Forecasts & Trends : Stocks

The Stock Market Conundrum

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

IN THIS ISSUE:

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

Introduction

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

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

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

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

Ball of Confusion

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

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

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

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

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

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

The Gloom-and-Doom Argument

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

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

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

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

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

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

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

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

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

Damn the Torpedoes, Full Speed Ahead!

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

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

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

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

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

Trillions of Dollars Sitting in Cash

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

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

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

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

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

Looking at the Big Picture

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

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

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

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

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

Is the Market Defying Gravity?

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

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

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

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

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

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

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

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

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

Conclusions

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

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

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

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

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

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

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

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

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

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

Very best regards,

Gary D. Halbert

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Institutionalized Deception

Gary D. Halbert — Tue, 28 Jul 2009 22:05:00 GMT

IN THIS ISSUE:

Figures Don't Lie but...
The Recovery Fallacy
Limiting Losses is the Key
The Potomac Guardian Example
Conclusions

Introduction

Some of you may remember the radio spots some years ago by Eddie Chiles, CEO of the Western Company. His brief commercials would often contain a phrase borrowed from the 1976 movie Network: "I'm mad as hell and I'm not going to take it any more." Right now, I feel somewhat the same way. While I'm not quite as angry as Mr. Chiles, I am concerned that investors continue to be subjected to misleading arguments that favor "buy-and-hold" investments over "actively managed" strategies, even though we've had two major bear markets in this decade alone.

This is especially true now that the market is again moving upward. Wall Street is making a big deal of the fact that the stock market has rebounded from its March low. What they don't tell you is that most of this rebound was needed to just erase the losses incurred in the early months of the year, not to mention losses incurred in 2008.

Even worse is that these misrepresentations continue to be made by many of the big brokerage and mutual fund firms that are intent only on keeping investors' money tied up in their products. Likewise, many in the financial press have also continued to pass on these faulty arguments in the name of prudent advice. It's time to realize that Wall Street's conventional wisdom is designed to have you do what's best for them, and not necessarily what's best for you!

What irritates me even more is that these same buy-and-hold outfits continually preach that it is "impossible to time the stock market." I beg to differ! In the pages that follow, I'm going to show you a professional money manager that has successfully timed the stock market for over a decade, with an average annualized return of 9.13% versus the S&P 500 return of 4.26% over the same period. So don't tell me it's impossible to time the stock market! As always, I must add that past performance is no guarantee of future results.

This week, I'm going to challenge one of the most prevalent buy-and-hold arguments that I consider to be most misleading. I have written about this in the past, but I think it is important to keep spreading the word about buy-and-hold studies and marketing materials that are repeatedly designed to tell only half of the story. The half they tell you is how it hurts you to be out of the market on the good days. The half they don't tell you is how difficult it is to recover from large bear market losses. What else is new?

Figures Don't Lie but...

Proponents of buy-and-hold present a variety of very misleading arguments when attempting to counter the advantages of active investment management strategies. While the statistics that they provide are usually accurate in and of themselves, they are spun together into a web of deception in an attempt to keep unwitting investors in the promoters' funds and/or brokerage accounts.

For example, those who offer buy-and-hold strategies have recently started referring to them as "diversification" rather than Modern Portfolio Theory, asset allocation, etc., etc. The obvious implication is that if you're not using one of these buy-and-hold methods, your portfolio is not diversified. Hogwash!

By adding active management strategies, you can actually increase diversification by adding different investment strategies and not just a variety of investment asset classes. Plus, if you look at the history of bear markets, it's in the buy-and-hold programs where diversification often breaks down as previously uncorrelated investments all start going down together in a declining market. I'll bet you haven't seen this disclosed in any traditional mutual fund advertising.

Another example of this type of deception goes something like this excerpt from an article I found on a prominent brokerage firm's website:

"...Bull market returns tend to be front-loaded, with the bulk of returns accruing to the earliest months of the rally. Being late to the party can mean the birthday cake is half eaten by the time you arrive. For example...The first 12 months of the average bull market has provided more than 40% of an entire bull market's price appreciation, yielding on average 45% for investors..."

While the statistical return figures quoted in this excerpt appear to be true, I have a number of problems with the implications of this statement. The first problem is that it doesn't explain that the 45% average gain after the end of a typical bear market may not even get you back to break-even after the bear market losses you've just incurred. Unfortunately, many investors mistakenly believe that a 45% gain will erase a 45% loss, but it won't.

For example, the 45% average gain mentioned above will cover a portfolio loss of only about 31%. In other words, if your investment portfolio lost 31% of its value, it would take a gain of 45% just to get you back to break-even. So what would it take to get back to break-even if you had a loss of 45%? Doing the math, we find that $10,000 incurring a 45% loss drops to $5,500. To gain the $4,500 back, the investor would need to earn a return of over 80%!! This is another tidbit of information you're not likely to find in Wall Street's glossy marketing materials.

Here is a table showing various levels of loss and the gain it would take just to get the portfolio back to where it started:

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%

The moral of this story is that avoiding large losses can be just as important (actually more so, as I will discuss below) than holding investments so that you don't miss out on subsequent gains.

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 Recovery Fallacy

There's a flip side of this buy-and-hold fairy tale that I also need to address. As noted above, buy-and-hold adherents use the statistics showing that much of a bull market's gain is concentrated in the first 12 months to convince investors to stay invested at all times. Going to cash, they say, will prevent you from taking advantage of the outsized returns that often occur during the early months of a new bull market.

However, this argument is bogus unless you decided to move to cash at or near the very bottom of the market. Had you chosen to move to cash sometime before the bottom, you could actually miss some of the early bull market gains and still be better off than had you stayed in the market.

You see, to get the maximum benefit of the average 45% gain in the first year of a new bull market, you must be invested at the very bottom of the market. About the only way to do this is to have followed the buy-and-hold advice of staying invested at all times. So, to get the full value of the 45% average upside, you would likely have had to endure the pain of the entire bear market's downward ride. OUCH!!!

Common sense, however, tells you that if you exited the market sometime before the actual market bottom, you could afford to miss out on some of a new bull market's early gain and not be any worse off.

To provide an example, I documented six times when market analysts, journalists, talking heads, etc. incorrectly predicted an end to the current bear market over the past year or so. By comparing where the markets were when these "false bottom" calls were made to the actual lows at the market close set in March of 2009, we can see that timing the market isn't necessarily a bad thing if it allows you to avoid losses.

The most recent dip in the S&P 500 Index took it down to 676 at the close on March 9th and the Dow Jones Industrial Average (Dow) closed at 6,547 on the same date. Compare that to the stock market levels on the dates of these selected bottom callers:

In January of 2008 with the Dow at 13,265, well-known perma-bull Abby Joseph Cohen predicted a reversal in the Dow and that it would be at 14,750 by the end of the year.
On March 17, 2008 with the Dow at 11,972, some analysts declared a "Bear Stearns Bottom." CNBC guru Jim Cramer declared that the bear market had been tamed.
On July 31, 2008, Jim Cramer again predicted that the Dow's July 15, 2008 low of 10,962 would be the market bottom. As Cramer put it, "Bye, bye bear market."
On October 9, 2008 with the Dow at 8,579, professional stock trader Tony Oz declared that the market was near a significant bottom.
On November 20, 2008, the Dow posted a new low of 7,552, which prompted some analysts and investors to again declare that the bear market was dead. However, the Dow eventually broke through the 7,552 low on February 27, 2009.
Finally, many investors thought that the New Year (accompanied by a new president) would somehow bring about a "hope" rally in the stock markets. It didn't. At the end of 2008 the Dow stood at 8,776, yet it continued to fall even further until closing at 6,547 on March 9th, its lowest level yet during the current bear market.

If nothing else, the above list shows that some very smart analysts with extensive experience in the stock market can be very, very wrong when it comes to calling the market bottoms. However, it's likely that any of these market gurus would have told you that getting out of the market on these dates would be the worst time to do so, since they expected the market to reverse course and go higher.

Limiting Losses is the Key

My purpose in noting these predictions of "false bottoms" is to illustrate what would happen should an investor ignore buy-and-hold advice and get out at exactly where Wall Street might consider it to be the worst possible time – when the "experts" were saying a market bottom was in. You may think I'm being a contrarian, but this analysis will show you why Wall Street never mentions how much more you might lose if you're not, in fact, near the bottom of the market when you decide to cash out.

Take the first bottom call from the list when Ms. Cohen predicted a market bottom in January of 2008. The Dow ended up falling an additional 6,718 points after this inaccurate prediction. This drop represents a 50.6% reduction in the value of the Index and, using the mathematics of gains and losses discussed above, will require a gain of over 102% just to get back to break-even.

In other words, investors who moved to cash in January of 2008, despite an expert opinion that the market had hit bottom, could stand to miss out on the first 102% of a new bull market's gains before they would be worse off financially than had they not gone to cash at all. Do you think that this investor might recognize that a new bull market is under way sometime before the markets post gains of 102%? I think so, especially if he is using a professional active money manager as I will discuss later on.

The table below shows a similar analysis for all of the "false bottom" dates from the above list. The results reflect how much further the market fell after the experts' calls, and how much return you could have missed in the early stages of a market rally and still not have been harmed:

Date	Dow Position	Additional Loss to March '09 Low	Gain Required to Break Even
January 1, 2008	13,265	6,718 (50.6%)	102.6%
March 17, 2008	11,972	5,425 (45.3%)	82.9%
July 15, 2008	10,962	4,415 (40.3%)	67.4%
October 9, 2008	8,579	2,032 (23.7%)	31.0%
November 20, 2008	7,552	1,005 (13.3%)	15.4%
January 1, 2009	8,776	2,229 (25.4%)	34.0%

The most obvious lesson to be learned from this analysis is that going to cash during a bear market may not be as dangerous to your portfolio as the far from accurate buy-and-hold crowd promises. As the above table represents, the potential to lose more money before an actual market bottom effectively debunks the idea that missing out on early market gains in a renewed bull market is a reason to stay invested. Obviously, this doesn't work if you actually do get out at the actual bottom of the market, but that's a hard call to make.

The next most obvious realization is that it might be possible to maximize returns and minimize losses if you could move out of the market early in the bear market, and then move back into the market fairly soon after the bull market begins. That way, you'd not only benefit from avoiding losses, but also from participating in the outsized gains early in the bull market. Actually, this concept is the driving force behind the active management strategy known as "market timing."

However, attempting to time the market on your own can be dangerous, since making the wrong move at the wrong time could actually expose you to more losses than a buy-and-hold strategy. That's why we recommend that you depend upon professional money managers with time-tested systems with the potential to get out of bear markets as early as possible and avoid big losses, and then get back in when conditions suggest a renewed uptrend. These strategies can help you to control the emotions associated with investing on your own.

The Potomac Guardian Example

The best way for me to illustrate the value of professional active management is by way of example using one of our recommended actively managed investment programs. My company has been offering the Potomac Guardian managed account program since 1996, and it has shown to be a consistent performer over that time. While past performance can't guarantee future results, this investment has provided a much smoother growth line than the benchmark S&P 500 Index.

Potomac's Guardian Program essentially ignores Wall Street's admonitions to refrain from timing the market. Potomac has developed a proprietary strategy that moves gradually to cash or a hedged position when their system detects a greater level of market risk. This gradual pace helps Potomac keep from being "whipsawed" by quick up and down spikes in the market, while also maintaining a market exposure should a downward trend prove to be temporary.

Since Potomac's Guardian Program defies Wall Street's conventional wisdom, let's compare its performance to that of the unmanaged S&P 500 Index during the 2000 – 2002 bear market. We'll assume an investment of $1,000 at the beginning of the bear market and actual month-end performance data from April of 2000 through September of 2002. Note that our analysis is for comparison purposes only since you can't invest directly in the S&P 500 Index.

Over this time period, the amount of money deemed to have been invested in the S&P 500 Index dropped from $1,000 to $562.54, a loss of 43.75%. Over the same time period, the Potomac Guardian program grew from $1,000 to $1,004.80. Potomac actually made a modest profit in the 2000-2002 bear market when an S&P 500 buy-and-hold strategy incurred a devastating loss of almost 44%. You can clearly see from this analysis why I recommend proven active management strategies over Wall Street's buy-and-hold mantra.

