the strength of the company issuing the bond.

If the company's profitability increases (since the issuance date of the bond), the quality of their bonds increases. For an investor in a junk bond, this is an almost-perfect scenario: One in which a junk bond with a high interest rate becomes a quality bond with a high interest rate (this being the result of the formerly high risk borrower becoming a low risk borrower).

For example, ABC Corp. had a debt rating of "B" and issued a bond at 12%. Meanwhile, AAA-rated debt was paying 4%. Sometime following issuance of this debt, ABC Corp. enjoys a return to profitability and its debt rating is upgraded to "A". The result is that holders of those old ABC Corp. bonds now hold A-rated debt that is paying 12%! This, in turn, makes the underlying bond more valuable since investors are willing to accept a lower rate of interest on debt issued by a stable company.

How to Invest in High-Yields

In my opinion, investing directly in individual junk bonds should be left to the wealthy and institutional investors. In fact, the majority of investors in junk debt are institutional…mutual funds, pension funds, hedge funds, and others. This, however, does not suggest that investing in junks is only for the wealthy. Most all investors can get involved with junk bond investing by investing in mutual funds that specialize in them.

By investing in a mutual fund that specializes in junk bonds, an investor can take advantage of a professional fund manager. Additionally, the investor will be able to reduce risk via the diversification that mutual funds offer. (A typical mutual fund will hold as many as 200-400 bonds, all of which are owned, on a pro rata basis, by investors in the fund.)

Keep in mind, though, that investing in a mutual fund does not mean that the investor has no risk. Like the bonds held by the fund, a mutual fund can gain or lose value. Plus, in the event of a slowing economy, high yield bond mutual funds can lose significant value. So, for anybody considering an investment in high yield bond funds (or for that matter, any mutual fund) consider your tolerance for and ability to withstand potential losses.

An Improvement on Buy-and-Hold Bond Investing

As much as we really like investing in high-yield bond funds, they have one major flaw. That flaw is that there are times in which high yield bonds (and mutual funds investing in them) will get absolutely annihilated in a bear market. The years 2007 and 2008 are the most recent examples of this. In 2008, the majority of high yield bond mutual funds lost more than 20% of their value. Worse still were those funds that lost more than 50% of their value!

Risk-averse investors may find themselves asking: "Is there a way to invest in high yield bond funds without the risk of losing money in a down market?" Fortunately, the answer is, "Yes, there is." There are any number of advisers whose role is to actively manage money for their clients. (The author of this paper is among those who manage money for investors who want to invest in high yield bond funds.) The goal for most of these advisers/managers is to be invested in a security/market when it's gaining in price and to sell that security/market before its price goes down too much.

If the adviser is able to do this buying and selling successfully (and we emphasize "IF"), then that adviser's clients/investors would be able to make more profit while taking less risk. By reducing the losses during time periods in which high yield bonds are losing money (1998-2002 and 2007-2008) one can dramatically improve the potential for long-term profits.

Is the Party Over for 2009?

At this point, readers of this paper are either eager to invest in high-yield bond funds or skeptical and not interested in the increased risk. For those who are tempted to invest in the high-yield bond market, a question arises: "How much profit is left after the big run junks have had this year?"

It goes without saying that we have no idea how much more high yields can offer. But we can offer a look at three possible scenarios:

Scenario 1. The Economy Improves. If the economy continues to improve, profits of most corporations will rise. At the same time, we would expect profits of many issuers of high yield debt to improve. If this scenario does, in fact, occur then we would expect high yield bonds to continue increasing in price. (Additionally, bondholders would continue to receive interest payments from those bonds.)

Scenario 2. The Economy Sours. If the economy begins to worsen, then corporate profits will likely be depressed. At the same time, profits of issuers of high yield debt would probably suffer. In this scenario, the prices of high-yield debt would probably begin to fall. The buy-and-hold investor would suffer losses to his/her investment. Investors who use skilled, successful active managers have a great probability that their adviser/manager would sell their junk bond fund and invest their money in the safety of a money market fund. This move to safety would preserve the value of investors money.

Scenario 3. The Economy Muddles Along. If the economy becomes listless and neither grows nor contracts, there is the possibility that high-yield bond prices could stagnate. That is, prices would neither rise nor fall. It would be extremely rare for this to continue for an extended period of time, but let's assume it does. In such a situation, the investor neither gains nor loses money on his/her investment principle. However, he/she could continue to reap profits in the form of high interest income being generated by the bonds.

So, looking at the three possible scenarios, the only one that we would expect to pose a threat of significant loss is Scenario #2, specifically for the buy-and-hold investor. The investor who uses a skilled, active adviser/manager has a significantly greater chance of avoiding losses during a "down market". [There are no guarantees, of course. GDH]

In summary, we contend that high yield bond mutual funds can be an extremely attractive way to invest, though subject to substantial losses during falling markets. Furthermore, we believe that investing in high yield bond mutual funds can be an even more attractive method of investing, if managed under the guidance, direction, and oversight of an experienced and skilled adviser.

Steven D. Landis, CFP®
Sojourn Financial Strategies, LLC

References:

Glenn Yago. "Junk Bonds." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved December 20, 2008 from the World Wide Web: http://www.econlib.org/Library/Enc/JunkBonds.html
John Waggoner. USA Today. February 7, 2008.
"Junk Bonds: Everything You Need to Know". Investopedia®

END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Columbus High-Yield Bond Program (CHYB)

As Steve made clear in his whitepaper, active management of high-yield bond mutual funds can potentially allow investors to participate in both capital gains and coupon returns, while also moving to the sidelines during times of downward price pressure. This ability to move to cash in downward trending markets is very important, especially considering the aggressive nature of high-yield bond investments.

It might come as a disappointment that the CHYB Program is up "only" 25.01% so far in 2009 as of August 31, considering that the Barclay's High-Yield Credit Bond Index is up over 40% over the same period of time. However, this analysis is very short-sighted given that historical drawdowns in the Barclay's Index have exceeded -33%, while the CHYB's worst-ever drawdown has been limited to just over -6%.

The value of minimizing losses becomes even more apparent when looking at the rolling 5-year returns as of August 31. The CHYB Program has a 5-year annualized return of 8.94% while the unmanaged Barclays Index has managed an annualized return of only 5.27%. Again, the ability to move to cash in downward trending markets can make a significant difference in long-term returns, though there are no guarantees. And remember that the CHYB returns are net of all fees and expenses.

The Columbus High-Yield Bond Trading Strategy

Steve's proprietary trading model uses technical indicators to determine the high-yield bond market's potential future movements. However, Steve goes one step further by analyzing the technical indicators unique to each of the high-yield bond mutual funds he uses. Like many other active money managers, Steve will sometimes use specialized high-yield bond index funds. However, he also uses traditional high-yield bond funds when his system tells him they have the best potential for future gain.

Doing this allows him to combine his market timing expertise with the bond selection expertise of the mutual fund manager. Plus, traditional high-yield bond funds typically pay a higher "coupon" rate of return than specialized index funds.

As a general rule, the CHYB Program invests in only one mutual fund at a time, though future growth may require him to use two or more funds. Client accounts will either be 100% in a high-yield mutual fund or 100% in cash (money market); there are no graded investments or partial positions taken.

The CHYB trading model does not use leveraged funds nor does it use specialized inverse funds that provide a net "short" exposure to the high-yield bond market. However, Steve may use such inverse funds as a hedge under certain conditions. Best of all, Steve's strategy employs the use of trailing stop orders that close out trades should losses exceed a pre-determined percentage. In winning trades, these stop-loss orders ratchet up with gains, providing the potential to lock in any positive returns over and above the stop-loss trigger percentage.

If I had to describe our observations of Steve's trading model, I'd have to use the term "patience." Steve does not employ any discretion in his trading, so he will allow the system to stay in cash as long as necessary until the high-yield bond market environment improves. For example, the CHYB Program was in cash for much of 2008, which is why it ended the year with only a 2.9% loss rather than a drop of over 26% as was the case in the Barclays High-Yield Credit Bond Index.

Performance Evaluation

The goal of the CHYB Program is not necessarily to "beat the market" over the short run, but rather to participate in market gains while also managing risks. From the historical performance statistics provided below, it is evident that Steve has attained this goal in the past, though past performance cannot guarantee favorable future results:

Performance Statistics
(Net of all fees and expenses)

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
(Please see Important Disclosures below.)

The CHYB Program is available through the Purcell Advisory Services platform. Accounts are held at Trust Company of America (TCA), an independent trust company located in Denver, Colorado. Clients have online access to their accounts via the TCA website. Both TCA and Purcell issue quarterly statements and TCA produces year-end tax reports. TCA charges a custodial fee of 1/10th of one percent (ten basis points) of the account balance.

The minimum account size for the CHYB Program is $50,000 per account. Management fees are billed quarterly in advance based on the following annual percentages for various sized accounts:

First $500,000	2.50%
$500,000 to $1 million	2.25% (entire account)
$Over $1 million	2.00% (entire account)

It is important to remember that all performance information provided above is net of both the management fee and custodial fee charged on the accounts.

Conclusions

We have been offering the Columbus High-Yield Bond Program for over three years now, and I continue to be impressed with the way it can participate in market gains and then move to the safety of the money market fund when the risk of loss becomes too great. I also like the fact that it is a non-discretionary system, which is an important factor when the model has been in cash for an extended period of time.

Over the years, I have seen money managers disregard their trading systems when they signal to be in cash for weeks or months. Overriding a trading system can also result from clients calling to ask why they are paying a fee to sit in a money market fund. Steve stuck to his guns during the extended cash position in 2008, and we haven't heard many clients complaining about having lost only 2.9% for the year when the stock and high-yield bond markets were in free-fall.

While you may have missed much of the move in high-yield bonds so far in 2009, I think Steve makes a good case for investing in this program now. Since we recommend this program for investors with at least a three-to-five-year time horizon, we feel that the CHYB Program's combination of market participation and risk management is a fit for the less aggressive portion of your portfolio. As always, be sure to read all offering materials and Important Disclosures before making a decision to invest.

If you would like to learn more about the Columbus High-Yield Bond Program or any of our other risk-managed AdvisorLink® investment programs, please feel free to give one of our Investment Consultants a call at 800-348-3601 or click on the following link to complete one of our online request forms. If more convenient, drop us an e-mail at info@halbertwealth.com or visit our website at www.halbertwealth.com to learn more about this and our other actively managed investment strategies.

Special Reminder about the "All They'll Need to Know" Booklets

As I mentioned a couple of weeks ago, we have now exhausted our supply of the end-of-life planning resource entitled "All They'll Need to Know." You can, however, still obtain a copy of the "All They'll Need to Know" booklet directly from Emerson Publications. I have negotiated a discounted price on both the printed and electronic versions of the booklet which you can access by clicking on the Emerson Publications website link below:

http://emersonpublications.com/index.php?pr=ATNTK-Halbert&nosessionkill=1

I am making this valuable resource available as a service to my readers and I do not share in any part of the purchase price of either version of the booklet. This discount is available for a limited time only, so I suggest that you take advantage of this offer as soon as possible.

Wishing you profits,

Gary D. Halbert

IMPORTANT DISCLOSURES: Halbert Wealth Management, Inc. (HWM), Sojourn Financial Strategies, LLC (Sojourn), and Purcell Advisory Services, LLC (Purcell) are Investment Advisors registered with the SEC and/or their respective 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. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from the Advisors in exchange for introducing client accounts. For more information on HWM or any other Advisor mentioned, please consult their respective Form ADV II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index and the Barclays High Yield Credit Bond Index (which both include dividends) were used. Both represent unmanaged, passive buy-and-hold approaches, and are designed to represent their specific market. The volatility and investment characteristics of these indexes may differ materially (more or less) from that of this program, and these Indexes cannot be invested in directly. The performance of the S & P 500 Stock Index and the Barclays High Yield Credit Bond Index is not meant to imply that investors should consider an investment in the Columbus High-Yield trading program as comparable to an investment in the "blue chip" stocks that comprise the S & P 500 Stock Index or the high yield investments that comprise the Barclays High Yield Credit Bond Index. Historical performance data from inception through December 2005 represents a tracking account managed by Steven D. Landis and audited by MoniResearch, an independent corporation, Steve Shellans, President. Performance from January 2006 forward is from an actual account in Purcell Advisory Services Columbus High-Yield Bond Program. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Columbus High-Yield Bond Program.

Purcell utilizes research signals purchased from Sojourn, an unaffiliated investment advisor. The signals are generated by the use of a proprietary model developed by Sojourn, with the objective of providing superior risk-adjusted returns using high-yield bond investments. Assets in the program are allocated 100% to the appropriate high-yield mutual funds or 100% to the money market according to the purchased research signals. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Columbus High-Yield trading program.

In addition, you should be aware that (i) the Columbus High-Yield trading program is speculative and involves risk; (ii) the Columbus High-Yield trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Purcell will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Columbus High-Yield trading program's fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Any investment in a mutual fund or money market fund carries the risk of loss. Mutual funds and money market funds have 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. Returns illustrated are net of the maximum annual management fee of 2.5%, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Dividends and capital gains have been reinvested. Management Fees are deducted quarterly, and are not accrued on a month-by-month basis. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. Individual account results may vary based on each investor's unique situation. No adjustment has been made for income tax liability. Performance for individual accounts may differ materially (more or less) from the results illustrated. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

On the Economy & Obama's Trillions

Gary D. Halbert — Tue, 08 Sep 2009 20:33:00 GMT

IN THIS ISSUE:

The Economy - More Signs of Recovery
Is the Recession & Credit Crisis Over?
Obama Adds $2 Trillion to Debt Forecast
Economic Assumptions Still Too Optimistic
What in the World Are They Thinking?
Do They Want Control Even If It Ruins The Economy?

Introduction

In my June 16 E-Letter, I reprinted the non-partisan Congressional Budget Office's (CBO) projections of annual federal budget deficits over the period from fiscal 2009 to fiscal 2019, which estimated that the national debt will more than double over that 11-year period - not including over $1 trillion for nationalized health care (if it passes) and several trillion more that will be required to rescue Social Security, Medicare and Medicaid over the next decade.

The White House Office of Management & Budget (OMB), which is partisan, runs budget deficit projections similar to those of the CBO. The OMB's deficit projections over the same period, 2009-2019, showed the national debt increasing over $2 trillion less than the CBO's forecast of $11.11 trillion. However, on Friday, August 21, the White House quietly announced that the OMB had revised upward its deficit projections to fall in line with the CBO's. So, it's official.

The only good news on the deficit front is that both the CBO and the OMB recently revised downward the fiscal 2009 budget deficit, which closes out at the end of September, from the earlier reported $1.8+ trillion to around "only" $1.6 trillion. Time to break out the bubbly, right? Wrong! We will look at the latest deficit projections as we go along, but the problem is still the same; Obama seems intent on spending this country into financial ruin.

