Forecasts & Trends : Halbert Wealth Management, GDP

Why the Economy May Disappoint in 2010

Gary D. Halbert — Tue, 26 Jan 2010 21:38:00 GMT

IN THIS ISSUE:

4Q GDP to Rise - But by How Much?
Retail Sales - Worst Drop on Record in 2009
Uncertainty and the Slow Recovery
Political Implications & How to Move Forward
Conclusions: Expect the Economy to Disappoint
P.S. Pelosi & Reid Plot Secret Plan for ObamaCare

Introduction

All eyes will be on this Friday's Gross Domestic Product report for the 4Q of last year. Pre-report estimates suggest the 4Q GDP number will come in around 4.5% (annual rate), as compared to 2.2% in the 3Q. There are a number of widely-followed analysts that believe the 4Q GDP number could surprise on the upside in the 5-6% range, but that remains to be seen.

Yet even if the GDP number comes in at or above expectations on Friday, there are increasing fears that the economy will fall short of earlier forecasts for the first half of 2010. Reasons for such concerns vary but the December retail sales report sent shivers down the optimists' spines. As I will discus below, retail sales for all of 2009 fell by the largest percentage decline on record, following a disappointing performance in 2008.

With consumer spending accounting for apprx. 70% of GDP, many economists are downgrading their 2010 forecasts. Previous forecasts of 5-6% growth in the first half of 2010 are being scaled back to 2-3% in many cases, and even that could be optimistic. This is consistent with what I have been suggesting for the last several months.

An excellent article appeared in the Wall Street Journal earlier this month that sums up our economic and financial dilemma as well as any I have seen. It is co-authored by three University of Chicago economists. If you want to understand why we likely face a year of anemic economic growth in 2010 – as opposed to 5-6% growth that some analysts predicted late last year – I suggest you read this article very closely; it is reprinted later on in this E-Letter.

Finally, there is word that Nancy Pelosi and Harry Reid are plotting a backdoor way to pass the Senate healthcare reform plan, even though the Senate no longer has the 60 votes to override a filibuster. If this is true, it is disgusting! I have included a link to this story as a P.S. at the end of this E-Letter. If you think healthcare reform is now dead, you need to read this.

4Q GDP to Rise - But by How Much?

The Commerce Department reported late last year that 3Q GDP rose by 3.5%, but later revised that number down to only 2.2% (annual rate). Even with the downward revisions, most economists proclaimed that the positive growth in the 3Q of last year marked the end of the worst recession since the Great Depression.

Here are the quarterly GDP reports for 2008 and 2009 (through the 3Q) as reported by the Bureau of Economic Analysis within the Commerce Department:

2008	2009
1Q -0.7%	1Q -6.4%
2Q +1.5%	2Q -0.7%
3Q -2.7%	3Q +2.2%
4Q -5.4%	4Q ???

The Commerce Department noted that 3Q economic growth was fueled primarily by consumer spending, exports, private inventory rebuilding and federal government spending. Most analysts believe that these four areas of growth continued in the 4Q as well. However, as we will discuss later on, there are some reasons to question whether consumer spending continued to rebound in the 4Q – but I'm getting ahead of myself.

The government's first “advance” estimate of 4Q GDP will be released this Friday. As this is written, the pre-report consensus is for a rise of 4.5% in the 4Q. But some respected analysts believe that 4Q GDP likely rose by 5-6%, mainly due to inventory rebuilding. That remains to be seen. And don't forget that the “advance” GDP report this Friday, whatever it is, could be revised significantly lower (or higher) over the next couple of months, as was the case with the 3Q GDP report.

Retail Sales - Worst Drop on Record in 2009

Every year we hear conflicting reports during the holiday season as to how retail sales are going. Inevitably, some reports suggest that sales are running above expectations, while others indicate just the opposite. The real facts don't become clear until the following January when we get the official retail sales report for December.

The latest retail sales report for December was quite the negative surprise, marking the largest annual percentage decline on record. Retail sales fell in December as demand for autos, clothing, appliances, electronics, etc. all slipped more than expected to finish an already disappointing year.

The Commerce Department reported earlier this month that retail sales declined 0.3% in December compared with November. This was much weaker than the 0.5% rise that economists had been expecting. For all of 2009, retail sales fell 6.2%, the biggest decline on record, and it comes on the heels of a modest decline in 2008.

While a record decline in retail sales last year is bad enough, we must put it in a broader perspective. Retail sales typically increase every year, even during recessions, if only modestly. In fact, retail sales have risen every year since such records have been kept with the exception of 2008 when annual sales fell a modest 0.5%, and then fell again in 2009 as noted above.

The 0.3 percent decline in December was the first setback since September when sales fell 2%. Sales posted strong gains of 1.2% in October and 1.8% in November, raising hopes that the consumer is starting to mount a comeback. Yet for the year, retail sales fell by the largest amount since records have been kept.

The December drop in sales was a surprise given that the country's largest retailers reported better-than-expected sales during the last week before Christmas. But even with the late rebound reported by the nation's biggest chains, these retailers suffered their worst annual decline ever.

The weakness over the year reflected the battering that consumers have taken from the worst recession since the Great Depression, a downturn that has cost over 7 million jobs and left households trying to rebuild savings depleted by losses on Wall Street and a crash in housing prices.

Economists are worried about consumer spending in the months ahead given their forecasts that unemployment, currently at 10%, will keep rising until perhaps midyear. The growing worry is that GDP will slow significantly in at least the first half of 2010 unless consumers continue to spend at 3Q and 4Q levels, which is looking increasingly doubtful.

The trends in personal consumption spending are considered critical to any sustained economic revival, since consumer spending accounts for apprx. 70% of total economic activity (GDP). This explains why many forecasters are downgrading their predictions for 2010.

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 Struggling Economy – Putting It All in Perspective

A big part of my job as a writer has always been to try and make complicated matters understandable for my clients and readers. I was advised many years ago to try and keep things simple, and that advice has served me well.

But occasionally I run across articles and research papers that do a much better job than I when it comes to handicapping our economic and financial situation and putting it all in perspective. Such is the case with the article below, which was published earlier this month in the Wall Street Journal by three noted University of Chicago economists.

If you want to truly understand the economic and financial pickle we are in, I suggest you read this article carefully.

QUOTE:

Uncertainty and the Slow Recovery
A recession is a terrible time to make major changes in the economic rules of the game.

by Gary S. Becker, Steven J. Davis and Kevin M. Murphy

In terms of U.S. output contractions, the so-called Great Recession was not much more severe than the recessions in 1973-75 and 1981-82. Yet recovery from the latest recession has started out much more slowly. For example, real GDP expanded by 7.7% in 1983 after unemployment peaked at 10.8% in December 1982, whereas GDP grew at an unimpressive annual rate of 2.2% in the third quarter of 2009. Although the fourth quarter is likely to show better numbers—probably much better—there are no signs of an explosive take off from the recession.

We believe two factors are behind this rather tepid rebound. An obvious one is the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the federal government. The confidence of bankers and venture capitalists has been shattered, at least for a while, and it will take time for them to recover from the financial turmoil of the past couple of years. The household sector also faces a difficult period of financial retrenchment in the wake of a major collapse in home prices, overextended debt positions for many, and high unemployment.

The second factor is less obvious, but possibly also of great importance. Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas. So in addition to continuing and extending the Bush-initiated bailout of banks, AIG, General Motors, Chrysler and other companies, Congress and President Obama signaled their intentions to introduce major changes in taxes, government spending and regulations—changes that could radically transform the American economy.

The efforts to transform the economy began with a fiscal stimulus package of nearly $800 billion. While some elements served the package's stated purpose and helped to soften the recession's impact, the overall package was not well designed to foster a speedy recovery or set the stage for long-term growth. Instead, the “stimulus” was oriented to sectors that liberal Democrats believe are deserving of much greater federal help. This explains why much of the stimulus money is going toward education, health, energy conservation, and other activities that would do little to soak up unemployed resources and stimulate the economy.

In terms of discouraging a rapid recovery, other government proposals created greater uncertainty and risk for businesses and investors. These include plans to increase greatly marginal tax rates for higher incomes. In addition, discussions at the Copenhagen conference and by the president to impose high taxes on carbon dioxide emissions must surely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases.

Congressional “reforms” of the American health delivery system have gone through dozens of versions. The separate bills passed by the House and Senate worry small businesses, in particular. They fear their labor costs will increase because of mandates to spend much more on health insurance for their employees. The resulting reluctance of small businesses to invest, expand and hire harms households as well, because it slows the creation of new jobs and the growth of labor incomes.

The administration also indicated early on that it would take a different approach to antitrust policy, reversing a 30-year trend toward more consumer-based interpretations of antitrust laws. Likewise, the installation of a pay “czar” in Washington is scary, even though his activities are so far confined to companies that received substantial bailout assistance from the Treasury. Perhaps as a next step, Congress will decide that executive pay is too high generally and levy special taxes on bonuses, or impose other controls over executive compensation—as the British and French have done. Congress is also considering major new regulations on consumer financial products.

In its efforts to combat the financial crisis and recession, the Fed created over $1 trillion of excess reserves at banks through various bailout programs and open market operations. When banks draw on these reserves for loans to businesses and households, there is a potential for the money supply to grow rapidly, possibly producing a substantial inflation. How hard the Fed will fight inflationary pressures through open market sales and other actions that raise interest rates is a significant source of uncertainty about future inflation and about the potential for monetary policy tightening to choke off the recovery.

The uncertainty about monetary policy has important political dimensions as well. The Fed now faces greater political pressures than at any other time in the past quarter century, as seen from the grilling the Senate Banking committee gave to Fed Chairman Ben Bernanke in deciding whether to approve his reappointment. These pressures may intensify greatly if, and when, future Fed actions to restrain inflation conflict with politicians' desires to prop up housing and the major government enterprises enmeshed in housing finance.

Even though some of the proposed antibusiness policies might never be implemented, they generate considerable uncertainty for businesses and households. Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending—despite their huge excess reserves—reluctance by businesses to undertake new capital expenditures or expand work forces, and decisions by households to postpone major purchases. [Emphasis added, GDH.]

Several pieces of evidence point to extreme caution by businesses and households. A regular survey by the National Federation of Independent Businesses (NFIB) shows that recent capital expenditures and near-term plans for new capital investments remain stuck at 35-year lows. The same survey reveals that only 7% of small businesses see the next few months as a good time to expand. Only 8% of small businesses report job openings, as compared to 14%-24% in 2008, depending on month, and 19%-26% in 2007.

The weak economy is far and away the most prevalent reason given for why the next few months is “not a good time” to expand, but “political climate” is the next most frequently cited reason, well ahead of borrowing costs and financing availability. The authors of the NFIB December 2009 report on Small Business Economic Trends state: “the other major concern is the level of uncertainty being created by government, the usually [sic] source of uncertainty for the economy. The ‘turbulence' created when Congress is in session is often debilitating, this year being one of the worst. . . . There is not much to look forward to here.”

