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By Gary D. Halbert
January 6, 2004



1.  The Economy – Another Good Year Ahead.

2.  Stocks – Will Move Higher But Riskier Now.

3.  Bonds – High-Yield Is Still The Place To Be.

4.  Gold, The U.S. Dollar & Commodity Plays.

5.  The Ugliest Campaign Ever Lies Just Ahead.

6.  Correction To Last Week’s E-Letter.


The holidays zoomed by, for me at least.  This is always the case with young kids in our family, but this was one of the best Christmas holidays ever at the Halbert house.  Now, as always, we are back to business and turn our sights to the New Year and what we can likely expect.

On the economic front, things could not look better.  We had new, even more positive economic data released in late December and last week.  Barring some negative surprise, such as another terrorist attack, the economy will continue to improve this year, although not at the blistering 8.2% rate in the latest GDP report. 

As for the investment markets, the stock markets should continue to advance in 2004, but not likely at the rate we saw last year.  In the bond markets, Treasuries will likely continue to struggle, while high-yield bonds should continue to outperform as they did in 2003.  The US dollar is likely to continue to fall, while precious metals could continue to edge higher.  Yet there is at least one problem with all of these trends, which I will discuss below.

On the political front, expect to see the nastiest presidential campaign ever this year.  Whether or not he becomes the Democratic nominee, Howard Dean has dragged the Dems to the far left, complete with vitriolic criticism of President Bush and his handling of the War On Terror.  With both parties expected to spend record amounts of money this year – despite campaign finance reform (a joke)- you can expect the debate to get much more UGLY!

The Economy – Another Good Year

A year ago, the gloom-and-doom crowd was widely predicting a “double-dip recession.”  As usual, they were wrong.  On December 23, the Commerce Department confirmed that GDP expanded at the blistering annual rate of 8.2% in the 3Q.  That gain followed increases of 3.1% in the 2Q and 2.0% in the 1Q. 

Most economists expect that GDP rose at a 4-5% annual rate in the 4Q.  Assuming the 4Q is near the midpoint of this range, that will mean the economy expanded by 4½% in 2003.  Not bad, especially considering how many naysayers there were a year ago.

On Friday, the Institute for Supply Management announced that its ISM Index for manufacturing activity surged to 66.2 in November, versus 62.8 in October.  It was the largest monthly gain in over 20 years.  Even unemployment is improving, finally.

Most economists expect growth of 3-5% for this year.  The highly respected editors at The Bank Credit Analyst agree: 

“We have a high degree of confidence. The [monetary] policy environment should remain conducive to growth in all the major regions and leading economic indicators are pointing north. Barring some unforeseen shock, the current impetus toward stronger growth should continue.

As a rule, economic trends do not change on a dime. There is a general rhythm to the economic cycle in the sense that once an upturn takes hold, it sets in motion a chain of events that becomes self-sustaining. The business cycle has averaged four to five years in recent years, which means the current one should be safe until at least 2006. The cycle typically comes to an end when increased inflationary pressures force policy to become restrictive. While we expect inflation to edge higher, it will not become enough of a problem to create the need for a monetary squeeze during the next year or two. We are particularly encouraged by the broad-based nature of the economic upturn.”

This is actually a change in position for the BCA editors.  Up until this latest issue, the editors had expected the current recovery to run out of steam by the end of 2004, with the likelihood of a severe recession afterward.  Now, they are suggesting that the current recovery could go on until 2006 or even longer.  That’s very good news, especially given BCA’s excellent track record in forecasting the economy.

Stock Market Outlook – Could Get Dicey

2003 was an excellent year for investors who followed my advice.  The stock markets bottomed out in March, just before the war, and moved steadily higher.  From the low at 800 in March, the S&P 500 is over 1100 today, a gain of 37%. 

Unfortunately, many investors did not take my advice to move back to a fully invested position in stocks and/or mutual funds just before the war.  Money market funds are still loaded with cash, which means that many investors missed the ride in 2003.  But it also means that money can push stocks higher this year when people finally decide to get back in.