However, Wall Street's argument isn't that large losses won't happen from time to time; rather that you need to stay in the market to participate in the gains that come about during the early months of a new bull market. Therefore, let's see how the S&P 500 Index performed as compared to the Potomac Guardian program in the 12 months following the market bottom in early October 2002.

From October 2002 through September 2003, the S&P 500 Index gained a whopping 24.4%. Since the Guardian Program moved back into the market gradually, it produced a gain of only 9.33% over the same 12 months. So, buy-and-hold wins, right?

Not so fast! As I mentioned above, we have to factor in the mathematics of gains and losses. To get a true comparison, we need to see what happened to the hypothetical values of our sample accounts in the 12 months following the bear market of 2000 – 2002.

As noted, the value of $1,000 invested in the S&P 500 Index in April 2000 would have shriveled down to only $562.54 by September 2002. However, this investment benefited from the 24.4% accumulated gain over the 12 months following the bear market. Doing the math, we see that the S&P 500 Index account grew from $562.54 to $699.80 over that one-year period. Not bad, but still far short of the original $1,000 investment.

The Potomac Guardian account, however, didn't lose money during the bear market, retaining a value of $1,004.80 and underscoring the importance of avoiding losses. During the subsequent 12 months, the Guardian account gained 9.33%, growing our example account balance to $1,098.55 at the end of September, 2003. Remember, the Potomac numbers are based on actual performance net of fees and expenses, while the S&P 500 Index numbers do not include any management fees.

Thus, the S&P 500 Index investment had a greater percentage gain after the end of the bear market, but Potomac retained a higher dollar value. Since most grocery stores don't accept percentages as payment, what really matters is your MIP (money in pocket) at the end of the day. So here's a tough question: Which account would you rather have?

Wait a minute! I can already hear the buy-and-hold devotees becoming defensive, saying that I am misrepresenting the case for active management by cherry picking a time period. I'm not sure how they could say that, since I used the 12-month example from a buy-and-hold article, but let's humor the buy-and-hold advocates for a while longer. After all, they've had a hard decade considering we've had two major bear markets in less than ten years.

The buy-and-hold groupies might protest that I didn't show what happened after September 2003. Since the S&P 500 Index produced a gain of two-and-a-half times that of the Guardian Program in the 12 months following the bottom of the 2000 – 2002 bear market, they might reason that future years would allow the S&P 500 Index to catch up to Guardian. That's a logical conclusion. Logical but wrong.

Below, I have listed the actual performance numbers for both the S&P 500 Index and the Potomac Guardian program picking up at October 2003 and going through September 2007, which marks the month-end closest to the market peak reached in early October 2007:

	S&P 500 Return	S&P 500 Accum Value	Guardian Return	Guardian Accum Return
Value at Sept 2003		$699.80		$1,098.55
Oct - Dec 2003 Return	12.18%	$785.04	12.39%	$1,234.66
2004 Annual Return	10.88%	$870.45	10.21%	$1,360.72
2005 Annual Return	4.91%	$913.19	5.27%	$1,432.43
2006 Annual Return	15.79%	$1,057.38	16.13%	$1,663.48
Jan - Sept 2007	9.13%	$1,153.92	4.76%	1,742.66

So, while the S&P 500 Index spent most of its time getting back to break-even, the Potomac Guardian Program was busy building wealth on a risk-managed basis. This also illustrates that, while Potomac moves back into the market gradually, once it is fully invested it can match or even beat market index returns. Obviously, there's no guarantee that they can always do so.

And just in case you're curious, the Potomac Guardian Program has significantly limited losses in the most recent bear market cycle. From the market peak in October of 2007 through June of 2009, Guardian had annualized return of -5.27% versus the S&P 500 Index's -23.32%. This again shows the value of having a program that can play defense as well as offense.

From its inception in June of 1996, Guardian has produced an annualized return of 9.13% through June of 2009, net of fees and expenses. Over the same period of time, the S&P 500 Index has an annualized gain (including dividends) of only 4.26%. If you accumulate these returns over the entire period, you will find that the S&P 500 Index would have grown a one-time investment of $100,000 into $172,558. Meanwhile, the Potomac Guardian Program would have produced a nest egg of $313,748 over that same period of time. That's a difference of $141,190 in favor of Potomac. Such is the value of successful active management strategies. Again, which account would you rather have? (Past results are not necessarily indicative of future results.)

As a moderate-risk investment, the Potomac Guardian program may be suitable to a wide variety of investors who seek asset growth with an eye on capital preservation. At my company, we consider Guardian to be a "core" holding, meaning one that may be suitable for a wide range of investment goals and risk tolerances.

It is also important to note that the results above are net of Potomac's 2.5% annual management fee and any expense loadings in the mutual funds they use. Yes, in my example an early Guardian investor would have paid higher fees with Potomac than in a low-cost index fund, but that investor would have had over $140,000 more MIP at the end of the day. Yet again, which would you prefer?

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

Are you mad yet? Well you should be! Major financial services firms have fed you a steady stream of misinformation about the benefits of active management as opposed to buy-and-hold strategies. And now that two consecutive bear markets have decimated investors' portfolios, Wall Street is still singing the same buy-and-hold song. Hopefully, this time it's a funeral dirge.

It seems clear to me that if buy-and-hold was actually superior to market timing or other active management strategies, Wall Street could make the case without using deceptive or misleading studies and analyses. But they don't – primarily because more and more studies are showing that successful active management strategies such as market timing CAN beat buy-and-hold portfolios.

At the end of the day, what really matters to most investors is the value of their accounts when they need their money. A double-digit historical return over a 75-year time horizon doesn't do you much good if the value of your investment dives 50% just at the time you need your money for retirement, a college education, etc. The siren song of buy-and-hold strategies is that you'll be OK if you just hold on. Many Baby Boomers who took that advice are now facing retirement with a smaller nest egg and not much time for buy-and-hold's empty promises to catch up.

If you would like to check out an actively managed program that can move in and out of the market, I suggest you take a look at the Potomac Guardian Program. While future performance can't be guaranteed, Guardian's actual results spanning the bursting of two asset bubbles and subsequent bear markets not only speaks well for that program, but also helps to disprove Wall Street's buy-and-hold mythology.

To get more information about the Guardian Program, including detailed performance information and a description of Potomac's trading methodology, give one of our Investment Consultants a call at 800-348-3601 to discuss this investment in more detail and ask any questions you may have. You can also click on the following link to access our online request form. This will allow you to request a packet of information to be sent to you via first-class mail. Or, visit our website at http://www.halbertwealth.com/advisorlink/potomac.php to access this information. Also be sure to read the Important Notes following my signature below before deciding to invest.

And remember, Potomac is only one of the actively managed investment strategies we recommend. We have several other professionally managed investment programs that also have very positive risk-adjusted returns as compared to Wall Street's buy-and-hold mantra. Maybe it's time you take a look and consider adding some of these programs to your portfolio.

Finally, we are sponsoring an online webinar featuring the Potomac Guardian Program on August 6th at 1:00 PM Eastern Time. You can learn more about this webinar and register to attend at the following Potomac Webinar Link. In this webinar, you'll hear directly from a member of Potomac's Investment Committee and be able to ask any questions you may have about Potomac's proprietary investment strategy.

We've had an incredible attendance rate at our first two online webinars. Maybe you should register and see why.

Wishing you profits in a difficult market,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM) and Potomac Fund Management (PFM) are Investment Advisors registered with the SEC and/or their respective states. Some Advisors are not available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. HWM receives compensation from PFM in exchange for introducing client accounts. For more information on HWM or PFM, please consult the appropriate Form ADV Part II, or the PFM Annual GIPS Disclosure Presentation 2007, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As a benchmark for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) represents an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of the S&P 500 may differ materially (more or less) from that of the Advisor, and this Index cannot be invested in directly. The performance of the S&P 500 Stock Index is not meant to imply that investors should consider an investment in the Potomac Guardian trading program as comparable to an investment in the "blue chip" stocks that comprise the S&P 500 Stock Index. Potomac's performance results are based on the Model Portfolio. The Model Portfolio is an actual account that is considered representative of the majority of client accounts with similar investment objectives. Returns for the Model Portfolio are time-weighted, total returns that reflect the reinvestment of dividends and capital gain distributions. The Guardian strategy is actively allocated across many sectors and/or asset classes, overweighting those exhibiting the best risk-to-reward ratio. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment in a mutual fund carries the risk of loss. Mutual funds carry their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

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

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

Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. The results shown are for limited time periods and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

On The Economy, 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

When Will The Bull Market Return?

Gary D. Halbert — Tue, 17 Mar 2009 20:48:30 GMT

IN THIS ISSUE:

David Henry On A New Bull Market
Why Wall Street Needs A New Bull
Make Half A Decision

Introduction

This week, I am off spending some time with my son, who is home from college for Spring Break. Since we live on the lake, I’m putting in a lot of time driving the boat while he and his friends ski and wakeboard on Lake Travis. It’s a tough job but somebody’s got to do it.

Since I’m out most of the week, I have chosen to reprint below a very informative analysis on the history of bear markets in stocks, and what it might take to turn the one we’re in around. This article originally appeared in Yahoo! News and I thought the author, David Henry, had some good insights into how stock market cycles work.

Last week, many market analysts were pleased to see a consecutive string of positive days in the stock market. Of course, this immediately sent some in the financial media into a frenzy about how we have now seen the bottom of the bear market and we can only go up from here. It seems that there is no shortage of cheerleaders for a renewed bull market. If wishing could make it so, we’d definitely have an up market from here on out. But for now, I remain unconvinced.

That being the case, I follow David Henry’s reprint with a discussion about why we often see so much attention being given to a return of the bull market. Obviously, everyone from investors to the government wants the market to go up since it’s supposedly a sign of a healthy economy. But as we all know, our economy and financial system are far from healthy at this point, so it remains to be seen if the bear market is over.

The last two bear markets in US stocks have underscored the weaknesses of the widespread “buy-and-hold” investment strategies that have been Wall Street’s mantra for decades. The bottom line, in my opinion, is that when you offer buy-and-hold investment products that only work in up markets, you root for a bull whenever you can.

I’ll end up the E-Letter by discussing a way for you to include active management investment strategies that may be more comfortable for you. Sometimes, making “half a decision” can help you to test the waters of active management, while still having a foothold in other investment strategies that may be more familiar to you. Let’s get started.

Stock Markets: When Will the Bull Return?
By David Henry, Yahoo! News, Fri Mar 6, 2009

QUOTE:

The stock market is crashing -- slowly, and in plain view of the people who count on it most. The 53% plunge in the Dow Jones industrials since October 2007 [measured as of March 6th – GDH] has wrecked the college- and retirement-savings plans of millions of investors. It has permanently lowered the long-term investment projections of private endowments and pension funds. It has sent corporate compensation experts scrambling to figure out how to reward top employees. All told, more than $10 trillion of stock market wealth has vanished, and with it the confidence that springs from financial security.

While 17 months may feel like an eternity, it could turn out merely to be a prequel. The questions on the minds of investors, money managers, and corporate executives are threefold: How much longer will the bear market last? How low will the averages go? And when might investors get their money back?

As Warren E. Buffett has said: "Beware of geeks bearing formulas." It's especially difficult to predict the direction of the markets these days because the most popular gauges, from price-earnings ratios to measures of investor "capitulation," have stopped working. The peculiar nature of this bear market limits the kit of useful tools to just a handful of bond market and business confidence indicators.

Those signals, along with interviews with financial historians, market strategists, and economists, point mostly to painful scenarios. Stocks don't seem likely to fall much more from here -- but market turmoil could continue for months or even years. Worse, by the time the market revisits its highs, so many years are likely to have passed that many older people will have gotten out of stocks, missing out on the rebound. The flip side is that new money put into the stock market now will likely do comparatively well over the long term. That's welcome news for twentysomethings and executive compensation consultants, but perhaps not for soon-to-be retirees.