But first, there is more good news on the economic front. More and more forecasters now believe that GDP has moved into positive territory in the 3Q, and perhaps it has. Unfortunately, we don't get our first 3Q GDP estimate until the end of October. The latest GDP estimate for the 2Q was unchanged at -1.0%, which was better than expected. I will cover the latest encouraging (and not so encouraging) economic news just below.

The Economy - More Signs of Recovery

We have seen considerably more positive signs than negative over the last month. Let's begin with the ISM manufacturing index which rose sharply to 52.9 in August, up from 43.4 in July. It is the highest reading since June 2007. A reading above 50 in the ISM index indicates that the economy is recovering. The ISM "new orders" index jumped 9.6% in August to 64.9, which confirms that inventory rebuilding is intensifying, albeit from very depressed levels.

Durable goods orders jumped 4.9% in July (latest data available) following -1.3% in June. Industrial production increased 0.5% in the same period. The factory operating rate also increased modestly in July. Construction spending, however, was still down slightly in July.

The Index of Leading Economic Indicators rose for the fourth consecutive month in July (latest data available) with a rise of 0.6% following a gain of 0.8% in June. Four consecutive up months in the LEI is quite encouraging, indicating that the worst of the recession is likely behind us, and the economy may move into positive territory before year-end.

The Consumer Confidence Index bounced back in August to 54.1 versus 47.4 in July. After rising sharply in the spring, the Index drifted lower in June and July so the latest recovery was welcomed. The University of Michigan Consumer Sentiment Index also closed out higher at the end of August.

Unfortunately, the rise in consumer confidence that began in the spring has not translated into significantly higher consumer spending. Retail sales in July fell 0.1%. Personal consumption expenditures, another measure of consumer spending, were up only 0.2% in July. Most Americans are still very concerned about the economy, and many are choosing to save rather than spend. The Commerce Department reports that the personal savings rate rose to 5% of disposable income in the 2Q, the highest rate in over a decade.

On the housing front, there was some good news in the last month. Pending home sales rose 3.2% in July following a gain of 3.6% in June. Actual sales of existing homes rose 7.2% in July to an annual rate of 5.24 million units. Sales of new homes rose 9.6% in July, the largest monthly gain since February 2005. Much of the increase in home sales in recent months is attributed to the up to $8,000 in tax incentives for first-time home buyers; yet no one knows what will happen when this stimulus program ends later this year.

The Labor Department announced last Friday that the US unemployment rate jumped to 9.7% in August, up from 9.4% in July, and above pre-report expectations. In August, the official number of unemployed persons increased by 216,000. The Labor Dept. also reported that there are now 14.9 million unemployed Americans, and this number is likely headed even higher in the months ahead.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Is the Recession & Credit Crisis Over?

In the 30 years that I have been writing about the markets and the economy, a "recession" has consistently been defined as two or more consecutive quarters of negative growth in GDP (or GNP back in the old days). Likewise, two consecutive positive quarters meant that the recession was over. Be that as it may, if the initial GDP report for the 3Q is even mildly positive (which we won't get until the end of October), you're going to hear virtually everyone declare that the recession is over - whether or not that proves to be the case.

While I remain a bit skeptical, most of my trusted sources believe at this point that 3Q GDP will be at least mildly positive, and that the 4Q will be as well, in large part due to inventory rebuilding. But most of these same sources are not predicting a strong recovery in the economy. Some believe that there is still a real chance that we will slip back into recession in late 2010 or 2011, especially if consumers continue to save rather than spend.

As for the credit crisis, I think it is fair to say that it is no longer a crisis. But as anyone who is trying to get credit for a business knows, the banks are still not lending remotely as they were before the subprime blowup occurred. New lines of credit are few and far between. Many banks still have too many bad loans on their books, so they're not looking for new ones.

According to the FDIC, 84 US banks have failed so far in 2009, a record pace. So while it may be safe to say that the credit "crisis" is over, we are still far from being out of the woods. There are now 416 banks on the FDIC's "problem list" (up from 305 in March), so there will continue to be multiple bank failures every month for some time to come.

Then there's the 800-pound gorilla in the room - the Fed. At some point, the Fed will have to unload the $2+ trillion in questionable securities and toxic assets on its balance sheet. The Fed can't continue to print money ("quantitative easing") indefinitely; likewise, it will have to shrink the money supply at some point; and finally, short and medium-term interest rates will have to be allowed to rise somewhere down the road, especially if the economy rebounds.

Obviously, no one short of Ben Bernanke knows when this will happen. My best sources believe that because of the deflationary forces created by deleveraging, the Fed has at least a year to maintain its current stimulative policies without risking higher inflation. Similarly, they believe the Fed can wait a year or so before having to begin unloading assets and trim its balance sheet.

Virtually, everyone I read in the financial/investment world agrees that the Fed faces a daunting challenge when the time comes to unload these assets. This problem, above all, will continue to hold the threat of a double-dip recession over the economy and the markets. We all need to keep this in mind even if the economy goes positive for a few quarters.

Obama Adds $2 Trillion to Debt Forecast

2009	$1.845	trillion	2015	$785	billion
2010	$1.379	trillion	2016	$895	billion
2011	$970	billion	2017	$945	billion
2012	$658	billion	2018	$1.023	trillion
2013	$672	billion	2019	$1.189	trillion
2014	$749	billion

TOTAL $11.11 Trillion

As noted in the Introduction, both the CBO and the White House Office of Management & Budget (OMB) recently reduced the budget deficit forecast for fiscal 2009 from the $1.845 trillion noted in the table above to apprx. $1.6 trillion. So, the $11.11 trillion shown above would now be reduced to apprx. $10.87 trillion (if the latest projections prove to be correct).

Note that this astronomical amount does not include over $1 trillion for nationalized health care (if it passes) and several trillion more that will be required to rescue Social Security, Medicare and Medicaid over next decade as the Baby Boomers retire. Nor does it include the existing national debt of $11.7 trillion. The $10.87 trillion is merely the sum of annual budget deficits over the 11 years from 2009 to 2019.

Given that September is the end of fiscal 2009, the talk is now focused on record budget deficits for the 10 years from 2010 to 2019. Never mind that the 2009 deficit will be apprx. $1.6 trillion, almost four times larger than our previous worst deficit in history, which was $438 billion in fiscal 2008 under President Bush.

If you take out the $1.845 trillion 2009 deficit from the table above, the CBO deficit estimate for 2010-2019 is $9.02 trillion. This is $9 trillion that we will add to the national debt over the next 10 years, based on Obama's budget projections. Yet for months now, the Obama administration has taken flack because its own OMB has maintained that the 2010-2019 deficits would only total apprx. $7 trillion. But that has recently changed.

Now if you're the President of the United States, and you have some news that is not flattering to release to the public (especially in a recession), you might decide to quietly release that news at the end of the day on a Friday, and hope that it doesn't get much play on the weekend news shows. That is exactly what happened on Friday, August 21.

At the end of the day on Friday, August 21, a senior White House official announced that the Office of Management & Budget had revised its deficit forecasts for 2010-2019 from $7 trillion to apprx. $9 trillion. At long last, that puts Obama's forecast in line with the CBO's forecast.

Obama Administration officials acknowledged that they relied on overly optimistic assumptions about the economy when they forecast in March that President Barack Obama's budget plans would generate deficits of $7.1 trillion over the next 10 years. After factoring in the severity of the recession and the prospect of a more sluggish recovery, the White House concluded that the budget outlook is significantly worse and revised the 10-year tally of deficits to $9.05 trillion.

Some in the media welcomed the presumably more accurate deficit forecast; some even went so far as to note that such huge spending will be just fine, such as liberal commentator Paul Krugman of the New York Times. Others, however, were quite critical and seriously questioned how the Obama Administration could have been off by $2 trillion in its forecast.

The conservative Weekly Standard published a scathing article on August 31. Here are some excerpts:

"What's $2 Trillion Among Friends?

$2,000,000,000,000. That's the amount by which the Obama administration raised its ten-year estimate of the nation's budget deficit from the one it made only a few months ago. Now, $2 trillion is a lot of money. But even more significant is the fact that this revision represents almost a 30 percent increase -- no tiny percentage of the earlier $7 trillion figure. It seems that expenses are higher -- up 24 percent this year, the largest increase since the height of the Korean War -- than originally estimated, and revenues are lower. The resulting deficit, says Peter Orszag, Obama's budget director, is ‘higher than desirable'. He might have added that the administration's critics had it right when they claimed that the earlier estimate represented a turn around the dance floor with that old seductress, Rosy Scenario.

There's worse: the new estimate assumes that Medicare and Medicaid spending will be cut by $622 billion, even though Congress has made it known that it is reluctant to make any such cut. Then there is the $600 billion in revenue included for the sale of [carbon] emission permits, despite the fact that the House has given away so many permits in order to buy support for the cap-and-trade emission-reduction that the program will produce at most $450 billion. Those two items alone come to almost another trillion dollars in red ink. Throw in another trillion-plus for Obamacare, and it is no surprise that senior economist Bill Gale, at the liberal Brookings Institute, says that the deficit will hit over $10 trillion over the next decade, a figure he finds ‘deeply alarming'.

This year, the deficit will come to 11.2 percent of GDP, and by 2019 the [national] debt will be equal to 76 percent of the [projected] value of the nation's output of goods and services, almost double the 41 percent when Obama took control of the nation's finances. No problem, say White House economists. Unsustainable, says Warren Buffett, among others."

Economic Assumptions Still Too Optimistic

Warren Buffet is absolutely correct. Whether it's $7 trillion or $9 trillion, it's way too much and unsustainable. Over the next five years alone, 2010-2014, the debt swells by $4.5 trillion. In fact, these projections could actually be too low based on the economic forecasts used in the projections. I should point out that this is not just an Obama phenomenon. White House budgets, whoever was president, have been laced with optimism, and no president has forecast a recession in these 10-year projections.

(By the way, all presidential administrations produce these 10-year forecasts on spending, revenues and the budget deficits/surpluses, even though they won't be in office 10 years from now.)

Consider the latest OMB projections for growth in GDP in the next several years in real terms, exclusive of inflation. The White House projects that GDP will grow by 3.8% in 2011 and climb above 4% a year for the next three years, followed by two years above 3%. This is far higher than historical norms; the economy has not seen such a period of growth since the 1960s.

And we can almost be assured of at least one more recession, if not two, over the next 10 years, what with the government running massive deficits every single year. Remember, the Fed will have to unload some $2 trillion in troubled assets at some point in the next few years. And, most forecasters agree that at some point, foreigners are going to curtail US dollar purchases, which will likely drive interest rates higher, at the least, or a currency crisis at the worst.

Excessive Obama optimism is not limited to economic growth. Despite the enormous monetary stimulus pumped out by the Federal Reserve in 2008-2009, bank credit that is widely regarded as potentially inflationary, the Obama administration assumes that inflation will actually decline from 2.1% in 2008 to 1.5% in 2009 and then to 1.3% in 2010 and 2011, and not rise above 1.8% through 2019. While it is true that inflation is declining now, thanks largely to the big drop in energy prices over the last year, we are almost certain to see higher inflation down the road.

What in the World Are They Thinking?

Most Americans that keep up with the economy and rising government spending, even remotely, are very alarmed about the exploding debt that President Obama has proposed for the next decade. Many of us wonder, what in the world could they be thinking? Do they want to purposely wreck the US economy? Frankly, I'm beginning to think so, as I will discuss later on.

Here is a snapshot of how many liberals on the left think about the perpetual rise in government spending and exploding deficits over the next decade. What follows is an August 23 editorial in the New York Times by liberal commentator Paul Krugman. He boldly attempts to explain why Obama's massive spending and deficits won't be a problem. He is wrong, of course, and I have inserted many bracketed words to help his column be more readable. I will elaborate afterward:

"How big is $9 trillion?

There's been some hysteria [no kidding] about the [Obama] administration's new estimate that the cumulative deficit will be $9 trillion over the next decade. Don't get me wrong: this is bad. But it's being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn't. [really?]

What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion [annually]. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we're talking about adding debt that's equal to around 40% of GDP [this figure is bogus - see comments below].

Right now, even if we do run these [trillion dollar annual] deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s. (There are some technical issues in comparing these various numbers — gross debt versus net (mainly about Social Security) and overall government debt versus federal, but they don't change the basic picture.)

Again, the debt outlook is bad. But we're not looking at something inconceivable, impossible to deal with; we're looking at debt levels that a number of advanced countries, the US included, have had in the past, and dealt with."

Wow! So record trillion dollar deficits don't matter, Mr. Krugman? There are so many ways to debunk this article, I almost don't know where to start. Let's first look at Krugman's most egregious misrepresentation. In the second paragraph, he states that the $9 trillion in new debt will be only 40% of GDP by 2019. What he fails to note is that we already have $11.7 trillion in national debt today. If we add another $9 trillion, the debt will be $20.7 trillion - or 94% of GDP - by 2019!! Nice try, Mr. Krugman.

Second, it's a lame attempt to compare the economy today with the period just after World War II. We had the most robust economic growth in history just after WWII when we were rebuilding Europe, veterans were buying homes, durable goods, cars, etc. as never before and our manufactured goods faced very little foreign competition. May I remind you, Mr. Krugman, that we are not in that position today!

Third, why should we all just assume that the US economy will average 2.5% annual growth over the next 10 years, despite doubling the national debt, just because it is some historical average? As discussed earlier, we will almost certainly see another recession in the next decade, as foreign buyers of our massive debt may require higher interest rates or dump the US dollar.

Do you honestly believe the US economy will grow by 2.5% annually for the next 10 years when consumer spending is stagnant and Americans are increasing savings at the highest rate in over a decade? We've just been through the worst financial crisis since the Great Depression, and we are very likely looking at several years of below-trend economic growth. On top of that, if we spend the $9 trillion, taxes will have to go up on almost all Americans at some point, which is also bad for the economy.

Like your liberal cronies, you make these assumptions and leave out certain facts to justify your belief that bigger government and higher taxes are the answer to all of our problems. Mr. Krugman, take a look at Social Security, Medicare and Medicaid - and more recently President Bush's prescription drug program. Give me one example of how these government-run programs have been anything but a fiscal disaster. You can't.

Finally, Mr. Krugman (in case you happen to read this), let me say that I enjoy reading your columns and watching you on the TV talk shows. You give me insight and understanding as to the thinking of those on the far left.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Do They Want Control Even If It Ruins The Economy?

As noted earlier, I have thought about this question for many years. Why do the liberals want the government to control most everything in the economy and our lives? While members of Congress have the best healthcare in the world, they will have dozens of family members and friends and countless colleagues that will be subject to the House healthcare bill, if it is passed. So why are they so hell-bent on passing it?

