Are You Going To Make Any Money In 2005?

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
December 21, 2004

Are You Going To Make Any Money In 2005?

IN THIS ISSUE:

1. Economic Outlook Remains Good For Stocks

2. Reviewing My Market Advice In 2002-2004

3. You Should Have Made A LOT Of Money

4. How Our Professional Money Managers Have Done

5. Why You Definitely Need Professionals Now

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 on a solid path with GDP growth of 3.9% in the 3Q. The stock markets, after a shaky first half of the year, recently surged to three-year highs. Bonds have delivered impressive returns. And even precious metals have surged higher after many years of going nowhere or down.

Once again, the gloom-and-doom crowd has been proven wrong. These pessimists constantly spew negative forecasts year after year. As always, the gloom-and-doomers predicted a recession in 2004, which obviously didn’t happen. Unfortunately, these “perma-bears” convince many investors to remain on the sidelines and/or put their money in programs and strategies that only work if the equity markets go down (or not at all).

Fortunately, you have not read any of that negativity in this weekly E-Letter since I began writing it in late 2001, and not since I became a weekly columnist for InvestorsInsight.com in late 2002. My best sources, including the internationally respected Bank Credit Analyst (which I summarize for you frequently), have maintained positive forecasts for the economy and generally positive forecasts for the equity markets.

If you have followed the advice I have put forth in these weekly E-Letters, you should be very happy with your equity investments over the last 2-3 years. The S&P 500 Index gained 28.7% in 2003 and is up around 8% for 2004. If you followed my advice in these pages, you should have done even better.

If you invested with the three professional money managers I have recommended on numerous occasions over the last two years, you have enjoyed exceptional performance, while also knowing that these managers have the flexibility to exit the market or “hedge” their positions if conditions so warrant. (Past results are not necessarily indicative of future results.)

This week, we will briefly review the economic outlook, the outlook for the equity markets going forward, and we will look back to review the investment advice I have offered you over the last two years.

What’s Ahead For The Economy In 2005

As noted above, Gross Domestic Product grew by 3.9% (annual rate) in the 3Q, following the gain of 3.3% in the 2Q. The manufacturing sector continued to expand for the second year in a row. The housing market set new records this year. Retail sales for November were 7.2% higher than a year ago. The unemployment rate fell to 5.4% in November. The economy remains on a solid growth path.

Most economists forecast the economy to expand at a rate of 3% or better in 2005 as well. Likewise, The Bank Credit Analyst predicts growth of 3-3½% in GDP for 2005. Even though short-term interest rates are edging higher, the economy should continue to expand in the New Year.

[FYI, I will be reviewing BCA’s latest forecasts for the economy and the markets either next week or the week after.]

Yet as I have begun to warn in recent weeks, there is a recession in our future. When it will occur and how severe it will be is very much uncertain at this point. But the next recession is not likely to unfold until late in 2005 and more likely not until 2006 or even later (despite promises to the contrary by the gloom-and-doom crowd.)

So as we look ahead to the New Year and plan for our investments, we should see a generally positive environment for the economy and the equity markets.

Stock Markets Surprise On The Upside Again

In late 2002 as the S&P 500 Index was falling 22% for the year, I predicted in these pages that the equity markets could soar if we went to war in Iraq. In the December 17, 2002 issue, I wrote:

“If the war goes well, the equity markets could turn sharply higher, just as they did in Desert Storm. The S&P 500 Index rose 35% in the 12 months following the Desert Storm low. If this is correct, then the ‘war correction’ could provide another excellent buying opportunity.”

In the December issue of my monthly Forecasts & Trends newsletter, I advised clients and subscribers that BCA had recommended that investors increase their holdings of stocks and equity mutual funds. Because I felt that stocks could “surprise on the upside,” I wrote a free Special Report discussing ways to get back into stocks and mutual funds, including market timing strategies, which we offered in this E-Letter.

If you took my advice in late 2002, you should be very happy today. If you did nothing but buy an S&P 500 Index fund in the days just after my December 17, 2002 E-Letter, you should have made a profit of apprx. 35% since then.

