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The Economy, The Markets & More On Harriet Miers

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
October 25, 2005

IN THIS ISSUE:

1.  Economic Indicators Mixed To Weaker

2.  Stocks Lower But Still In The Trading Range

3.  Lightening Up In Real Estate Revisited

4.  ADVISORLINK®  Programs Available To You

5.  Harriet Miers - Dark Secrets In Her Past

Introduction

Following two of the worst hurricanes ever to strike the US, the enormous devastation across the Gulf Coast, the virtual loss of New Orleans, the major damage to the Gulf ports and the crippling of Mississippi River barge operations, virtually every forecaster has predicted a slowdown in the US economy.  Predictions range from a short-term dip lasting only a few months to a full-blown recession.

If you read this E-Letter regularly, you know that my forecast has been somewhere in the middle.  In recent weeks, I have predicted that the economy would go into a “stall” for the next 3-6 months, with GDP growth falling to a 1½-2% annual rate, down from the recent rate of 3.3% in the 2Q – but that we would most likely avoid a recession.  I also predicted a rebound in the economy following the 1Q of next year.

In my August 30 E-Letter and again in my September 13 E-Letter, I recommended that you reduce equity exposure and bond exposure, unless professionally managed.  I also recommended that you consider selling real estate that you own for investment purposes only (not your home).  Since then, stock prices have gone down, bond values have gone down, and there are growing signs of a peak in real estate and housing.

While I am not ready to rescind my forecasts and recommendations of late, I must say that the economy seems to have held up a little better than I initially expected following the hurricanes.  Caution: it is still too early to tell; consumer confidence could still get even worse; and the economy could still take a significant dive.  But so far, things are better than I expected them to be in late August and early September.  Thank goodness.

While not a prediction, there is a chance that the effects of the hurricane disasters will not send the economy and the stock markets into a major tailspin.  Despite some short-term weakness, there is a chance that we may remain in a broad trading range, although at lower levels.

This week, let’s examine where things stand now, even with yet another hurricane.  Let’s look at the indicators we’ve seen in the last few weeks, and let’s briefly review what’s happened in the markets.  And then let’s discuss what to do with our money as we head into the holidays.

Finally, there is some even more disturbing news buzzing around the Internet regarding Harriet Miers, President Bush’s nominee to the Supreme Court.  It turns out that her law firm in Dallas paid $22 million to settle a lawsuit that involved securities fraud back in 2000.  I have some first-hand knowledge regarding this matter.  It’s a bizarre story, and one that will surely sink her nomination – and embarrass the Bush administration - if it makes it into the mainstream media.

Economic Indicators Mixed To Weaker

Before delving into any economic analysis, there are two caveats.  First, we know that upcoming economic reports for September and October will be skewed to the downside by the hurricanes.  Second, as this is written, we have not seen many reports for September yet.   So any forecast just now is tentative.

As I have written in recent weeks, the economy was slowing down even before the hurricanes struck.  The Index of Leading Economic Indicators has fallen for the last three months, and the latest report released last week shows that the LEI plunged -0.7% in September.  This was actually worse than expected as pre-report estimates suggested a drop of only –0.5%.  So we are definitely in for an economic slowdown.

You will recall that the Consumer Confidence Index plunged to the lowest level in over two years in September, well below expectations.  The latest report for October was released this morning and the Index fell even further, surprising economists who had expected a modest increase.  However, the ABC News/Washington Post “Consumer Comfort Index” showed a modest rebound at mid-October, and department store sales, which were way down in September, improved modestly at mid-month.

The American Bankers Association (ABA) reported at the end of September that credit card delinquencies hit a record high of 4.81% of all accounts in the 2Q (latest data available).  It remains to be seen how much this figure will jump for the 3Q, which will include the effects of the first two hurricanes, but it will not be pretty.

About the only positive news on the economy is in the housing sector.  Housing starts were up 3.4% in September, along with new building permits which increased 2.4% over August.  However, new home sales fell a surprising 9.9% in August (latest data available) according to the Commerce Department.

The latest report on durable goods orders is due out this Thursday and is expected to show a drop of 1-1½% for September.  The first “advance” report on GDP will be released this Friday, and virtually all analysts are predicting a decline.  The only question is how much.  GDP for the 2Q was an annual rate of 3.3%.

The bottom line is that the economy is slowing down; it was already slowing down before the hurricanes; and it remains to be seen just how much more it will slow down.  As noted above, I am feeling better about the economy than I did just after the hurricanes, but I still believe that GDP is headed toward 2% or possibly lower for the next several months.