The answer can only come down to two questions. Question #1: Do they really believe that their proposed national heathcare program is the very best we can offer the American people? And if so, why doesn't Congress adopt it for themselves? Or Question #2: Is this really just a massive power grab that puts the government in control of our healthcare and our lives?

President Obama would like us to believe that nothing will change if healthcare reform is passed - that if you like your current insurance plan, you can keep it. But that is patently false and abundantly clear if you read the onerous House healthcare bill, or even just the highlights that are readily available on the Internet. If they ram this down our throats, I firmly believe that the quality of our healthcare will suffer and the costs will far exceed any estimates being put forth by President Obama and the Democrats.

At the end of the day, I have to conclude that nationalizing healthcare (one-sixth of the US economy) is nothing more than a giant power grab by the liberals. In addition, if our government racks up $10+ trillion in cumulative deficits over the next 10 years, as Obama proposes, we are on our way to financial ruin.

Bill Clinton never scared me; he was too much of a political animal to swerve too far from the center. Unfortunately, the same could be said of George W. Bush, who routinely strayed from his supposedly conservative principles. Not so with President Obama. Sadly, many of those who voted for him did not do their homework or they would have known that he is a left-wing ideologue, as I warned in these pages last year.

Sorry to end on such a negative note, but it is what it is.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Federal deficits to bankrupt America
http://washingtontimes.com/news/2009/sep/04/looking-behind-the-curtain/

ObamaCare's Crippling Deficits
http://online.wsj.com/article/SB10001424052970203585004574393110640864526.html

Massachusetts & the ObamaCare Mistake
http://www.realclearpolitics.com/articles/2009/09/05/obamacare_increases_costs_wait_times_98176.html

Obama Cannot Escape Hard Choices in September
http://www.realclearpolitics.com/articles/2009/09/07/obama_cannot_escape_hard_choices_in_september_98192.html

When Does the Spending Charade End?
http://www.ibdeditorial.com/IBDArticles.aspx?id=336955542241664

A Case of Mistaken Identity - The "Other" Gary Halbert

Gary D. Halbert — Tue, 01 Sep 2009 19:59:00 GMT

IN THIS ISSUE:

An Alter-Ego on the Internet
The Late Gary C. Halbert
My Background and Qualifications
Halbert Wealth Management, Inc.
The Forecasts & Trends E-Letter
Conclusions - Don't Forget the "D"

Introduction

Since hundreds of thousands of new subscribers come onboard my Forecasts & Trends E-Letter each year, it is important to advise readers from time to time that there is another Gary Halbert that is prominent on the Internet. His name is Gary C. Halbert. I am Gary D. Halbert. We are not related, and I have never even met Gary C. Halbert.

In fact, Gary C. Halbert is now deceased, but he continues to have a huge presence on the Internet even after his death. If you do a Google search for "Gary Halbert" without my middle initial, you do not find a direct link to me until somewhere around the second page of links. The entire first page of links, including the sponsored links, refer to the deceased Gary C. Halbert, not me - even though he passed away in April of 2007.

Perhaps it wouldn't be so bad if it were just a case of mistaken identity. However, the checkered past of Gary C. Halbert makes many of the subject lines of the search results appear to be very negative, especially to someone like me in the Investment Advisory business. Here's an example of what you might see when you Google "Gary Halbert" without my middle initial:

Gary Halbert has passed away (never good for business);
Gary Halbert Reviews - Is Gary Halbert a Scam?
Gary Halbert - Even though he apparently did something very wrong, he's still one heck of a good writer!
Gary Halbert shut down? He's not who you might think. Read the summary of facts we turned up.

If you happened to have done an online search for my name and came upon these links, let me assure you that they are NOT talking about me, but rather Gary C. Halbert (deceased).

Today, it has become second nature to go on the Internet and Google someone's name after hearing about them or seeing an advertisement. Thus, there's no telling how many people have received my E-Letter and then unsubscribed after doing a quick Internet search for my name and reading one of the horrible links above (or others) about the other Gary Halbert. While I do not want to speak ill of the dead, I do hope you can understand my desire to distance myself from Gary C. Halbert, even though he is no longer with us.

This week, I'm going to help clear up any confusion that my readers may have regarding the two Gary Halberts on the Internet. I'll spend a little time relating what I know of Gary C. Halbert, but most of the time discussing my background so that you will be more comfortable that I'm neither shut down nor dead, nor have I ever been imprisoned for fraud.

Gary C. Halbert

As I noted above, I have never met Gary C. Halbert and have never talked to him on the phone. The closest we came to communicating happened when he wrote me a terse e-mail as a result of a previous e-letter discussing how he and I were not the same person.

I do not know for sure exactly what Gary C. Halbert did, other than what is available on the Internet. While he wrote a newsletter and had a website (which is still operating - why, I don't know), his main claim to fame seemed to be as a marketing/direct-mail consultant. In fact, some of the links generated by Internet search engines are offering his old copywriting materials. Sometimes, you can even find his marketing materials on E-bay.

If that were the entire story, it might not be so bad since being confused with a formerly well-known direct-mail copywriter is not the worst thing in the world. However, Gary C. Halbert evidently had a few skeletons in his closet. According to information on www.gary-halbert.net, Gary C. Halbert spent "…several years in the Boron Federal Prison Camp for fraud in the 1980s." That's certainly not something I'd want my readers to think happened to me.

Then, back in 2003, the Securities & Exchange Commission initiated litigation against Gary C. Halbert and his son, Bond Halbert, for "possible violations of the federal securities laws" related to a stock trading system they had been promoting. According to the SEC press release, Halbert was being investigated for "…possible material false statements concerning a stock trading system made by or on behalf of Gary C. Halbert…"

I'm not sure how this SEC investigation came out in the end, but the important thing to know is that I was not the target of it. I have always tried to keep my 30-year regulatory record clean, which is no small feat when you consider that my various companies are regulated by the SEC, Financial Regulatory Authority (FINRA), Commodities Futures Trading Association (CFTC), National Futures Association (NFA) and even the Texas Department of Insurance.

Thus, you can see how someone doing an Internet search on my first and last name might give up before learning that there are actually two Gary Halberts on the Internet. Given the recent Madoff, Stanford and other investment frauds uncovered by the recent bear market, even a whiff of impropriety is enough to send investors elsewhere. Thus, having someone with the same name apparently being imprisoned for fraud and formerly under SEC investigation has likely sent more than a few of my readers to the unsubscribe link.

Again, I hold no animosity for Gary C. Halbert, and I find it sad that he passed away at the relatively young age of 68. The above discussion is simply a presentation of the facts and they are what they are. The important thing is, when you read any of these Internet postings about Gary C. Halbert, that you realize it's not me, Gary D. Halbert.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

And Now for My Story

Friends, family and co-workers will tell you that self-promotion is not one of my strong suits. In that way, I guess I'm the polar opposite of the other Gary Halbert whose self-promotion has taken on a life of its own on the Internet. Thus, discussing my background in the financial services business does not come natural to me, but at times I feel it's important so that you can feel that you know the person who writes to you each week. So here goes…

After obtaining my MBA in International Management, I began my career with a nationwide commodities brokerage firm in 1976. I specialized as a "hedging" broker and worked with agri-businesses and large farmers who wanted to use the futures markets to hedge the price of physical commodities that they dealt in or produced. In 1982, I moved to another nationwide brokerage firm that catered more to investors who wanted to trade commodities futures on a speculative basis.

It was during this time that I noticed how many brokers and brokerage firms were more interested in generating fees and commissions for themselves than providing good advice to their clients. After hearing an industry big-wig claim that over 90% of individual commodities account holders lost money, I realized that investors needed someone on their side of the table to help them evaluate the many investment opportunities available.

In 1984, I decided to leave the ranks of the big brokerage firms and, along with my wife Debi, founded ProFutures, Inc. While I knew that many investors needed professional help, I also found that the large minimum investments required by many successful money managers were a barrier to entry for most people. So, in 1987, we organized the ProFutures Diversified Fund, a managed futures fund featuring multiple Advisors, deeply discounted fees and commissions and a minimum investment of only $10,000.

In the years that followed, ProFutures expanded its services within its original mission of matching client needs with suitable professional money managers. In addition to other futures funds, ProFutures organized a series of private equity hedge funds and an offshore currency fund.

Halbert Wealth Management, Inc.

In 1994, my clients began asking for help with their more traditional investments, including mutual funds. Realizing that the principles that apply to selecting traditional money managers are similar to those required when selecting a commodities trader, we formed ProFutures Capital Management, Inc., later to become Halbert Wealth Management, Inc. (HWM). HWM's flagship service is ADVISORLINK®, an innovative program offering HWM's clients access to active management strategies from third-party money managers with the goal of participating in market gains with an eye on limiting investment losses.

Over the years, we have developed other programs to meet investors' needs, but they all have the common denominator of using professionals to manage money in an effort to produce better results than you can get on your own. While the initial selection of programs to be recommended to our clients is important, I think one of the greatest values we provide is the ongoing monitoring of our money managers.

As I have noted many times, I invest in every program we recommend alongside my clients. Not only does this mean that my money is at risk along with yours, but also that my accounts are available to us for monitoring purposes. Each day, my staff reviews the performance and trading of each investment program we recommend and sends a summary around to everyone in our office. This way, we not only know where each program is in terms of performance, but we are also able to spot any deviations from expected trading patterns.

If we see something unusual, we can determine if a mistake was made or if a money manager has significantly modified their trading model. Either way, we're on the phone or sending an e-mail immediately to determine what's going on. Several of our money managers have commented over the years about how quickly my staff can spot a small trading deviation and be on the phone asking for an explanation.

While it's something we don't like to think about, there are also times that it becomes necessary to fire a money manager. It's just a fact of life that sometimes a money manager ceases to perform according to expectations and has to be replaced. However, in all of my experience, I have never had a money manager tell me that I needed to fire him or her, and I'll bet you've never had it happen to you, either. Money managers always have a new "fix" to try or other excuse, but the sad truth is that sometimes they need to be fired.

Since my company sits on your side of the table, we are concerned about doing what's in your best interest, not ours or the best interests of a money manager. Thus, we become your advocate when it comes time to let a money manager go and search for new strategies for your investment dollars. Equally important, we constantly search the universe of US money managers to find new talent to recommend to our clients. We attend conferences where money managers gather, and we have several databases that track professional money managers.

The Forecasts & Trends Weekly E-Letter

Since most of you know me through my Forecasts & Trends weekly e-letter, it might be a good idea to revisit how this Internet publication came to be. I have been writing my paper F&Ts for over 30 years. In the weeks just after the September 11, 2001 terrorist disaster, I started writing more frequent updates in the form of expanded e-mails. Eventually, the Forecasts & Trends E-Letter became a weekly publication.

In 2002, I was approached by the owner and president of InvestorsInsights.com, an Internet- based investment publishing company with over 1 million potential readers all across the nation. They asked permission to re-publish my weekly Forecasts & Trends E-Letters, and as you might expect, I immediately accepted.

Generally speaking, I write about the economy, the markets, investments, financial matters, what's happening in the world, geopolitics, etc. But I also write about political issues from time to time because they can and do often affect the economy, the markets and even our investments. If you have read me for long, you know that I am a political conservative on most issues, and my views often don't sit well with our more liberal readers; nonetheless, I tell it like I see it.

Fixing the "Gary Halbert" Problem

Call me naïve, but I thought that the untimely death of Gary C. Halbert might actually result in lower Internet visibility on his part, but such has not been the case. Aside from the many links to notices about the other Gary Halbert's death, there are now a flood of websites offering his direct-marketing and copywriting materials for sale. As I noted above, you can sometimes even find them on the E-bay online auction website.

The result is that Gary C. Halbert is at least as visible on the Internet after his death as he was before, and possibly more so. Perhaps this is a testament to the quality of his marketing and copywriting materials. Otherwise, he would have evaporated into oblivion following his death. However, because many of the links have very negative subject lines, I am now going on the offense to try to even the odds of my name appearing at the top of the search engine lists.

We are in the process of spending a considerable amount of time and money in an effort to place sponsored ads that will at least tell the story of there being two Gary Halberts on the Internet. Hopefully, this will help to avoid any confusion on the part of investors and potential E-Letter subscribers.

Writing To Strangers, Sort Of

Some of you may be wondering why having a namesake on the Internet is such a big deal, especially since he is deceased. The reason is that, especially in today's post-Madoff investment environment, reputation is everything. It's very frustrating to spend over 30 years building a business known for honesty and integrity, only to be confused with another Gary Halbert whose reputation on the Internet is questionable, to say the least.

I have over a thousand investment clients who live all across America. I have never met most of them. Most have come to me by way of third-party referrals, as noted above. I also don't know very many of you who are among InvestorsInsight's 1+ million E-Letter recipients. It's an interesting challenge to write to over a million people you don't know, but it's vitally important that I be able to earn my readers' trust.

I have a lot of questions I wish I knew the answers to. Like, most of all, I wish I could know exactly what most of you are looking for in terms of information and advice. We assume that we have readers from all financial strata - from the very wealthy to middle class folks, from those who are very sophisticated investors to those who are just starting out, from those who are retired to those who are just starting to save for their retirement, etc., etc.

My goal is to provide a variety of topics, most of which are at least somewhat investment related, that will hopefully be helpful to a majority of this broad cross-section of readers, but also knowing that not everything I write will be useful to all of you week in and week out.

We Are Avid Readers

My editorial staff and I are avid readers. We have to be. We subscribe to dozens of financial periodicals (including some very expensive ones) and investment-related magazines and newsletters. In addition, we are voracious surfers of the Internet.

Each morning, for example, one person on my editorial staff spends over an hour cruising our list of Internet sites, looking for interesting news and information that may not have been covered (or was mis-reported) by the mainstream media. By mid-morning each day, he sends me an e-mail with a list of links to the stories he thinks I will want to read. Some of those stories end-up in my SPECIAL ARTICLES section below.

On Monday of each week, or even earlier, we sit down and think about all the topics and reports we've read and decide what will be the focus of the weekly E-Letter. Some weeks, there's just so much to write about, I don't know where to start. On other weeks, the topic seems obvious. And then on some weeks, I'm still scratching my head on Monday.

The Common Thread - Spotting Mis-Information

There is a ton of mis-information out there. If you have been reading me very long, you know that I believe the mainstream media is very slanted. For years now, I have directed you to a great website for tracking the bias in the mainstream media - the Media Research Center CyberAlert at www.mediaresearch.org. If you haven't done so, check it out.

I also believe that many in the financial media are also very slanted, in one way or the other. Some analysts and publications spin the news and reports so as to only reflect their views on the markets and investing. This includes the "perma bulls" on Wall Street.