Government statistics tell a similar story. Business investment in the third quarter of 2009 is down 20% from the low levels a year earlier. Job openings are at the lowest level since the government began measuring the concept in 2000. The pace of new job creation by expanding businesses is slower than at any time in the past two decades and, though older data are not as reliable, likely slower than at any time in the past half-century. While layoffs and new claims for unemployment benefits have declined in recent months, job prospects for unemployed workers have continued to deteriorate. The exit rate from unemployment is lower now than any time on record, dating back to 1967.

According to the Michigan Survey of Consumers, 37% of households plan to postpone purchases because of uncertainty about jobs and income, a figure that has not budged since the second quarter of 2009, and one that remains higher than any previous year back to 1960.

These facts suggest that it was a serious economic mistake to press for a hasty, major transformation of the U.S. economy on the heels of the worst financial crisis in decades. A more effective approach would have been to concentrate first on fighting the recession and laying solid foundations for growth.

They should have put plans to re-engineer the economy on the backburner, and kept them there until the economy emerged fully from the recession and returned to robust growth. By failing to adopt a measured approach to economic policy, Congress and the president may be slowing the economic recovery, and thereby prolonging the distress from the recession. [Emphasis added, GDH.]

END QUOTE

Political Implications & How to Move Forward

You may or may not agree with the analysis and conclusions offered by the three economists above. Obviously, I think they hit the nail squarely on the head, or I would not have reprinted the article. But whether you agree or disagree, one thing is very clear:

President Obama and his administration made a conscious decision to pursue the most aggressive and politically charged elements of their agenda – healthcare reform, cap-and-trade and card check (pro-unions) – in the first year of his presidency. And they decided to enact the $787 billion stimulus package in ways that did not create a lot of near-term job growth.

We can argue about why this was the path they chose, but one reason has to be that they knew these policies would be unpopular, and thus they needed to pass them as quickly as possible before the president's enormous popularity faded (as it always does).

Now that Obama's key initiatives (namely healthcare and cap-and-trade) have failed to pass, at least for now, and now that the Democrats have lost their filibuster-proof 60-vote super majority in the Senate, it remains to be seen how the president will move forward. I would not even venture a guess at this point.

Obama's senior adviser, David Axelrod, said last week that the president intends to move full-speed-ahead with his agenda, despite what happened last week in Massachusetts. But that remains to be seen, and in my opinion, is quite doubtful. Without admitting as much, I expect President Obama will quietly move to the center, as so many presidents have done before him.

Of course, there are others who believe what Axelrod said last week – that the president will continue to press ahead with his controversial agenda, precisely with the goal of labeling the Republicans as “obstructionists” going into the November mid-term elections. Whatever the president decides, it will be very interesting to watch it all unfold.

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: Expect the Economy to Disappoint

Whichever political path the president decides to take just ahead, the US economy is likely to disappoint in at least the first half of this year. As noted above, many economists are now scaling back their estimates for growth in the first half of this year.

Consumer spending is not likely to rebound to pre-recession levels anytime soon. As a result, we may be lucky to see GDP growth of 2-3% for the first half of this year, with much of that the result of debt-financed government spending.

Oddly, I am seeing few, if any, suggestions for what growth may be in the second half of this year. That is partly because no one knows when the employment trend is going to pick up. As a result, consumers remain pessimistic and this mood could persist even in the second half of the year. The same may be true for businesses and plans for new capital spending later this year.

All of this does not bode well for a continued rise in the stock markets, which rose meteorically in 2009 after the March lows. The S&P 500 Index (see chart below) is approaching major overhead resistance at 1200 and above. With economic forecasts being revised lower, we could see stocks come under pressure just ahead, or simply move into a broad trading range. In my view, the easy money in stocks is behind us.

Given all the uncertainties and challenges facing us, I would suggest that this is a good time to consider some of the “actively managed” investment programs I recommend (and where I have most of my own money). Most importantly, these professionally managed programs include the flexibility to move to the safety of cash (money market) or hedge long positions should the market trends turn lower once again.

The primary objective of these actively managed programs is to minimize losses during down periods in the stock markets, while also participating in market gains during upward trending periods. The equity programs I recommend fared much better in 2008 than the S&P 500 Index, and some even made money in the bear market. (Past results are no guarantee of future results.)

For investors who held onto their equity positions through the nasty 2008 bear market, the stock market recovery last year served to improve their portfolios; however, buy-and-hold investors are nowhere near where they were at the peak of the bull market in late 2007.

If you'd like to learn more about the professionally managed investment programs I recommend, please feel free to give one of our Halbert Wealth Management Investment Consultants a call at 800-348-3601. You can also send us an e-mail at info@halbertwealth.com, or obtain more information on our HWM website at www.halbertwealth.com. We look forward to hearing from you.

Wishing you profits,

Gary D. Halbert

P.S. Healthcare reform is now dead, right? With the latest election of Republican Scott Brown to the US Senate in Massachusetts, most political pundits have concluded that healthcare reform is dead, at least for now. However, Dick Morris, political commentator (and former senior adviser to President Bill Clinton), says that Nancy Pelosi and Harry Reid are quietly crafting a plan to ram through the Senate healthcare plan, despite widespread public disapproval. Whether you like or loathe Dick Morris, you may want to read his latest warning on healthcare reform moving secretly ahead, despite the loss of the 60-vote super majority in the Senate. Here's the link:

Pelosi & Reid Plot Secret Plan for ObamaCare
http://www.dickmorris.com/blog/2010/01/25/pelosi-and-reid-plot-secret-plan-for-obamacare/

SPECIAL ARTICLES

The Economy: Smooth Sailing Now, Icebergs Ahead
http://articles.moneycentral.msn.com/Investing/JubaksJournal/smooth-sailing-now-icebergs-ahead.aspx?page=1

Banks didn't cause the housing/credit crisis, government did.
http://www.investors.com/NewsAndAnalysis/Article.aspx?id=518758

Investors Face Three Market Dangers
http://www.nytimes.com/2010/01/24/business/24fund.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

On The Economy, Bonds & Bear Market Rallies

Gary D. Halbert — Tue, 05 May 2009 21:15:55 GMT

IN THIS ISSUE:

First Quarter GDP Falls More Than Expected
Stocks Always Outperform Bonds, Right? Wrong!
Should You Put All Your Money in Bonds? No!
Is the Current Market Rally Too Big to Fail?
Conclusions – Not Out of the Woods Yet

Introduction

Last Wednesday the government reported that 1Q GDP declined at an annual rate of 6.1%, thus confirming that we are still in a deep recession. While the GDP report was worse than the pre-report consensus, it was very much in line with what I predicted in my April 21 E-Letter. I continue to believe that we will be in this recession all year.

Several recently released studies highlight the fact that long maturity Treasury bonds have outperformed stocks over the last 40+ years, and by a substantial margin over the last 28 years. I will examine these reports as we go along. Does this mean you should put all of your money in bonds now? I'll tell you why I believe that would be the wrong move to make at this time.

Finally, we get calls every day asking if the recent rally in the stock markets means that the bear market is over, or if this is just a bear market rally. While no one knows for sure, we will take a look at some past bear market rallies to keep things in perspective. I think you'll find this week's letter interesting.

GDP Falls More Than Expected (But Not to My Readers)

The Commerce Department reported last Wednesday that 1Q GDP fell at an annual rate of 6.1%. The pre-report consensus called for a drop of 4.7%, so the actual report came as a negative surprise to the markets (but not to those of you who read my April 21 E-Letter). The decrease in real GDP in the 1Q primarily reflected negative contributions from exports, inventory investment, equipment and software, and decreases in commercial and residential construction.

There were, however, a few bright spots in the latest GDP report, particularly in regard to consumer spending. The GDP report last Wednesday noted that personal consumption expenditures (consumer spending) increased at an annual rate of 2.2% in the 1Q in contrast to a decrease of 4.3% in the 4Q. That number seemed unusually high to me in light of the continued plunge in consumer confidence in the 1Q (more on this below).

Durable goods orders increased 9.4% in contrast to a decrease of 22.1% in the 4Q. Nondurable goods orders increased 1.3% in contrast to a decrease of 9.4% in the 4Q. These are encouraging signs but were overwhelmed by the bad news in the 1Q.

Commercial construction plunged 37.9% year-over-year in the 1Q, even worse than the 21.7% decline in the 4Q. Residential construction decreased 38.0% in the 1Q compared with a decrease of 22.8% in the 4Q. Equipment and software purchases decreased 33.8% compared with a decrease of 28.1% in the 4Q. Exports of goods and services decreased 30.0% in the 1Q compared with a decrease of 23.6% in the 4Q. Imports of goods and services decreased 34.1% compared with a decrease of 17.5% in the 4Q.

The bottom line is that if we had not seen the pickup in consumer spending and durable goods orders, the 1Q GDP number could well have been down 8-10%. The recession is still quite severe, and I continue to predict that it will be with us all year.

It remains to be seen if the next 1Q GDP update on May 29 will include a downward revision from the -6.1% number reported last week. If so, that may not be good news for the markets.

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 Always Outperform Bonds, Right? Wrong!

The conventional wisdom going back over a century is that stocks outperform government bonds over time, right? Surely most everyone reading this has been taught that axiom over the years. It's your basic Investing 101 gospel. It's also the financial planning gospel. It goes like this: stocks are more volatile than bonds, but they deliver a fairly significant return premium over bonds in the long-term. Since government-backed bonds are considered safer, if held to maturity, then it only stands to reason that they would deliver somewhat lower returns than stocks over time.

So as a general rule, you should invest more heavily in stocks over bonds when you are younger and have lots of years to ride out the occasional bear market. Then, as you get closer to retirement age, you begin to scale back your equity allocation and invest more in government bonds. Many traditional asset allocation and financial planning models suggest something in the range of a 60/40 stocks/bonds split when you are younger and over time moving to a 40/60 stocks/bonds split – and then even more in bonds as you hit retirement.

Yet this conventional wisdom has come under increased scrutiny recently. Why? Since we've had two serious equity bear markets in the last decade, Treasury bonds have now outperformed equities over the last 30-40 years. Many financial academics and Investment Advisors are now seriously rethinking their long-held beliefs about bonds. (You might note that yours truly never believed you should have all of your money in stocks and bonds only, but that's another story for another time.)

Given the severity of the recent stock market debacle, with the benchmark S&P 500 Index plunging almost 45% since the peak in late 2007, the long-term performance numbers for stocks-versus-bonds have changed. Government bonds now have somewhat higher returns than stocks, especially over the last 30-40 years. Let's look at the numbers.

If we look back from 1801 (for some reason this is a popular historical date) to today, stocks did beat government bonds by apprx. 2.5% per year on average, which is huge considering the compounding effect over more than two centuries. This is the basis for claims that stocks beat bonds over the long-term. But these days, the “long-term” is hardly measured by multiple centuries. Today, a long-term investment horizon is more typically three to five years, or 10 at tops.

But even if we are to look back 200+ years, we see several long periods in which Treasury bonds beat stocks, including the last 30-40 years. Bonds outperformed stocks in the following time windows: 1803 to 1871 (68 years); 1929 to 1949 (20 years);and yes, 1968 to 2009 (41 years).