The biggest key to the US economy is whether the housing bubble bursts.  As noted above, new home sales fell sharply in August.  It will be important to see what happened in September.  What happens in the housing market may determine if this is a short-term dip in the economy, or if a recession is in our future.  For now, the former looks more likely.

Stocks Lower But Still Within The Trading Range

If you took my advice in late August and early September to reduce exposure to stocks and bonds, you should be a happy camper today.  Both stocks and bonds have moved lower over the last six weeks.  Despite the latest selloff, stocks remain in the lower end of the two-year trading range.  Like the economy, stocks have held up better than I expected just after the hurricanes.

One of the main reasons equities have held up better than expectations is the surprising earnings reports of late.  Out of 164 S&P 500 companies reporting so far, 112 have announced 3Q earnings that were above expectations.  Only 26 had profits below expectations in the 3Q.  If this pattern continues, 3Q earnings will have risen by over 15%. 

Of the S&P 500 companies that have reported, most are also projecting another profitable quarter to finish out the year.  The consensus estimate is for 4Q profits to come in at a healthy 16% or better.  If the 4Q is positive, that will make 10 consecutive profitable quarters, something that has only happened three times in the last 50 years.

So, is this good earnings news enough to warrant moving back to a fully-invested position in stocks and equity mutual funds?  I don’t think so.  The editors at The Bank Credit Analyst agree.  In their latest October publication, the editors at BCA continue to recommend below-average holdings of stocks.

BCA’s main concerns for equities are: 1) the economic slowdown; 2) rising interest rates; and 3) earnings are likely to disappoint in 2006.  They are also concerned that the housing bubble may be about to burst, or at least lose some air.  While not outright bearish on stocks, Martin Barnes and his fellow editors at BCA believe there will be a better opportunity to buy stocks and equity mutual funds later on.

As for bonds, one can make a case that a slowdown in the economy should be bullish.  Historically, bond yields go down when the economy slows down.   Another argument is that the Fed looks determined to keep inflation under control.  Over the last couple of weeks, Alan Greenspan and several others at the Fed have let it be known that they intend to hike short-term rates at least two more times.

While these factors would suggest that we should be buying bonds in the current decline, there are a couple of other factors which suggest caution at this time.  With oil and gasoline prices still extremely high, there is a widespread belief that inflation is rising rapidly, even though the “core rate” (minus food and energy) is holding fairly steady.  Inflation fears will serve to reduce buying and keep short-sellers picking away at bonds.

The other factor is the $100-$200 billion (or more) that the government is planning to spend on rebuilding the Gulf Coast.  As this money starts pumping into the economy in large sums next year, we could see bond yields start to rise again.  Given this uncertainty, I look for a continued trading range in bonds, which is best handled by a professional Advisor.

Lightening Up In Real Estate Revisited

In my August 30 and September 13 E-Letters, I recommended that you strongly consider reducing exposure to real estate, especially properties that you hold only for investment purposes, or strictly real estate mutual funds.  If you have held properties for a number of years, they should be much, much more valuable today.  I would take some profits.

In SPECIAL ARTICLES below, I have included an article that describes what Tom Barrack, arguably the world’s greatest real estate investor, is doing today.  Hint: he’s selling.  In the article, he explains why.   You might want to read this one.

ADVISORLINK®  Programs Available To You

If you have read this E-Letter for long, you know that I am in the investment business.  Our primary business is that of searching the country for successful money managers, especially those who offer “actively-managed” programs that have the ability to “hedge” or move partly or fully to cash (money markets) depending on market conditions.

The objective of these actively-managed programs is to deliver market rates of return (or even better in some cases), but more importantly to reduce risk and limit losses when the markets move lower.  Specifically, we want to avoid the 44% losses in the S&P 500 as we saw in 2000-2002 bear market.

The goal of many active managers is to match (or hopefully exceed) market returns in the good times, and lose a lot less than the market averages during the bad times.  Not many can do that, but there are some that can.  The key is finding them, and that is what we do.

In our AdvisorLink® service, we offer eight different equity programs and five bond programs.  Each program offers a different strategy.  All of these programs are managed by independent Registered Investment Advisors (money managers) that we have found and recommend to our clients. 

All of these programs invest in various mutual funds, which allows them to achieve good diversification and reasonably low minimum investments.  Minimum account requirements for most of our recommended programs vary from $25,000 to $100,000.

Clients establish their own individual accounts at the particular custodian (mutual fund family or trust company), and grant the manager the authority to invest in funds according to his strategy.  The Advisors charge an annual asset-based management fee and share a portion of that fee with my company in return for introducing the client.