And then there is the "gloom-and-doom" crowd for which the sky is always falling. I call them "perma-bears" since they always expect the worst. They missed the greatest bull market in stocks in history during the 1980s and ‘90s. For them, the next depression is always right around the corner.

The common thread in my writing is that I try to bring you the real story, whatever that may be, whether it's about the economy, the investment markets, world events or politics. This is not to suggest that I am right all the time. I'm not. What I do is read a variety of respected publications and writers, in addition to the mainstream media, and I try to maintain a flexible attitude. I try to give you my very best thinking every week. And I don't mind admitting when I'm wrong.

Along this same line, I very much appreciate your comments and suggestions for topics that I can write about. Remember, this E-Letter is for you, and I will try to address your comments and suggestions - if you send them to me.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions - Don't Forget the "D"

To recap, if you do an Internet search for "Gary Halbert," you will see a LOT of links about the "other" Gary C. Halbert, and nothing about me, Gary D. Halbert until you get a couple of pages deep in most search engines. Just keep that in mind.

However, if you search for "Gary D. Halbert" on Google, you will find me at the top followed by pages and pages of links to things I have written in the past. Thus, it is always important that you add the "D" to your search, if you are looking for a past article that I have written.

As should be obvious, I do not endorse or recommend any of the products or services offered by those who continue to promote the late Gary C. Halbert. I could not in any event because I don't know what those products or services are.

I could not even begin to speculate how many prospective clients we have lost over the last 10 to 15 years of the Internet explosion because of the confusion that Gary C. Halbert has generated with me. Obviously, there is no way to know, and unfortunately that is water under the bridge.

We have known about this problem for over a decade. But as noted above, we plan to take some bold new steps to get my name above his on most Internet search engines. Time (and money) will determine how successful our upcoming efforts will be. I will keep you posted.

Finally, I would like to ask a favor of you. For many years, the majority of new clients that come to us do so because one of our existing clients referred them to us. I am extremely grateful for that! So, if you should tell someone that they might want to check out our services, please emphasize that they use "Gary D. Halbert" should they do a search on the Internet.

Next week, we return to economic, financial, market and investment topics as the summer is winding down, kids are off to school, and we return our focus to how to make some money in this very challenging market environment.

And be sure to send me your comments and suggestions for making this weekly E-Letter better for you. What you like; what you don't like; and ideas for making it better. Thanks in advance!

I hope you had a great 2009 summer - I sure did, despite the Texas drought.

Very best regards,

Gary D. Halbert

P.S. - Last week, I mentioned that we had come across an important resource for end-of-life planning entitled "All They'll Need to Know." This booklet helps you think through a multitude of issues that arise after an untimely death, but are often overlooked by other estate planning materials.

In my E-letter, I offered readers a discount on the price of the electronic version of this booklet, or a free paper copy of the booklet as long as our existing supply held out. After receiving an overwhelming response, our existing supply of booklets is now depleted and we are unable to honor any more requests for a free booklet.

You can, however, still obtain a copy of the "All They'll Need to Know" booklet directly from Emerson Publications. To help defray the cost, I have negotiated a discounted price on both the printed and electronic versions of the booklet which you can access by clicking on the Emerson Publications website link below. This discount is available for a limited time only, so I suggest that you take advantage of this offer as soon as possible. Just click on the following link to access the Emerson Publications website:

http://emersonpublications.com/index.php?pr=ATNTK-Halbert&nosessionkill=1

This booklet is an important resource for loved ones in case of an untimely death, so I urge you to order either a printed or electronic version while the special discounted price is still available.

GDH

SPECIAL ARTICLES:

Witch Hunt at the CIA Hurts America
http://www.nypost.com/seven/09012009/postopinion/opedcolumnists/punishing_patriots_187490.htm

The Obama Slide
http://www.nytimes.com/2009/09/01/opinion/01brooks.html?_r=2&ref=opinion

Democrats' Strange Bedfellows on Health Care Reform
http://www.forbes.com/2009/08/31/health-care-reform-lobbying-biologics-opinions-contributors-phrma.html

"Death Panels" Aside, End-of-Life Planning Is Important

Gary D. Halbert — Tue, 25 Aug 2009 20:47:00 GMT

IN THIS ISSUE:

The "Death Panel" Controversy
Untimely Death -- An Unpopular Subject
Most Survivors Are Unprepared
Getting Your Affairs in Order
Leaving a Written Record
Special Offer for My Readers
Conclusions -- Be Prepared
Personal: Central/South Texas in Record Drought

Introduction

You'd have to be living on a desert island lately to not be aware of the "Death Panel" controversy surrounding the health care reform bill. Former Alaska Governor, Sarah Palin, first made the news with the assertion that a panel of bureaucrats would have the power to make life and death decisions regarding the rationing of the limited supply of health care. Thus, the theory goes, anyone not deemed "worthy" of treatment could be denied expensive drugs or medical treatments.

As discussions about Death Panels spread like wildfire, liberals and their mainstream media lapdogs howled at this accusation. Palin, usually a favorite target of the loony left and liberal media, initiated such a national furor that the provisions discussing Medicare reimbursement for end-of-life counseling have been dropped, or so we are told.

So far, I have refrained from commenting too much on the ever-changing health care reform proposals, although it has been so tempting since there is so much information and mis-information about the various proposals already in the news and on the Internet. Suffice it to say that you simply can't add the care of 46 million uninsured individuals to the existing number of health care providers and not create shortages (rationing) at some point.

This week, however, I would like to point out that the Death Panel discussion may be having an ancillary positive effect, no matter which side of the health care debate you land on. I have seen numerous articles and Internet blog discussions about how Palin's (and many others') remarks have increased interest about the importance of end-of-life planning, which is a positive benefit from my point of view.

I will also revisit several important end-of-life financial planning issues that I have covered in the past that everyone should consider, just in case the unthinkable happens. I will also tell you how you can obtain a very helpful resource entitled, "All They'll Need To Know" that will help you prepare for the time when you will no longer be around to make your wishes known.

Untimely Death -- An Unpopular Subject

Much of the recent end-of-life attention has centered on the need for a "living will," which the MedicineNet.Com website defines as "… one form of advance medical directive…pertaining to treatment preferences and the designation of a surrogate decision-maker in the event that a person should become unable to make medical decisions on their own behalf." Both I and members of my staff have had to deal with end-of-life issues with terminally ill parents, so we know the value of this service first-hand.

However, you shouldn't stop there. Living wills are only the tip of the iceberg when it comes to planning for survivors. There are many financial, legal and family issues that should be addressed prior to death or becoming incapacitated to help take some of the pressure off of a surviving spouse or other loved ones.

No one likes to talk about death, and many people put off planning for this contingency for that reason. Most young people think that death is a long way away, so they do nothing in the way of planning. Yet people of all ages are killed every day in accidents. The survivors of premature deaths are usually the hardest hit, because the death comes as much more of a surprise. That's why it's very important to plan for the possibility of an untimely death, even if you are young and healthy.

Also note that in this E-Letter, I will refer to the "financial partner" as the person who primarily handles the family finances, and the "non-financial partner" as the one who is usually not aware of all of the financial details.

Unprepared Survivors

In the financial services business, we have more than our fair share of widows and widowers who come to us without a clue as to what kinds of investments they and their late spouse owned, how much was invested, or how and where the assets are held. They are not alone. I have read in the past that over 90% of survivors are not fully prepared for an untimely death.

This isn't surprising given how many families handle their financial affairs. In many cases, one spouse is in charge of the checkbook, investments and most importantly, filing of important papers. The other spouse is often minimally involved, signing on the dotted line when necessary and generally knowing where important records are, but not familiar with the details.

Unfortunately, the non-financial partner is sometimes that way by choice. I have talked to many couples where the husband or wife will say that the finances are the other partner's responsibility, and they don't care to know anything about them. In other cases, the financial partner intentionally keeps the other partner in the dark. This is especially prevalent with single individuals, who are often reluctant to share their financial information with someone else, even a family member.

Add to this lack of knowledge the shock and grief that accompanies an untimely death and you have a recipe for a financial disaster. And then it gets worse: Widows and widowers are often preyed upon by unscrupulous scam artists who offer help in time of need, but end up taking advantage of bereaved survivors whose judgment may be clouded by sorrow.

Yet, most of these problems are almost totally preventable. Just by taking a little time to document the financial details that pertain to your family can save hours of searching, not to mention the emotional strain coming from being thrust into the financial role without any preparation.

Gather and Organize Your Information

My first bit of advice may sound too simplistic, but it is to gather your financial information into one place: a file cabinet, bank safe deposit box or other suitable storage medium. It is amazing to me how many different places financial information is kept in many families. Some have part of their information at their office, other parts at home, some in a file cabinet, some in a dresser drawer, some in all of the above, etc., etc. There are times when survivors find important documents only by accident, and sometimes many years after death.

There's no wonder why many survivors have a hard time figuring out what their financial situation is, because they are having a hard time finding all of the information, much less sorting it out. An article I recently read (http://www.unclaimedassets.com) estimated that more than 25% of life insurance benefits are not paid because beneficiaries didn't know a policy existed. How sad!

When deciding where to store your important financial information, be careful about using bank safe deposit boxes. In some cases, banks will freeze access to safe deposit boxes upon notification of the death of the holder. This can be true even if the box is jointly owned with right of survivorship. Therefore, access to any important paperwork kept in the safe deposit box could be significantly delayed. If it is necessary to keep original documents in a safe deposit box, you should make copies of them to access if death occurs when banks are closed or access to the box is restricted.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Getting Your Affairs in Order

Once you have gathered all of your financial materials together in one place, it's time to review them and get them in order. By getting them in order, I don't mean alphabetizing them or putting them in nice neat file folders. What I mean is that you should review your overall financial situation and make sure that it reflects your current and long-term plans. Specifically, I would recommend that you do the following:

1. Update your will. If you don't have a will, get one ASAP. It is also very important to update your will periodically. Estate laws change periodically and differ from state to state. I recommend that you consult a competent attorney who specializes in estate planning for this, even if your estate is not expected to be large enough to trigger an estate tax.

I do not recommend using do-it-yourself resources to do your will because they can never tailor a document to fit all of the intricacies of most families, and this is especially true when it comes to blended families. Plus, since estate planning law changes frequently, websites and books will not always notify you when your document needs to be revised, but a good attorney will.

2. Make sure all of your assets are titled correctly. The way assets are titled has an effect on how they transfer upon your death. For example, a bank account held by two people as "joint tenants" transfers differently than if it were jointly owned with "right of survivorship." However, consult with your attorney regarding titling issues as there are some risks involved when naming other owners to your accounts.

In addition, it is important to keep your information current and updated. For example, if you have recently married, you may want to add your spouse to the account, unless it is intended to be separate property in community property states. Or, you may have remarried and want to remove an ex-spouse from the title of an asset.

If you have established trusts as part of an estate plan, it will be important to make sure that any assets that are part of these trusts are also titled correctly. Trusts are a key element of estate plans, and you will need a good attorney to help you with this.

3. Make sure contractual beneficiary designations are current. Life insurance, annuities, retirement plans and IRAs can all be transferred contractually by naming a beneficiary. This means that the proceeds are transferred outside of the will and need not go through probate. However, this makes it even more important to keep these beneficiary designations updated.

If you have recently married, or if one or both parents are deceased, you will need to replace parents or other family members as beneficiaries of your insurance policies. Just as important, if you have divorced, you may want to remove your ex-spouse as beneficiary, unless your divorce decree requires otherwise. It is not uncommon for insurance proceeds to be paid to an ex-spouse just because a person never got around to changing the policy beneficiary.

Under most retirement plans, the current spouse is required to be the beneficiary of death benefits, but this is not always the case for IRAs. Therefore, you will also want to make sure your IRA beneficiary is current. It is also important to name contingent beneficiaries should the primary beneficiary predecease you.

4. Make sure you have a "financial power of attorney." A financial power of attorney simply empowers a trusted individual to manage your financial affairs should you become incapacitated. It takes effect at such time that you can no longer handle your own business affairs, and ceases upon your recovery or death.

In addition to the financial power of attorney, it is important to note any automatic payments you may have set up to be withdrawn from your checking account. If deposits are no longer made into the account, these automatic withdrawals could bounce, possibly affecting utilities, insurance coverage, debt payments, etc.

If you pay your bills via the Internet, then it is also important to make that known, as well as the user ID and password for your financial power of attorney designee or survivor to use to access your banking information and pay bills as they become due.

5. Make your wishes known. This piece of advice is obviously not limited to financial issues, but it is vitally important to make your wishes known when transferring financial holdings or any other asset with significant value upon death. While I have noted above how many financial instruments can have joint ownership with right of survivorship, or carry the ability to name a beneficiary, there are other items of value that may not be able to be transferred as easily, such as family heirlooms, antiques, valuable collections, personal items, etc.

In those cases, it is imperative that you state your wishes clearly in either a will or living trust. I think this is especially true today when there are so many "blended families" made up of children united by remarriage of the parents. What may be a family heirloom to one child could be a valuable commodity at the local pawnshop to another. It happens.

Another very important item to consider in this process is the disposition of financial assets. Whether those financial assets are stocks, bonds, investment or security accounts, or real estate, it is important for the financial partner to leave instructions as to how they should be handled upon death.

We often get calls from widows who are now trying to sort through the family investments and determine what they should do with them. Sometimes these callers are in a near-panic trying to make decisions about assets they know little or nothing about. Had the financial partner left clear written instructions, this confusion could be avoided. Thus, it is critically important for the financial partner to consider the level of sophistication of the non-financial partner, and leave written instructions for the disposition of assets accordingly.

Along this line, I am sad to report that survivors are often targeted by brokers and insurance salesmen and even bankers who offer financial help, but are really out to liquidate all assets and put them into products that will generate commissions or fees for them. From my experience, it is rare that every single investment should be liquidated upon the death of one partner, yet we often hear from survivors who have been given this very advice.

Therefore, an important part of getting your affairs in order should include the knowledge that your survivors will likely be targeted by the financial services industry and others, so you should leave very specific instructions as to how each asset should be handled.

6. Note all important contacts. There are some who successfully go through all of the prior steps in getting their affairs in order, only to fail to make a list of important contacts for their surviving partner. This list should contain the names, addresses and phone numbers of all important contacts. From a financial perspective, these should include your bankers, brokers, insurance agent, attorney, accountant, and financial and investment advisors. You should also include user names and passwords for websites where you have made any financial or investment transactions or have accounts.

This list is important because while the surviving spouse may be able to find all of the insurance policies and account statements, he or she may be totally lost as to how to proceed from there. Having a complete list of contact information will be very comforting during this time of great emotional stress for the survivors.

Write It All Down

Once you have all of your affairs in order and organized where they can be found, it is important that you document all of this in a concise manner. This documentation will serve as a guidepost for your survivors to let them know what assets you have, where they are located and how they should be treated. It is not enough to just tell the other partner about these issues and hope they remember. As the old saying goes, "a short pencil is better than a long memory."