The implications of this are quite interesting. While Treasury bonds can be quite volatile at times, they always pay off in full if held to maturity. Stock investors have no such guarantee. As a result, stocks are supposed to provide a “risk premium” of a couple percentage points or more, at least historically, to pay for that chance their price could drop (potentially to zero).

Yet as noted above, stocks have not lived up to that historical expectation over the last 30-40 years, not to mention the current bear market. Based on the actual returns in stocks and bonds over that period, you could have chosen one of the safest investments in the world and performed better than those following Wall Street's buy-and-hold forever mantra (which I have never believed should be one's only strategy).

Bonds Really Outperformed Over the Last 28 Years

Economist and author A. Gary Shilling recently published an interesting study on the performance of stocks versus bonds over the period from 1981 to early 2009. For purposes of illustration, Shilling assumed that one bought a 25-year zero-coupon T-bond at the all-time low in October 1981 when long-bond yields were well above 14%. Each year thereafter, he rolled it into another 25-year bond to maintain the 25-year maturity and reinvested the income.

By comparison, Shilling assumed that one bought the S&P 500 Index at its low in July 1982 and reinvested the dividends each year. Then he tracked the performance of both investments through the end of March 2009. The results are quite surprising! Of course, keep in mind that we have seen one of the largest declines in interest rates and inflation in history over the last 28 years, along with two major bear markets in stocks in the last decade.

Shilling found that the 25-year zero-coupon bond delivered an average annual return of 20.4% over the 28 years, while the S&P 500 gained an average of only 10.7% annually over the period from 1981 through March 2009.

If you would like to review Shilling's study (that was printed in Forbes recently) in more detail, I have provided a link to it below in SPECIAL ARTICLES.

Actually, you can go all the way back to 1969 and long-bonds (Treasuries with 20-year or longer maturities) still beat the S&P 500, but only by a marginal amount.

So, Should You Put All Your Money in Bonds? No!

Given that bonds almost doubled the returns of the S&P 500 over the last 28 years, and given that the S&P 500 fell 37% last year and is still down in 2009, you might think it's time to put all or most of your money in Treasury bonds. I do not recommend doing so. First of all, interest rates today are the lowest in many years.

The 20-year and 30-year Treasury bond yields are currently well below 4%, which is extremely low. The 10-year T-bond is well below 3%. Sooner or later the inflation threat will sink in, and bond rates will rise, possibly significantly.

With trillion dollar budget deficits as far as the eye can see, and with other trillions being spent on bailouts, toxic asset purchases, etc., there is little doubt that the US will experience a significant increase in inflation in the years ahead. Some fear we will see hyperinflation given the unprecedented spending by President Obama. Therefore, now could be one of the worst times to load up on Treasury bonds.

Stocks, on the other hand, remain quite depressed. The S&P 500 Index is down apprx. 45% from the highs back in late 2007. While no one knows if the early March lows are “the bottom,” stocks are much cheaper in terms of value today than are bonds, which are in my opinion over-valued.

The question before us is not what happened over the last four decades, but what might happen in the future. One Internet blog entry that I read noted that a call to invest in bonds right now may be similar to John Bogle's (of Vanguard fame) advice in the late 1990s to buy a S&P 500 Index fund and hold it for the foreseeable future. Given that we have experienced two major bear markets since then, that advice was obviously wrong!

There are several bond studies coming out that basically reach the same findings as Gary Shilling's numbers quoted above. So bonds are getting a LOT of attention of late. While all this attention is almost sure to drive more investors to bonds, I would not follow the crowd by selling stocks and equity mutual funds to buy Treasury bonds, which will go down in value if interest rates rise.

ENDORSED ADVERTISEMENT

Is the Current Market Rally Too Big to Fail?

We have heard a lot since last year about institutions that were deemed “too big to fail” and were thus eligible for billions in government bailouts. While it's admittedly a bit different in the stock market, there are market analysts and investors who are claiming that the sheer size of the recent market rally means that the bear market is over and happy days are here again; in other words, this 25% rally is “too big to fail.” While all of us would like to believe that the bear market has run its course, I'm afraid that we can't make that judgment based on the size of the recent rally.

To illustrate this point, I'll reference an excellent example that I came across the other day. The illustration begins with a question: What would an investment of $100,000 be worth if it was invested over a three year period that benefited from the following stock market rallies.

+48.0%
+23.4%
+27.6%
+35.0%
+24.6%

The natural inclination is to assume that the $100,000 would be worth far more at the end of the three-year period. Compounding the original $100,000 investment by the returns above results in an ending value of almost $400,000. However, we know that markets don't go straight up, and there were also some down periods during this timeframe. So we have to reign in our guess to something less. So, what about $200,000 to $250,000? That sounds like a reasonable range, doesn't it?

Well, the correct answer is only $10,800! Yes, over this particular three-year period, $100,000 invested in the Dow Jones stocks would have lost almost 90% of its value.

Surprised? Shocked? I have to admit that this illustration is somewhat of a trick question because it conveniently leaves out the fact that these market rallies occurred over the three years between September 1929 and July of 1932, the darkest period ever for the US stock markets. During this time, the down periods were far worse than the market rallies, so a $100,000 investment in the stock market lost over 89% of its value.

While the above illustration is designed to generate a surprise reaction, it also makes a very important point in regard to bear market rallies. Very rarely do bear markets go straight down, just as no bull market goes straight up. There are almost always “corrections” in the short-term trends, and these reversals are frequently large enough to convince investors that the major trend has changed as well. This can be very costly, especially if they make a change, only to find that the correction was just that, and then the major trend continues.

After the Crash of '29, there were several powerful market rallies that followed. Just as now, I'm sure there were stock market pundits back then claiming that a new bull market had surely begun during some of these rallies, especially the one in late 1929 to early 1930 that gained 48% over the course of 22 weeks.

While the 1929–1932 period was the most prominent example, other notable bear markets have had strong rallies that proved to be false alarms. One Internet source I consulted noted that the 1973–1974 bear market had two bear market rallies of apprx. 10%, and the 2000–2002 bear market had three substantial rallies with the smallest being 19%.

Even the current bear market that began in October of 2007 has had four double-digit rallies, including the one we're in right now. Each of the preceding rallies has provided hope to market participants and drawn many of them back into the market, only to see their investments dwindle further.

As I have mentioned in these pages several times, I am not sure that we have seen the end of this bear market, especially if we learn in the coming weeks that some or many of the largest insurance companies are in trouble. While I am willing to consider the possibility that the March 9 low was the bottom of the market, I also believe that we are very likely to at least retest this low again in the future.

A good example of the market retesting its prior lows is the period of time from July of 2002 to March of 2003. The statistics on the 2000–2002 bear market indicate that the S&P 500 Index hit an intra-day low of 768.67 in October of 2002. However, when you look at a chart of the S&P 500 Index during that period of time, you see that we came very close to the October 2002 intra-day low in July of 2002 (775.96) and again in March of 2003 (788.94). Chartists call this a “triple bottom.” I would not be surprised to see a similar situation occur in 2009.

What Should You Be Doing?

There's an old saying that you should “hope for the best but plan for the worst.” I think that's where we are today in the stock markets. With the unprecedented government intervention in the credit markets and even corporate ownership, we are sailing in uncharted waters. Politicians, who are always happy to see a healthy stock market, now have an even greater incentive to make sure the economy pulls itself out of the ditch. No one wants to run for re-election with the stock market in a slump, especially when the government controls some of the nation's largest banks and corporations.

Therefore, while we all hope that the March 9 low set the bottom of the current bear market, we have to plan as though there's more pain to come. There are a number of ways you can do so, including:

If you are fully invested in the market, you have experienced a nice bump in the value of your portfolio recently. Not knowing what lies ahead, you may want to consider taking advantage of the rally and moving some of your investments to cash. This way, if the market continues to rally, you'll still participate in the gains but with less exposure. However, if we retest the March 9 lows, you'll have some money on the sidelines out of harm's way.
If you are totally on the sidelines in cash, then you have probably been spared some of the bear market's losses, depending upon when you cashed out of the market. However, you have also missed out on the recent market rally. Don't let this regret grow into an emotional need to jump into the market. You could be setting yourself up for losses if we retest the March lows.

If you feel you must get back into the market in some way now, I would suggest that you “dollar cost average” into the market. This is a strategy that calls for making partial investments over time rather than committing your whole portfolio at once. That way, if we retest the March lows, not all of your portfolio will be affected.
Finally, I suggest that you consider the actively managed strategies I recommend that have the flexibility to move to cash or hedge long positions during market downturns. This professionally managed approach takes away the worry and hassle of deciding whether to be in or out of the market. Since I have written about some of these managers in the past, I'll not go into detail here. Suffice it to say that professional active money managers seek to position your portfolio to participate in up markets but become defensive during market downturns.

In light of the current stock market situation, I am reminded of a conversation I had many years ago with a very successful active money manager. We were discussing the higher management fees charged by active managers, typically in the 2-2½% range annually. I made the comment that I believed such fees were justified in return for getting investors out of the market during serious downturns. The manager responded as follows (more or less verbatim):

You know, most people think they pay us our fees to get them out of the market to avoid the big declines and bear markets. But getting out of the market is the easy part. What people really pay us for is to get them back in the market – that's the hard part.

That conversation comes to mind because we hear from so many people who got out of the stock market late last year or early this year, and they have no idea when to get back in. That's when having a time-tested mechanical timing system directing a portion of your portfolio can be very valuable.

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 – Not Out of the Woods Yet

Following the release of the 1Q GDP report last Wednesday, the Dow Jones promptly rallied 200 points, and the S&P 500 gained 22 points – even though the overall GDP report (-6.1%) was worse than expected. People reacted to the increase in consumer spending in the 1Q as a sign that the recession may be ending.

Yet if we dissect the numbers within the GDP report, as I did above, we find that most sectors of the economy declined at an even faster pace in the 1Q. These facts suggest that this recession has not hit bottom and will be with us for some time to come.

It may be that the 1Q proves to be the worst part of the recession. Most economists expect the decline in GDP to be smaller in the 2Q and even smaller in the 3Q. While those estimates may prove to be correct, we saw no convincing evidence that the recession was starting to bottom in the 1Q. Given that, I think we can dismiss forecasts calling for a return to positive GDP in the second half of this year.

Also keep in mind that there may be more bad news for the credit crisis just ahead. As I discussed at length in my April 7 E-Letter, there is plenty of evidence that some of the largest insurers in the US are in financial trouble. Some are pleading for bailouts, and it is probably reasonable to expect they will get them. But this news is getting hardly any media attention thus far. So this could be the next shoe to drop in the credit crisis.

Obviously, it is very difficult to know what to do with your investments in times like these. Investors who are on the sidelines wonder if they should jump back in. People who rode the market all the way down are wondering if they should now get out. Based on the calls we get, most investors are still very nervous, even though the stock markets have recovered somewhat.

In my Investment Advisory business, we have found that investors mostly want to talk to someone they can trust and explore all of the options. They don't want to talk to someone who is automatically going to tell them to sell all of their investments and transfer their money to a new Advisor or program, nor do they want to be hounded on the phone or via constant e-mails. Fortunately, we don't do any of those things at my company.