My Advice Before The War Began

Fast-forward to early 2003. The stock markets were in a steep decline in the early part of 2003. Investors were selling due to fears about the war in Iraq. In my weekly E-Letters of February 18, March 3 and March 18, I continued to predict that we were seeing a major buying opportunity in stocks and mutual funds.

In the March 2003 issue of Forecasts & Trends newsletter, I also made the following prediction:

“I have been suggesting in my weekly F&T E-Letter that we will see an excellent buying opportunity in equities just as the war begins in Iraq… While I don’t expect a roaring bull market, I could see the major market indexes rising 20-30% in a post-war rebound in confidence and the economy.

Could the pre-war low in equities be the bottom of the bear market and the beginning of a new bull market?… There is no way to know if the rally I expect will begin a meaningful new trend to the upside, or if it will merely be another intermediate rally such as we saw last October--November.

But if the war goes well, I think both the stock markets and the economy may surprise on the upside for the rest of the year.”

The S&P 500 Index bottomed on March 11 at 800.73, just days before the war began. Let’s say you took my advice and bought an S&P 500 Index fund when the market was around 820. If you did, you have made a profit of apprx. 47% as of December 15, 2004.

Let’s say you were cautious and wanted to see how the war in Iraq unfolded, and you waited until the end of March to buy. At April 1, the S&P 500 had recovered to 848. If you bought then, you should have made a profit of apprx. 42% as of December 15.

If you took my advice in early 2003, you should be very happy today.

And How Did Our Professional Equity Managers Do?

Throughout late 2002 and since then, I have frequently suggested in these pages that readers consider opening accounts with two of our recommended equity money managers – Niemann Capital Management and Potomac Fund Management. As you may recall, I frequently include links such as this one where you can see their actual performance numbers over the years. You may be interested to know how well these two equity managers have done over the same period.

From April 1, 2003 through December 15, 2004, Niemann’s “Dynamic” program gained apprx. 72% in its accounts, and Niemann’s less aggressive “Risk-Managed” program gained apprx. 47%. Potomac’s more conservative “Guardian” program gained apprx. 33% during the same period. All of these numbers are net of all management fees and expenses.

In addition to delivering these outstanding results on the upside, all three of these programs have the flexibility to move partly or fully out of the markets – or hedge their positions – during market downturns. In an S&P 500 Index fund, you can experience huge losses when the markets trend lower (down 22% in 2002, for example).

In late 2002 and early 2003, I also recommended our favorite bond manager – Capital Management Group along with the two equity managers noted above. CMG has a phenomenal 10-year performance record. In 2003, CMG’s more aggressive program gained apprx. 43%, and their more conservative program gained apprx. 27% in 2003. And they are up again in 2004.

** As to these three money managers, past results are not necessarily indicative of future results. See additional disclosures and risk factors at the end of this E-Letter.

My Pre-Election Advice On Stocks

Fast-forward to this year. The stock markets had a choppy, difficult year in 2004. Most of the major market indices were sideways for the year going into the 3Q. Even our recommended professional equity managers were mostly sideways for the first half of this year. Everyone was frustrated.

Yet I again recommended that investors move to a fully invested position in stocks and mutual funds just before the election. In my October 19 E-Letter, I wrote:

“Given this [good economic] outlook, and the fact that interest rates are still very low, I continue to believe that stocks have a window of opportunity over the next year or so to move higher. I believe that if President Bush is re-elected, we could see stocks begin to trend higher again.

Actually, it could happen regardless of who wins the election in November. The country is so ready for all of the vile rhetoric and campaign rancor to be over with that stocks might rally no matter who wins.

How much higher might stocks move? I don’t know. Yet the equity markets have surprised on the upside many times over the last 20+ years.

For the record, I do not expect a multi-year bull market to unfold anytime soon. In fact, I don’t expect the markets will make it to their all-time highs seen in late 1999 or 2000 again anytime soon. But if the S&P 500 were to move up to 1,400 from 1,100 presently, that’s definitely a move worth participating in.”

That advice again proved to be right on target. If you bought an S&P 500 Index fund in the days just after my October 19 E-Letter, you are very happy today. The markets turned strongly higher as the election came and went. The S&P 500 bottomed on October 25 just below 1,100 and has since rallied almost 10%.