There are various methods of documenting everything your survivors will need to know. The simplest is a letter to the surviving partner detailing where all of the important papers are and how they should be handled. However, it is sometimes hard to think of everything to put into the letter, and a letter that does cover everything may be so long that it's overwhelming.

Others keep a summary file folder along with their other important papers that contains copies of statements for assets, special instructions, important contacts, etc. The summary file approach is usually easier to update than rewriting an entire letter to address changes.

I don't recommend either of these approaches. I have always recommended a more detailed method of keeping track of your assets and leaving detailed instructions for your loved ones when you are gone. There are various products on the market for doing so. However . . .

Back in 2005 I ran across one of the most useful and thoughtful financial tools I have ever seen to help organize all of the important items necessary to pass on to loved ones in case of an untimely death. It's a booklet entitled ALL THEY'LL NEED TO KNOW from Emerson Publications. I was so impressed with this planning tool that I negotiated the right to reprint them and offered them to my clients and E-Letter subscribers.

To put it mildly, the response was HUGE! We mailed out thousands of booklets to clients and readers, many of whom had their own stories to tell about how a previous death showed them the need for such a resource.

All They'll Need To Know provides checklists that cover virtually every piece of information you would need to pass on to surviving loved ones. This format is superior to a letter, in that it allows you to simply enter information into a template. You can even provide information on who you want to receive your special personal possessions, and even details about the funeral service you would like to have. Believe it or not, these small things are sometimes some of the most stressful decisions that survivors must make.

We still have a very limited supply of these printed booklets available, free of charge, on a first-come, first-served basis. Just complete our online request form to get your own copy while they last.

As a practical matter, the printed booklet has limitations in that personal preferences and financial information change over time, especially for younger individuals. Thus, mark-outs and erasures are common, which can also lead to confusion. Plus, in our electronic age, much of our personal information is now kept on our computers. Fortunately, Emerson Publications also has a Microsoft Word version available that is much easier to update.

I have managed to negotiate with Emerson Publications on the electronic version of the All They'll Need To Know booklet so that my clients and readers can purchase it at a discounted price of only $16.99. I am delighted to be able to share this with you, as this is something we all need and can make use of.

To obtain your discount on the electronic version of All They'll Need To Know, click on the following special Emerson Publications link. This web page has been specially designed for my clients and readers so the discount is automatically incorporated. Note that neither I nor my firm receives any part of the purchase price of this software, nor are we compensated in any other way. Here's the link:

http://emersonpublications.com/index.php?pr=ATNTK-Halbert&nosessionkill=1

Or, if you prefer, you can request one of our remaining printed copies of the booklet by either giving us a call at 800-348-3601 or by completing one of our online request forms. There is absolutely no charge for the printed version, but the supply is limited. When they're gone, they're gone and we will not be reprinting them.

Once you receive your booklet in the mail or via download, I encourage you to complete it soon, and then let your spouse or other loved one know where it will be kept. Since the booklet will contain some of your most sensitive information, you should select a keeping place that is safe and secure. Plus, be sure to completely erase the electronic version from old computers before you sell, trade or discard them.

It is also important that you review the information in your All They'll Need To Know booklet at least annually to make sure all information is current. Outdated records can be just as confusing as no records at all.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

As I stated at the beginning of this article, I wanted to keep my comments non-political and generally focused on basic end-of-life financial matters. There are many other estate planning and family considerations to be made in addition to the above items, including deciding guardianship of minor children, setting up and maintaining trusts, establishing a succession plan for sole proprietors, funeral expenses, etc. However, all of these are far beyond the scope of this short E-Letter, and most require the services of a qualified attorney and CPA.

Suffice it to say that there are many financial, legal, and family issues to be considered upon a person's death. These issues can either be dealt with prior to death through careful planning with qualified professionals, or left to bereaved survivors who will have to face these issues during a period of great stress and turmoil.

If you are reading this E-Letter, it is likely that you are the financial partner in your family. If so, I suggest you carefully consider the suggestions I have given and take steps to inform and protect your loved ones upon your death. I also encourage you to order the All They'll Need To Know booklet and complete it with the help of your non-financial partner. This will help him or her see the importance of becoming involved in the family finances.

While the subject matter of this week's E-Letter may be less than cheerful, it is nonetheless important, especially in terms of long-term financial and estate planning. We all know that none of us are guaranteed to see tomorrow, so pre-death planning is an important consideration for anyone who wants to make it easier for their surviving loved ones.

That's all on that subject for now. I hope this helps.

Personal: Central/South Texas in Record Drought

As you may have heard, the central and southern parts of Texas, where my family and I live, are in the grips of the worst drought on record. During 2009, we have received only a fraction of the rainfall we normally receive, and this comes on the heels of a greatly reduced year in 2008. You can see from the following link that the drought is "exceptional" (ie -- worst ever) in this part of Texas, with no end in sight: http://www.ndmc.unl.edu/DM/MONITOR.HTML

Long-time clients and readers will recall that we live outside Austin on Lake Travis, arguably the most pristine, picturesque and clearest lake in this part of the country. It is 65 miles long with depths up to 200 feet, and 120 feet at the deepest point where we live. The lake provides water supplies for Austin and other surrounding areas. The lake is now down 50 feet from normal and is dropping at the rate of more than two feet per week. It is a real hike over rocks to get to our boat dock, which we move further out as the water level drops.

Adding to the drought, we have had a record heat wave this summer. As of today, we have had over 60 days of 100+ degree heat this summer. Everyone in this region of Texas is under mandatory water rationing which is on-track to get even worse, as there is no meaningful rain in the forecast. I am struggling to keep our grass and landscape alive on our five acre property. The good news is, some weather forecasters believe that "La Niña" could bring some major drought relief to Texas sometime this fall, and at least the days are getting shorter.

Other than the drought, things are all well and good with the Halbert family. The kids are back in school now; my son is a sophomore engineering major in college and earned an academic scholarship at the end of his freshman year; my daughter is a Senior in high school this year and was awarded "student of the year" honors last year by the school faculty and administration.

As always, I am most grateful for my loving family, my many loyal clients and to all of you who faithfully read these weekly E-Letters. Your comments and suggestions are always appreciated.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Brookings "Experts" Admit Stimulus a Bust:
http://www.aim.org/briefing/brookings-experts-admit-stimulus-a-bust

Buy-and-hold strategy losing grip on investors
http://www.latimes.com/business/la-fi-trading25-2009aug25,0,2266089.story

Why Obama Appointed Bernanke to a New Fed Term
http://www.time.com/time/politics/article/0,8599,1918422,00.html

Is The Recession Over? Don't Bet On It

Gary D. Halbert — Tue, 18 Aug 2009 22:12:00 GMT

IN THIS ISSUE:

Economic Signs of Improvement
Fed Vows to Keep Rates Low
Market Comments from John P. Hussman, Ph.D.
Conclusions

Introduction

We have seen some encouraging economic news in recent weeks, and President Obama and his cronies in the mainstream media have declared that the worst recession in post-war history is all but over. The advance estimate of 2Q GDP was down considerably less than expected (-1.0%); the unemployment rate actually fell slightly in July to 9.4%; and the ISM manufacturing index posted a nice improvement last month.

While these reports were better than expected, and continue to suggest that the worst of the recession is behind us (as I have suggested often in recent weeks), this economy is far from out of the woods yet. Growth prospects continue to look muted, although a growing number of forecasters are suggesting that GDP will register a positive number in the 3Q due largely to the rebuilding of inventories, as I discussed in my August 4 E-Letter.

This week, we will look at the latest economic reports, as well as the Federal Reserve's latest decision on interest rates and purchases of Treasury securities. Also, the Fed says it will end its record large purchases of government agency debt in October. If indeed this happens, it will be the first step in ending the Fed's massive stimulus spending.

Next, so that we don't all get caught up in the latest hype that the recession is over, I will reprint excerpts from a recent Weekly Market Comment written by John P. Hussman, Ph.D. Dr. Hussman is best known as the president of Hussman Investment Trust, and he manages the Hussman Strategic Growth and Hussman Strategic Total Return Funds, which are actively managed and can go to cash in bear markets.

Dr. Hussman's latest analysis is consistent with the view many of us have that the recession, while improving in some areas, is not over yet, and that the ensuing economic recovery over the next year or longer will be disappointing -- even if there is a bump up in the 3Q. All of this should make for interesting reading, so let's get started.

Economic Signs of Improvement

Over the last several weeks, we've seen some encouraging economic reports. In some cases, "encouraging" simply means that the reports weren't as negative as expected. That was certainly the case with the advance 2Q GDP estimate at the end of June, which showed a decline of only 1% (annual rate) versus pre-report estimates which were considerably worse. Some analysts expect that number to be revised downward somewhat when the second estimate is released later this month.

On the manufacturing front, the ISM Index rose more than expected in July to 48.9, up from 44.8 a month earlier. Industrial production rose 0.5% in July, and construction spending and the factory operating rate both rose modestly last month as well. These are all signs that the recession may be leveling out.

On Thursday of this week, we get the latest Index of Leading Economic Indicators (LEI) for July, and the pre-report consensus is for a rise of 0.6%, following +0.7% in June. If the LEI is up for July, that will mean the fourth consecutive monthly increase. That would be very encouraging and a sign that we will likely be out of this recession by the end of the year.

The US unemployment rate unexpectedly dropped from 9.5% in June to 9.4% in July, as employers slashed 247,000 jobs, the slowest rate of decline in nearly a year. This news temporarily sent stocks to their highest level of the year since the pre-report consensus was for a rise to 9.6%

However, the July decline in the jobless rate came about not because more people had jobs, but because almost 800,000 "discouraged workers" - people who have essentially given up on looking for a job - were not counted as unemployed, thereby allowing the official unemployment rate to fall modestly in the latest jobs report. The number of long-term unemployed people - those who have been out of a job but looking for more than 26 weeks - rose by another 584,000. Thus, it appears we are still headed for 10% employment before this cycle reverses.

Despite the still troubled employment situation, investors welcomed the reports above, and more and more forecasters have apparently decided that the recession is over. I continue to believe that we are still at least a few months from concluding that the recession has ended. The Consumer Confidence Index fell for the second month in a row in July, and retails sales were down slightly last month. Therefore, it is premature to declare that the recession is over.

Fed Vows to Keep Rates Low

To no one's surprise, the Federal Open Market Committee (FOMC) announced last Wednesday that it will continue its policy of keeping interest rates at their historically low levels. The FOMC also maintained its position that interest rates could remain historically low for an "extended period of time." In other words, the floodgates of liquidity are still wide open.

About the only new revelation was that the Fed announced that it will stop buying long-term Treasuries in October of this year. This could be the ultimate case of good news/bad news, in that it's good that the Fed may no longer be printing money to buy Treasuries, but bad in that these securities will soon have to compete in the open market, and this could lead to higher interest rates. Remember that this is why the Fed committed to start buying Treasuries in the first place.

However, the Fed's printing press will not be idle as it said it will continue to purchase up to $1.25 trillion in agency mortgage-backed securities and other agency debt from Fannie Mae and Freddie Mac. The Fed's hope here is to keep a lid on mortgage rates in an effort to stimulate the housing market.

From an economic standpoint, the latest FOMC statement notes that US economic activity is "leveling out," meaning that the rate of descent has slowed. However, this simply means that the recession may not get deeper. The Fed's prospects for recovery, however, were modest, at best. The Fed expects economic activity to remain weak "for a time" (whatever that means) and a return to sustainable economic growth is likely to be gradual.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Market Comments from John P. Hussman, Ph.D.

Dr. John Hussmanis best known as the president of Hussman Investment Trust (a mutual fund family), and he manages the Hussman Strategic Growth and Hussman Strategic Total Return Funds. Dr. Hussman is also the chairman, president and controlling shareholder of Hussman Econometrics Advisors, Inc. which has published his Weekly Market Comment letters for years, and they always have some interesting points about the economy, the markets, etc.

As a mutual fund manager, Dr. Hussman is somewhat unique in that he not only actively seeks the best opportunities in the stock market, but will also move to neutral positions in his funds during market downturns. In other words, the investment strategies he employs are similar to those used by the active money managers my firm recommends.

The following excerpts are from Dr. Hussman's August 10, 2009 Weekly Market Comment. [Note that we have removed discussions about specific funds where possible.] Pay particular attention to Dr. Hussman's outlook for the economy.

QUOTE:

The U.S. economy lost a quarter of a million jobs in July. Meanwhile, over 400,000 workers abandoned the labor force (and are therefore no longer counted among the unemployed), which prompted a slight decline in the unemployment rate despite the job losses. In the context of an economy still strained by high levels of consumer debt and still record delinquency and foreclosure rates, labor market conditions are still troublesome. Still, the pace of job losses and new unemployment claims has clearly softened from the pace we observed early in the year.

If we knew that this was a standard economic downturn, we might conclude that the recent improvements are durable. However, nothing convinces us that this is a standard economic downturn. As for market action, the major indices have generally been strong, as has breadth (as measured by advances versus declines), but the "investor sponsorship" evident from trading volume has been uncharacteristically dismal compared with initial advances of past bull markets. So here too, we have very strong concerns that the recent advance may not be as durable as investors appear to believe.

All of that said, we aren't inclined to fight even what we view as errant analysis, and the Strategic Growth Fund has about 1% of assets allocated to near-the-money index call options -- about enough to gradually close down about 40% of our hedge in the event that the market advances markedly higher from here, but without putting us at risk of much loss in the event of failure. With investors now anticipating and pricing in a sustained economic recovery, as well as a spectacular earnings rebound, a lot of things will have to go right from here in order to sustain higher prices than we currently observe.

Frankly, our call option allocation here is something of a paean to a notion -- a sustained economic recovery and new bull market -- that I have no belief in whatsoever. But at this point, the broad strength in the major indices, even lacking volume sponsorship or favorable valuation, requires that we allow for the possibility of additional investor speculation. Even if we do observe such an outcome, it's difficult to envision that the S&P 500 will clear the 1000 level for all time, without revisiting it again in the months (not to mention years) ahead. To the extent that we don't clear 1000 permanently, establishing investment exposure here with anything but call options amounts to a game of trying to "ride" the market higher and to get out before it returns to or below current levels. With the market strenuously overbought already, that game strikes me as exquisitely difficult to get right. Hence the use of a modest allocation to call options only, without closing our downside hedges.

Call me skeptical. But if you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP. That sort of tab will undoubtedly buy some amount of Cool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up.

Moreover, it might be enticing to look at a chart of the S&P 500 and envision a quick return to 2007 highs and beyond, but it is important to recognize that those highs were based on profit margins about 50% above historical norms, combined with an elevated P/E multiple of about 19 against those earnings. Even if the economy is poised for a sustained recovery here, the belief that those joint outliers will be quickly re-established goes against historical precedent.