Searching For Precedents

History can't provide as many clues to the market's direction as usual. That's because while most bear markets more or less track the business cycle, this one began with a broken financial system. That makes the current bear more like the one that snarled from 1929-32 than others of the past 100 years. But that analogy doesn't fit perfectly, either. "We have no good precedents to help us," says Peter L. Bernstein, a 90-year-old market essayist and financial historian who was a teenager during the Great Depression. "What's breathtaking is the rapidity of the decline and its breadth."

The market anxiety is especially high now because of the raging fire in the economy. "The next six to nine months are going to be awful," says Desmond Lachman of the American Enterprise Institute. Waves of corporate defaults, home foreclosures, bank failures, and job losses are still to come.

Of course, the stock market already knows that for the rest of 2009 the economy will be a "shambles," to use Buffett's recent description. Today's low share prices may well reflect that. The Dow Jones industrial average has already fallen through the 7,000 level predicted earlier this year by Nouriel Roubini, the New York University economist nicknamed “Dr. Doom” for daring in 2006 to foretell the credit calamity. That's right, even Dr. Doom was too optimistic.

If recent history were a reliable guide, it would be just about time for the bear to retreat to his den, which nowadays might include a flat-panel TV and leather chair bought at a foreclosure sale. The market's average decline during bear markets since the 1929 market crash is just 30%. What's more, those past bears lasted an average of 13 months, making this one look not just mean but old.

But this is no ordinary slump. Even the most basic market gauge, the price-earnings ratio, which measures a company's share price relative to the earnings it generates, is unreliable. Historically, the overall market has traded at prices that average 15 times earnings, ranging from roughly 8 during the worst bear markets to 25 or greater during bull runs. At the start of the year, the market's p-e ratio was about 11, suggesting that stocks were already cheap and wouldn't drop much more. Instead, the Standard & Poor's 500-stock index fell 19% in January and February, the worst opening months on record.

Why did the p-e ratio get it so wrong? The "e" is plunging -- by 18% in January and February alone, according to Thomson Reuters. As a result, even though the stock market has dropped, it hasn't gotten any cheaper relative to earnings. Sure, a lot of earnings vanished amid a fog of one-time charges that may say nothing about companies' future profit power. But analysts still aren't seeing through that fog; their earnings projections are more scattered than they've been in two decades. "You don't know what the 'e' is because the economy is in free fall," says Charles Biderman, CEO of TrimTabs Investment Research.

The credit bust has rendered other trusted market indicators useless -- most notably monetary policy, or the Federal Reserve's raising or lowering of its benchmark interest rate. Before the current slump, the federal funds rate was a reliable indicator in all but one bear market since World War II, says James B. Stack, president of InvesTech Research and Stack Financial Management. When the economy slowed, the Fed began cutting rates to turn the business cycle back up. After the second cut came, investors stepped in to buy, anticipating higher corporate earnings. But the Fed has cut rates 10 times since August 2007, to essentially zero, and yet the economy and stock market keep sliding. "The Depression is the only parallel for the lack of effectiveness in monetary policy," says Stack. It is failing because too many borrowers don't want to borrow and too many lenders don't have the capital or courage to lend.

Measures of capitulation, Wall Street's term for the final moment of a sell-off when the last weak investors give up on stocks, aren't working, either. The idea is that once the wobbly players are out, the ones left are strong enough to bid up stocks. Bull runs begin during those moments. Market mavens try to track capitulation by parsing statistics from days of heavy selling and comparing the intensity of past routs. Many thought they saw capitulation last September, says Eric C. Bjorgen, senior analyst with the Leuthold Group in Minneapolis. "But then the market kept going down," says Bjorgen. "Extreme fear was not a good indicator." The gauges became even more bullish with the selling in November, after which the market rallied 24%. Then it fell again. Biderman of TrimTabs says that's because much of the selling was by hedge funds that had been using borrowed money, not a major factor in previous bear markets.

Another signal that's turned out to be misleading is "cash on the sidelines," or the funds in money market and bank savings accounts. In normal times, strategists could look with some confidence to money in these accounts as buying power that investors were holding back from the stock market. The greater the cash compared with the value of the overall market, the more impact it could make on stocks. In January the reading reached its highest levels since 1984, says Bjorgen. Even so, he's dubious. As long as investors are worried about their own incomes, he says, the money seems most likely to stay right where it is. TrimTabs' Biderman, who tracks how investors move their money among asset classes, says he doesn't see much chance of this cash flowing into stocks with the job and housing markets so weak. He figures investors have been taking more money out of stocks than they've been putting into their cash accounts. "Some people are being forced to sell stocks to eat," Biderman says. "They are certainly not going to buy Google here."

With the ordinary historical measures failing, experts are looking further back for clues. During the Great Depression, the Dow plunged 89% from the 1929 crash to July 1932. Then it went through some big swings before losing 49% in 1937-38 as the economy tanked again. World War II, which grew in part out of financial stress around the globe, followed. The Dow didn't get back to its 1929 high until 1954.

Much, of course, has changed in the U.S. since the Great Crash. Back then Washington made major policy mistakes, such as erecting trade barriers and letting too many banks fail without protecting depositors. This time, with a couple of exceptions, the government hasn't blundered so, even though it hasn't yet solved the economy's many problems.

So this bear market likely won't rival that of the Great Depression. But the bear markets during other banking crises have been brutal in their own right. In a recent study of 21 such episodes from around the world, including ones from Spain in 1977, Sweden in 1991, and Thailand in 1997, professors Carmen M. Reinhart of the University of Maryland and Kenneth S. Rogoff of Harvard University found that stocks fell an average of 56% -- the same loss the S&P 500 had suffered through Mar. 3. Those bear markets also tended to be agonizingly slow, taking an average of 3.4 years to reach bottom. "Everything is protracted," says Reinhart. "In the best-case scenario, you are looking at six years or longer" to return to past highs. Bad as that sounds, it would compare favorably with Japan, whose Nikkei index reached 38,900 in 1989 and now trades at around 7,200.

Of course, just because investors have lost money in stocks doesn't mean equities are a bad choice from this point onward. "Stocks can't make up for the past 10 years, but they can do extremely well from our current position," says Jeremy J. Siegel, author of Stocks for the Long Run and professor at the Wharton School of the University of Pennsylvania. Siegel says that while stock returns have fallen behind government bond returns over the past 20 years, history says that's almost certain to reverse. He's found only one 30-year period when stocks returned less than bonds, and that one ended in 1861. "That tells us that once you are down 50%, those who are in stock markets for 10 to 15 years will get much better returns," he says. Lately, government bond prices have run up, boosting the odds that stocks will be the better play in the future.

So where to look for signs of an incipient upturn? One logical place is the corporate debt market, which understands the economy's core problem firsthand. Eventually, the pace of new defaults on corporate bonds will slow, and bad debts will be reduced or erased in financial reorganizations and bankruptcies. When those things happen, the economy and stock market should breathe easier…

Another critical factor is the health of the banking system. One measure to watch is banks' so-called net worth, or the difference between how much they owe and the value of their assets. Rebuilding the banking system's net worth will be monumentally difficult. "On average, this process takes about six years," says Joseph Mason, a banking professor at Louisiana State University who has studied past banking crises. So far, little has been accomplished -- a big reason the stock market hasn't gotten up from its knees.

Keep An Eye On CEOs

Government policy decisions could speed or slow the pace of rehabilitation for the banks and, in turn, the stock market. David A. Hendler, a New York-based bank analyst at CreditSights, says his job has shifted from financial analysis toward Washington analysis. Essentially, his task is to figure out how quickly the government will permit weak banks to consolidate. When investors believe they know which banks will survive, they'll buy their stocks. The process is so critical to the stock market that Richard Bernstein, chief investment strategist at Merrill Lynch, is tracking six signposts for financial industry consolidation. Among them: the extent to which the government carves up and sells bad banks rather than buying into them to prop them up.

Other strategists are keeping a close eye on the people who really know what's happening in the economy: business leaders. Biderman says he'll know corporations are getting confident once they start buying back their own shares and acquiring other companies. Right now they show no such bravado. Announcements of share buybacks are down 90% from a year ago, leaving that market thermometer so cold the mercury is off the scale.

In the end, the timing of the bear's retreat will likely hinge on that great market imponderable: psychology. How investors feel has a lot to do with whether they start seeing mixed signals as proof of a glass half-full. "The (market) stress causes the analytical part of our brains to shut down, and that makes us hyperreactive to bad news," says Michael A. Ervolini, CEO of Cabot Research, a consultancy catering to institutional investors. People become convinced conditions are worse than rock-bottom bad, he says. Only after they see that they've overreacted can things improve: "We look for the market to start (saying) tomorrow will be brighter."

For now, pessimism is winning the day. In the worst-case scenario, bad debts will continue to weigh on borrowers and lenders, causing the economy to slow even more, which will erode incomes and push more borrowers over the edge. Economies and corporations around the globe will weaken and rattle investors and business executives even more. Such fears have prompted Ben McCoy, a 30-year-old software engineer, to swear off new stock investments. Instead, he's putting money into his own business ventures, such as writing software for real estate appraisers and a blog about personal finance called moneysmartlife.com. "With these investments, I feel like I have more control," he says.

More Ben McCoys could signal the stirrings of an upturn. A market bottom, says Merrill's Bernstein, "generally occurs when everyone thinks it will never happen. You want to hear people giving up on the stocks-for-the-long-run theme."

But something positive must draw investors back. George A. Akerlof, a Nobel prize-winning economist at the University of California at Berkeley and co-author of a new book, with Yale professor Robert J. Shiller, on the importance of sentiment in moving markets, says investors will have to be offered a new story they can believe to get them to buy again.

That new story likely involves corporate and consumer debts being reduced to what borrowers can pay, freeing them of past mistakes so that new money can be put to productive use. Banks resume lending, and the stock market bottoms, signaling that the recession will be over soon. Budding optimism reverses the vicious cycle of losses. A bull is born.

A more probable outcome is the one drawn from the narrow history of bear markets that grew out of financial crises. In it, the bear scenario continues to play out until the bull takes over, with more debt busts and government trial and error until things get set right again. That could mean two more years of bouncing around and then another six or so before the Dow is back above 14,000. Not long ago, such an outcome would have seemed unimaginably bleak. Given the other possibilities, it doesn't seem so bad now.

END QUOTE

Why Wall Street Desperately Needs A New Bull Market

As this is written, the stock market has just staged a comeback of sorts. Yesterday (March 16th) marked an end to four consecutive days of positive returns, something not seen since November of last year. The Dow closed up just over 9% for the week, even after falling to its lowest level in 12 years on March 9th. Is the bear market over? Have we seen the bottom of the market? Can you again trust your buy-and-hold advisors who counsel you to “stay the course?” Maybe, but don’t count on it.

As the above article indicates, a new bull market may not be just around the corner, and David Henry isn’t the only one saying so. Peter Schiff, an analyst and fund manager also nicknamed “Dr. Doom” for his early warnings about the subprime crisis, says the worst is not yet over. A January 23rd Fortune magazine article highlights Schiff’s evaluation of the current situation:

“I'm as negative as I've ever been because everything the government is doing now is going to make the situation much, much worse. They're trying to reflate this bubble. All along I knew that what would potentially be fatal wasn't the recession itself but the government’s response. But what they've already done exceeds even my worst-case imagination.”

More recently, Schiff has provided a counter-argument to the idea that the market’s recent rally marks the end of the current bear market. In a March 11 entry on his Internet blog (http://peterschiffblog.blogspot.com), he again states his opinion that the bear market is not yet over. Though he concedes that we could see a bear market rally (read: sucker rally) that lasts for a period of weeks or months, he notes that such rallies were common in the 1930s and do not necessarily point to an end of the current bear market.

I think one of the reasons the analysts that are calling the market bottom get so much attention is because Wall Street and the financial media so desperately need a new bull market to appear. Quite frankly, it’s the only kind of market environment where their buy-and-hold investments are likely to work, so it’s really sort of a matter of survival. If our experience is any indication, investors are leaving buy-and-hold investments in droves, no longer heeding the tired old “stay the course” message.