Our recommended professional equity managers also went on another upward run in profits at the same time. As this is written, all three of the equity programs referred to above are up strongly for the year. (Past results are not necessarily indicative of future results.)

I’ve Given You Some Very Good Advice

This E-Letter may seem a bit self-congratulatory. That is not my intent. We have seen over 500,000 new E-Letter readers added to the InvestorsInsight.com subscriber list in 2004 alone. They do not have the benefit of having read my weekly E-Letters since late 2002 when I predicted that the economy would rebound and that stocks would surprise on the upside. Nor did they have the benefit of my call to move back into stocks and equity mutual funds before the Iraq war began in 2003.

Yet for all of our nearly 2,000,000 subscribers, I think it is worth pointing out that my advice regarding the stock markets has been very timely over the last two years. If you acted on my recommendations, you are no doubt very happy today.

My advice will not always be so timely and accurate. My timing is far from perfect. This is why I subscribe to expensive analytical services that I have come to respect over the last 28 years. I read these publications carefully for their analyses. I then take the various research and forecasts and formulate my market advice with the benefit of my 28 years of experience in the investment business. That’s how I formulated the advice I have offered in these pages over the last 2-3 years and for years before in my monthly newsletter.

Without patting myself on the back too much, it is true that if you followed my stock market advice over the last two years, you have made a LOT of money.

Unfortunately, the next several years are not likely to be so easy. While I continue to believe that stocks have some more room on the upside in the months ahead, the latter part of 2005 and probably beyond will not be so good in my opinion.

Stocks may have more on the upside just ahead, but current valuations are not cheap by just about any measure. Profits will not be as easy to come by. And as noted above, whenever the next recession unfolds, equity prices are likely to move significantly lower. We just don’t know when that day will come.

Now More Than Ever, You Need Professional Managers

The continuing investment theme I have repeated over and over during the last two years is the same, especially now. There are professional money managers out there that have long-term performance records that are far better than most of us can do on our own – and that includes me.

The next few years will almost certainly be a difficult time in the investment markets, especially when we hit the next recession. The days of easy profits are over, in my opinion. You are going to need professionals on your team.

Specifically, you are going to need professional managers that have time-tested systems that will get them partly or fully out of the market during major downturns. Or at least with strategies to “hedge” their positions when the equity markets turn south.

There are lots of professional equity managers out there. But the truth is, most don’t do any better (and many do worse) than the major market indices. At my company, we continually search the universe of professional managers to find those that truly have an edge. It’s only a small handful that makes it past our rigorous due diligence, but as you have seen, the managers that make our cut offer real value, especially in difficult markets.

New Managers Coming In The New Year

Over the last two months, my senior due diligence team has visited prospective money managers in Pennsylvania, New Jersey, Oregon and Washington. With every money manager we recommend, we conduct an on-site due diligence visit in their offices. We meet the principals, the key people and we thoroughly check out their operations. It is often during these on-site visits that we discover something that makes us reject the manager.

One of the things we have been looking for in money manager candidates is programs that employ “hedge fund-like strategies.” Most hedge funds can go long or short, as you may know. Because of the expectation of some difficult times ahead, wealthy investors have been herding into hedge funds at a record pace. It was recently reported that hedge fund assets swelled to over $1 trillion in 2004!

Unfortunately, hedge funds typically require minimum investments of $500,000 to $5 million just to get in the door. Many of the best hedge funds are closed to new investment no matter how much money you have.

As a result, we have been looking for money managers who use more traditional investment vehicles such as mutual funds, but who use strategies that are similar to some of the successful hedge fund strategies.

We will be finalizing our due diligence on the managers we recently visited over the holidays and early in January. At this point, I am confident that we will be announcing one or more new managers in January and/or February.

Conclusions

Over the last two years, I have given you some excellent advice on the stock markets. If you took that advice, you have made a LOT of money. My advice will not always be so good, but I believe I can continue to help you, especially as we move into more uncertain times.

If you have followed my advice and you have made a lot of money, let me caution you that I don’t believe it will be so easy to do so by the second half of 2005. When the current upward run ends, it will be critical to have your money with professional managers who have systems to get them out of the markets or hedge their positions.

Most investors will not know when to get out until it’s too late. Most investors don’t know how or when to “hedge” their positions. Few investors actually “short” the market when we hit large downturns.