I would like to offer you the ability to talk to any of our Investment Consultants about your investment needs with no cost or obligation to invest of any kind. My company is very different in that all my Investment Consultants are paid a salary, and do not receive commissions or incentive compensation of any kind. Thus, their marching orders are to make sure that our clients' investment needs are met, even if it means not participating in any of the investment programs we recommend.

If you would like to discuss your current investments and/or retirement planning with someone who is not going to pressure you to invest with them, then you are welcome to call one of my experienced Investment Consultants, at no charge to you. You can call us at 800-348-3601, or if you prefer, you can send an e-mail to info@halbertwealth.com and your questions will be immediately routed to one of our staff members.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

Gary Shilling Study: Stocks vs. Bonds
http://www.forbes.com/2009/04/22/treasury-deflation-stocks-personal-finance-guru-insight-gary-shilling.html

More on the Financial Stability Board
http://spectator.org/archives/2009/05/04/the-fed-fails-upward

Economic & Investment Outlook For 2009

Gary D. Halbert — Tue, 06 Jan 2009 22:10:01 GMT

IN THIS ISSUE:

Editor's Notes On BCA & The Other Gary Halbert
Obama & The New Age Of Big Government
The Economy -- Have We Seen The Worst Of It?
Are The Bailouts Necessary & Will They Work?
The Latest Disappointing Economic Reports
Stock Markets -- Might We Have Seen The Bottom?

Introduction

2008 proved to be a catastrophic year in the financial and credit markets as well as for most investors as judged by the global equity markets. The credit markets and bank lending activity ground to a virtual halt, something not seen in most of our adult lifetimes. Consumer confidence and spending, which now accounts for over 70% of US GDP, fell off a cliff in the span of just 3-4 months late last year. We are now in an unprecedented "credit crisis," the outcome of which remains to be seen.

The US government and the Federal Reserve have responded to the credit crisis in ways that most of us could never have imagined, and they are not nearly done yet. Much more is to come. We can agree or disagree with these giant bailout measures, but like them or not, even more enormous government rescue programs are sure to come in the Barack Obama administration, on top of his already aggressive plans such as nationalized health care, etc.

One thing to keep in mind is that our new President is a man who embraces government ownership and control of the private sector, so we can expect more massive bailouts in the next year or longer as needed. Already, Mr. Obama is suggesting another fiscal stimulus package approaching $1 trillion this year, and that is just the beginning -- I promise. But the point of what follows is not a political piece. The question is whether or not the plans will work.

What we do know is that we are officially in a recession that reporting agencies now believe began in December 2007. Most forecasters now expect that GDP plunged 4-5% (annual rate) in the 4Q of last year, and will continue to fall for at least a couple more quarters. Meanwhile, deflation is becoming a greater threat. In the pages that follow, we will take an in-depth look at the latest economic and inflation numbers. I'll give you the latest thinking from my best sources on what may lie ahead.

But first, I have a couple of important Editor's Notes that have resulted from many reader inquiries, before we get into the meat of this week's letter. Let's get going.

Editor's Notes

The Bank Credit Analyst: I frequently get questions from long-time readers asking why I do not mention the Bank Credit Analyst (BCA) or quote from their monthly reports as I have for many years. Considering the amount of interest, an explanation is in order.

You may recall that BCA maintained throughout 2007 that the subprime mortgage dilemma would be contained to the housing market, and that a recession was not the most likely scenario for the US or the rest of the world. Then in early 2008, BCA did an abrupt about-face on the subprime crisis, complete with a forecast of a credit crisis and a potentially deep global recession.

I have to admit I was surprised that BCA was late in identifying perhaps the most significant trend change in our lifetimes and an oncoming credit crisis. However, no economic forecasting service is perfect, and I have a number of other sources of economic and financial forecasts that were also late to recognize the full effect of the subprime debacle. So that is not the reason I no longer quote BCA.

Quite the contrary. In early 2008, BCA contacted me in regard to my summarizing and quoting their materials. According to BCA, some of their subscribers had complained about having to pay a large amount of money for what I periodically offered to my clients and E-Letter readers for free. When I first began sharing BCA's outlook over 20 years ago, my comments were limited to a monthly newsletter that went only to my clients and prospective clients. Now, however, my Forecasts & Trends E-Letter goes out to over a million e-mail addresses each week.

While BCA has long been a valuable source of information for me, I fully understand their concerns. After all, they make their money through subscriptions, so anything that might diminish their subscription base would obviously need to be addressed. As a result, I agreed to no longer quote or summarize BCA's views of the economy or markets in light of their concerns.

Finally, it is important to note that BCA has never been my sole source of economic information and forecasts. My staff and I review numerous other sources for forecasts and analysis that help me in forming my own view of the economy, the markets, etc.

The "Other" Gary Halbert: As a reminder, to this day I am often confused with Gary C. Halbert, which is most interesting since Gary C. Halbert passed away in early 2007. For the record, I am Gary D. Halbert and am no relation to Gary C. Halbert; in fact, I never met the man. Apparently, Gary C. Halbert was a successful copywriter and marketer at some point in his life, and he had a newsletter called "The Gary Halbert Letter" and a website by the same name.

The confusion typically occurs when someone does an Internet search for "Gary Halbert." If you type Gary Halbert into Google, for example, the entire first page of results are for Gary C. Halbert -- even though the man has been dead for nearly two years. The first Google result for me -- Gary D. Halbert - is not until the lower part of page two.

We have often wondered how much business we have lost over the years from investors who searched the Internet looking for me but found the other Gary Halbert instead and were not favorably impressed! I have no idea why Gary C. Halbert's website is still on the Internet.

If, however, you type in "Gary D. Halbert," you'll find me at the top of the non-sponsor results. Bottom line: if you should refer someone to me, please advise them to include my middle initial "D." if they wish to find me on the Web. Better yet, advise them to go to my website at www.halbertwealth.com.

On that note, let me extend a huge THANK YOU to all of our clients who have referred friends, relatives, etc. to us over the years. Client referrals are one of our best sources of new business!

With the above noted housekeeping items out of the way, let's turn our attention to the economy, the ongoing credit crisis and the investment markets. But first, let's consider the bigger picture of what to expect from President Obama. The following is not meant to be a political slam on our soon-to-be new president; rather it is simply a perspective on the times to come.

Obama & The New Age Of Big Government

There is no arguing that Barack Obama is one of the most liberal politicians of our time, as is Joe Biden. President-elect Obama believes that more government is the solution, not the problem. He has stacked his new Cabinet with Clinton retreads who believe as he does, including Hillary Clinton as his Secretary of State designee.

President-elect Obama vows that as soon as he is in office, he will pass a gargantuan financial rescue bill (bailout) that is estimated to be as large as $800 billion to $1 trillion in an attempt to unfreeze the credit markets and create at least one million new jobs. No doubt the Democrat controlled Congress will go along. It appears that a number of Republicans will go along as well.

Mr. Obama says his huge rescue plan will be targeted at tax cuts and infrastructure projects that will create new jobs. I, however, predict that much of the bailout money will continue to go to recapitalize banks, financial institutions, automakers and other large companies that get into serious trouble. Obama may have no choice if he and the Fed are to stave off a debt deflation and a depression.

In fairness to President-elect Obama, he comes into office at one of the worst possible times in the last century. He is inheriting the worst economy in decades, the worst financial crisis since the Great Depression and a record large federal budget deficit -- just to name a few. He has an enormous job ahead of him with major problems that have no immediate solutions, and which may get worse before they get better.

But keep one thing in mind dear readers. President-elect Obama comes from a political persuasion that believes it is perfectly acceptable for the government to own equity stakes in the private sector. And he comes into power at exactly the time in which much of the public is more than willing to see this happen, and when even some conservative analysts admit that such steps are probably a "necessary evil."

Based on the many comments I receive from readers, it is obvious that many of you are totally against the government bailouts. Be warned, however, that the bailouts are far from over in my opinion. So it is in this context that I move on to more specific issues.

The Economy -- Have We Seen The Worst Of It?

As noted above, we see and read lots of economic, financial and investment forecasts at my company. Here is the general consensus on the economy of late (obviously, there are forecasts that are better and worse than the consensus I see out there). The general consensus is that the US economy (GDP) fell by an annual rate of 4-5% in the 4Q. We won't get the first official GDP estimate until the end of this month.

The general consensus is that the first half of 2009 will also see negative GDP, but perhaps not as bad as the 4Q we just endured. The unemployment rate is expected to rise to at least 8%, and some believe 10%, well before the end of this year. However, most forecasters currently believe that the US economy will bottom out and begin a slow recovery some time in the second half of this year -- assuming, of course, that there are no more big negative shocks, and that the banks slowly resume lending.

Some of my respected sources believe that, if necessary, the Obama administration and/or the Fed will institute some government mechanism that will guarantee bank loans if that's what it takes to unfreeze the credit markets. (I'm not making this up, folks.)

Assuming the economy bottoms out sometime in the second half of this year, the general consensus is that GDP will grow at a below-trend rate of only 1½-2½% for the next several years following 2009 as the world continues to deleverage (i.e. -- reduce debt).

Of course, there are some respected forecasters that believe the above noted scenario is too optimistic. Some believe that the bailouts will not be successful, the credit markets will not unfreeze this year, and that we are headed for a modern day depression. Others believe that even if the bailouts work, we will be facing runaway inflation in 2010 and beyond. Clearly, there are few, if any, rosy scenarios floating around today.

Are The Bailouts Necessary & Will They Work?

Most conservatives (and even some liberals) I talk to are opposed to the various government bailout measures to-date and the trillion dollar rescue package that President-elect Obama has planned. Many say, "Let ‘em all fail." Several media polls have shown that a majority of Americans are opposed to the bailouts. Personally, I would much prefer an economic stimulus plan that eliminated the capital gains tax and reduced other taxes, but that is not going to happen with the Democrats in control of Congress and the White House.

Given that reality, most of the sources that I respect agree that the bailouts and the various actions by the Fed were necessary in an effort to avoid a debt deflation and a possible depression. Their argument is that with consumer spending accounting for over 70% of GDP, and with consumer spending having fallen off a cliff, the government had to step in to keep us from going from a serious global recession to something worse.

In fact, some forecasters are calling on other countries to follow the lead of US policymakers and slash their interest rates and recapitalize their money center banks. Some actually criticize Europe for resisting such rescue efforts, while praising the UK for its financial rescue efforts.

Further, I would also say that there is a consensus in the forecasting world that it was a huge mistake for the government to let Lehman Brothers go bankrupt. Many analysts believe that it was the failure of Lehman that caused the major banks to put a lockdown on lending, even to each other.

I certainly don't expect to make any bailout converts with this discussion. However, I think it is pertinent to point out that there are respected analysts and forecasters that believe the government and the Fed had no choice but to do what has been done, and that the government may have to do even more if we are to avoid a depression.

Now to the question of whether the bailouts will work. At this point, the answer is we don't know. The first "economic stimulus package" of $168 billion last spring was considered pretty much a non-starter. Various sources have estimated that most Americans who received the tax rebate checks in late April and May saved most of the money or used it to pay off credit card debt or other bills, rather than spend the money as was hoped by the Bush administration.