Yet, these purveyors of the failed buy-and-hold strategy continue to advise clients to stay invested. If you exit the market, they say, you’ll miss out on the big market moves that usually occur early in a new bull market cycle. Of course, what they don’t say is that if you get out, they’ll miss out on their fees and possibly commissions too, but they don’t like to dwell on that.

In reality, many financial firms simply have too much invested in software, marketing materials, broker training, etc., etc. to toss their buy-and-hold strategies in the garbage can where they belong. Almost every day, we get calls from investors who are tired of listening to advice that puts a financial firm’s best interest above their own. Good for them!

The stories we hear from new investors calling us now are all different, but really they are largely the same. They had a comfortable retirement nest egg going in the late 1990s. The multi-decade bull market, and their buy-and-hold strategies, had served them very, very well for two decades. But then came the tech bubble bursting in 2000 and the bear market of 2000-2002. Unfortunately, I don’t think that bear market really got the attention of investors, especially with the market rally in 2003.

Next, we experienced the subprime crisis, and next the freeze in the credit markets, and an unprecedented bear market in stocks in such a short time. Stocks have plunged well over 50%, and buy-and-hold strategies have collapsed commensurately over the last year. Now, investors who have believed in buy-and-hold for years are abandoning such strategies in droves.

Two gut-wrenching bear markets since 2000 have shown investors and brokers alike that the “stocks are best for the long haul” mantra may not be the best alternative. After all, what is the “long haul?” Unfortunately, buy-and-hold strategies may require a time period far beyond the realistic time horizons of many investors.

These bear markets have also illustrated that the asset values can vanish into thin air at the very time they are needed the most, even though “proven” diversification and asset allocation (buy-and-hold) techniques have been employed. The most recent bear market is a good case-in-point, where once non-correlated asset classes all plunged in value at the same time.

I have argued for years that the buy-and-hold strategies advanced by Wall Street and “Modern Portfolio Theory” were fatally flawed, and it would be nice to conclude that I told you so. But that misses the point. The only question now is how to go forward without incurring 50+% losses in the future. If my argument for avoiding huge buy-and-hold losses has not gotten your attention by now, I guess it never will.

But if it has, I offer the following advice as to how to get started. I have offered this line of reasoning for over two decades, and it has worked consistently for many investors.

Make Half A Decision

“You don’t want to abandon the investment strategy (buy-and-hold) that worked so well for you during the bull markets of the 1980s and 1990s,” or so you have been told by your broker or financial advisor. But now your portfolio is down over 50% and your retirement plans are in shambles. Now, finally, you are open to other ideas. Good. What follows is an easy way to get started comfortably.

Frankly, we realize that the type of investment strategies we recommend are very different from what most investors, and even many investment professionals, have been educated to believe. Since the onset of the bear market back in October of 2007, my staff has told me of many calls from investors who are interested in the actively managed programs we recommend, but who are reluctant to make the change.

In those cases, we suggest that investors consider making “half a decision.” In other words, place only half as much as you might otherwise commit to active management strategies, as long as applicable minimum investments are met. We have many investors who will test the waters with smaller accounts before making a full commitment to active management strategies.

I am so confident that active management strategies will prove their merit versus buy-and-hold strategies that I welcome you to make half a decision in regard to your investment portfolio. If you prefer, open a minimum account in one of the actively managed programs we offer in our AdvisorLink® Program. Once you see the difference between the performance of your actively managed investments and your buy-and-hold strategy, I believe you’ll begin to see the light. Of course, there are no guarantees in regard to the future performance of any investment.

This is a very good way to get started, in my opinion. Based on how the buy-and-hold mantra has served you over the last several years, maybe now is the time to try something different with at least part of your portfolio. Think about it.

For more information on the programs I recommend, and have most of my own money invested in, feel free to give one of my Investment Consultants a call at 800-348-3601 or, if you prefer, send us an e-mail at info@halbertwealth.com. You can also obtain more information on our website at www.halbertwealth.com. Whatever you do, don’t let buy-and-hold’s empty promises continue to decimate your portfolio.

Hoping we can help you in these tough times,

Gary D. Halbert

SPECIAL ARTICLES:

The Market’s Rally is Misguided Optimism
http://articles.moneycentral.msn.com/Investing/SuperModels/market-rally-just-misguided-optimism.aspx

Obama’s Incompetent Socialism
http://www.newsmax.com/morris/obama_bailout/2009/03/16/192401.html

Will China Dump the Dollar?
http://www.fundmasteryblog.com/2009/03/16/will-china-dump-the-dollar/

Why The Stock Markets Are Collapsing

Gary D. Halbert — Tue, 10 Mar 2009 20:46:56 GMT

IN THIS ISSUE:

The Economy Continues To Slump Badly

US Stock Markets Continue To Plunge

Obama's Multi-Trillion Dollar Spending Spree

Obama's Budget – The First $2 TRILLION Deficit?

Obama's Plan To Nationalize Health Care This Year

Obama's “Cap-and-Trade” Environmental Proposal

Conclusions – Why The Stock Markets Are Collapsing

Introduction

Economic news continues to worsen week after week. As I will discuss below, Gross Domestic Product contracted at almost twice the previously reported pace in the 4Q of last year, and most analysts now expect a similar or worse slowdown in the 1Q. Many forecasters now believe the recession will last all year, with a modest rebound beginning in 2010. We will look at the latest economic data as we go along.

The stock markets continue to plunge, even as trillions of dollars in bailouts and government spending have been announced. The Dow and the S&P 500 fell 33.8% and 38.5% respectively in 2008. So far this year, the Dow and the S&P 500 are down another 25+%. Both indexes are down more than 50% from their peaks in October 2007. While the equity markets are grossly oversold, there is still no evidence of a bottom, although I fully expect that we are close.

Investors around the world are stunned, not only as a result of the collapse in the US and global equity markets, but also due to the continuing severe credit crisis. More and more analysts and politicos are calling for the US to nationalize the major money center banks that are teetering on the brink of insolvency. Clearly, people around the world are preoccupied with the economic and financial crises.

In the following pages, we will recap the unprecedented spending that President Obama has proposed over the last six weeks, including his first federal budget proposal totaling a record $3.55 trillion for fiscal 2010. Obama's 2010 budget projects a record deficit of $1.75 trillion, and I believe it will be even higher as I will discuss below. No wonder the markets are not happy!

It is also clear now that President Obama has decided to use these crises as an opportunity to cram down all of his big liberal plans for the country this year. In addition to spending trillions of dollars, he is also moving forward with other major plans including “Cap & Trade” (carbon emissions), “Card Check” (expanding unions) and nationalized health care – just to name a few, all of which will eventually mean higher costs for American consumers.

When Mr. Obama was elected, most political analysts believed that he would attempt to enact these major liberal plans over the course of his four-year presidency. Yet it is obvious now that he wants them all this year, while Americans are preoccupied with the economic and financial crises. If he gets his way, it will dramatically change the face of America. More on this as we go along

The Economy Continues To Slump Badly

It will come as no surprise to readers of this E-Letter that the US economic numbers continue to falter. But by far the most shocking number released over the last several weeks was the latest 4Q GDP report released in late February. In late January, the Commerce Department's advance estimate for 4Q GDP was -3.8% (annual rate), which was the worst in well over a decade.

Then on February 27, the government revised this number to -6.2%, the deepest quarterly decline since early 1982. I have been watching US economic data for over 30 years, and I have never seen the Commerce Department miss the GDP number this badly over just a one-month period of time. Clearly, this economy is contracting severely.

The US unemployment rate continues to ratchet up rapidly. On Friday, the Labor Department reported that unemployment rose to 8.1% in February, up from 7.6% in January. Many forecasters predict this number to rise to near 9% by year-end, and some even project the jobless rate to reach 10% by the end of this year.

The Consumer Confidence Index plunged again to a new record low in February of 25.0, down from the previous record low of 37.4 in January. Consumers' appraisal of overall current economic conditions, which was already bleak, worsened much further in February. Those claiming business conditions are “bad” rose to 51.1% in February from 47.9% the prior month.

On the manufacturing front, reports are equally grim according to the reports for January (latest data available). Durable goods orders plunged 5.2% in January following a drop of 4.6% in December. Factory orders fell 1.9% in January following a plunge of 4.9% in December. Industrial production fell 1.8% in January following a drop of 2.4% in December.

The nation's factory operating rate fell to 72.0% in January, down from 73.3% in December. Elsewhere, the construction spending rate fell another 3.3% in January, down from 2.4% in December. This is the worst manufacturing downturn in decades.

On the housing front, the numbers continue to worsen. Existing home sales fell to 4.49 million in January from 4.74 million in December (again, latest data available). New home sales fell to 309,000 in January, down from 344,000 in December. Housing starts in January fell to 466,000, down from 560,000 in December. Meanwhile the median home sale price continues to fall, sliding to $170,300 in January, down 15% from a year earlier.

In summary, we find ourselves in the worst economic slump since 1981-82, and many would argue something worse. A growing number of forecasters are coming to the conclusion that we may be headed into a depression. But as I will discuss as we go along, Obama has authorized over $3 trillion in new spending, the Fed will spend up to $2 trillion and Congress has just passed more new spending projects. So, that much money should start to show up in the economy before long.

US Stock Markets Continue To Plunge

As noted in the Introduction, The Dow and the S&P 500 fell 33.8% and 38.5% respectively in 2008. So far this year, the Dow and the S&P 500 are both down over 25%. Both indexes are down more than 50% from their peaks in October 2007. The Nasdaq Composite Index fell 40.5% in 2008 and is down another 17.6% so far in 2009, down over 55% since the peak in late 2007.

Stocks have been battered with a steady stream of bad news so far this year, as noted in the latest economic reports above. In addition, there has been report after report of faltering banks. The government now owns 36-40% of Citigroup, which saw its share price fall below $1.00 last week. The 30 companies that make up the Dow Jones Industrial Average are commonly referred to as “Blue Chips” or the strongest of the strong. Over the last year, however, the number of Dow stocks trading under $10 per share has increased dramatically.

In addition to Citigroup, other beleaguered Dow stocks include General Motors at $1.50 per share, Bank of America at $3.00, General Electric at $6.00 (down 60% this year alone), and Alcoa at $5.00.

The government has also increased its equity stake in AIG, now reportedly owning over 80% of the insurance giant. Speaking of insurance, I am hearing from sources inside the industry that we could be hearing announcements soon that some major insurers are in serious financial trouble.

Investors around the world want to know what is driving the equity markets down so dramatically. Certainly, the credit crisis and the economic recession are weighing heavily on stock prices. But I believe there is much more to it than that. As I will discuss later on, I believe that the markets are voting NO on the massive spending Obama has authorized in his first 40 days in office.

Obama's Multi-Trillion Dollar Spending Spree

In sheer size, the economic measures announced by President Barack Obama to address “a crisis unlike we've ever known” are remarkable, rivaling and in many cases dwarfing the New Deal programs that Franklin D. Roosevelt famously created to battle the Great Depression. Here is a list of the massive spending that Obama has gotten passed or is proposing:

1. In February, Congress passed and Obama signed into law a record $787 billion stimulus bill, which is mostly new federal spending along with aid to struggling states and tax incentives.

2. Treasury Secretary Geithner announced last month that the government would make available up to $2 trillion on top of what has already been spent or promised in a rescue effort for banks and other financial institutions, including credit card companies and those who make student loans. We have yet to see the details on this massive rescue plan. Clearly, the lack of a detailed financial rescue plan for the banks is spooking the stock markets.

3. The president pledged up to $275 billion in federal aid to help stem the tidal wave of home foreclosures. Here, too, the details are unclear as to how it will work.

Add it all up and the total for these three spending proposals alone is over $3 trillion in new government debt over the next 2-3 years. In all, the plans noted above would raise the federal portion of the US economy to some 31%, more than twice the level after eight years of FDR's historic New Deal spending.