If you haven’t looked at the professionals I recommend, I strongly urge you to do so now. Check them out on my website. I hope to have more exciting managers and programs to announce in the weeks ahead.

MERRY CHRISTMAS, HAPPY HANUKKAH & HAPPY HOLIDAYS TO ALL!!!

Best holiday wishes,

Gary D. Halbert

SPECIAL ARTICLES

Searching for Christmas in a “politically correct” world.
http://www.usnews.com/usnews/issue/041227/opinion/27john_2.htm

Christmas without Christmas.
http://www.weeklystandard.com/Content/Public/Articles/000/000/005/048gzcsk.asp

IMPORTANT NOTES ON INVESTMENT PROGRAMS DISCUSSED ABOVE:
ProFutures Capital Management Inc. (PCM) and the other advisory firms 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. This publication is not intended as 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. PCM receives compensation from Niemann (NCM), Potomac Fund Management (PFM) in exchange for introducing client accounts. For more information on PCM, NCM, or PFM, please consult PCM Form ADV II ,NCM Form ADV II, PFM Form ADV II.Officers, employees, and affiliates of PCM 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 or other benchmarks cited may differ materially (more or less) from that of the Advisors. Historical performance data was provided by the Advisors and where possible verified by PCM from selected customer account statements and/or independent custodian statements. However, since only selected accounts were analyzed there can be no assurance that the performance in these accounts was consistent with others. In all cases, performance histories reflect a limited time period and may not reflect results in different economic or market cycles. 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. Investment returns and principal will fluctuate so that an investor’s account, when redeemed, may be worth more or less than the original cost. 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.

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. Performance is based on actual accounts used as model portfolios, which are considered representative of the majority of client accounts with similar investment objectives. Individual account results may vary based on each investor's unique situation. No adjustment has been made for income tax liability. Performance for other programs offered may differ materially (more or less) from the program illustrated. 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.

IMPORTANT NOTES: ProFutures Capital Management, Inc. (PCM) and Capital Management Group (CMG) are Investment Advisors registered with the SEC and/or their respective states. This report does not constitute a solicitation to residents of any jurisdiction where the program mentioned may not be available. Information in this report is taken from sources believed to be reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal advice. This publication is not intended as 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. PCM receives compensation from CMG in exchange for introducing client accounts. For more information on PCM or CMG, please consult PCM Form ADV II or CMG Form ADV II. Officers, employees and affiliates of PCM may have investments managed by Advisors discussed herein and others. As benchmarks for comparison, the indexes used represent an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of the benchmarks cited may differ materially (more or less) from that of the Advisor.

The individual account performance figures reflect the reinvestment of dividends, and are net of applicable commissions and/or transaction fees, CMG investment management fee, and any other account related expenses. Past performance may not be indicative of future results and does not guarantee positive returns. The performance results have been compiled solely by CMG and have not been independently verified. In calculating account performance, CMG has relied on information provided by the account custodian. The CMG Risk Management Plan is a technically based strategy offered by Capital Management Group, Inc. These illustrations are based on actual account performance from 2000 to present (Trust Company of America client accounts). The results from November 1992 to 2000 are based on our actual trade signals applied to the Funds. CMG trades various high yield bond funds. CMG traded most of the stated funds but not all funds for the period reflected. The above accurately reflects the blended results of an assumed investment in the Funds when applying CMG’s actual trade dates for the period indicated and under the conditions stipulated when applying the risk management techniques to the actual price movements of the Funds. CMG trades various High Yield Bond Funds. CMG traded most of the stated funds but not all the funds for the period reflected. This illustration should not be construed as an indication of future performance which could be better or worse than the period illustrated. The period (1992-1997) was a period of generally rising fund prices. The period 1997-2001 was a period of generally declining prices. A money market rate of 5% was assumed from 1992-1999. All dividends and capital gains have been reinvested. The results shown are net of CMG’s 2.25% annual management fee through February 17,2004. Thereafter, they reflect the CMG High Income Plus Fund maximum expense load of 2.85%. CMG’s Leveraged Bond Program assesses a fee on the gross accounts value (including funds borrowed on margin).

Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater: Investment returns and principal are not guaranteed.