One thing is clear, however: the Bush administration did not have a well-designed plan for how it intended to use the first $350 billion of the $700 billion Troubled Asset Relief Program (TARP). That was obvious when President Bush and Treasury Secretary Paulson changed the objective of the TARP from buying up troubled mortgage-related securities to recapitalizing the major banks and most recently the automakers.

Some (but certainly not all) of the criticism of Bush and Paulson may have been unfair. I don't believe anyone knew how difficult it would be to reinstate trust in the credit markets and to get the major banks lending once again. As discussed above, President-elect Obama will face the same challenge when he takes office, and talk of some kind of government loan guarantee program for the banks continues to gain momentum, for better or worse.

While it remains unclear if the bailouts will work, there is now little doubt that Mr. Obama's request for a massive new rescue program of up to $1 trillion will be passed by the Congress within the next month or two. Over the weekend, several leading Republicans stated that they would support such a huge stimulus program, provided it was not loaded with earmarks. So I believe it is safe to assume we will see Obama get his wish.

The Latest Disappointing Economic Reports

I have been poring over economic data for over 25 years, and I do not remember another time when the various reports have been as overwhelmingly negative as over the last month or so. Let's take a look at the latest numbers. As noted earlier, most forecasters expect that 4Q GDP fell by 4-5%; however, that report won't be out until January 30.

The final report on 3Q GDP was an annual rate of --0.5%, about as expected, following +2.8% in the 2Q. The decline in 3Q GDP was largely the result of a 3.8% drop in personal consumption expenditures.

The Index of Leading Economic Indicators (LEI) fell 0.4% in November (latest data available). The LEI has been falling for over a year. More troubling, the six-month change in the LEI was negative 2.8%, and the 12-month change was --5.6%. The Conference Board reported that the Consumer Confidence Index fell to a new all-time low of 38.0 in December.

Consumers' appraisal of current conditions grew substantially worse in December. Those claiming business conditions are "bad" increased to 46.0% from 40.6% in November, while those claiming business conditions are "good" declined to 7.7% percent from 10.1%. Consumers' assessment of the labor market was also considerably more negative than in November. Those saying jobs are "hard to get" rose to 42.0% from 37.1% in November, while those claiming jobs are "plentiful" decreased to 6.2% from 8.7% a month earlier.

The plunge in consumer confidence resulted in even worse than expected retail sales during the holiday season. Spending Pulse, an organization that collects consumer spending data from MasterCard, says consumers spent about 20% less on electronics, women's clothes and jewelry in November and December in comparison with the same period last year. Spending Pulse says total retail sales declined up to 8% during this holiday season.

The numbers are not all in yet, but it also appears that online sales declined for the first time ever. Reuters reported that online sales for the holiday period up to December 23 fell 3% from the same period last year, marking the first decline in Internet spending since comScore, Inc. started tracking online sales in 2001.

On the manufacturing front, the news is equally dismal, if not worse. The Institute for Supply Management (ISM), a purchasing management group based in Tempe, Ariz., said its manufacturing index was 32.4 for December, the lowest reading since June 1980, when it stood at 30.3.

Manufacturing activity failed to grow for the fifth consecutive month, according to the ISM, and ISM noted that the December decline was representative of all sectors of manufacturing. An ISM index reading above 50 indicates growth, while a reading below 50 indicates a slowdown. A reading below 41 is typically associated with recession in the broader economy.

Industrial production fell 0.4% in November and was 5.5% below yearago levels. Capacity utilization (the factory operating rate) fell to 75.4 in November, down from 81.1 a year ago. Durable goods orders declined 1.0% in November, following the huge drop of 8.4% in October. It was the fourth consecutive monthly decline in durable goods orders.

The unemployment rate jumped to 6.7% in November, the highest level in more than 14 years. Forecasters expect the December unemployment rate to jump to 7% when the latest report comes out on Friday. Nonfarm payroll employment fell sharply by 533,000 in November. As noted earlier, most analysts expect the unemployment rate to rise to 8% or higher in the first half of 2009. At 500,000 jobs lost per month, it could hit 10% by the end of this year if the economy doesn't begin to rebound.

News on the housing front was equally disappointing. Sales of existing homes plunged 8.6% nationally in November. New homes sales also declined again in November. The national median sales price for existing homes fell by the largest monthly amount on record in November. The median price was $181,000 as compared to $208,000 a year ago, a decline of 13.2% nationally. Of course, in many areas prices are down far more than 13% over the last year.

The National Association of Realtors reported that there were 4.2 million unsold homes on the market at the end of November. At the current sales pace, it would take 11.2 months to sell all the homes on the market. NAR also notes that many homeowners have taken their properties off of the market. Understandably, housing starts continue to plunge, with November starts at 625,000 versus 771,000 a month earlier.

Deflation -- Consumer Price Index Goes Negative

As I have discussed above and in previous E-letters, the government and the Fed desperately want to hold off deflation in the economy. This fear is the overriding reason behind the bailouts, including the potentially $1 trillion stimulus package Mr. Obama and Congress are planning. Lawmakers are particularly frightened now that the Consumer Price Index has gone negative for the last several months, and especially as it plunged lower in October and November.

In October, the CPI fell by a full 1.0% - the largest monthly dive since records began to be kept in 1947. Yet the record October decline was significantly eclipsed in November when the CPI plunged 1.7%. The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) decreased a full 2.0% in November. Of course, the significant fall in energy prices is helping this trend along, but there is much more at work here than just falling gasoline prices.

For the 12 months ended November, the CPI actually rose 1.1%. That compares starkly to July of last year when the CPI was up 5.6% on a year-over-year basis. The trend in price inflation is clearly falling rapidly. Even the "Core" CPI -- less food and energy -- is falling. The Core CPI was down 0.1% in October and was unchanged in November.

Wholesale prices are falling even faster. The Producer Price Index fell 2.8% in October and another 2.2% in November. The 2.8% dive in October was the largest monthly decline on record. The Labor Department also reported that the price of imported goods dropped 4.7% in November and more than 10% in the past quarter. Prices are coming down in a hurry! This is Bernanke's worst nightmare!

Price data such as the above, and similar numbers from around the world, are leading to increased discussion about deflation. A recent cover story in The Economist made it pretty much official: Deflation, not inflation, is now the greatest concern for the world economy.

Over the past year, producer prices have fallen throughout the developed world. Consumer prices have been falling for the last six months in France and Germany. In Japan, wages have actually fallen 4% over the past year. Prices are also falling in China and Hong Kong.

So far, none of these price declines looks anything like the massive deflation that accompanied the Great Depression. But the appearance of deflation as a widespread problem is disturbing, not only because of its immediate economic implications, but because until recently most economists regarded sustained deflation as a fundamentally implausible prospect, something that should not be a concern.

Such assumptions are now under fire as the Fed has slashed short rates to zero. I assume we'll be discussing deflation a lot more this year.

Stock Markets -- Might We Have Seen The Bottom?

The US and global equity markets will be buffeted in 2009, on the negative side, by slowing economic growth, continued deleveraging, a shortage of credit and possible deflation. On the positive side, the markets should be aided by extremely low interest rates, the government's massive efforts to reflate the economy and unfreeze the credit markets and the possibility that a lot of money now on the sidelines could come back into the market at some point.

Unlike the general consensus about where the economy is headed this year (worse in the first half, but a recovery by year-end), there is no such consensus regarding where the stock markets are going over the next year or longer. Opinions and forecasts are all over the board.

Some analysts I respect believe that the US stock market is in a secular bear market, and that we probably have not seen the worst of it. If the economy is going to get worse in the near-term, and then grow at below-trend rates of 1½-2½% over the next 2-3 years after 2009, this is a rather dire forecast for corporate earnings, which supports the case for lower stock prices over time.

Other analysts I also respect believe that the waterfall collapse in equity prices in 2008 significantly overshot on the downside, and that the November lows could represent the bottom, although they would not be surprised to see a retest of the late November lows at some point.

Forecasters in the latter camp point to the fact that there is an ocean of money around the world that is sitting in Treasuries and other no-risk/low-risk vehicles earning next to nothing. They suggest that with an even modest uptick in consumer confidence, a flood of domestic and international money could come rushing back into US equities -- especially with the rebound in the US dollar last year.

Most analysts in both camps seem to agree that the equity markets are overdue for a potentially strong corrective rally which could play out over the next several months. Specifically, most forecasters I read believe that there will be some kind of "Obama rally" after the inauguration. The problem is that the broad equity indexes have already rallied 20-25% from the five-year lows in November.

Conclusions

One thing appears clear: 2009 is likely to be another wild year in the markets. So, what is an investor to do? Remain in cash and earn little or no return, or jump back into equities and risk losing even more money if the market retests the November lows as some analysts expect? I can't tell you what the market is going to do in 2009, but I can restate what I have said since beginning this E-Letter in 2002 -- it's wise to have at least part of your portfolio in an investment program that can switch to a defensive posture (cash or hedged) in uncertain markets, in my opinion.

While I don't have space in this week's E-Letter, in upcoming issues I'm going to discuss how active management -- investment programs that have the ability to go to cash or hedge long positions - benefited investors in 2008. I'm also going to highlight the huge inflows into some of these programs during 2008, even though most mutual funds were hemorrhaging assets badly. And you may be interested to learn where these inflows were coming from. What do they know that you don't know? The answer may surprise you.

I'll also bring you up to date on the performance of the latest additions to our AdvisorLink team, the Scotia Partners Growth S&P Plus and S&P Moderate Growth programs. While past performance cannot guarantee future results, suffice it to say that Scotia's programs continue to meet our expectations.

If you'd rather not wait on these future issues and want to learn more about Scotia and the other actively managed investment programs that have the potential to become defensive when market conditions warrant, feel free to give one of our Investment Consultants a call at 800-348-3601 or send us an e-mail at info@halbertwealth.com. You can also find out more about these programs on our website at www.halbertwealth.com, or request a complete Scotia Investors Kit by completing our online Scotia request form.

Wishing you a profitable New Year,

Gary D. Halbert

SPECIAL ARTICLES

Tyranny of the Tax-Exempt (Must Read!!!)
http://www.newsmax.com/insidecover/obama_stimulus_package/2009/01/06/168219.html

Obama's Trillion Dollar Political Stimulus Package
http://www.realclearpolitics.com/articles/2009/01/fiscal_follies.html

Obama Eyes $300 Billion Tax Cut - What A Surprise!
http://online.wsj.com/article/SB123111279694652423.html

Obama Lies About Government Bailout Plan
http://www.aim.org/aim-column/obamas-lies-about-government-bailout-plan

On The Economy And Active Management

Gary D. Halbert — Tue, 21 Oct 2008 22:07:39 GMT

IN THIS ISSUE:

A Look At The Latest Economic Numbers
Economic Forecasts Roundly Downgraded
Fallacies Of A "Buy-And-Hold" Only Approach
The Goal Of Active Management Strategies
The HWM Difference
Is It Time To Try Active Management?
Conclusions -- Don't Miss The Next Bull Market

Introduction

This week, we will take a look at the latest economic numbers which look quite bleak overall. There is little doubt that the US and the rest of the world are headed into a global recession sparked by the international credit crisis. The only question now is: How deep and how long?