This does not include the remaining $350 billion in TARP money that Obama will get to spend this year. Plus, there is also talk of a second stimulus package later this year, one supposedly aimed at consumers directly.

And let's not forget that the Federal Reserve has purchased over $1 trillion in troubled assets and related securities over the last year alone. Fed chairman Bernanke told Congress recently that the Fed is prepared to double that amount this year.

President Obama and Bernanke tell us that all this massive spending is necessary to avoid a “catastrophe.” Yet no one knows if these huge spending programs will work. No wonder the stock markets are tanking.

Obama's Budget – The First $2 TRILLION Deficit?

President Obama unveiled the largest federal budget in history in late February – a whopping $3.55 trillion. With the economy in recession, the Obama administration projected that the budget deficit for fiscal 2010 would be a record $1.75 trillion. However, there are reasons to believe it will be even higher.

For example, Obama's budget plan assumes that Gross Domestic Product, the sum of all goods and services produced by the nation, will shrink by only -1.2% this year and rebound to about 3.2% by next year. Given that GDP plunged by 6.2% (annual rate) in the 4Q, and the likelihood that the 1Q will be just as bad or worse, we would have to see a huge rebound in the second half of this year for GDP to average only -1.2% for the year overall.

Furthermore, none of my trusted sources expect GDP to rebound to 3.2% in 2010. The point is, federal tax revenues in 2010 will almost certainly be lower than the assumptions in Obama's $3.55 trillion budget, so the deficit is almost certain to be larger than projected.

Obama's budget plan also assumes that the US unemployment rate will average 8.1% this year and get slightly better in 2010. The US unemployment rate stood at 7.2% for December 2008. It has since risen to 7.6% in January and to 8.1% in February. Most economists now expect the unemployment rate to reach 9% by year-end. That does not average out to 8.1% for the year.

Here again, the unemployment realities will mean that federal tax revenues in 2010 will almost certainly be lower than the assumptions in Obama's $3.55 trillion budget. As noted above, the Obama administration projects a budget deficit of $1.75 trillion for fiscal 2010. But it will not surprise me if the deficit is $2 trillion or more in 2010. No wonder the markets are tanking!

$410 Billion Omnibus Spending/Pork Bill

The Senate is expected to pass the huge $410 billion omnibus spending bill that will finance the government through the end of September any day now. This is possibly the most pork-laden spending bill in history. It is widely reported that the bill contains over 8,500 “earmarks” (pet spending projects for lawmakers' states and districts).

The omnibus spending package ran into trouble last week when several Democratic senators opposed not only the pork-barrel spending in the bill, but also the shear size of the bill - $410 billion. That is an 8% increase over the prior omnibus bill. Among the Democrats in opposition was Senator Evan Bayh of Indiana who told the Wall Street Journal:

“The omnibus increases discretionary spending by 8 percent of last fiscal year's levels, dwarfing the rate of inflation. Such increases might be appropriate for a nation flush with cash or unconcerned with fiscal prudence, but America is neither.”

During the presidential campaign, candidate Obama promised that he would wholly change the budget process in Washington by going line by line through spending bills, picking out the wasteful earmarks, vetoing the bills, and telling Congress to send them back stripped of the pork. President Obama has echoed that promise since he took office - but just not for this bill. Since this omnibus bill was largely negotiated last year when Bush was still in office, Obama labeled it “unfinished business,” which he says he will sign and “start fresh next year.”

So, it is politics as usual in Washington, only the numbers are much bigger! These historically huge spending programs and bailouts that Obama and the Democrats in Congress have authorized have really spooked the stock markets. And the Democratic spending machine isn't finished yet. Using the “never let a crisis go to waste” doctrine, Obama has made it clear that he plans to pursue massive spending for other pet liberal programs over the next couple of years.

Obama's Plan To Nationalize Health Care This Year

President Obama recently convened a health care summit at the White House, which was attended by “experts” across the health care and insurance industries. The Washington summit is to be followed by regional meetings across the country in the weeks and months ahead.

The summit concluded without specific details as to what an Obama health care system would look like. We do know that Obama's 2010 federal budget calls for the creation of a $634 billion health care reserve fund to cover reforms over the next 10 years. The President's remarks at the summit included the following:

“To the liberal bleeding hearts hoping for universal health coverage, I don't think we can solve this problem without talking about costs. And to those obsessed with costs…[we will] not slash the social safety net. I just want to figure out what works. We don't have a monopoly on good ideas. We've got to balance heart and head.”

For those fearing a total socialization of health care, this is at least some good news. By all accounts, President Obama is resisting the liberal calls for a “single-payer” socialized health system of the type that exists in Canada and Europe. So what can we expect? No one knows for certain just yet, but two of the ideas being floated are: 1) an expansion and retool of Medicare; and 2) some variation of the health plan that members of the federal government enjoy.

It is abundantly clear that Obama intends to enact his massive health care reforms this year, and unlike the Clinton administration, Obama appears to have the votes in Congress to get it done. So, now the question is, how to pay for it? As noted above, his 2010 budget includes $634 billion over 10 years to help fund his health care “reforms.” But where does this money come from?

The Obama administration says that $318 billion of it will come from tax increases on the “wealthy.” Another large portion will supposedly come from “internal reforms” to the Medicare system. Specifically, Medicare Advantage would be placed into a new competitive biding system that will supposedly do away with federal subsidies paid to these private medical plans, which is projected to save $175 billion over 10 years.

They say another $37 billion could be saved as home health care payments to Medicare are reduced, and a further $20 billion could come from higher rebates from drug companies for drugs sold to the Medicaid program. All of this only adds up to $550 billion. Where will the other $84 billion come from? I have no idea, and at the moment, neither does the Obama administration.

The Obama plan does not seem to be in danger of going the way of the ill-fated Hillary-Care proposal in 1993. House Representative Joe Barton (R-TX) was on hand for Obama's health care summit last week. Barton was pivotal in derailing Hillary-Care, but he told those assembled at Obama's summit that he largely supports the health care reforms that President Obama has outlined thus far.

Barring some big surprises, President Obama is going to get his massive reform of the health care system, whether we like it or not, possibly before the end of this year. While it may stop short of socialized medicine, the government will be in charge of our health care system, and we all know how well the government controls spending, costs and quality. Again, no wonder the stock markets are tanking!

Obama's “Cap-and-Trade” Environmental Proposal

The “cap-and-trade” concept is not a new idea. The type of cap-and-trade program that President Obama wants is very similar to that of the European Union. Yet, the EU's cap-and-trade program is in near-collapse, which demonstrates the weakness of this strategy.

Under a cap-and-trade system, polluters (think power generation plants, steel mills, etc.) are given a cap on greenhouse gasses they can emit into the atmosphere. If they exceed their limits, they can either make their process more environmentally friendly by upgrading technology and equipment, or they can buy credits from other entities that produce fewer emissions than their caps. The goal is that, as the overall emissions caps are reduced over time, industries will find that reducing emissions is more cost efficient than buying credits.

The cap-and-trade idea is often confused with a “carbon tax,” but the two are different. In a carbon tax, the government charges a fee for the production, distribution or use of fossil fuels, rather than creating a system of emission credits that can be traded among companies. Whatever the structure, virtually all agree that any program to curb greenhouse gasses will increase prices as higher costs are passed on to consumers. Even President Obama admits this.

President Obama's recent $3.55 trillion budget proposal calls for a cap-and-trade system to be implemented by the year 2012. The government would auction credits to power plants, industrial plants, etc., with some of the proceeds over the cost of administering the program to go back to taxpayers (I wouldn't count on it).

The Congressional Budget Office (CBO) estimates that a cap-and-trade system will cost middle-income families as much as $880 to $1,500 per year in added costs. Thus, Obama's plan to offset these increased costs through a payroll tax rebate ($400 for individuals, $800 for families) won't cover all of these costs. Plus, the liberals in Congress have not yet had their say. The final bill may concentrate the rebates on lower income families, possibly leaving many middle income and high income families out entirely. Of course, the rationale is that higher-income families will reduce their costs by lowering their energy bills through conservation. …Right.

Also, it is important to recognize that certain areas of the country will be hit much harder by cap-and-trade, especially those that rely heavily on coal for electricity. I have included a link to a very good article on which areas will be hurt the most in Special Articles below.

Here again, Obama's cap-and-trade plan serves as yet another tax on higher income folks who create most of the new jobs in this country. Critics also say that a cap-and-trade program could lead to the loss of as many as four million jobs and reduce the US GDP, but still may not effectively reduce emissions. Again, no wonder the stock markets are tanking!

Obama's “Card Check” Proposal To Strengthen Unions

It is no secret that Obama has long been an advocate for the organized labor unions. As a senator, he co-sponsored the “Employee Free Choice Act of 2007,” which was very favorable to unions but was fortunately never enacted. As a presidential candidate, he had a very pro-union agenda, including repeated promises of making “Card Check” the law of the land.

Card Check, considered one of the most sweeping revisions of labor law since the 1930s, would allow unions to do away with secret ballot voting by workers who are deciding whether or not to unionize. Instead, workers would be required to vote in public by signing a card signifying their desire for, or against, union representation.

Secret ballot elections have been the law of the land for a very long time, and even many union members do not want this to change. Critics of the Card Check system say that a secret ballot election is the only way to insure that employees are not faced with undue coercion when making their decision. Card Check changes all that, since union organizers can place a card in front of a worker and know exactly which box they check. Liberal union leaders have wanted Card Check for a long time, since it makes unionization much easier.

Union membership has been steadily declining since the 1950s when an estimated 35% of the American workforce belonged to a union. Today, the Bureau of Labor Statistics reports that only 12.4% of wage and salary workers belong to a union. By far, government employees are the most likely to be unionized, with a membership rate five times that of private employees.

Unions hope that the new Card Check rules, which are almost assured to pass and be signed into law, will help to put them back on a growth path. The economic consequences will be higher labor costs for producers, lower productivity and higher prices for goods and services to consumers over time. Just look at the big three carmakers and see how beneficial increased unionization is likely to be for the US economy.

Conclusions – Why The Stock Markets Are Collapsing

I now firmly believe that President Obama and his top advisers have made a calculated decision to try to ram through the largest parts of his liberal agenda this year, while the American people are preoccupied with the economic and financial crisis.

I recently wrote that Rahm Emanuel, Mr. Obama's new Chief of Staff, told a Wall Street Journal conference of top corporate executives late last year (comments he almost certainly probably wishes he could take back):

“You never want a serious crisis to go to waste. Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before.”

So Obama's liberal policy agenda that would have been considered aggressive over the full four years of his presidency is apparently going to be crammed down the American peoples' throats this year if possible.

Obama's massive emergency spending/bailout plans announced in just the first 40 days of his presidency total over $3 trillion, something never before remotely seen. Obama's 2010 federal budget of $3.55 trillion will likely result in a budget deficit of $2 trillion next year, and over $1 trillion in each of the next 2-3 years.

Meanwhile, the Fed is in the process of printing and spending another $2 trillion in debt to fund banks and buy toxic assets. Where this Fed printing and spending will stop is anyone's guess, unfortunately. The implications for inflation down the road are ominous.

And let's not forget the Congress which is about to pass a $410 billion omnibus spending package to keep the government running through September that was 8% higher than last year at this time, and included over 8,500 pork-barrel earmarks. Obama obnoxiously broke his campaign promise to veto earmarks by saying this enormous omnibus spending bill was “unfinished business” left over from the Bush administration, and promises to sign it into law.

On top of all this, Obama's liberal policy initiatives such as nationalized health care, cap-and- trade and Card Check (just to name a few) will add hundreds of billions in cost to American consumers over the years ahead. And despite what Mr. Obama says, taxes at all levels will have to eventually be increased to pay for this massive spending. It will change the face of America as we know it, but that is a story for another time.

The long-term implications of these unprecedented multi-trillion dollar spending plans are unknown. No one knows for sure if all of these huge spending efforts will work to revive the economy and unfreeze the credit markets. If they do, then there is the prospect for spiraling inflation in the years to come.