If you are having difficulties with these trading range markets in stocks and bonds, or if you don’t want to continue managing all of your own money, I invite you to check out the managers I recommend.  Go to my website or call us toll free at 800-348-3601.

Harriet Miers - Dark Secrets In Her Past

This story has not yet made it into the mainstream media (I do not know why); apparently none of the Senators on the Judiciary Committee know about it; and it remains to be seen if the Bush administration knows about it.  What follows is a bizarre story, and it happened right here in Austin, Texas.

In the late 1970’s a former NFL football player named Russell Erxleben set up a foreign currency trading company called Austin Forex International.   Erxleben had been the star kicker for the Texas Longhorns before going pro, so he was widely-known in the Austin area.  Erxleben held the record for the longest field goal in NCAA history.

I first met Russell Erxleben in late 1997 when I was coaching my son’s Pop Warner football team.  I coached and served on the Board of the Lake Travis Pop Warner Youth Association for a number of years.  Erxleben had a son a year younger than my son, and he was one of the coaches on that team (I never actually coached with him).

According to the Texas State Securities Board and the Texas Attorney General, Erxleben raised over $50 million from some 800 investors, most of whom lived in Austin, for his foreign currency business. 

As it turned out, it was pretty much a Ponzi scheme.   The State Securities Board and the Attorney General shut him down in September of 1998.   Shortly thereafter, the Feds got involved (SEC, IRS, etc.).  All of the money had disappeared. 

On September 18, 2000, a US District Court sentenced Erxleben to 84 months in prison, a $1 million fine and $28 million in restitution in connection with his conviction for one count of conspiracy to commit securities fraud, mail fraud and money laundering, and a second count of securities fraud in connection with his activities as president of Austin Forex International, Inc.

So what does any of this have to do with Harriet Miers?  A bunch! 

The main law firm that Erxleben used was Locke, Liddell & Sapp in Dallas.  In 1996, Harriet Miers was elected president of Locke, Purnell, Rain & Harrell – which later became Locke, Liddell & Sapp.  

On Oct. 13, 1999, a suit was filed in Austin alleging that Locke, Liddell & Sapp, under Harriet Miers' reign, had developed “work product” including internal memos and notes that aided Austin Forex International in its scheme to defraud investors.

When the case naming the law firm as a defendant surfaced in 1999, Harriet Miers was adamant that Locke, Liddell & Sapp had done nothing wrong. “Locke Liddell has done nothing improper and in our judgment never should have been named as a defendant,” she told the press at the time.

Still, on April 14, 2000, Locke Liddell agreed to pay $22 million to settle the suit.

I don’t know if this is true, but Bankrupt.com noted that the amount was so high because court authorities approving the settlement believe that Locke Liddell’s behavior in the fraud was so outrageous that an example needed to be made of the firm to serve as a warning to other firms that they have an obligation to take action when they become aware that a client’s actions are causing harm to third parties. Moreover, no firm can ever participate in a client’s fraud, whether by advice and internal memos, or by guidance which ends up being communicated to clients.

In fairness to Miss Miers, during this same period she had been selected by then Governor Bush to head-up the scandal-ridden Texas Lottery Commission.  She may not have even known about Erxleben’s fraudulent activities.  But she was, after all, president of Locke, Liddell and the co-managing partner.

I have two stories on all of this in SPECIAL ARTICLES below.  Be sure to read them.

Where Is The Media On This???

If you do only some minimal searching of Harriet Miers on Google, you can find all of this information, plus a whole lot more.  You can also read about some of the very questionable things that allegedly happened in the Texas Lottery Commission after Harriet Miers became the chairwoman.  There are other allegations and stories as well if you care to look.

I am dumbfounded on two fronts.  One, President Bush has to know all about Harriet Miers’ background.  After all, Bush was here in Austin at the time the Erxleben Ponzi scheme blew up.  It was all over the press.  Almost everyone in Austin learned about how some 800 clients got burned and how $50 million disappeared.  So why did he nominate her?  He owes her, perhaps?

The second thing that dumbfounds me is, where is the media on this?  If people like you and I can find this information so easily on the Internet, why can’t they?  Actually, I suspect that some in the media have this information already.  The question is, how and why is it being bottled-up?

When this information goes public, it could be very ugly for the Bush administration!

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

Harriet Miers’ law firm implicated in securities scandal.
http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=46688

Harriet Miers – securities scandal & more.
http://www.counterpunch.org/frank10042005.html

World’s best real estate tycoon selling out.
http://money.cnn.com/2005/10/21/news/newsmakers/barrack/index.htm


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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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