Following that discussion, I will review the advantages of including active investment strategies in your portfolio. Long-time readers know that I have been a strong advocate of "active management" strategies, especially those that have the flexibility to move to cash (traditional market timing), "hedge" long positions during market downturns or even go "short" and provide the potential to profit even when the markets decline. Not surprisingly, such active management strategies are back in demand in the wake of the recent stock market collapse.

Now that active management strategies are coming back into vogue, I will tell you why I have always been a fan of money management techniques that seek to avoid big losses, especially of the magnitude that we've all seen over the last 4-5 weeks. I think you'll find that discussion very interesting in light of the recent stock market chaos.

Though I have mentioned the advantages of active management strategies many times in the past, the current market environment has resulted in many more calls to my staff from investors who now seek to include these strategies in their portfolios. Thus, this may turn out to be one of my most popular E-Letters ever, though it's unfortunate that investors have had to endure severe losses in their portfolios to make it so.

A Look At The Latest Economic Numbers

We have long known that consumer spending accounts for apprx. 70% of US Gross Domestic Product, and consumer spending is predicated on consumer confidence. At this point, consumer confidence is in the tank and consumer spending is falling off a cliff.

The mid-October University of Michigan Consumer Sentiment Index plunged to 57.5, down from 70.3 in the last half of September. This is one of the deepest monthly declines in the Sentiment Index since it has been recorded. The latest report noted that there have only been four surveys that posted monthly declines of 10 index points or more. The government's Consumer Confidence Index to be released next Tuesday is expected to show a similar sharp decline.

So a recession is upon us despite the fact that US GDP rose by a healthy 2.8% in the 2Q. We may even find that the economy remained technically in positive territory in the July-September quarter when the government releases its first report on 3Q GDP on October 30. Regardless of what next week's GDP says about the 3Q, there is little doubt that economic growth will fall into negative territory in the current 4Q. And it will likely be down a lot.

Not that much else matters when consumer confidence and spending are in freefall, but here are some of the other recent economic reports.

The Index of Leading Economic Indicators (LEI) actually rose 0.3% in September, reversing the recent downward trend. However, analysts are careful to point out that the rise was primarily due to a large increase in the money supply, essentially masking sharp declines in stock prices and residential building permits and increased layoff activity. The September increase was also offset by a larger downward revision to August's LEI. The leading indicators are almost certain to fall again for October, probably significantly due to the continued washout in the stock markets.

Retail sales fell more than expected in September, down 1.2% following a decline of 0.4% in August. Chain store sales, including Wal-Mart, declined sharply in September and will almost certainly be down even more this month. I don't shop very often, but I was in Macy's over the weekend and it looked like two-thirds of the store was marked down 40-50% or more.

US auto sales plunged 26.6% in September, making it the first month since 1993 when buyers drove less than one million new cars and trucks off the dealerships' lots. Analysts predict that October will be even worse. GMAC announced on October 13 that it will only make car loans to buyers with a credit score of at least 700. This is bad!

On the manufacturing side, the ISM Index fell from 49.9 in August to 43.5 in September. Any reading below 50 in the ISM Index indicates that manufacturing is in a recession. Factory orders fell a whopping 4.0% in August (latest data available). I'm sure it has happened before but I don't remember seeing a 4% drop in one month in the past.

The unemployment rate held steady at 6.1% in September, but this number will definitely go higher for October and the rest of the year as well.

Economic Forecasts Roundly Downgraded

I read and hear a lot of economic forecasts, and every one is being downgraded in light of the events of the last 4-5 weeks. Other than the gloom-and-doom crowd that always predicts a recession or worse, I don't know any outfit that predicted what we have seen in the last month or so. Thus, everyone is having to downgrade their economic forecasts.

The consensus outlook, prior to the last 4-5 weeks, was that the US economic growth would go mildly negative in the 4Q and somewhat more negative in the 1Q and 2Q of next year. Most forecasters felt the US economy would rebound back into positive territory in the second half of next year. But frankly, I don't know anyone that has a clear forecast for what happens next year.

The problem is, no one knows for sure if the massive government bailout is going to work. The Treasury Department is working feverishly to put together the apparatus to begin buying up distressed debts. It's a complicated process that is rife with conflicts of interest. The thinking originally was that the Treasury would be buying assets after the first of the year. Now they are hoping to be in business before the holidays. They need to be.

Fallacies Of A "Buy-And-Hold" Only Approach

The stock market collapse over the last several weeks has devastated millions of investors' portfolios and shattered retirement plans for untold numbers of Americans. Many investors' portfolios are down 35-40% or more in just the last 5-6 weeks. The market plunge has brought into serious question Wall Street's mantra of "buy-and-hold" for the long-term.

Whether it's called "asset allocation" or "index investing" or any of a number of other names, the basic premise of buy-and-hold investing is to indefinitely hold a group of investments in hopes they will produce gains in an amount to meet investment goals. If you have read me for long, you know that I have never been a big fan of having your entire investment portfolio in a buy-and-hold strategy, especially if there is no "risk management" component involved to deal with periodic bear markets.

Instead, I have recommended "active management" strategies which incorporate risk management techniques. While active management can include programs that stay fully invested and rotate among market sectors, most of those that we recommend have the flexibility to move to the safety of cash (money market) or "hedge" long positions during bear markets. Some can even "short" the market and can profit when the market drops.

At Halbert Wealth Management (HWM), we specialize in finding successful money managers that use active management strategies which seek to minimize the effects of bear markets in stocks and bonds. This is not to say that the strategies we offer cannot lose money in down markets. Any equity investment has the potential to lose money. Instead, the Advisors we recommend in our AdvisorLink® Program use sophisticated investment strategies to limit the downside risk of a bear market or major downward correction -- something you won't find in most buy-and-hold portfolios.

We continually search the universe of professional money managers in an effort to find those Advisors who have delivered solid "risk-adjusted" returns and have managed to avoid the huge losses so common in bear markets and major downward price corrections. As it has turned out over the years, we have found the best risk-adjusted returns among active managers that move out of the market or hedge long positions from time to time to avoid bear markets.

The traditional Wall Street wisdom over the years has been that it is impossible to "time" the market. They argue that if you are out of the market from time to time, you are likely to miss the best days. So you should stay fully invested at all times.

Does that argument sound familiar? I'll bet it does, especially over the last year or so when you may have wanted to sell out, but your broker talked you into holding on. Now, with the stock markets down 35-40% or more (and it may not be over yet), it's probably the worst time to sell out, so you're stuck.

But there were active managers who limited losses in the latest bear market by moving to the safety of cash, hedging their long positions and/or shorting the market. This includes many of the equity money managers I have recommended to you in these pages. Later on, I'll tell you how to find detailed performance statistics on these money managers, but first let's look at the underlying premise of one active management strategy known as "market timing."

The Goals Of Active Management Strategies

Simply put, successful active management/market timing strategies have two basic goals:

1. Participate in stock market gains in the good times; and

2. Limit market losses to half or less of equity losses in the bad times.

These goals are simple in concept, I trust you would agree, but more than a little challenging to deliver. In fact, most active managers we run across don't succeed in meeting these goals over the long haul. Yet there are those that have, if you just know where to find them.

To be honest, many money managers and even individual investors can decide to move to cash in bad times. We are encountering investors who have been on the sidelines for months due to subprime fears. The real challenge is to know when to get back into the market once the market rebounds.

It is also important to note that some active money managers go one step further and seek to make money in down markets by entering into "short" sales of major market indexes using specialized mutual funds. While this is a more aggressive strategy than one that will only go to cash or hedge long positions, it provides investors with the potential to make money even when the markets are going down.

Here is the basic challenge for active managers if they are to beat the buy-and-hold strategy: How do you devise a system that keeps you in the market on most of the good days, but also takes you out (or "short") when bear markets come along? Let me say, this is not easy! And most active managers and market timers are not successful over time.

Those that have been successful over time, generally speaking, have developed sophisticated systems that gauge stock market trends and generate signals for when to enter and exit the market. This is not seat-of-the-pants, emotional trading, though some Advisors do have some measure of discretion built into their systems.

There is much, much more to it than this, of course. It is one thing to be generally correct about the trend -- up or down; it is quite another to know which sectors of the market to invest in. Space doesn't permit me to elaborate on how successful active managers determine which sectors to invest in, when they get their trend signals, but trust that this is another important variable when it comes to selecting a successful active money manager.

The bottom line is, there are active managers and market timers out there that have been successful in delivering their clients good returns over time, but more importantly have avoided the sometimes huge losses that come with buy-and-hold strategies.

The key is, how do you find them? Most investors don't know how to find these successful active managers. Most of these successful managers don't advertise, so they are not household names. The big brokerage firms are not likely to tell you about them, since they don't buy into the Wall Street buy-and-hold mantra.

Truth is, you will probably only find them if you stumble into a boutique investment firm like mine that has the money and the commitment to search high and low for the handful of successful active managers that are out there.

The Halbert Wealth Management Difference

My firm recognizes that we're not the only company that offers active management strategies to our clients. We do, however, believe that we have structured our AdvisorLink® Program in such a way as to offer investors the most flexible way to participate in such programs.

In many cases, actively managed investment programs are "packaged" and sold to investors as a single solution. The selection and retention of each money manager, the types of strategies employed, and the allocation to each participating manager is set by the sponsoring firm. Think of it as being something like a fund of funds. There's nothing wrong with this approach, and we are even considering some of these programs to offer our clients. However, the drawback of such programs is that they limit the investor to pre-selected options.

At HWM, we have "unbundled" the mix of active money managers so that each is available with or without any of our other managers, and in an allocation that can be tailored for each investor. Since most of our clients tend to be do-it-yourself investors, we feel it offers them the following advantages:

Due Diligence -- I have written a number of times about the extensive due diligence each money manager must endure in order to be added to our list of recommended programs. We not only subject the numbers to intense analysis, but also the Advisor's administrative capabilities and business stability.

We also have face-to-face meetings with each Advisor in order to not only get a feel for his or her grasp of the strategy being employed, but also to get a personal feel for the individual with whom our clients' money will be placed. Most of the time, these meetings take place as part of an on-site visit to the Advisor's office by my due diligence staff.

We then summarize the results of our findings in an Advisor Profile document that is made available to each prospective investor. For the investor, this means that the money manager has been subjected to a great deal of scrutiny as to performance, strategy and administrative capabilities. Thus, a lot of the legwork has already been done for our clients.

Another part of due diligence is in regard to ongoing monitoring of an active money manager's performance and operations. We monitor trading and performance on a daily basis, and communicate with money managers immediately if we notice anything out of the ordinary or not within our expectations for the particular program being monitored.
Transparency -- Even before the recent subprime mortgage debacle, "transparency" was a big issue in the managed funds world. Now, it's likely to become the law of the land, even for secretive hedge funds. Fortunately, investors have always enjoyed a high level of transparency in regard to the programs we offer.

As I noted above, some sponsors of actively managed investments will keep the details of who is managing parts of the portfolio a secret. That way, they can make a change in the lineup with a minimum of disruption. However, HWM offers each money manager as a stand-alone unit, providing full visibility of each manager and his or her approach to managing money. This transparency also allows each prospective client to review a detailed summary of the money manager's actual performance since the program's inception.