Investors around the world are watching their stock portfolios being decimated – down over 50% in just over one year – and are asking WHY is this happening? Sure, the subprime mortgage debacle was the catalyst. But in my view, the radical changes that President Obama is pursuing – sooner rather than later – are in large part why the stock markets are in a freefall collapse instead of a normal bear market.

Fortunately, the professional money managers I have recommended to you in this E-Letter over the last several years have done their jobs admirably. Their active management strategies that have the ability to move to cash or hedge long positions have limited losses to less than half what the stock markets have lost. Some have even made money in this historic bear market. As always, I must add that past performance is no guarantee of future results.

As always, I invite you to call us at 800-348-3601 so we can help you make sense of this frustrating investment environment. That is all for this week, depressing as it may be once again.

Wishing you the best in tough times,

Gary D. Halbert

SPECIAL ARTICLES:

Deception at Core of Obama Plans
http://www.realclearpolitics.com/articles/2009/03/a_dishonest_gimmicky_budget.html

The Anti-Stimulus Plans
http://weeklystandard.com/Content/Public/Articles/000/000/016/249nhfrg.asp

Winners & Losers in Huge Congress Spending Bill (who got what in pork)
http://www.foxnews.com/politics/2009/03/09/winners-losers-proposed-massive-spending/

Who Pays for Cap and Trade?
http://online.wsj.com/article/SB123655590609066021.html

Who's Making Money In This Crazy Stock Market?

Gary D. Halbert — Tue, 10 Jun 2008 18:42:52 GMT

IN THIS ISSUE:

Recent Market Volatility Difficult To Navigate
Scotia Partners, Ltd. – Our Latest Find
A Leveraged Long & Short Equity Strategy, With A Twist
Impressive Results In Recent Volatile Market Environment
Hedge Fund-Like Strategy For Only $25,000

Introduction

Over the last year or so, we have experienced an increase in market volatility that has proven to be difficult for many investors and investments to weather. A Wall Street Journal article from earlier this year documented how from 2004 through 2006, the Dow Jones Industrial Average had only one day with a gain or loss of over 2%. In 2007, amid concerns over the subprime mortgage bust, the bursting of the housing bubble and the credit crisis, this number rose to 14!

In fact, last Thursday and Friday were good examples of this volatility. After an impressive gain of 1.9% in Thursday’s trading, the S&P 500 Index reversed course and lost over 3% percent the very next day. However, as the WSJ article noted, this level of volatility is nothing new. And in fact, the current market volatility is relatively tame compared to the bear market of 2000 – 2002.

Such recurring market uncertainty is one reason that I decided over 10 years ago to seek out professional money managers who have established successful historical track records using active management strategies. In volatile markets, investors are often hit with conflicting messages from the gloom-and-doom crowd who says “the end is near,” and the buy-and-hold crowd who counsels “this, too, shall pass.” I continue to believe that active management strategies can offer investors an effective option for dealing with virtually any kind of market environment.

That’s why I am especially pleased this week to be able to introduce you to an Advisor who has not only posted an enviable track record over the past 3½ years, but has also shown the ability to not only survive the market’s recent volatility, but to thrive in it. The Advisor is Cliff Montgomery, CFA, founder of Scotia Partners, LTD. and its Growth S&P Plus Strategy has now been added to our list of recommended actively managed investments.

While past performance cannot predict future results, Scotia’s 12-month gain of over 90%, and year-to-date gain of 32.56% is a testament to a trading strategy that has been able to tame the market’s recent volatility. These are real numbers for real accounts and are net of all fees and expenses. Scotia’s trading model is different than any I have ever analyzed, and I’ve seen a lot of trading systems in my 30+ year career.

As we review Scotia’s Partners’ strategy and performance this week, you will see numbers that will likely look better than those of any other investment alternative you may have seen. Keep in mind that Scotia’s money management system is an aggressive program which uses leverage with both long and short positions. It is therefore not suitable for all investors. Past performance is not necessarily indicative of future returns.

Volatility And Your Investments

It is now quite clear that the stock markets have moved to a higher level of volatility since the beginning of the subprime crisis last year and the subsequent bursting of the housing bubble. And, it remains to be seen how long this period will last. Unfortunately, few sources of financial and investment information take the time and effort to discuss just what volatility is, and why it can be bad, or good, for your portfolio.

“Volatility” means the measure of the uncertainty of the returns on any particular investment, or even in regard to the market as a whole. This uncertainty about the direction and magnitude of market returns moves higher and lower over time. In periods of low volatility, the markets may move up or down in a seemingly orderly fashion, without many unexpected events. But in periods of high volatility, as we have seen over the last 12-18 months, the markets can experience very large moves in one direction one day, and reverse course the next.

While there are a variety of ways to calculate, evaluate and try to predict volatility, it still comes down to trying to “know the unknowable.” Even so, the financial services industry has come up with ways to measure market volatility, with the best-known of these indicators being the Chicago Board Options Exchange (CBOE) Volatility Index, or “VIX” for short. This index seeks to measure the expectations of near-term volatility based on the prices of S&P 500 index options. The thought is that, since options represent an expectation of future price movements, then measuring the magnitude of such expectations can shed light on possible future volatility.

The following chart shows the movement in the VIX since 1990:

As you can see in the above chart, volatility is a regular, recurring feature in the stock markets. More importantly, we see that periods of high volatility can last for several years, as was the case from 1998 to 2003. While we do not know how high volatility may get in the near future, or how long it may persist, a growing number of analysts I respect believe this period could last for several more years.

One interesting thing about the market’s most recent bout of volatility is that it has proven to be very difficult to trade, even for some seasoned active managers that fared well during the 2000–2002 bear market’s even higher level of volatility. Space does not permit me to go into some of the various theories for why the markets have been so difficult to navigate over the last couple of years. Suffice it to say that many previously very successful money managers are scratching their heads as to why their systems have not worked over the last 12-24 months.

As a result, my staff and I have combed through the various money management databases, looking for active money managers who have shown the ability to invest successfully in this very tricky market environment. Specifically, we looked for managers that have shown the ability to manage money in both high and low volatility markets. As you will read below, Scotia Partners is one of the few success stories, and that is putting it mildly!

Scotia Partners, Ltd.

Scotia Partners, Ltd. was founded in 2006 by Clifford J. Montgomery, CFA. Cliff graduated from Messiah College in Grantham, PA with dual degrees in Environmental Science and Accounting but has spent most of his working career in the financial services industry.

Early in his career, Cliff worked as a mutual fund trader for a medium-sized SEC Registered Investment Advisor. After that, he became a research analyst at Theta Investment Research, LLC, a firm that his father, Paul, had established. At Theta, Cliff had the opportunity to witness how different market environments affected the performance of different types of money management strategies. He also began to notice how some active money managers were “whipsawed” by market action, especially during periods of high volatility.

Cliff reasoned that there should be some way to build a trading model that would issue trading signals only on days when there was the greatest probability of success and stay in the safety of a money market account the rest of the time. Ideally, such a system would trade both long and short, and use leverage to enhance returns.

With that in mind, Cliff began researching how markets and trading systems worked with the goal of producing his own active management strategy. In 2003, Cliff finalized his basic trading model and began trading it in real time with real money. He soon found that during periods of low volatility, his program did well. More importantly, in high volatility markets, his model actually did even better. I can tell you, this is very rare. As always, past performance does not guarantee future results.

Over time, Cliff continued to enhance his trading model and in 2004, began actively trading his Growth S&P Plus Strategy. In 2006, Cliff established Scotia Partners, Ltd., as a Registered Investment Advisor with the State of Pennsylvania so that he could offer his programs to investors. Cliff chose the name “Scotia” because it reflects his Scottish heritage. Cliff notes that his family motto, “Garde Bien,” which means “Watch Well,” serves as a reminder of the approach Scotia takes to managing client money.

Ever seeking to increase his investment analysis skills, Cliff received the prestigious Chartered Financial Analyst (CFA) designation in 2005. With so many professional designations available in the financial services business, investors sometimes can’t tell which are meaningful and which are not. I can attest that the CFA certification is one of the most challenging financial professional designations in the investment industry, and is a distinction shared with many successful mutual fund managers and noted market analysts.

The Scotia “Growth S&P Plus” Strategy

Investors familiar with alternative investment strategies, such as hedge funds, often seek out programs that can go both long and short in the market. In such programs, the potential for profit exists no matter what the market’s direction. Some also seek out leveraged programs that offer greater potential gains (or losses) per dollar invested, especially in volatile markets. Unfortunately, many such programs are available only to wealthy investors, but the Scotia Growth S&P Plus Strategy offers both long/short trading and 2X leverage without the barriers to entry found in many hedge funds.

The Growth S&P Plus investment strategy is a combination of Cliff’s basic trading model plus a proprietary overbought/oversold indicator that overlays the basic model. The objective of the strategy is to provide positive returns regardless of market conditions, with significantly reduced risk due to limited market exposure. Of course, there are no guarantees that Scotia can continue to achieve this objective.

Using technical analysis, the basic model begins the process by seeking to determine a long-term market trend (6-12 months) for the S&P 500, which then sets the overall direction for any trades. If the long-term trend is determined to be bullish, only long S&P positions will be taken. If the overall trend is gauged as bearish, the basic model will only take short S&P positions.

Once the long-term trend is identified, the intermediate trend is then determined by plugging S&P 500 Index prices into several different technical indicators over different time intervals within a 2-4 week time period. If the intermediate trend is in agreement with the long-term trend, the basic model is eligible for positioning on either the long or short side of the S&P. If the intermediate trend is not in agreement with the long-term trend, then the model will remain in the safety of a money market account.

With both long-term and intermediate trends identified, the basic model then looks for short-term movements against the trend, to potentially take advantage of the probabilities in favor of “reversion to the mean.” In other words, Cliff’s model views a contra-trend market movement as an opportunity, since future market action should move back in line with the overall trend. Thus, Cliff describes his model as being trend-following in the long term, but contrarian in the short term.

But there is yet one more wrinkle to Scotia’s Growth S&P Plus program. Cliff has also developed a proprietary overbought/oversold indicator that overlays the basic model. This added signal seeks to identify long or short trades that have a high probability of success, without regard to the direction of the long-term trend indicator. Accordingly, this overlay generally results in more trades per year than would be possible under the basic model.

The Growth S&P Plus Strategy is exceptional in that it has historically been in the safety of a money market account over half of the time and trades only on days when Cliff’s proprietary strategy indicates chances are optimal for a gain. Again, this is one of the most interesting trading strategies I have ever seen, and it has certainly done extremely well in a market environment reeling in the wake of the subprime/housing meltdown. Remember, however, that past performance does not guarantee future favorable results.

Cliff’s methodology is 100% mechanical with no discretionary input, and no provision for Cliff to override any trading signal. In addition, the Growth S&P Plus Strategy does not make graduated or partial investments. Instead, the model will be 100% long in the Rydex S&P 500 2X Strategy Fund, 100% short in the Rydex Inverse S&P 500 2X Strategy Fund or 100% neutral (money market), depending upon the signal. These Rydex S&P 500 Index funds seek to provide investment returns equal to 200% of the daily performance of the underlying S&P 500 Index, with the S&P 500 2X Strategy providing a leveraged long exposure and the Inverse S&P 500 2X Strategy providing a leveraged short exposure.

Historically, the strategy has averaged approximately 65 round-trip trades per year, and has been in the safety of a money market fund approximately 65% of the time. Scotia does not employ any formal stop-loss techniques to limit risk other than the relatively short duration of trades. If a trade makes money, the model automatically retreats to cash. If a trade loses on its first day, the model may stay long or short, but if even one indicator disagrees with the others, the model exits the market and goes to cash.

Performance Evaluation

To say that Scotia’s track record is one that attracts a lot of attention would be an under- statement. As of May 30, the Growth S&P Plus Strategy had a 12-month gain of over 90% and a year-to-date increase of 32.56%. While past performance doesn’t guarantee future results, these numbers are hard to ignore. However, we feel that the real story is how Scotia’s trading model has been able to be effective in the volatile markets of 2007–2008, when many other previously successful trading systems failed miserably.

