Special Update #4

Dear Clients,

Another 72 hours has passed since my last Update. There has been a lot of new news and, unfortunately, very little of it is good:

1. The death toll (missing persons) has topped 6,300 in NYC, plus hundreds more in Washington (I think it is a miracle that this number is not 20,000+, and it would have been if the attacks in NYC had been later in the day);

2. The FBI reports, finally, that as many as 200 Islamic terrorists are probably still living in the US, their plans as yet unknown and, reportedly, 44 are trained pilots;

3. We heard reports on Thursday that at least 3,000 Islamic terrorists are now believed to be in Europe, with some 30 Al Qaeda (bin Laden) terrorist cells now believed to be in Germany;

4. The US stock markets fell hard again on Wednesday and Thursday; they are very sharply lower again today; the Dow is down over 15% in a week, as this is written; confidence is badly shaken; margin call selling is rampant; investors are panicking; but a major bottom is coming;

5. The Bank Credit Analyst (my oldest and most reliable source for info on the economy and the markets) held its teleconference on Thursday with their latest thinking on what lies ahead; details appear below;

6. The US is undertaking a massive transfer of military equipment, war planes, carriers and troops to the Middle East and Indian Ocean; Stratfor.com believes the first target will be Iraq, not Afghanistan;

7. The US is clearly going forward with its (initially deemed) "Operation Infinite Justice" campaign against terrorist groups and nations, but no one knows what violence this may spark around the world;

8. Enlistment in the US armed services has skyrocketed this week, with young men and women lined up to serve their country (YEAH!);

9. The Saudis reportedly have offered the Taliban billions of dollars to hand over bin Laden; Taliban has so far refused and threatens a "jihad" (holy war) against the US if we attack;

10. The government estimated Wednesday that 3Q GDP will be down apprx. 1.3% and 4Q will be down apprx. 2% (annualized rates); recession is here;

11. United Airlines and American Airlines announced layoffs of 20,000 each, following similar cuts elsewhere in the industry; Delta is next; Boeing announced 30,000 layoffs; and

12. "Hardball" host and MSNBC commentator Chris Matthews wrote a DESPICABLE editorial on Sept. 17, basically lamenting the fact that Bill Clinton was not still the President when this tragedy occurred; whining about how Clinton never had a crisis such as this so he could show his greatness; you heard nothing about this in the media, but you can read this garbage in the "Special Articles" section below;

13. ProFutures' clients are not panicking, like the stories we hear from other investment firms; in fact, our phones have been much, much slower than usual since the crisis began; our clients have never been prone to panic; as discussed below, our futures funds are sharply higher for the month, and most of our mutual fund timers have only minor losses, despite the unprecedented crash in the stock markets.

DANGEROUS TIMES

Things are not good and more bad news is clearly not out of the question. As I pointed out in my last Update #3 on Tuesday, a lot of bad things could happen as soon as (or even before) the US launches its military attacks on terrorists in the days or weeks ahead. And my warning on Tuesday was before Wednesday's news that 200 or more terrorists may still be in the US, plus thousands in Europe.

Most people talk as if any terrorist attacks in Europe would be against the Europeans. However, if more terrorist acts are committed overseas, do not be surprised if those acts are directed at American interests in foreign countries.

It is troublesome, to me at least, that our intelligence networks apparently knew nothing about the massive attack on the US last week, yet only one week later they claim to know that some 200 Islamic terrorists (including 44 pilots) are probably still in the US today, and thousands are in Europe and elsewhere. I have heard that this latest information on terrorists in the US came from Israel. We also hear numerous reports that Israel warned the US over a month ago that there were at least 200 terrorists in the US, and that some kind of major attack was in the works.

How could this information have been discounted or ignored? The fact is, our intelligence operations have been hamstrung over the last 8 years. I could write countless pages about this, but what good would it do? Maybe I will later on, when the time is appropriate. But the truth will come out sooner or later on our lapse in intelligence and who is responsible for it.

It remains to be seen if more terrorist acts will occur. There are some reports that further actions are planned for this weekend and more for early October, but I have no idea if these reports are for real or just speculation. Reports came out yesterday that Europe may be the target of attacks over the weekend. Again, I don't know how real these reports are. In any case, we should all remain vigilant, and the government should make national security the #1 priority.

President Bush addressed the world before a joint session of Congress last night. His speech was excellent, very uplifting and unquestionably resolute. He received rave reviews, even from the liberals. But I must note that the media response probably would have been the same no matter who was the President at a time like this. Even though it was a great speech, the markets still opened sharply lower this morning.

The President created a new Cabinet position - "Secretary of Homeland Security" - and tapped PA Governor Tom Ridge for the new post. Other than his pro-choice position on abortion, Ridge is a staunch conservative and very tough on crime. [Prediction: at the end of Bush's first term, Cheney will retire and Ridge will be Bush's running mate.]

It is now obvious that the US is preparing for major military action against terrorists and the countries that harbor them. While I don't agree with all of Colin Powell's positions, we can be encouraged by his position on warfare. His so called "Powell Doctrine" says we should never start any conflict unless we are fully capable of finishing it and steadfastly determined to do so. His doctrine also calls for overwhelming force whenever we go to war.

Polls show that most Americans want the US to attack Afghanistan. I would recommend this only if our leaders have sound reasons to believe they can actually capture or kill bin Laden and his senior comrades. For another view on whether or not we should bomb Afghanistan, read the "AFGHANISTAN" article by clicking the link under "Special Articles" below. It is very insightful.

Americans continue to try to understand why these terrorists would take the actions they have and kill thousands of innocent people. I have read a very good assessment of the terrorists' master plan, although I cannot verify its accuracy. However, it is very instructive in any event. Click on the "ISLAMIC GLEE" link in the "Special Articles" section below.