I continue to recommend fully invested positions in stocks and/or mutual funds.  However, I do not expect the equity markets to perform as well as they did last year, and I fully expect to see some nasty corrections in the weeks and months ahead.  While I do expect the stock market averages to be higher a year from now, it’s likely to be a bumpy ride.

For that reason, I continue to recommend that you use professional advisors to manage most of your equity investments.  Among others, I continue to recommend Niemann Capital Management, which had one of its best years ever in 2003.  For more information on Niemann, CLICK HERE.  (Past performance is not necessarily indicative of future results.)

If you do manage your own equity investments, I would recommend that you move largely to “value” stocks and value oriented mutual funds at this point.

Bonds – What To Do Now

In late 2002 and early last year, The Bank Credit Analyst predicted the economic recovery and warned that Treasury bonds could get hammered.  As a result, I recommended that my clients significantly reduce their holdings of T-bonds and high-grade corporate bonds and move largely to “high-yield” diversified bond funds. 

This was at a time when investors were herding into Treasuries, just at the wrong time as it turned out.  Long-term interest rates hit bottom last summer and then rose sharply.  Most bonds took a beating, and just as BCA predicted, Treasury bonds were hit the hardest.

Meanwhile, high-yield bonds enjoyed a great year in 2003.  Unlike Treasuries and high-grade corporate bonds, high-yield bonds tend to do well during economic recoveries.  According to Morningstar, in 2003 the average high-yield bond mutual fund gained 21%, through November. The Credit Suisse/First Boston High-Yield Index gained over 25% in the same period. Capital Management Group, our recommended high-yield bond Advisor, had one of its best years ever.  For more information on Capital Management Group, CLICK HERE.  (Past results are not necessarily indicative of future results.)

Like stocks, I don’t expect high-yield bonds will match their 2003 results in the new year.  However, I do expect them to continue to do well, especially when managed by a professional who can move to the safety of money market funds should that outlook change.

Gold & The US Dollar

Gold hit new highs at $424 on Monday, and I expect it to move even higher, especially if the US dollar continues to fall.  The dollar is down apprx. 30% against the Euro.  So far, the drop in the dollar has not derailed the rise in the equity markets, nor has it led to a significant slowdown in foreign purchases of dollar-denominated assets.

The Bush administration and the Fed seem content to let the dollar drop further, so long as it does not lead to problems in the financial markets.  While the bull market in gold and the bear market in the US dollar may well continue, I still believe it is too risky to try to take advantage of these trends at this point, unless in a professionally managed account.

My Caveat For 2004

All of my views and market forecasts expressed above are widely held.  The “consensus opinion” is that the economic recovery will continue, that interest rates won’t rise much, and that stocks and gold will move higher, while the dollar will continue to move lower.  I always get uncomfortable when too many people agree with me.

Also, all of these trends (stocks, bonds, gold, the dollar) have moved significantly already.  As cautioned above, there could be some nasty corrections in all of these trends in 2004.  Along this line, we should not rule out the possibility of another terrorist attack in the US.  I think it is remarkable that we have not had another attack since 9/11.  The terrorists would like nothing more than to strike the US before the election and possibly cost President Bush his job.  Just something to keep in mind.

The Bull Market In Commodities

After many years of depressed prices, most of the commodity markets rose sharply in 2003.  Along with the various metals, energy prices and most agricultural commodity prices are up sharply.  This is leading to renewed interest in the futures markets.

I do NOT recommend that investors try to trade in the futures markets on their own.   It has long been reported that over 90% of individual investors who trade in the futures markets lose money.   Due to the high leverage involved, you can actually lose more than you invest.

There are professionally managed futures funds (also called commodity pools) which are available to investors.  As you might expect, there are good ones and bad ones, so you need to do your homework before investing.