You will note that the Scotia growth chart below shows a more modestly sloping growth line from its inception to apprx. June of 2007, at which time the growth line took a much steeper upward angle. When comparing this chart to the VIX chart above, we see that the higher level of growth coincided with an increase in the market’s volatility, brought on by the subprime fiasco and subsequent bursting of the housing bubble.

As a result, we essentially split Scotia’s track record into two parts and scrutinized each using our various investment analysis software. As noted above, Scotia’s performance during the market volatility that began around June of 2007 has been spectacular. As I noted in the Introduction, Cliff’s cautious approach to money management not only survived, it thrived.

Since we know that the market goes through cycles of high and low volatility, we also analyzed Scotia’s performance prior to June of 2007 to see how Growth S&P Plus might perform in more “normal” market conditions. We were pleased to find that, between its inception in August of 2004 and May of 2007, the Growth S&P Plus Strategy produced an annualized gain of 12.84% with a maximum month-end drawdown of only -7.36%.

Since any long-term investment horizon is likely to include periods of both high and low volatility, Scotia's strategy would appear to give investors the potential to do well in either type of market environment. However, if you believe as I do that the stock market will continue to be volatile over the next few months or even longer, the Growth S&P Plus Strategy may be exactly what your portfolio needs now.

Though the worst month-end drawdown is a relatively tame -7.36%, Cliff says that potential drawdowns in the Growth S&P Plus program can be -20% or more based on his analysis and testing. This, again, confirms that this program should only be considered by investors with an aggressive risk tolerance.

Since its inception in August of 2004, the Scotia Growth S&P Plus Strategy has proven its ability to navigate past periods of both high and low market volatility by posting an annualized return of 29.35% through May 30, 2008, net of all fees and expenses, with a worst-ever month-end losing period (or “drawdown”) of –7.36%. See the actual performance history in the tables below for more comparisons and detailed monthly returns. Also note that there are no guarantees of favorable future performance.

In short, dear readers, I have not seen a real performance record like this in a long time!

Performance Statistics
(Net of all fees and expenses)

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Please see Important Notes at the end of this E-Letter.

While Scotia’s performance is very impressive by itself, it’s even more so when compared to the S&P 500 Index’s annualized return of 8.43% and the Nasdaq 100 Index’s annualized return of 7.86% over the same period of time. While past performance is not necessarily indicative of future results, it’s clear that Cliff’s high-probability approach to money management has been effective in the past, especially when faced with highly volatile market conditions.

Since Scotia’s Growth S&P Plus Strategy has numbers that are sure to attract attention, it is important to note that this investment may be most suitable for aggressive investors who are comfortable with using leverage and a long/short exposure to the S&P 500 Index. You should only consider this program if you have a three-to-five-year investment horizon and are comfortable possibly spending a large amount of time in a money market account, awaiting the next high-probability trading opportunity.

Even though Scotia’s Growth S&P Plus Strategy has been in the market less that half the time and has delivered outstanding results with limited losing periods, this is an aggressive investment and should only be considered by investors who are comfortable with taking on significant investment risk. Cliff counsels his direct clients to invest no more than 20% of their portfolios into this program, as he feels the recent big run-up in performance may not be sustainable.

The Trading Platform

Cliff has outsourced administrative tasks to Purcell Advisory Services, a Registered Investment Advisor in Tacoma, Washington that we also work with. Purcell provides back-office support for his trading activities, allowing him to concentrate on market analysis and the generation of a trading signal. Cliff communicates his trading signals daily to Purcell, and they execute the trades and maintain client accounts. Purcell is highly experienced when it comes to providing back-office operations for professional money managers, and currently does so for a number of Investment Advisors nationwide.

Because of this outsourcing, the Halbert Wealth Management due diligence team has also subjected Purcell Advisory Services to a full review of their administrative capabilities and internal controls, including an on-site visit to their offices in Tacoma, Washington. We are happy to report that they passed our due diligence review with flying colors.

Cliff shares offices with his father, Paul, and Theta Investment Research. As a result, Paul is very familiar with the trading strategy, and provides an ample level of backup should Cliff be unable to trade for any reason. Purcell also serves as an extra measure of backup so that trades could be unwound if both Cliff and Paul were to become incapacitated, or in the case of a regional disaster, power outage or Internet disruption.

All accounts are held in individual accounts at Rydex Funds, and clients have online access to their accounts via the Rydex website. Both Rydex and Purcell issue quarterly statements, and Rydex provides year-end tax reporting for those investing through non-retirement accounts.

Since this program has the potential to trade frequently, investors in taxable accounts may have to deal with “wash sales” and short-term gains. Given the actual performance numbers of late, it may be well worth any tax disadvantages. Even so, it may be most suitable for IRAs and other tax-qualified retirement accounts. The Growth S&P Plus program may also be managed within no-load, low-cost variable annuity products available through Purcell that can help to address the negative tax consequences of frequent short-term trading in a non-retirement account.

Scotia’s minimum account size is $25,000. Management fees are billed quarterly in advance, based on the following schedule:

First $100,000	2.50%
$100,001 to $1 million	2.25% (entire account)
Over $1 million	2.00% (entire account)

Conclusions

The Scotia Growth S&P Plus Strategy can be a very attractive option for investors who understand the risks and want to diversify their portfolios by adding an investment that has both leverage and a long and short exposure in the market. As noted above, the program has an annualized return of 29.35%, net of all fees and expenses, with a worst-ever month-end drawdown of only –7.36%.

Yet the most impressive thing about this program is that it has shown outstanding results during the last 12 months, gaining over 90% during a time when other money managers found it difficult to stay above water. Keep in mind that past results are not necessarily indicative of future performance, and you should not expect the same return over the next 12 months.

And you can access Scotia’s Growth S&P Plus Strategy for a minimum investment of only $25,000, which is important for investors with smaller portfolios who want access to an investment option that uses both leverage and a long/short trading strategies.

Our analysis has also shown that Scotia’s historical returns show little or no correlation to the major stock market indexes, or to other Advisors I have written about in this E-Letter. Thus, the Growth S&P Plus Strategy may be an ideal complement to the other actively managed investments offered under the Halbert Wealth Management AdvisorLink® Program. For more information on the Growth S&P Plus Strategy, visit our website at www.halbertwealth.com.

If you believe, as I do, that market volatility could continue to be high, or go even higher, and that the equity markets will face some tough times in the next several years, then I suggest that you take a serious look at Scotia’s very successful program. Having the potential to make money in a very volatile market may prove extremely important over the next few years.

If you have any questions or would like to talk to one of our experienced Investment Consultants about whether this program may be suitable for a portion of your portfolio, please give us a call at 1-800-348-3601, or e-mail us at info@halbertwealth.com. You can also request additional information, including paperwork to establish an account, by going to our online request form. Also be sure to read the Important Notes about this investment program following my signature below.

Very best regards,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL), and Purcell Advisory Services, LLC (PAS) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from PAS in exchange for introducing client accounts. For more information on HWM or PAS, please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends), and the NASDAQ Composite Index represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of these benchmarks may differ materially (more or less) from that of the Advisor. The performance of the S & P 500 Stock Index and the NASDAQ Composite Index is not meant to imply that investors should consider an investment in the Scotia Partners Growth S & P Plus trading program as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the stocks that comprise the NASDAQ Composite Index. Historical performance data represents an actual account in a program named Scotia Partners Growth S&P Plus, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Scotia Partners Growth S&P Plus. The signals are generated by the use of a proprietary model developed by Scotia Partners. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mutual funds carry their own expenses which are outlined in the fund’s prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

In addition, you should be aware that (i) the Scotia Partners Growth S&P Plus program is speculative and involves a high degree of risk; (ii) the Scotia Partners trading program’s performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Purcell Advisory Services will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Purcell Advisory Services trading program’s fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

Is Worst Of The Credit Crunch Behind Us?

Gary D. Halbert — Tue, 13 May 2008 18:08:00 GMT

Post-Mortem On The 1Q GDP Report
Recession, Even If Outside The Long-Held Definition
So How Bad Are Things Going To Get?
Have We Seen The Worst Of The "Credit Crisis"?
Maybe It's Not As Bad As We Thought
Stocks - Have We Seen The Bottom?
Conclusions - What To Watch For

Introduction

When the 1Q GDP report came out on April 30 and was better than expected, I wondered what the reactions might be. If you will recall, the report cited GDP growth of +0.6% for the 1Q when many believed the report would yield a negative number. In fact, the mainstream media and Hillary and Obama have led us to believe that we are already in the grips of a serious recession. It comes as no surprise that they still maintain that stance, despite the latest positive GDP number.

Likewise, I knew that the gloom-and-doom crowd would claim (as always) that the GDP report was bogus, and that we are headed for economic disaster. What else is new? But I wondered how economists and respected analysts in the financial industry would react to the better than expected GDP report at the end of April. As I expected, many in the economic and financial industry downplayed the report initially and pointed out that some of the "internals" in the report were indeed negative, as I reported last week.

But I also wondered that if, after a week or two of absorbing the latest GDP data, some respected economists and financial pundits would change their views and consider that we might not be in or headed for a recession, and that the state of the US economy just might not be so bad after all. As I will discuss below, that appears to be happening.

There is a broad consensus that the fate of the US economy, and whether we have a real recession or not, hinges on the housing/credit crisis. I happen to agree with that assessment, but I also believe it is still too early to tell if a recession is inevitable. Now, in light of the latest 1Q GDP report, the opinions and forecasts of some respected analysts are growing less negative as I will discuss later on.

Finally, have you noticed that the stock markets have been going up nicely since early March, despite a ton of bad news? Stocks have a history of bottoming out before the economy recovers from a downturn. Some analysts believe that is what is happening now. Maybe it's time to consider getting back in.

Post-Mortem On The 1Q GDP Report

While the mainstream media and the Democrats all but promised a very negative GDP report for the 1Q, the actual advance number came in better than expected at +0.6% for the first three months of this year, the same as for the 4Q of last year. Granted, +0.6% is indicative of an economy that may be teetering on the edge of a recession, but it was at least mildly positive and above the pre-report consensus.

The immediate media response to the report was as expected, that the report was overly optimistic. As I reported last week, even the Wall Street Journal was skeptical:

"...But underlying data [in the report] - on consumer spending, business investment and construction - paint a picture of a deteriorating economy, one that expanded only because of a rise in exports and a buildup of inventories... Excluding exports and inventories, the economy contracted at a 0.4% rate..."

Yet as I also reported last week, there was some encouraging news in the latest GDP numbers. For example, consumer spending that makes up apprx. 70% of GDP actually rose 1% in the 1Q, at a time when consumer confidence fell to the lowest level in 20 years. While the latest WSJ/NBC poll found that 81% of Americans believe we are now in a recession, people continued to spend money in the 1Q. This is at least somewhat encouraging.

On the inflation front, the latest GDP report revealed that the price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.5% (annual rate) in the 1Q, compared with an increase of 3.7% in the 4Q. Excluding food and energy prices, the "core" price index for gross domestic purchases increased 2.2% in the 1Q, compared with an increase of 2.3% in the 4Q of last year. This was also better than expected. In a separate report released last week, the Labor Department reported that US productivity rose by a better than expected 2.2% (annual rate) in the 1Q. Non-farm output per hour worked rose 3.2% versus a year earlier, the largest gain in almost four years.

At the end of the day, it is clear that we are not in a recession just yet, at least based on the "advance" 1Q GDP report, which will be revised two more times in the coming weeks. Maybe a recession lies ahead, but it's not here yet. Perhaps the US economy will have sunk slightly into the negative side in the 2Q, which we won't know until late July when the 2Q GDP report will be released. But even if the 2Q GDP report is slightly or somewhat negative, that will not confirm that a recession is upon us.

Keep in mind that the government's $168 billion "stimulus package" is going out to most US taxpayers as this is written, and this should provide at least a modest boost to the economy in the second half of this year.

As a result of the better than expected 1Q GDP report and the stimulus package, some respected analysts are dialing back their forecasts for a US recession just ahead, and perhaps for good reason. Some readers have criticized my view over the last year or so that a recession was not the most likely scenario, especially in light of the housing/subprime/credit crunch. Still, I may yet be proven correct. Some well-known analysts are coming to agree as I will discuss below.