In any event, we've got some call option coverage to gradually allow participation if this run continues.

Post-Crash Dynamics

When markets crashes are coupled with changes in the fundamentals that supported the preceding bubble -- as we observed in the post-1929 market, the gold market of the 1980's, and the post-1990 Japanese market, and currently observe in the deflation of the recent debt bubble -- they typically do not recover quickly. Indeed, the hallmark of these post-crash markets is the very extended sideways adjustment that they experience, generally for many years.

The chart below updates the position of the S&P 500 (red line) in the context of other post-crash bubbles. The horizontal axis is measured in months. Note that very strong and extended interim advances have been part and parcel of similar experiences.

The intent here is not to argue that the U.S. stock market must by necessity follow the same extended adjustment that followed prior burst bubbles. Rather, the intent is to underscore that it is dangerous to infer that structural difficulties have vanished simply because a market enjoys a strong post-crash advance.

My friend James Montier at SocGen draws a similar pattern from a larger historical collection of post-crash bubbles - including the above instances, as well as others such as the South Sea Bubble and the Railroad Bubble of the 1840's. The underlying theme is that the adjustment period following the bursting of a bubble tends to be very extended.

I understand the eagerness of investors to put the entire credit crisis behind them and look ahead to a recovery of the prior highs, but these hopes are based on the assumption that a positive boost to GDP, once achieved, will propagate into a full-fledged recovery. Again, however, no economic improvement is evident in the behavior of consumer demand and capital spending, once you adjust for the impact of government spending (particularly transfer payments).

Yes, we have observed a massive reallocation of global resources from savers (who have bought newly issued Treasury debt) toward mismanaged financial institutions that made bad loans. Yes, there are certainly favorable short-run economic numbers that can be achieved by running a year-to-date federal deficit equal to seven percent of the U.S. economy. The problem is that this money does not come from nowhere. We have effectively sold an identical ownership claim on our future production to those individuals and foreign governments who bought the Treasuries. Government "stimulus" is not free money. The continued attempt to bail out bad loans with good resources (largely foreign savings) will end up costing our nation some of our most productive assets, which will be acquired by foreign countries and investors for years to come.

From my perspective, investors have gotten entirely too far ahead of themselves with the assumption of a sustained recovery. Nevertheless, we again have about 1% of assets in index call options to allow for further market strength if it emerges. I expect that if they move "in the money," we will leave their strike prices unchanged unless market internals deteriorate measurably. Leaving our call option strikes fixed would open us up to losing on any subsequent downturn whatever we make on a further advance, but again, our opening exposure is fairly limited. We'll let the market put us into a more constructive position if investors are inclined to continue their exuberance here. [Emphasis added, GDH.]

Market Climate

As of last week, the Market Climate for stocks was characterized by unfavorable valuation and mixed market action, but enough evidence of speculation (reasonable or not) to own about 1% of assets in index call options. We are otherwise hedged.

During earnings season, there are often days where most of the performance of the Fund is driven by significant movement in a small handful of Fund holdings. These movements can be positive or negative, and may cause the Fund to move differently than one would expect that the Fund "should" move based on our investment position, and on what the market did on a particular day. As I've frequently noted, short-term movements, particularly day-to-day, are not effective indicators of the Fund's investment position, or predictors of Fund performance. Performance is always best measured from the peak of one market cycle to the peak of the next, or over an extended period of years representing neither a peak-to-trough nor trough-to-peak movement in the market.

Based on our standard methodology, which considers normalized earnings (not the far more depressed level of current earnings) the S&P 500 is now priced to deliver 10-year total returns in the area of 6.9% annually. This is a figure that has historically been associated with bull market peaks, including 1969 and 1987. In most instances, such valuations turned out badly in reasonably short order. It is, however, true that prospective returns were even worse prior to the 1929 crash, and during the bulk of the period since 1996, so there have been some historical periods where speculators have driven valuations to higher levels, and during these times, it has not been particularly effective to stand in front of speculators saying ‘no, stop, don't.' [Emphasis added, GDH.]

Ultimately, all of those periods where valuations were driven to higher levels were followed by poor long-term returns, with stocks generally trading at lower levels at some point one or more years later. So we can say with a reasonable degree of confidence that even if the present advance continues, investors will most likely observe current levels again either within the current market cycle or (worse) several years out. Overvalued markets simply do not "run away" for good. Still, it can be painful or at least unenjoyable to remain defensive during a speculative advance.

In bonds, the Market Climate last week was characterized by relatively neutral yield levels and moderately unfavorable yield pressures. As usual, we will tend to increase our bond durations on spikes in yield (weakness in bond prices), and these are becoming more interesting -- though not strongly attractive. Our most recent extension of durations was in the 3.9%-4% area for 10-year Treasuries, and a push materially above that level would represent enough of a yield pickup to move a modest amount of short-maturity Treasury allocations into mid-maturities. As I've noted in recent weeks, we don't anticipate much in the way of extended directional movement in the bond market, so most of our portfolio activity will probably tend to be modest reallocations in response to yield fluctuations. At the point where we observe either fresh inflation pressure or general declines in Treasury yields (i.e. general downward pressure on real interest rates), I expect that we'll observe fresh pressure on the U.S. dollar and upward pressure on precious metals shares. For now, those markets are likely to be somewhat range-bound as well.

We've got an extended economic adjustment ahead. Most probably far longer than most investors presently expect. As always, we'll take our opportunities as the evidence emerges, with the objective of outperforming our respective benchmarks over the complete market cycle, and an additional emphasis on defending capital over the course of that cycle. [Emphasis added, GDH.]

END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

While we have seen some encouraging economic reports over the last few weeks, it is premature to declare that the recession has ended. As discussed above, the unemployment rate is very likely to rise even higher before this cycle is over. Remember that consumer spending is still the main driver of this economy, and retail sales fell slightly in July well below the pre-report consensus. The Consumer Confidence Index fell a second month in a row in July.

On the positive side, the Fed remains committed to keeping interest rates very low for an extended period, and liquidity is plentiful for now. If this Thursday's Leading Economic Indicators report is positive, that will market the fourth consecutive monthly increase, which will be a very good sign that the recession will end by the end of the year.

I agree with Dr. Hussman that stocks are overbought at this point, as many investors who bailed out in February and March are now jumping back in. The stock market has felt like a mini-bubble since the March lows and especially in July. Thus, I would not be surprised to see the downward correction that began last week to continue in the weeks ahead.

Finally, I recently told you about our online webinar featuring the Potomac Guardian Program on August 6th. We had hundreds of investors register for the webinar and it was well-received. If you were unable to attend this webinar but would still like to learn more about the Potomac Guardian Program and its investment strategy, you can now find a recorded version on our Internet website at www.halbertwealth.com.

Wishing you profits in a difficult market,

Gary D. Halbert

SPECIAL ARTICLES

Stocks: Five Key Signals for Investors
http://www.businessweek.com/investor/content/aug2009/pi20090817_099111_page_2.htm

Why Obama's Ratings Are Sinking
http://online.wsj.com/article/SB10001424052970204683204574354383543314054.html

Public Spending's Day Of Reckoning
http://www.forbes.com/2009/08/12/public-spending-finances-economy-debt-opinions-contributors-desmond-lachman.html

Retirement Focus: Target-Date Funds in the Crosshairs

Gary D. Halbert — Tue, 11 Aug 2009 19:25:00 GMT

By Mike Posey

IN THIS ISSUE:

Target-Date Funds 101
Advantages of Target-Date Funds
Criticisms of Target-Date Funds
The Feds Come Down on Target-Date Funds
Buy-and-Hold on a Stick

Introduction

Target-date mutual funds are a fairly recent entry into the mutual fund field, having been first introduced in the early 1990s. Since then, they have become very popular - especially after the passage of the Pension Protection Act in 2006. For those of you who may not be familiar with this type of investment, target-date funds are specialized mutual funds that offer an investor the option of buying a single fund that invests its assets based on an assumed date of retirement. As retirement nears, the fund's allocation is usually changed to become more conservative.

These funds have become hugely popular with investors because they represent a one-stop shopping opportunity for a diversified portfolio. Thus, they appeal to individual investors and 401(k) participants who are not comfortable making their own portfolio decisions. Just pick your date of retirement and your investment decision is made.

Usually structured as a mutual fund that invests in other mutual funds (a "fund-of-funds"), target-date products automatically allocate an investor's assets among a variety of asset classes, generally based on traditional asset allocation techniques.

Due to the simplicity of this approach, target-date funds have become standard features in scores of 401(k) plans where participants must direct the investment of their accounts. The premise is easy - just put your money in the fund that corresponds with your normal retirement date, sit back and let the fund take care of the details. At least that's the theory.

Too bad things have not gone as well in actual practice. Federal regulators including the Department of Labor and the SEC have been looking into the performance of these funds during the recent bear market. In addition, regulators are investigating the "need for additional guidance given the importance of these investments to the retirement savings of investors."

In this week's Retirement Focus E-Letter, I'm going to discuss the development of target-date funds, how they work and their advantages to investors. I'll also discuss the shortcomings of target-date funds, which became painfully evident over the course of this bear market. What we'll find is that, like many one-size-fits-all approaches, target-date funds can have some serious drawbacks.

The Basics of Target Date Funds

As I noted above, target-date funds are a one-size-fits-all investment solution usually structured as a mutual fund that invests its assets exclusively in other mutual funds. In most cases, the mutual fund family that sponsors the target-date funds directs its assets into other funds within the same fund family. Since most fund families sponsor a wide variety of mutual funds, it's usually not hard to achieve the fund's directive for diversification through an asset allocation strategy.

Target-date funds are also sometimes called "lifecycle funds," because they seek to provide an automatic approach to investing over time. As such, they are typically sold to investors as a sole investment. Otherwise, holdings outside of these funds could throw the asset allocation out of whack. For example, if a younger client put half of his or her 401(k) account in a target-date fund that had 80% invested in equities, yet held the other 50% of the account in cash, this would greatly reduce the overall equity exposure. Thus, target-date fund proponents suggest that participants should invest all of their contributions in this type of fund to get the best results.

Over time, target-date funds slowly shift their assets to more conservative funds as the assumed retirement date nears. In the industry, this is known as the fund's "glide path." As a general rule, the longer the fund has until the target retirement date, the higher the percentage invested in stocks. As the retirement date nears, more of the portfolio is shifted to bonds and other fixed-rate investments.

While allocations within target-date funds are generally based on asset allocation and Modern Portfolio Theory, it would be a mistake to assume that all funds have similar stock/bond allocation ratios. There is a wide variation in the amount of assets invested in equities and bonds, even among target-date funds with the same assumed retirement date (more about this later on).

Since all funds are not created equal in regard to the allocation to stocks and bonds and the glide path used, it is up to participants to determine whether the specific allocation method of any given target-date fund is appropriate for their investment goals and risk tolerance.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Advantages of Target-Date Funds

While many investors are not interested in a fund that makes all of the investment decisions for them, the creation of target-date funds did serve a real need. In the past, I have written about how some 401(k) participants will not make a decision as to how to invest their contributions. As a result, these contributions sit in low-earning cash or guaranteed-return funds, offering little hope of meeting the participants' retirement goals.

Target-date funds attempted to fix that by allowing a participant to make a single decision based on their assumed year of retirement. In theory, nothing could be easier. The participant was invested in a fund with the potential for growth and the employer was able to escape possible fiduciary liability for allowing an employee to remain in low-yielding investments.

However, even with this simplification, there were still 401(k) participants that would not even elect to invest in a target-date fund based on their retirement date. To remedy this situation, the Pension Protection Act of 2006 allowed employers to select "default" investments for participants who would not or could not make their own elections.

This law also strengthened automatic enrollment policies, so that now an employee can be enrolled into a 401(k) and have his or her money invested in a target-date fund without taking any action or making any investment decisions. Obviously, this is not a wise course of action on the part of the employee, but it can serve as a fail-safe for those who simply won't take action to secure a retirement nest egg.

Other advantages of target-date funds include the following:

Ideally, a target-date fund not only allows a participant to make a single investment decision upon participation, but also handles future rebalancing and allocation adjustments necessary to reduce portfolio risk as participants get older. In other words, it's billed as being a "set it and forget it" investment;
Likewise, in an ideal world, the target-date fund would not only provide for growth prior to retirement, but also provide a way to help retirees not outlive their money. The rationale here is that, absent target-date plans, many retirees move all of their money to "safe," fixed-rate investments upon retirement to avoid losses. By doing so, however, they might subject themselves to returns so low that they end up outliving their money. Many target-date funds maintain some level of equity investment even into retirement, which provides the potential for additional growth. Of course, it also provides for the potential for losses;
Gary has written many times about how studies conducted by the Dalbar organization show that investors who frequently change funds forfeit much of the long-term return. Target-date funds can help curb the desire to chase the latest hot performance among optional 401(k) investments by removing the need to make subsequent investment decisions after the initial purchase;
Many target-date funds have low minimum investments, making them available for even relatively small 401(k) contributions;
Asset allocations are managed by professionals within the mutual fund family sponsoring the target-date fund. Thus, participants have the potential benefit of professional management, but they are usually limited to an asset allocation strategy, which is a form of buy-and-hold investing that I do not recommend;
Some target-date funds offer the use of traditional mutual funds while others select among only passive index funds. The presence of a fund manager who tries to add value over and above the performance of an index can be an advantage, but there are no guarantees that they can always do so; and
Target-date funds can be an excellent way to take advantage of a strategy known as "dollar-cost averaging." This strategy is based on making investment purchases at regular intervals (usually monthly). Over time, contributions buy more shares when prices are lower and fewer shares when prices are high. The ultimate goal is to lower the total average cost per share purchased over a participant's working lifetime.

Disadvantages and Criticisms of Target-Date Funds

Almost since they were first introduced, target-date funds have met with criticism. Primarily, critics focus on the idea that a one-size-fits-all solution is rarely, if ever, appropriate for everyone who owns the fund. We know this to be true as the risk tolerance, return expectations and a host of other variables often determine an investor's comfort with a particular portfolio allocation.

Some dismiss this criticism by noting that 401(k) participants generally have the choice of whether or not to select their own mix of funds from those offered in the plan, so if a target-date fund is selected they should be satisfied with the result. This may be true, but it doesn't help participants who might get out of target-date funds because they are too aggressive for their risk tolerance.