If you would like more information on futures funds, you can call us at 800-348-3601 or you can e-mail us at

The Ugly Political Season

Presidential election years always lead to spirited debates and even mudslinging.  But this year’s election will almost certainly prove to be one of the ugliest on record.  First of all, the candidates will be spending record amounts of money.  Bush is expected to rake in upwards of $300 million for his campaign.  Whoever is the Democratic nominee is expected to receive a similar – or potentially even larger - amount.

How is Howard Dean (or whoever is the Dem’s nominee) going to raise $300 million, you might ask.  And what about campaign finance reform?

There is a giant loophole in the campaign finance law that was just blessed by the Supreme Court on December 10.  The new laws do not prohibit outside parties from independently raising money to support the candidate of their choice.  Independent, non-profit groups such as and ACT (Americans Coming Together) are raising tens of millions to use against Bush, while groups like the Club For Growth are raising money to use against the Democratic nominee.  This activity is not prevented by the new campaign finance reforms.

Actually, the Democrats have an advantage in this area because some billionaire liberals are putting tens of millions of dollars into groups like and ACT.  Legendary hedge fund manager, George Soros , is a billionaire liberal who has pledged $25 million or more to defeat Bush.   Soros has always been close to the Democratic Party, has raised money for Howard Dean and has contributed tens of thousands of dollars to liberal and left-wing groups.  Some believe Soros is laying the groundwork for a Howard Dean-Wesley Clark ticket in which he would have a great deal of influence.

Another billionaire leftist, Peter Lewis, has promised another $12 million to this effort.  Former Republican party chairman Marc Racicot says their goal is to raise over $400 million to defeat the president. The Wall Street Journal has reported that this is part of the Democratic Party’s strategy to direct money to groups that will coordinate their attacks on Bush.

Now you know why many liberals supported the campaign finance reforms that were passed last year!  Of course, the same could be said of some conservative groups as well.  But most political observers I read believe this loophole will benefit the Democrats more than the Republicans.

The point is, there will be far more money spent than ever before on the presidential election this year.  Given the widespread hatred of Bush among the liberals and within the Democratic party, you can bet it will be a NASTY campaign, especially if Howard Dean is the nominee.

It will be interesting to see if the nasty mudslinging will backfire on the Democrats.  President Bush’s approval ratings have risen back to the low-to-mid 60s from the low-to-mid 50s a few months ago.  His approval ratings for his handling of the War On Terror are even higher.  So, it remains to be seen if criticizing Bush, especially as Howard Dean has done, will not play well with the American people.

The Iowa Caucuses are on January 19, and the New Hampshire primary is on January 27.  If Howard Dean wins those two, it will be almost impossible to beat him.  It will also be very interesting to see what the Clintons do if Dean wins these first two contests.  Dean has all but said he will remove Clinton crony Terry McAuliffe as head of the DNC if he is the nominee.

In any event, the next few weeks will be interesting to watch!  Check out the links below for more interesting stories.

Correction:  The “Million Dollar Boat”

We noticed in last week’s newsletter that the illustration given for the “Million Dollar Boat” example was incorrect in the version that was forwarded to our readers.  Unfortunately, something happened between my final text and the publisher’s version that incorrectly stated one of the accumulated values of the example, and omitted the 10% illustration completely.  Here’s how the numbers should have read:

     Total Distribution at age 28:


     Value at age 67, assuming 6% earnings for 39 years:


     Value at age 67, assuming 8% earnings for 39 years:


     Value at age 67, assuming 10% earnings for 39 years:


Thus, if our 28-year-old bought a boat with his $25,000 401(k) distribution rather than rolling it over, it could end up costing him over one million dollars at age 67 (his Social Security retirement age) assuming average annual earnings of 10%.

Happy New Year, everyone!

Gary D. Halbert


How Carville and McAuliffe created Dean.

Warning from Democrat Zell Miller to his party.

Electoral vote advantage goes to Bush. ad comparing Bush to Hitler draws fire.



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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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