Recession, Even If Outside The Long-Held Definition

In the 30+ years I have been in the investment business, a recession has been defined as two consecutive quarters of negative GDP growth. But just as I have expected, the media wants to redefine the definition of a recession to something more politically correct. The media would now have us believe that the US economy is in a recession anytime that economic growth, or the lack thereof, creates a net reduction in jobs.

Clearly that is happening - the unemployment numbers have confirmed for the last three months that net jobs are in decline. However, the April unemployment rate was actually better than expected and declined from 5.1% to 5.0%. Net job losses in April were only apprx. 20,000 which was well below the reported job losses of apprx. 80,000 in March and February.

Yet the greater question is, has the long-time definition of a recession changed? Do we now define a recession as two consecutive quarters of negative GDP growth, as we have for all these years, or is it some new definition that is much more limited? This is quite a debate, but it is fueled primarily by liberals that want to capitalize on President Bush's failures to advance their own agendas.

What is all too clear is that the US economy is indeed in a marked slowdown, recession or not. The slowdown has been precipitated and exaggerated by the subprime/housing/credit crunch, which is still far from over. And what we do know is that the housing slump has led to a plunge in consumer confidence to the lowest level in over 20 years.

So, is this a recession by historical standards? Not yet. But is it a recession based on the new media math? I would reluctantly have to say yes. Maybe we redefine it as a "psychological recession." Consumers are still spending, as noted above, but they feel really bad about the state of the economy, and think things are going to get worse.

So How Bad Are Things Going To Get?

The credit crunch is very real. The repercussions of the housing slump, the subprime crisis and the resultant credit crunch are far from over. Liquidity in the credit markets remains a fraction of what it was a year ago. We see this in the investment markets as well, where trading volume remains down significantly.

The Fed has slashed interest rates time after time in an effort to relieve the credit crunch, with the latest cut in the Fed Funds rate to 2.25% on April 30. That brings the cumulative rate cuts since last September to 3.25%, which is a more rapid rate-cutting spree than in the first eight months of 2001 when the Fed was last battling a recession. Still, it remains to be seen if this will be enough to avoid a recession this time around.

There are analysts on both sides of this fence. Some believe the combination of Fed rate cuts and other federal relief on the mortgage side, along with the stimulus package (more on this below), will be enough to prevent the housing crunch from sparking a real recession. Others believe it is too little, too late, and the plunge in consumer confidence will result in spending falling to levels that will guarantee a recession later this year.

The stimulus package that the President and Congress passed totals apprx. $168 billion, most of which will be doled out over the next couple of months. It remains to be seen just how much that will boost the economy and when. Will most consumers immediately spend the money? Or, will they save most or all of it (doubtful)? Obviously, the Bush administration hopes consumers will quickly spend the money in one way or another to boost the sagging economy.

But even if consumers do spend most of the newfound money, it is not certain just how much that will stimulate the economy. Estimates vary as to when consumers will spend the money, but generally it is believed that the stimulus package will add apprx. 1% to GDP. But when?

Some people have already received their government stimulus checks, but most will receive them over the next several weeks. This suggests that most of the positive impact on the economy from the stimulus package will not be felt until the 3Q. Furthermore, a one-time 1% boost will not, by itself, turn this economy around. Of course, we should not rule out additional stimulus to come, given that it's an election year.

Have We Seen The Worst Of The "Credit Crisis"?

As you know, the credit crisis has been sparked by the problems in the housing sector and subprime mortgage securities specifically. As noted above, the housing numbers, on balance, just continue to get worse month after month nationwide. Home foreclosures continue to rise; the inventory of unsold homes continues to rise; new and existing home sales continue to fall overall; median home sale prices continue to fall in most parts of the country; and housing starts continue to fall.

The question is, have we seen the worst of the housing/credit crisis? The answer to this question varies, of course, from region to region. Here in Austin where I live, for example, we have seen no noticeable slowdown in the housing boom; prices for homes are still going up generally; and credit for home loans is still widely available. This is also true in certain other areas of the country. Of course, in most areas of the US, just the opposite is happening and home values have fallen precipitously in some regions.

There is little doubt that the credit crisis is far from over and will persist for at least another year or two. It is clear that the credit crunch continues to spread from largely real estate related loans to commercial and industrial loans and credit card lending. Even Fed officials concur that lending requirements continue to tighten in most all loan categories nationally.

But might we have seen the worst of it by now? As noted below, there are those who believe we have. Some financial analysts now believe that the bailout of Bear Sterns in March may have signaled the worst of the credit crisis. That remains to be seen, of course.

Likewise, in light of the latest better than expected GDP report and the $168 billion stimulus package, some economic forecasters are shifting to a more positive, or less negative, slant. Given that, let's consider some more recent opinions on the overall state of the economy and the credit crisis.

Maybe It's Not As Bad As We Thought - Some Opinions

Here are some recent revised opinions on the current state of the economy from some sources that we should at least consider. The following quote is from Treasury Secretary Henry Paulson last week in an interview with the Associated Press:

"The worst of the nation's credit crisis may have passed...There's progress, and I think we're closer to the end of this than to the beginning... There's no doubt that things feel better today, by a lot, than in March... We will get some help from the stimulus [package]. Later this year, I expect growth will pick up."

Warren Buffet, the legendary investor and reportedly the richest man on the planet, had this to say last week:

"The worst of the [credit] crisis in Wall Street is over... I think the Fed did the right thing in stepping in on Bear Stearns."

Buffet said that he believes the worst of the global credit crunch is behind us, but he added that there is still considerable pain ongoing for individual consumers in many parts of the US. Based on his latest public remarks, it appears he believes we will get through this rough patch and continues to be bullish on the long-term prospects for the economy.

And this from Merrill Lynch CEO, John Thain last week:

"The U.S. credit crisis is easing and the risk in its housing market is dramatically lower now."

And this from our good friends at Stratfor.com:

"...we reiterate the view we have held from the beginning - which is that the subprime crisis would cause the economy to slow and, in extremis, cause a short recession... At the moment we are not even sure that the slowdown will cause a recession... But we rejected months ago... the idea put forward that we are in the greatest financial crisis we have seen since 1929."

And this from the Bank of England, which has had its own credit crisis:

"While there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months... As uncertainty falls and market liquidity improves, it should become clearer that some assets appear cheap relative to credit fundamentals."

While the housing/subprime/credit crisis is far from over, there are at least some signs that we may have seen the worst of it.

Stocks - Have We Seen The Bottom?

The major stock market indexes have been rising nicely since early March. This rally, in the midst of a great deal of bad news, has investors asking: Have we seen the bottom, and is it time to get back in? No one knows for sure, of course, but based on the discussion above and the possibility that the worst of the credit crisis might be behind us, I think there is a good chance that stocks could continue to trend higher just ahead.

Stocks have a history of bottoming out and rebounding well ahead of a turnaround in the economy. Thus, the latest strength in stocks might continue for a while. Most of the professional money managers I recommend are now positioned on the long side of stocks (vis-à-vis mutual funds). That includes Niemann Capital Management and Potomac Fund Management that I discussed at length last week.

Keep in mind, however, that I still believe (as do others) that the US equity markets may be in a broad trading range for the next year or longer. Since the range I envision is very broad, stocks could still have considerable upside potential from current levels.

Yet in this dicey environment, I think it is even more important to have a portion of your equity portfolio with professional money managers that have the flexibility to move to the safety of cash, or hedge positions, should market conditions dictate.

Conclusions - What To Watch For

As I see it, the economy has three major issues to deal with in the coming months and years. First, we have to get a better handle on exactly how much subprime exposure banks and Wall Street firms have, and whether or not they can survive. I expect we will have a much clearer picture on the subprime and related exposure before the end of this year.

Next, we're going to have to work through the housing dilemma. In some geographic areas, housing prices may continue to climb, albeit at a slower pace. In many others, however, housing prices will likely continue to fall, or stagnate where they are for an extended period of time. Either way, it's not good news for those who want a booming housing market to create equity in what is likely their largest investment.

Finally, I think the sticker shock associated with food and fuel prices is a major contributing factor to the recent plunge in the consumer confidence numbers. It seems that gas prices go up each day, and we're not even into the summer driving season yet. Food costs are also rising quickly, so it's no wonder that consumers are in a funk.

Despite that, the economy did remain in positive territory in the 1Q. Consumer spending, which accounts for apprx. 70% of GDP, continued to rise in the 1Q, although modestly. It remains to be seen if the economy will have dipped slightly into negative territory in the 2Q. And it will be interesting to see how much the stimulus package boosts the economy in the 3Q.

After reviewing the outlooks from all of my various sources of economic information, I believe we may have seen the worst of the subprime and housing crises. However, I also tend to agree with Peter Bernstein, who I quoted last week as saying that our current economic malaise could hang on longer than most people expect. Even so, there should be opportunities in the market for those who are properly positioned to take advantage of them.

Finally, I happen to think that now may be a good time to dip a toe back into the murky waters of the stock market. Sure, there's risk involved, but as I noted last week, sometimes you take on more risk by doing nothing.

So, if you are sitting on the sidelines, or are under-invested in equities, this may be a good time to consider investing with one or more of the professional money managers I recommend that have the flexibility to move to cash or hedge positions, just in case there is more bad news in the pipeline.

To talk to one of our Investment Consultants about these programs, feel free to give us a call at 800-348-3601, or send us an e-mail at info@halbertwealth.com. Plus, if you missed out on the free, no obligation risk tolerance assessment that I offered in my April 22 E-Letter, just click on the following link to access our Confidential Risk Tolerance Profile questionnaire.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES

Is the worst of the housing/credit crunch over? (Good read)
http://www.weeklystandard.com/Content/Public/Articles/000/000/015/097snjun.asp?pg=1

The Challenge From China
http://online.wsj.com/article/SB121063718854786789.html?mod=opinion_main_commentaries

Superdelegates put Obama within mathematical reach.
http://apnews.myway.com/article/20080513/D90KGU400.html

The Stock Market's Decade-Long Drought

Gary D. Halbert — Tue, 22 Apr 2008 19:58:00 GMT

A recent Investor's Business Daily article highlighted the fact that the S&P 500 Index is essentially in the same place it was nine years ago. This news comes as a rude awakening to those who have embraced Wall Street's buy-and-hold mantra and expect the stock markets to average 10% to 12% annual returns....(read more)

Would You Buy Stock In U.S.A., Inc.?

Gary D. Halbert — Tue, 04 Mar 2008 21:58:00 GMT

A few years back, I wrote an of article discussing how the US economy could be described as the largest corporation in the world and, as such, were shares of USA, Inc. an attractive investment? When I first wrote on this subject, I was confident that USA, Inc. would continue to surprise on the upside, and it did. However, in light of the many recent challenges to our economy, is USA, Inc. still a good investment?...(read more)

Leap Years, The Economy, Stocks & Politics

Gary D. Halbert — Tue, 26 Feb 2008 19:31:00 GMT

2008 is a Leap Year and this Friday, February 29, is "Leap Day." This week, we look at why we have Leap Years, and why it's actually more complicated than you might think. We also explore why the stock market usually goes up and finishes strongly in Leap Years, and the likelihood (or unlikelihood) that will do so this year. We also take a look at the latest economic indicators and whether a recession has begun....(read more)

Are You Going To Make Any Money In 2005?

Gary D. Halbert — Tue, 21 Dec 2004 07:05:00 GMT

Introduction The holidays are upon us, the New Year will be here before we know it, and this is the time of year for reflecting on the past and planning for the future. As investors, we have a lot to be grateful for this year. The economic recovery remains...(read more)

Will The Post-Election Rally In Stocks Continue?

Gary D. Halbert — Tue, 09 Nov 2004 10:16:00 GMT

Introduction The stock markets rallied strongly last week after the election, not only here in the US but in much of the rest of the world as well, as I predicted in my October 19 E-Letter. In that issue, I suggested that stocks would rally regardless...(read more)