Beyond the ability to know and evaluate each individual money manager, investors also are able to see exactly how their money is being invested. All of the various money managers we recommend offer our clients the ability to follow the trading of their accounts online.
Flexibility -- Since we do not offer any set portfolios containing a mixture of money managers available in our AdvisorLink® Program, investors have complete flexibility to combine programs in a way they feel is most suitable for their unique situation. We have some clients who invest in only one of the programs we offer, while many others choose to allocate their investments among several programs.

We feel that combining the various AdvisorLink® investments can offer investors additional diversification beyond just having a variety of different asset classes in a buy-and-hold portfolio. This additional diversification comes about in a number of ways, including the following:

● Diversification for different market environments. We all know that a declining market will generally result in losses in a buy-and-hold investment. However, such a market environment could also result in some active management strategies becoming "neutral" by going to cash or hedging long positions. In that event, an extended bear market could result in only money market returns. A combination of investment strategies can provide the potential for making money even in a down market. For example, it may be suitable to have both a "long or cash" strategy and a program that can go both long or short in the market. This would provide a potential for portfolio gains even in a declining market.

● Diversification to reduce correlation. I have discussed correlation of investment programs in past E-Letters, but the basic idea is that two investments are "correlated" if they tend to go up and down at the same times. It is generally best to include some non-correlated investments in a diversified portfolio. I have noted before that most of the investment alternatives in our AdvisorLink® Program have a low correlation to the major market indexes. However, it is also true that many of these programs have little or no correlation to each other

● Diversification among investment strategies. The recent market meltdown has shown that when times get tough, virtually all equity asset classes suffer. Even for investors who choose to maintain an asset allocation or other buy-and-hold investment strategy, adding actively managed programs that go to cash or even "short" the market can result in a higher level of strategic diversification.
Control -- A final advantage of our unbundled approach to active management strategies is that you have complete control over what managers are included in your portfolio. While HWM provides due diligence services and can assist you with making an allocation decision, the final say is up to you. This keeps you in complete control of your investment destiny.

Nowhere is this more important than when it comes time to move from one money manager to another. I often tell prospective clients that few, if any, money managers will ever tell you to fire them. I am personally aware of Advisors with substandard investment programs who keep promising investors that "things will get better" in an effort to retain their business.

At HWM, our due diligence and ongoing monitoring will help to identify Advisors whose programs may no longer be suitable for meeting your needs, and we will offer other alternatives. However, the final decision as to whether to retain a money manager is yours, as it should be. There are also no "lockups," early termination charges or any other impediments to accessing your money should the need arise.

In short, the HWM AdvisorLink®Program offers investors a "cafeteria-type" approach to money management. Do-it-yourself investors can evaluate each money manager on its own merits rather than accepting it as part of a "canned" approach. For investors who are not do-it-yourselfers, the HWM staff can help evaluate the most suitable mix of money management programs based on the investor's assets, risk tolerance and investment goals.

Our experienced staff is also available for ongoing questions about the performance of each of our recommended programs, as well as inquiries about specific issues regarding your account.

As you consider the investments that make up our AdvisorLink®Program, it's also important to remember that none of our Advisors invest in subprime mortgages or anything of the like. The equity managers I recommend invest in well-known, US-based mutual funds that you probably have heard of and can look up in the newspaper or on the Internet daily.

Plus, no one on my staff is paid a commission, so there is never any pressure to invest or incentive to sell you something that may be unsuitable for your needs. On that, you have my promise. Likewise, we have an ironclad "privacy policy" and your private financial information is never, ever shared with anyone else, other than as may be required by law.

Is It Time To Consider Active Management?

As I noted above, many of my readers have recently contacted us for information on the money managers I recommend in light of the market's recent meltdown. They have seen their buy-and-hold portfolios devastated by losses of 35-40% or more. Retirement prospects have been shattered for millions of investors. People across the US are now looking for risk-averse ways to invest their money that can deliver market returns with less downside risk.

Earlier, I said that I'd provide a way for you to see how our various programs have fared so far this year. If you are ready to explore the world of actively managed investments, I recommend that you visit our AdvisorLink® performance summary web page at the following address:

http://www.halbertwealth.com/advisorlink/programs.php

While you will no-doubt notice that some of the programs we offer had year-to-date losses as of the end of September, you will also note that these are far less than those suffered by the major market indexes. Our goal is to offer programs that limit losses to half or less than those of the market, which means that when the markets turn up again, there's less ground to make up.

One noticeable exception to this goal is the Niemann Dynamic Program, which has a year-to-date loss close to that of the overall market. The reason that losses have not been limited is that this particular program is a high-octane long-only program that is always fully invested. Niemann does not have the option to go to cash or hedge any of Dynamic's positions, so it suffers in down markets. However, I also urge you to look at the long-term performance of this program as compared to the S&P 500 Index. Of course, past performance is not necessarily indicative of future results.

Conclusions -- Don't Miss The Next Bull Market

The stock markets have imploded in the last 4-5 weeks on a scale that virtually no one anticipated. Buy-and-hold strategies are down nearly 35-40% or more in less than five weeks. Americans' retirement plans are now turned upside down.

I certainly don't have all the answers. But I do have some suggestions for avoiding the huge losses that have occurred in just the last few weeks.

I have argued these points about minimizing losses for over five years in these E-Letters. I have argued my thoughts about active management strategies that seek to minimize losses in market downturns.

Maybe now is the time to do something about it.

I don't know when the stock markets will bottom. Much depends on how quickly the credit markets free up. Whenever the market bottoms, I fully expect we will see a powerful bull market emerge. When that happens, you want a professional manager that will get you back in the market for the next run.

A very successful money manager once told me the following: Investors think they pay us our management fees to get them out of the market during the down periods. But what they really pay us for is to get them back in when the market heads higher again.

This is so true, I believe. Millions of investors have bailed out of the market in the last few weeks. Sadly, most will not know when to go back in. The only way to recover the massive losses that have been experienced over the last couple of months is to participate in the recovery.

The professional Advisors I recommend have histories of catching major trends in the market -- both up and down. And you don't want to miss the next bull market. Maybe it's time to get the professionals I recommend on your team.

If you are ready to join the ranks of investors who are putting active management strategies to work for them to reduce the risks of being in the market, I urge you to contact us about the various opportunities available in our AdvisorLink® Program. Feel free to call one of our Investment Consultants at (800) 348-3601, or send us an e-mail at info@halbertwealth.com. You can also request additional information about our risk-managed investments by completing one of our online request forms.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

How to Read the Constitution (By Justice Clarence Thomas -- A Must-Read!)
http://online.wsj.com/article/SB122445985683948619.html

Get Ready for the New New Deal
http://online.wsj.com/article/SB122455099434052597.html

The Coming Pink Slip Epidemic
http://www.businessweek.com/bwdaily/dnflash/content/oct2008/db20081020_022663.htm?chan=top+news_top+news+index+-+temp_top+story

The Fed, The Stock Market & What To Do Now

Gary D. Halbert — Tue, 12 Aug 2008 20:31:00 GMT

IN THIS ISSUE:

Fed Leaves Interest Rates Unchanged Again
But Will Inflation Really Moderate?
Stocks - Stuck In A Long-Term Sideways Pattern?
Bad News For Millions Of Baby Boomers
A Wall Street Myth About To Be Shattered?
Avoiding Big Losses Is The Key, Maybe It's Time You Join Us
The Bottom Line For Your Investments

Fed Leaves Interest Rates Unchanged Again

For the last 2-3 months, the media has warned us that inflation is rising and that the Federal Reserve was very likely going to raise short-term interest rates soon. I have argued, on the other hand, that the Fed would leave interest rates unchanged - probably for the rest of this year, at least - due to the ongoing housing/credit crunch and the sluggish economy.

Despite media warnings of a hike, the Fed Open Market Committee (FOMC) met last week and once again voted 10-1 to leave the Federal Funds rate unchanged at 2%. In its policy statement released along with the announcement of the decision, the Fed noted the following:

"Economic activity expanded in the second quarter [+1.9% GDP], partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. [Emphasis added, GDH.]

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability."

Fed watchers carefully parse the words in these policy statements. The key in the latest policy statement is the underlined text above. In the prior policy statement on June 25, the Fed basically said it had no clear idea how high inflation might go. However, in the August 5 statement above, the Fed indicates it expects inflation to moderate later this year. I would speculate that the Fed's revised view on inflation may have been somewhat influenced by the latest drop in oil prices.

Some financial pundits had, at the least, expected that the latest FOMC vote on policy would be closer than 10-1 as it was on June 25. Yet the lone dissenter remained Richard W. Fisher, president of the Federal Reserve Bank of Dallas. All of the other FOMC members, including Chairman Bernanke, appear more concerned with the credit crunch and the sluggish economy than the latest inflation numbers.

But Will Inflation Really Moderate?

The government's latest report on GDP for the 2Q showed the economy growing at a +1.9% annual rate. That same report cited consumer inflation having risen 4.2% (annual rate) in the 2Q versus 3.5% in the 1Q. However, the core rate of consumer inflation (minus food and energy) was only 2.2%, unchanged from the 1Q.

The Consumer Price Index rose 1.0% in June, slightly above pre-report estimates, as compared to a rise of 0.6% in May. The CPI core rate rose 0.3% in June, up slightly from 0.2% in May. Year over year, the headline CPI rose 5.0% in the 12 months ended June. The core rate rose 2.4% over the same period. This is still above the presumed Fed target for core inflation of 2% or less, but not dramatically so.

Obviously, consumer spending is one of the major drivers in inflation rates. Personal consumption expenditures rose 1.5% in the 2Q as compared to 0.9% in the 1Q. Some analysts attributed the rise in 2Q spending to the government rebate checks; however, the rebate checks were not all mailed by the end of June, so they were only partly a factor. The rebate checks should also help boost 3Q consumer spending, at least marginally, which argues that the inflation rate is likely to stay on the high side a bit longer.

On the positive side, most commodity prices have plunged over the last two months, after many set all-time record highs earlier this year. Corn, which peaked around $7.75 per bushel earlier this year, has now plunged to below $5.00. Wheat has plunged from around $12.50 per bushel to near $6.00. Rice is down sharply as well. And we all know that oil and gasoline prices have declined recently as well.

Barring any major weather problems as we head into the harvest season, and assuming we don't have any killer hurricanes in the Gulf, I could see commodity prices continuing to drift lower over the next several months. Thus, the Fed may be proven correct in projecting that inflation will moderate later this year.

Finally, the latest report on 2Q GDP which showed the economy growing at a 1.9% annual rate has put to rest much of the talk that we are already in a recession. What remains to be seen is whether or not still-high gas and energy prices will put a serious dent in consumer spending nationally in the current quarter and/or the 4Q.

Analysts at Wachovia Economics Group now estimate that GDP will rise 2.2% in the 3Q and 1.2% in the 4Q. I tend to think those numbers may be a bit optimistic, unless oil prices drop below $100 per barrel, but we'll see.