Target-date funds have been the subject of a number of other criticisms, including the following:

Many target-date funds are sponsored by mutual fund families that allocate its assets only among mutual funds sponsored by the same organization. While this is not a guarantee of poor performance, a single mutual fund family usually does not have superior funds representing all asset classes;
Target-date funds are also sometimes criticized for adding a layer of fees on top of those charged by the underlying mutual funds in which they invest. In fact, some fund companies "double dip" by charging fees on the underlying funds as well as on the target-date fund. Others, however, do not charge additional management fees for their professional management services. Thus, it's important to check on what fees will be charged before making a decision to invest;
One of the biggest disadvantages of target-date funds is that it's sometimes hard to tell exactly how it will be managed over time. As I noted above, asset allocation strategies can vary widely among fund families, and can even be modified within a fund as time goes by. For instance, I read several articles back in the summer of 2008 that discussed how target-date funds were increasing their allocations to stocks. Guess how those funds did over the last half of 2008!

The lack of easily understood labeling on target-date funds can actually help to defeat the simplicity they try to provide. Participants who do not want to make their own asset allocation decisions are not likely to want to dig through a prospectus to see how their target-date fund will be managed. Plus, according to a 2008 study by the Financial Research Corp., it was even hard for professionals to discern specific investment strategies, making it very difficult to compare one target-date fund to another.
On a related note, recent research has found that the amount of a target-date fund's allocation to equities can vary widely among fund sponsors, even when the funds are close to their target retirement date. While many experts agree that some exposure to equities is necessary in retirement to provide a potential for growth, most agree that this allocation should be rather small.

A good example comes from a 2008 Investment News article that noted the Oppenheimer Transition 2010 Fund (designed for someone retiring in the year 2010) had 75% of its assets invested in stocks. Not surprisingly, it lost over 41% of its value in 2008, a loss even greater than that of the S&P 500 Index's drop of 37%. Now, just think of retirees in this fund that have just two years or less before retirement. It's unlikely that they'll make back much, if any, of this loss prior to their target retirement date;
Another possible disadvantage brought about by all the variation in target-date funds is that employers who use these funds as default options may find themselves having liability for selecting the wrong default fund;
While most fund companies and employers have done a good job communicating about how target-date funds work, a recent study by Janus Funds found that 60% of target-date fund holders incorrectly believe that these funds provide some pension-like guarantees. They do not offer any guarantees and are subject to market losses, as most participants found out in 2008;
As both employers and plan participants seek to evaluate and compare various target-date funds that may be available to them, they often find that the target-date funds have a very limited actual track record. The number of target-date funds has exploded in the last few years, so many have little to show as far as a track record. You can try to get a better picture by analyzing the track records of the underlying funds used, but this can be a rather complex task.

Even worse, a participant must not only decide if the current allocation is appropriate for his or her investment profile, but must also see if the glide path will result in an appropriate allocation in all future years. In other words, a target-date fund investor must decide up-front if all future allocation adjustments will be appropriate for his or her financial situation at that time, something that is impossible to know.

Again, I doubt that participants who already don't feel comfortable making their own investment decisions will go to this trouble. If not, they'll either stay invested in low-yielding investments, or pick the first target-date fund that sounds good without determining whether it is the most suitable option for them. Either way, their retirement security may be at risk;
As I noted above, target-date funds are designed to be a sole investment rather than part of an allocation of various funds. As such, however, a target-date fund may conflict with other investments a participant may hold outside of the 401(k) plan; and
While target-date funds may be useful for young participants who can benefit from dollar-cost-averaging, it may not be the most suitable investment for large accumulated balances. I'll discuss this in more detail later on, but target-date funds are nothing but buy-and-hold strategies on autopilot, which could subject large nest eggs to potentially significant losses.

As I have previously noted, any one-size-fits-all solution is bound to have negative implications for some who invest in these programs. However, target-date funds seem to have more than their fair share of disadvantages that can moderate, or even eliminate the advantages of these funds, depending upon the participant's personal situation.

The Feds to the Rescue

To say that many target-date funds did not fare well in the bear market of 2008 would be a vast understatement. In fact, we can say that most target-date funds didn't do very well. According to a recent speech by SEC Chairman Mary Schapiro, funds with target retirement dates of 2010 had returns in 2008 that varied from minus 3.6% to minus 41%. This is a huge disparity for a group of funds that are supposed to be designed for 401(k) participants retiring next year.

As you might suspect, the primary culprit causing this spread in returns was the wide variation in the stock allocations within the various target-date funds. Those with larger allocations to equities had the greatest losses, while those with lower equity allocations had smaller losses. However, large losses for employees who are close to retirement age were seen as especially disturbing to the SEC and Department of Labor (DOL), not to mention the unfortunate 401(k) participants who invested in these funds.

Plus, some funds actually increased their allocation to stocks last year, just before the market meltdown, in what can only be described as an attempt to chase returns. Supposedly, investors are paying their professional managers to apply a disciplined approach to investing, but chasing returns is what the Dalbar organization has identified as the reason average investors often earn poor returns. In my opinion, this is simply inexcusable for a professional money manager.

As a result of the shortcomings of target-date funds, the SEC and DOL held a joint hearing on these investments on June 18th. The purpose of this hearing was to have an "in-depth discussion" about the role of target-date funds in retirement planning as well as the need to improve regulation of these funds and better protect retail investors. In her opening statement, SEC Chairman Schapiro said:

Target date funds have become an increasingly popular investment option for Americans investing for retirement and educational needs. These funds and other similar investment options are financial products that allocate their investments among various asset classes. These funds automatically shift that allocation to more conservative investments as a "target" date approaches…

The "set it and forget it" approach of target date funds can be very appealing to investors. Target date funds were expected to make investing easier for the typical American and avoid the need for investors to constantly monitor market movements and realign personal investment allocations.

But, the reality of target date funds was quite surprising to many investors last year. It has been reported that the average loss in 2008 among 31 funds with a 2010 target date was almost 25 percent…

These varying results should cause all of us to pause and consider whether regulatory changes, industry reforms or other revisions are needed with respect to target date funds. And this is what I hope today's joint hearing will help us assess.

I researched our Morningstar Principia Pro software to find the 2010 target-date funds and did a bit of additional analysis. As usual, I searched only the "distinct portfolios" so that I wouldn't get multiple share classes of the same fund. The result was a group of 50 mutual funds falling within the "Target Date 2000 - 2010" Morningstar Category.

Sure enough, these funds had a wide variety of equity exposure, ranging from a low of around 10% to a high of over 65%. It is also important to note that this equity exposure was not just in relation to domestic stocks, but some funds had over 20% allocated to non-US stocks, which are usually deemed to be more aggressive than domestic stocks due to the currency risk involved.

In light of these statistics, it does appear that something probably needs to be done to standardize target-date funds, or at least provide for more disclosure. As I have said above, my concern is that investors may blindly buy a fund with the right target retirement date not knowing that the underlying investments may be far too risky. Of course, this can be avoided by carefully researching the prospectus, but the more research and due diligence is required of the participants, the less these funds are likely to be used. After all, the idea is to provide a solution to those who either can't or won't make their own asset allocation decision.

Plus, the skeptic in me wonders how effective the DOL and SEC will be in regulating these funds. After all, the DOL is the agency that approved these funds as a default investment just a couple of years ago, when all of the shortcomings of these funds were already well known.

Industry Not Waiting For Regulation

As you might imagine, the mutual fund industry is vowing to fight government regulations that dictate allocation percentages within target-date funds. The fund industry is also developing the next generation of target-date funds in an effort to correct the problems found in current products. One new innovation is to remove the requirement that all asset classes are managed by the same fund family. This "open architecture" could diversify the management of these funds, but might do little to affect the wide variation found in equity allocations.

Yet, I have to wonder whether the fund industry really understands the situation they have put target-date fund investors in, especially those who are close to retirement. A benefit plans consultant is quoted as saying the following in response to the industry's attempts to fix the inherent problems found in target-date funds: "It usually takes two or three tries to get the products right. The next generation products will correct deficiencies that the current crisis revealed."

And what about the retirees and near-retirees whose account balances are at risk while the fund industry makes these attempts to get its act together? If it's going to take two or three tries for the industry to get it right, you have to wonder what additional problems lie in these funds just waiting to spring upon unsuspecting investors.

Perhaps the most important news is coming from large corporate employers who are creating their own custom target-date portfolios using investments selected from among the various options available in their plans. These large employers can even customize their portfolios based on workplace demographics and the presence of other retirement plans. Unfortunately, this does little to help the millions of participants who work at smaller employers.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusion: Buy-and-Hold on a Stick

While I do agree that target-date funds serve a purpose in that they offer a simple way for a 401(k) participant to invest when they might otherwise leave their contributions in cash, the variations in allocation methods and lack of transparency make it questionable as to whether these funds are better than the alternative. After all, the guys who left all of their contributions in cash or "safe" investments are looking like geniuses right now.

I am also concerned that many employers may have adopted target-date funds without appropriate analysis, and may now have subjected themselves to liability. One study suggested that 80% of large employers now offer target-date funds. These funds could be ticking time bombs if they have questionable allocations or an inappropriate glide path. Thus, employers could find themselves facing the very liability they sought to escape by using the target-date funds in the first place.

In the end, the real shortcoming of target-date funds is that they are simply buy-and-hold strategies on autopilot. As such, they have all of the shortcomings of buy-and-hold that Gary has written about many times in this E-Letter. Even if the DOL and SEC are successful in standardizing target-date fund allocations, it will be within the context of a buy-and-hold asset allocation portfolio.

As a practical matter, many employers who sponsor 401(k) plans opt for buy-and-hold mutual fund solutions at the direction of brokers or financial advisors who know of no other way to invest. It's too bad that they ignore active management strategies that might be attractive to participants who see the value of moving to cash to manage market risks.

The only thing clear at this point in time is that target-date funds will soon be changing. Let's hope it's for the better. In the meantime, if you are invested in a target-date fund, I suggest that you request a prospectus on your fund and read it carefully. See how your money is allocated now, and also how this allocation will change as you proceed down the glide path.

Hoping you retire in style,

Mike Posey

SPECIAL ARTICLES

Unemployment - A Scary Reality
http://www.nytimes.com/2009/08/11/opinion/11herbert.html?_r=2&ref=opinion

Pelosi's 'Un-American' attacks can't derail health care debate or silence opponents
http://blogs.usatoday.com/oped/2009/08/unamerican-attacks-cant-derail-health-care-debate-.html

Boehner calls Pelosi & Hoyer op-ed 'reprehensible'
http://thehill.com/leading-the-news/boehner-calls-pelosi--hoyer-op-ed-reprehensible-2009-08-10.html

Recession May End But Growth Prospects Low

Gary D. Halbert — Tue, 04 Aug 2009 21:25:00 GMT

IN THIS ISSUE:

Finally, Some Good News For The US Economy
More Insights From The Latest GDP Report
Media & Obama Declare The Recession Is Ending
Consumer Spending Is Still The Key
100+ Hedge Fund Managers Offer Their Predictions

Introduction

The Commerce Department announced last Friday that the US economy contracted less than expected in the 2Q. According to the "advance" estimate, Gross Domestic Product declined at an annual rate of only 1% in the April-June quarter. This is considered to be good news since the rate of decline was below the pre-report consensus. Never mind that the better than expected number was almost entirely due to greatly increased federal spending in the 2Q. Also, never mind that the government announced that 1Q GDP was worse than previously reported.

The latest GDP report has caused many economists and analysts to declare that the recession is ending. Yet the report noted that most sectors of the economy and consumer spending are still contracting. While I would say that it is still too early to declare that the recession is ending, the latest data strongly suggests that we've seen the worst of this recession/credit crisis. We will look at the latest economic numbers and draw some conclusions as we go along.

While it is possible that the recession will end in the 3Q and GDP could go into mildly positive territory, the unemployment outlook is likely to get worse for at least the rest of this year and possibly through the first half of 2010. Even President Obama conceded recently that the unemployment rate will almost certainly rise above 10% by the end of this year. Thus, we're looking at another "jobless recovery" if we indeed pull out of this recession later this year.

Next, as we all peer into the likely economic outlook for the balance of this year and next year, and try to formulate our investment strategies accordingly, I will summarize the latest survey of the nation's largest hedge fund managers. What are they thinking about the economy and the investment markets; where are they positioning their assets now; and what do they think are the greatest risks down the road? I think you'll find their predictions very interesting.

Finally, Some Good News For The US Economy

Last Friday, the Commerce Department announced that the US economy contracted less than expected in the 2Q. According to the "advance" estimate, Gross Domestic Product declined at an annual rate of only 1% in the April-June quarter. The GDP report came as a surprise to many, since the pre-report consensus suggested a decline of at least 1.5%, and many (including your editor) expected a decline of 2-3% for the 2Q. Of course, this is the first of three estimates on 2Q GDP, so it could well be revised lower over the next two months. Even so, this is good news for the economy.

According to the latest report, GDP fell less than expected in the 2Q primarily due to the large increases in government spending. The Commerce Department report cited that the decrease in real GDP in the 2Q primarily reflected negative contributions from business investment, personal consumption expenditures, inventory contraction and exports. According to the report, these negative influences to GDP in the 2Q were mostly offset by positive contributions from the increase in federal government spending and to a lesser extent by state and local government spending, and a decrease in imports.

The fact that the economy declined by less than expected in the 2Q primarily due to increased federal spending and falling imports is certainly not the desired scenario. But after four consecutive quarters of negative GDP growth, investors were happy to see a drop of only 1% in the 2Q. Consumer spending, which makes up apprx. 70% of GDP, continued to fall in the 2Q, but again not as much as had been feared. Personal consumption expenditures fell 1.2% in the 2Q, which means that consumer spending is still on the decline, but somewhat less than pre-report estimates.

The latest GDP report was indeed better than expected, even if most of the improvement was due to increased federal spending. Unless you've been hiding under a rock over the past few days, you have no doubt heard the mainstream press cheering that the recession is ending and that happy days lie ahead. While we probably have seen the worst of the recession, we need to look at the latest numbers to get a better insight as to the bigger economic picture.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

More Insights From The Latest GDP Report

As noted above, last Friday's 2Q GDP report was better than expected, even though it showed that the economy contracted at a -1% annual rate in April-June. All the news in the report, however, was not so encouraging. The Commerce Department revised down its GDP report for the 1Q of this year from -5.5% to -6.4%. This means that the January-March quarter was considerably worse than earlier reported.

I should also note that the Commerce Department upwardly revised GDP for the 4Q of last year from –6.3% to –5.4%, which largely offsets the downward revision for the 1Q of this year as noted in the previous paragraph. Most notably, however, the Commerce Department also substantially revised the GDP number for the 3Q of 2008 downward to a negative 2.7% annual rate. This was a huge revision that was not expected. Thus, we have seen four consecutive negative quarters in GDP in the last year alone: 3Q 2008 – down 2.7%; 4Q 2008 – down 5.4%; 1Q 2009 – down 6.4%; and 2Q 2009 – down 1.0%.

This makes the current recession the worst since WWII, eclipsing even the previously worst recession in 1981-82.