THE BANK CREDIT ANALYST TELECONFERENCE

I participated in BCA's one hour teleconference yesterday morning. As I expected, the BCA editors had no definitive answers to what lies ahead. No one does. Nor did they make any specific predictions about where the equity markets will bottom. What follows is a digest of their latest thinking.

The Economy - The US economy was barely hanging onto positive growth before the tragedy, and the attacks couldn't have come at a worse time. Due to these events and their negative effects on numerous industries and consumer confidence, the editors predict that we will see a minimum of 2 negative quarters of GDP, and quite possibly 3 or 4.

The editors emphasized, however, that we should not forget or discount the fact that the economy has the two-pronged benefit of very easy monetary policy (low interest rates) and a soon to be very large fiscal stimulus (large new government spending).

The editors feel that the fate of the economy may well lie in the success or failure of the US war on terrorism. If the US is successful, the editors believe consumer confidence could rally quickly and strongly. Should this happen, along with all the fiscal and monetary stimulus, the editors believe the recession could be fairly brief. On the other hand, if the US military efforts are unsuccessful or misguided and consumers go into a funk again, they think the economy could be in a recession until at least the middle of next year.

Stocks - The editors believe, as I do, that the stock markets will present a once-in-a-generation, maybe a once-in-a-lifetime, buying opportunity just ahead. All of their indicators are screaming "extremely oversold." However, because this tragedy is unprecedented, and the fear factor is so great now, it is impossible to predict when the markets will bottom. They do believe, however, that all of the overvaluation issues which had existed in the markets in the recent past have now been erased, and many sectors are now grossly undervalued.

They note that panic selling, as we are seeing now, is a classic sign that a bottom is at hand. Their "capitulation" indicator is now as extreme as it has been at other major market bottoms.

While the editors do believe a great opportunity is upon us, they do not believe the markets will mount a strong, sustained uptrend until there is a noticeable improvement in corporate profits. Like the rest of us, the editors do not know how long it will be before that happens, in light of the tragedy. Of course, the time to buy will be BEFORE all the news is good.

Bonds - The editors were already negative on government bonds before the latest crisis, and they are even more negative given the latest flight to safety and further drop in yields over the last week or so. They believe that when the flight to quality is over, bonds could move sharply lower for a time, leaving many investors with losses. While they were not ready to do so in their telecon on Thursday, they expect very shortly to recommend that investors switch from government bonds to high quality corporate bonds (obviously those of carefully selected companies). They believe that the current very wide spread between government bonds and corporate bonds will narrow significantly.

US Dollar - The editors believe there will be more weakness in the US dollar, but they do not expect a crash or even a major bear market. They believe the lower dollar will actually be helpful to the US economy as it makes our goods cheaper overseas. The editors believe the Euro will move higher, up to par and beyond.

Gold - they remain uninterested in gold, neither bullish or bearish. [Gold has rallied to slightly above $290 as this is written, which is not impressive in light of the crisis, but it may well go higher when military strikes begin. I still think this is a "traders" market that most of us should stay out of.]

As you will recall, BCA has maintained a very positive longterm outlook for the US since 1995 when they first made their economic "upwave" forecast. The editors said Thursday that they will devote an entire section of their October research report to a discussion of whether or not that forecast has changed.

FUTURES FUNDS, ETC.

The Diversified and Alternative Funds have held very steady over the last 2 days, with both still up apprx. 6% for the month. The Long/Short Fund is still up over 2% for the month. It is good to see them doing what they are supposed to do! (Past results are not necessarily indicative of future results.)

Most of our mutual fund timers were partly or entirely in cash prior to the attacks on Sept. 11. Hallman & McQuinn are -1.91% for the month; Index is 0.0% for the month; Professional Sector Management is -1.8%; and Potomac Conservative Growth is -4.4% for the month. The S&P 500 is down over 15% this month by comparison.

FINAL THOUGHTS

1. There was a rumor on Thursday morning that a flight which departed from Milwaukee had been hijacked and was in route to Chicago. We know from contacts in Chicago that evacuations were begun yesterday morning at the AT&T building and Sears Tower, but the rumor proved to be false. Oddly, the media didn't cover this scare.

Friends and business associates of mine who work in the Sears Tower tell me that businesses are thinking of moving out in droves, even if they still have years left on their leases. I am also told that Goldman Sachs, which occupies several floors in Sears Tower, is also considering a move to a less conspicuous location.

We have only begun to see how dramatically our lives will be changed by the cowardly acts of Sept. 11th! The world will never be the same!!

2. Stratfor.com believes the target of the first wave of US military action will be IRAQ, not Afghanistan. Obviously, I am not in a position to know, but that would not surprise me.

3. News is unfolding that some groups took enormous short positions in airline stocks prior to the Sept. 11 attacks in New York and Washington. Securities authorities are racing to trace these trades to see if they provide links to the terrorists.

4. Now that the government has opened the spending spigots, there is a feeding frenzy in Washington. Everyone and their dog is trying to get money while Congress and the President are in the mood to spend. Hopefully, our leaders will stick to only emergency spending needs.

LET ME HEAR FROM YOU

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HAVE A GREAT WEEKEND!

Like you, I'm sure, my heart is still very heavy in the wake of this tragedy. I'm nervous like everyone else. But we have to get on with our lives, or the terrorists win.

NYC Mayor Rudi Gulliani (what a guy!, what a leader!), in a press conference this morning, advised New Yorkers to get out and do their Christmas and Hanukkah shopping, starting this weekend, while the stores and malls are not crowded.

I agree. I will be coaching youth football, as usual, on Saturday.

My best to all of you!