Stocks - Stuck In A Long-Term Sideways Pattern?

The recent sharp declines in US stock prices have caused many analysts and investors alike to rethink their forecasts for market returns going forward. If we look back to late 1999 and 2000 when many believe the last bull market ended, I could argue that the stock market has simply been in a broad trading range since then, particularly when we note that the recent top in the S&P 500 (right hand side of the chart below) occurred at roughly the same level as the top in early 2000.

I hesitate to point this out, but the US stock markets have experienced some very long sideways periods over the last century or so. The good folks at Rydex Funds put together the chart below which shows the performance of the Dow Jones Industrial Average from 1896 to 2007. Rydex illustrates that there have been three extremely long sideways periods in the market, lasting 18 years (1906-1923), 26 years (1929-1954) and 17 years (1966-1982), respectively. These extended periods of sideways movement are often referred to as "secular" bear markets.

[If you click on the chart above, a new browser window will display the full-sized chart. You can click on the image to zoom in closer for more detail; a second click will zoom back out.]

Rydex also notes that the current sideways market has lasted since early 2000, with an unstated suggestion that we may have several more years to go in this difficult market. I don't propose to know what the stock markets will do over the next 5-10 years.

What I do know is more and more respected market analysts, including The Bank Credit Analyst, have come to the view that US stock market returns are likely to be disappointing over the next several years or longer.

Some analysts now believe that investors should expect no more than single digit annual returns over the next several years, at best, and that assumes we do not experience a serious recession along the way.

Bad News For Millions Of Baby Boomers

So-called Baby Boomers are those apprx. 78 million Americans born between 1946 and 1964, most all of whom will retire between now and 2029. The first Baby Boomer, born one second after midnight on January 1, 1946, took early retirement (age 62) in February of this year and began to collect her Social Security benefits.

Estimates vary, but reportedly about 10 million Baby Boomers will retire over the next five years alone. An estimated 3.2 million Baby Boomers will turn 62 this year and 65 in 2011. Various studies conclude that most Baby Boomers have not saved nearly enough for their retirement. That comes as no surprise, since our national savings rate has been negative for the last two years.

Unfortunately, many Baby Boomers are hoping for another late 1990s stock market boom to propel them to where they need to be to fund their retirement - at the age they wish to retire and in the lifestyle they wish to afford. They may be sadly disappointed! And this doesn't begin to consider the fact that we are living longer than ever before.

So what will the Baby Boomers do to fund their retirement if the stock market doesn't cooperate with a big bull market over the next five years (or longer)? Simple: they will have to work longer to make up for their lack of saving and investment. The government has already raised the Social Security retirement age to 67 for those Americans born after 1959, and sooner or later the government will almost certainly have to raise the retirement age yet again.

A Wall Street Myth About To Be Shattered?

For decades, Wall Street has preached the buy-and-hold mantra (read: never get out of the market). They continue to warn that if you get out during the downtrends to minimize losses, you are likely to miss the uptrends. Therefore, you should stay fully invested at all times, take a long-term view, and be prepared to ride out some nasty bear markets and big losses along the way.

As the buy-and-hold strategy increasingly came under fire after the last couple of bear markets, Wall Street simply repackaged and renamed the buy-and-hold strategy and called it "asset allocation." Sounds much better, doesn't it? Asset allocation implies that you spread your investments over several asset classes (stocks, bonds, etc.). But the strategy is still the same: you buy and hold, and subject yourself to large losses whenever the asset classes hit a bear market.

Now, let's reasonably assume that millions of Baby Boomers are behind the curve in saving for their retirement, and that they need the stock market to boom over the next five years or longer to bail them out. Next, let's also assume that most of these Baby Boomers are also invested in the traditional buy-and-hold strategy that Wall Street has preached for years.

So what happens if the stock markets (and the bond markets for that matter) essentially go sideways, or only deliver single digit annual returns, over the next five years or longer? I think it is safe to say that there will be a revolt. Add in a recession, if we get one, and "revolt" could be putting it mildly! Baby Boomers could reject Wall Street's buy-and-hold mantra in a stampede.

Why? Because Baby Boomers no longer have 20-30 years to hold on as Wall Street suggests. Retirement for most will come much sooner, for many in the next 5-10 years. And if the stock markets continue to go sideways, or even marginally higher, over the next several years, Baby Boomers are going to become increasingly restless, to say the least.

Avoiding Big Losses Is The Key

My advice over the last 30 years has been consistent: avoid the big losses. In my view, you don't have the luxury of simply riding out bear markets and hoping you won't bail out near the bottom as so many investors do. The following "Breakeven Table" illustrates just how hard it is to come back from large losses.

Amount of Loss Incurred	Return Required To Break Even

10%	11.1%
15%	17.7%
20%	25.0%
25%	33.3%
30%	42.9%
35%	53.9%
40%	66.7%
45%	81.8%
50%	100.0%
60%	150.0%
70%	233.3%

I have consistently argued for "active management" strategies that can move you to cash (money market) or hedge long positions during bear markets and/or major downward market corrections, as a part of your overall portfolio.

The financial media decided some years ago to vilify active management strategies that can take you to cash from time to time as "market timing," and assured the investment public that market timing is impossible. Making matters worse, there were some market scandals in recent years that were deemed as ‘market timing' or ‘late trading,' when indeed they were nothing close or similar to traditional market timing, which simply seeks to take you out of the market and into the safety of cash, or hedge long positions, during major market downturns.

I have made a successful business out of promoting alternative investment strategies, including traditional market timing. We spend a lot of money each year seeking out active managers that have been successful in protecting clients from significant stock market downturns. Granted, there are many active money managers that have not been successful, but there are those who have admirable performance records.

The money managers I recommend in general: 1) have matched or exceeded stock market returns over time; but more importantly, 2) have limited losses during down market periods. This can be a WIN-WIN combination. Of course, past performance does not guarantee future results. The problem is, most investors don't know how to find these successful money managers.

Maybe It's Time You Join Us

This E-Letter goes out to apprx. one million presumably high net worth subscribers each and every week. I don't mind admitting that this E-Letter has been the largest source of new clients over the five-plus years I have written it. Still I wonder why more of my readers haven't come onboard with Halbert Wealth Management. I have some thoughts on why, in order.

1) As noted above, Wall Street has advocated for years that a buy-and-hold approach to your investments is the ONLY one that works over time; the stock market always goes up over time, right? But not if you seriously look at the chart above which shows multi-year periods when the stock market goes sideways or down.

2) Many investors have been conditioned to believe that their financial advisor/broker needs to be local, so you can sit down with him/her face to face every now and then. Fact: I have over one thousand clients all across America, and I have never met the vast majority of them. We do just fine over the phone.

3) Because many investors have been indoctrinated to Wall Street's mantra of buy-and-hold and asset allocation as the only way to go, they are therefore not open to active management strategies that just might get you out of the market during big downturns, or "alternative investments" that offer additional diversification beyond stocks and bonds.

4) Most investors are reluctant to change. Old habits are hard to break. We learn what we are taught, and it is hard to change, even if we need to in order to meet our financial goals. That will soon change, I predict, especially for Baby Boomers who are approaching retirement and are banking on a new bull market in stocks to bail them out.

The Bottom Line:
Stocks May Disappoint When We Need Them The Most

I realize that many of my clients and readers are already retired. But this week's message is primarily intended for those of you who are approaching retirement in the next 5-10 years. Many of you in this position have not yet saved enough to be comfortable in retirement. The stock market outlook may not be favorable for your retirement needs over the next several years, at least based on my best sources.

Maybe it's time to consider some active management strategies, and some alternative investments, that have historically limited losses during market downturns, and have met or exceeded market rates of return over time. Think about it. (As always, past performance does not guarantee future results.)

I understand that you may have concerns because Halbert Wealth Management is in Austin, Texas and you live somewhere else. But keep in mind that this is the greatest age of global communications in the history of the world. We have the Internet after all. As noted above, I have never met most of my clients all across America, yet we get along just fine.

How is that? #1: If you are one of my clients, you have access to me personally - I am happy to talk to clients as needed. #2: My experienced Investment Consultants (and all of my other employees) are on salary - no commissions - so they have your best interest at heart.

And one more thing. Be assured that I have my own money invested in every program, every fund and every manager we currently recommend. I don't expect anyone to invest in something that I don't also have my own money invested in. You have my word on that.

At the end of the day, maybe you should consider becoming one of my clients and allocating some of your portfolio to the active management strategies and professionally managed programs I recommend, even if you live hundreds or thousands of miles away.

But more importantly, you need to think about whether your traditional buy-and-hold investments are going to get you to where you need to be in the next 5-10 years. What if the stock markets are in one of those long sideways periods as illustrated in the chart above?

Maybe you need to consider a change. Are you really comfortable about funding your retirement? If not, consider what we have to offer. You can access certain of the money managers I recommend for as little as $25,000-$50,000. That way, you can start off small and add to it when you're comfortable.

For more information, call one of my experienced Investment Consultants at 800-348-3601. You may also contact us via e-mail at info@halbertwealth.com, or you can visit our website at www.halbertwealth.com to learn about the types of investment programs we offer.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES

Obama fights offshore oil exploration (bet you don't know this)
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Five GOP Stooges Blow The Drilling Opportunity
http://www.ibdeditorial.com/IBDArticles.aspx?id=303088152935198

Obama vs. McCain on the Economy
http://www.washingtontimes.com/news/2008/aug/11/obama-vs-mccain-on-the-economy

Why Barack Obama Is In Trouble (wish everyone could read this)
http://www.realclearpolitics.com/articles/2008/08/why_barack_obama_will_not_win.html

The War in Georgia Is a War for the West
http://online.wsj.com/article/SB121841306186328421.html?mod=opinion_main_commentaries

Forecasts & Trends : Halbert Wealth Management, GDP

Why the Economy May Disappoint in 2010

Dalbar Update: Investors Still Lagging The Market

On The Economy, Bonds & Bear Market Rallies

Economic & Investment Outlook For 2009

Introduction

Editor's Notes

Obama & The New Age Of Big Government

The Economy -- Have We Seen The Worst Of It?

Are The Bailouts Necessary & Will They Work?

The Latest Disappointing Economic Reports

Deflation -- Consumer Price Index Goes Negative

Stock Markets -- Might We Have Seen The Bottom?

Conclusions

On The Economy And Active Management

Introduction

A Look At The Latest Economic Numbers

Economic Forecasts Roundly Downgraded

Fallacies Of A "Buy-And-Hold" Only Approach

The Goals Of Active Management Strategies

The Halbert Wealth Management Difference

Is It Time To Consider Active Management?

Conclusions -- Don't Miss The Next Bull Market

The Fed, The Stock Market & What To Do Now

Fed Leaves Interest Rates Unchanged Again

But Will Inflation Really Moderate?

Stocks - Stuck In A Long-Term Sideways Pattern?

Bad News For Millions Of Baby Boomers

A Wall Street Myth About To Be Shattered?

Avoiding Big Losses Is The Key

Maybe It's Time You Join Us

The Bottom Line:Stocks May Disappoint When We Need Them The Most

The Bottom Line:
Stocks May Disappoint When We Need Them The Most