In addition to the headline GDP numbers noted above, last Friday's report also revealed that consumer spending declined in the 2Q. Personal consumption expenditures (PCE) fell by 1.2% in the 2Q following the very modest increase of 0.6% in the 1Q. This was well below the pre-report consensus that was looking for an increase of 2.4% in consumer spending in the 2Q. So much for the widely heralded rebound in consumer spending, but we should not be surprised given that consumer confidence turned lower once again in June.

Other indicators in the latest GDP report also suggest that the recession is not over yet. Durable goods orders decreased 7.1% in the 2Q, while non-durable goods orders decreased 2.5 percent, in contrast to an increase of 1.9% in the 1Q. Non-residential fixed investment decreased 8.9% in the 2Q, while non-residential structures decreased 8.9%. Equipment and software purchases decreased 9.0%. Exports of goods and services decreased 7.0%, while imports of goods and services decreased 15.1% in the 2Q. And the list of negatives goes on.

How is it then that GDP fell only 1% in the 2Q? Answer: increased federal spending. According to the GDP report, federal government consumption expenditures and gross investment increased 10.9% in the 2Q, compared to an increase of 4.3% in the 1Q. While we can all be happy that GDP fell less than expected in the 2Q, there is little comfort in knowing that the main reason for the better number was increased government spending.

Media & Obama Declare The Recession Is Ending

Many in the mainstream media wasted no time last Friday in predicting that the recession is ending, if it hasn't ended already. Since the 2Q GDP number was only down 1%, many now predict that 3Q GDP will almost certainly be a positive number. Predictably, President Obama took to the microphone on Friday afternoon to announce that we are now seeing the light at the end of the economic tunnel, and he attributed the better than expected GDP report to his $787 billion stimulus plan, even though only around 10% of the money has been spent.

[Editor's Note: FYI, more and more analysts are coming around to the idea I suggested in my July 21 E-Letter, that the government should scrap the apprx. 90% of the $787 billion that has not yet been spent. As an example, see the Investor's Business Daily editorial in SPECIAL ARTICLES below. Of course, this will never happen because Obama and the leaders in Congress can't wait to spend that money on their pork barrel projects.]

The latest argument for the recession ending now goes as follows. Since the Commerce Department revised 3Q 2008 GDP down sharply to -2.7%, this means that the worst of the recession started sooner than we thought. For some reason that I cannot discern, this is supposed to mean that the recovery from the recession will end sooner than we think – as in now.

Adherents to this suggestion point to the fact that the Index of Leading Economic Indicators has risen for the last three months in a row. Likewise, home sales and housing starts have risen modestly over the last three months in many parts of the country. No doubt, these are signs that the worst of the recession may be behind us, but they are no guarantee that the recession has ended. Nevertheless, there are now widespread forecasts that GDP will go positive for the 3Q.

There is, actually, a credible reason that GDP could manage a positive uptick in the 3Q. Given the severity of the recession and the credit crisis, businesses across America have slashed inventories dramatically. According to the latest GDP report, US businesses have cut back inventories by almost $300 billion in the four months ended in June. Most analysts had expected that inventory rebuilding would have begun in the 2Q, but in fact inventories continued to contract in the 2Q.

At some point, businesses will have to rebuild inventories, and some of my best sources believe that a modest rebuilding has begun in the 3Q. Companies that have weathered the worst of the recession and remain afloat will likely have to rebuild their inventories at some point just to stay in business. Plus, federal spending will remain high going forward, so it would not be a surprise to see a positive number in 3Q GDP. But we will not see the first advance report on 3Q GDP until late October. Unfortunately, a modestly higher GDP number for the 3Q will not necessarily mean that the recession is over.

Consumer Spending Is Still The Key

Personal consumption expenditures fell sharply in 2008 as a result of the housing slump, the credit crisis and the bear market in stocks. While there was a modest bump (+0.6%) in consumer spending in the 1Q of 2009, as noted above the latest GDP report showed that personal consumption expenditures declined 1.2% in the 2Q, well below expectations.

As I have noted in recent letters, not only are consumers holding back on unnecessary expenditures, they are also boosting their savings. It is now estimated that the national saving rate has climbed to 7% and may be headed even higher. Consumers remain fearful about the rising unemployment rate and the continued record rise in home foreclosures.

Unemployment typically continues to rise even after GDP starts to increase, so pain for workers is far from over. As noted above, even President Obama concedes that the US unemployment rate is headed to 10%, and it may well go even higher next year. The Labor Department noted that already 144 of America's 372 largest metropolitan areas reported unemployment rates of at least 10% in June. Rising unemployment will mean less shopping and a slower recovery.

While we have seen some mildly encouraging reports on home sales over the past few months, the home foreclosure rate continues to set new record highs. Just two years ago, the prediction was that only about two million Americans would lose their homes to foreclosure, a prediction based on the number of subprime mortgage loans with pending interest rate resets.

As we know now, however, more than five million homes have been foreclosed on since 2007, and there were more than 336,000 foreclosure filings in June alone according to RealtyTrac. Thus, it is now predicted by some that ten million homes will be foreclosed on before this cycle is over. If that is remotely correct, we are only about half way through the cycle.

With the unemployment rate and the foreclosure rate continuing higher, I don't think we will see consumers boosting spending significantly anytime soon. The latest consumer confidence numbers show that Americans are still jittery, with the Confidence Index falling from 49.3 in June to 46.6 in July.

Bottom line: The recession may well end later this year, but the recovery is likely to be disappointing. Those who are suddenly predicting 2-3% GDP growth in the 3Q and 4-5% in the 4Q are way too optimistic in my opinion.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

100+ Hedge Fund Managers Offer Their Predictions

The accounting firm RSM McGladrey recently published the results of their inaugural Hedge Fund Industry Survey. The survey, representing the thoughts and opinions of 102 hedge fund managers, offers some interesting findings about the state of the industry and their predictions for the economy, the investment markets and real estate.

You may be wondering why you should care what hedge fund managers think. After all, the mainstream press continually demonizes them with terms like "secretive," "risky," "unregistered" and a whole host of other dubious adjectives. In the latest stock market crash, hedge funds were singled out for their shorting of bank stocks (a strategy that can actually make money on a falling stock), which some said helped to accelerate the stock market's fall in the last quarter of 2008.

And let's not forget notorious hedge fund managers such as George Soros, who is known for being the man who "almost broke the Bank of England" in 1992, or Long Term Capital Management, a hedge fund managed by Nobel Prize-winning economists that almost caused a global financial crisis in 1998. These and other widely publicized implosions, coupled with the complexity and restricted availability of such investments, have generally cast hedge fund managers in a bad light, at least in the mainstream media.

Yet the 102 hedge fund managers surveyed by McGladrey represent some of the brightest and most successful minds in the investment world. Some of these managers are very adept at reading the economic tea leaves, especially as they relate to the markets. This not only helps them to make money for their clients, but to make money themselves since they typically base their fees on a share of client profits. No profits, no pay. Thus, you can bet that the future prospects for the global economy continue to be where hedge fund managers are concentrating their research, and why we want to peek over their shoulders through this survey.

A good portion of the survey deals with the new regulatory oversight of hedge funds that Obama has proposed and the managers' reactions to it, since heretofore hedge funds have been largely unregulated. It was surprising to see that 42% of the respondents felt that the SEC needs additional regulatory authority to do its job effectively, while 50% said the agency should simply be better funded to enforce existing rules, not make a lot of new ones.

While we might think all hedge fund managers would resist additional regulation of the funds they manage, another surprising result was that 37% of respondents believe there should be more regulation of hedge funds versus only 18% who said less regulation is needed. 43% of respondents believe that the current regulatory environment is the right amount.

However, hedge funds are now in the crosshairs and Congress will no-doubt put them on a shorter leash. Knowing this, 75% of those surveyed worried about the regulatory pendulum swinging too far and becoming so restrictive that it stifles the markets. Note that this includes some of those managers who believe that additional regulatory oversight is needed.

All in all, these results actually seem to indicate that a much larger segment of hedge fund managers are open to greater regulation than we might have thought. However, I think the real meat of the survey is in their outlook for the future of the economy and markets. 60% of respondents think that the current economic environment presents more investment opportunities than challenges. Knowing that some hedge funds "short" stocks in declining markets, a bear market expectation could be viewed as an investment opportunity for some funds. Thus, we need to look deeper into the survey's findings.

To begin with, 57% of hedge fund managers surveyed believe that the economy is now headed in the right direction (recession ending fairly soon), even though 83% of hedge fund managers believe that the unemployment rate will continue to rise, and 65% believe that consumer spending will decrease in the next 12 months. Over 80% of hedge fund managers believe that government spending, the Fed's balance sheet and tax rates (income and capital gains) will all continue to increase over the coming year. This explains why 42% believe the economy is still headed in the wrong direction.

Elsewhere, 59% believe that the stock markets have bottomed and are on the right track. However, respondents also acknowledge that there are still dangers lurking in the bushes that could derail the recovery. For example, 82% of respondents see both interest rates and inflation rising over the next year. While less than 20% expect either to increase "a lot," they acknowledge that the Fed faces a very difficult challenge on both fronts.

Since prospects for the stock markets generally depend upon the health of the economy, the survey asked hedge fund managers when they thought the US economy would return to positive growth. 33% of respondents felt that the economy would have positive growth by the end of 2009. 58%, however, believe that the US economy won't return to positive growth until sometime in 2010.

Of course, what we really want to know is what hedge fund managers expect the stock markets to do. After all, that's where most of us feel they have the greatest area of expertise. To get a better perspective of their predictions, it's important to note where the market stood when the survey report was written in mid-June 2009. Keep the following figures in mind as I discuss the stock market outlook of these hedge fund managers:

Dow Jones Industrial Average:	8,612.13
Russell 2000 Average:	511.83
S&P 500 Average:	923.72

To make a long story short, most hedge fund managers surveyed expect little or only moderate growth to occur in the major market indexes over the next year. For the Dow, the opinions are pretty evenly split among four general ranges of future values. 22% of hedge fund managers believe that the Dow will be under 8,000 a year from now. Another 22% believe it will be between 8,001 to 8,500 and yet another 22% believe it will be between 8,501 and 9,000. The next largest group of 21% believes that the Dow will end up between 9,001 and 9,500 in 12 months.

Clear as mud, right? About all we can glean from these predictions is that 87% of hedge fund managers think that the Dow will be between 8,000 and 9,500 in a year or so. Being so evenly split, I believe that these predictions fall in line with my best sources who think that the market will be in a trading range over the next year and possibly much longer than that.

Predictions of the future value of the S&P 500 were somewhat less concentrated, but still followed the same general pattern. 64% of respondents expected the S&P 500 Index to be between 851 and 1,100 a year from now, again pointing to a trading range market.

The Russell 2000, generally representing the small-cap stock universe, had the widest range of expectations with respondents fairly evenly spread among expectations ranging from under 400 to over 850. This result seems to say that anything can happen in small-cap stocks over the next year. What else is new?

As this is written, I find it interesting that the major market indexes are near the upper estimates reflected in the survey. With the Dow currently near 9,300 and the S&P 500 Index breaking above 1,000 yesterday, the markets have benefited from a significant rally since the McGladrey survey was taken. Perhaps this means that these hedge fund managers were too pessimistic in their views. However, if you believe that we're in for a trading range market, these levels could mean that we may experience some downward pressure on stock prices in the near future.

While we typically think of hedge funds as being only involved with financial instruments such as stocks, bonds, derivatives, etc., hedge fund managers also weighed in on the future of real estate values. 70% of respondents expect residential real estate values to continue to fall over the coming year, while a whopping 83% believe commercial real estate values will continue to fall. If they are correct, this will continue to have a chilling effect on the credit markets.

We all know that everyone from political candidates to the media leveled criticisms at the hedge fund industry for its part in the subprime meltdown and resulting credit crunch. The survey turned the tables and allowed hedge fund managers to rate the government on the job it's done during the recent economic malaise. So, how do the managers of these funds feel about the government's performance so far?

Interestingly, the Fed and its Chairman, Ben Bernanke, both fared well in the eyes of hedge fund managers as did the FDIC. President Obama and Treasury Secretary Tim Geithner got mixed reviews, but sentiments were overall positive. At the bottom of the barrel we find the SEC, which has been under a lot of criticism for its delayed response to the economic crisis.

One final question I'll highlight from the survey dealt with who hedge fund managers thought would ultimately clean up the "toxic assets" at the core of the financial crisis. 41% of respondents felt that the public sector (i.e. – the government and taxpayers) would end up holding the bag. I think that many of us are in this same camp.

However, 56% of managers felt that the private sector would provide the solution to cleaning up these hard-to-value securities. If that's the case, then hedge funds are likely to be at the epicenter of these private efforts to rid the financial system of these toxic assets.

Earlier on, I asked why we should care about the opinions of hedge fund managers. Perhaps the possibility that hedge funds may relieve taxpayers from some of the burden of having to clean up these toxic assets is the best reason of all to care about the opinions of those who manage these specialized investments.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

While investors welcomed last Friday's GDP report showing growth contracting only 1% in the 2Q (with two more revisions to come), we must keep in mind that this marked improvement from the 1Q was largely due to the large increase in federal spending. Consumer spending continued to fall in the 2Q and is unlikely to rise substantially anytime soon, as consumer confidence fell in June. Unemployment is likely headed over 10% well into 2010.

There is now a broad consensus that GDP in the 3Q will actually be at least mildly positive. That may indeed occur as businesses are forced to rebuild inventories at some point, and federal spending will certainly remain high in the 3Q and beyond. However, one quarter of positive GDP does not necessarily mean that the recession is over. Even if the recession is ending, economic growth is going to be weak due to decreased consumer spending.

Finally, there is the question of the stock markets. The meteoric rise of stocks since the lows in early March has obviously been a prediction that the credit crisis would ease somewhat and that the worst of the recession was behind us. Yet having risen apprx. 50% in just five months, even though the economy is likely to remain sluggish, this suggests that stocks may be testing their upper limits.

While it looks doubtful that stocks will retest their March lows, given how much money is still on the sidelines, I would be hesitant to recommend that investors jump back in the market now – unless you do so with a professional money manager(s) that has the ability to move to cash or hedge long positions.

Wishing you profits in a difficult market,

Gary D. Halbert

SPECIAL ARTICLES

Pull Back Unspent Part Of The Stimulus
http://ibdeditorials.com/IBDArticles.aspx?id=333152018981557

The Stimulus Lesson (why it isn't working)
http://www.weeklystandard.com/Content/Public/Articles/000/000/016/791ucyiq.asp

Has the Market Gotten Ahead of the Recovery?
http://www.smartmoney.com/investing/short-term-investing/has-the-market-gotten-ahead-of-the-recovery/