Brimmer Financial Newsletter
Fourth Quarter, 2001

Optimism returned to the stock market in the final quarter of 2001. The bellwether Dow Jones Industrial Average increased by over 13%, and the NASDAQ index, driven by "new economy" stocks, was up by an impressive 30%. And though these welcome improvements were not sufficient to pull the stock market into a complete recovery, the quarter indicated an improving mood on Wall Street, ending the worst performing two year period for our equities market in 23 years. The generally accepted benchmark used to determine whether a new bull or bear market has begun is a 20% move in the market, either up (bull), or down (bear). Measuring from the market low of 8235 on September 21, 2001, the Dow Industrials advanced by over 20% at year end, closing at 10021. With fear waning, and hope rising, the consensus is that after 18 months of bear market declines, the investment community has declared that a new bull market has indeed begun.

Wall Streeters use a number of well-worn adages to describe market behavior. One of these is "the bull market climbs a wall of worry." This is often heard early in a new upward market. The wall of worry expression paints the picture of a market going up despite indicators of economic recession, such as publicity about unemployment, low corporate profits and other negatives. Markets almost always begin rising in an economic recession. Anticipating economic difficulties that may lie six to twelve months ahead, sellers, also know as the bears, unload stocks en masse, pulling down share prices. Buyers, called the bulls, who anticipate improvements in the economy that have not yet materialized, purchase shares, pushing prices up. More bears pulling than bulls pushing, and we're in a bear market, and vice versa. Presently, investors are beginning to take advantage of the lower prices and the bull market appears to be gaining strength.

Our Federal Reserve lowered interest rates eleven times last year. We're now feeling the positive effects of yields that are at 30 to 40 year lows. Millions of homeowners have increased their disposable income by refinancing their mortgages. Banks have also benefitted. By lending
long-term, they collect higher interest payments than they pay out to their depositors. Cities, towns and states have refinanced their bond debts at lower and lower rates, saving taxpayers, who must pay the interest on municipal debts, from higher property taxes. And our central bankers have flooded the economy with billions in cash. This increased liquidity is floating an ailing economy by buoying it up with easier credit.

This low interest environment is a breeding ground for higher stock prices. I've mentioned before that "money goes where it is best treated." The cash horde on the sidelines, over $4 Trillion, is poised to move into longer term debt securities, stocks and mutual funds. Most investors move money from low yielding to higher yielding , or higher growth potential, securities when they perceive better opportunities. I doubt that this cash will pour into the market quickly. A more likely scenario would be that when both the securities market and the economy show sustainable profitability, there will be a gradual transfer of some portion of the low yielding cash into more promising investments. The current very low interest rates are exceptionally bullish. It may take some time, but should rates remain in low single digits, the outlook for stocks, using traditional valuation models is very bright, if not brilliant.

There is of course, a down-side to low interest rates. Current income from bank certificates of deposit, money market funds and other short term interest paying securities has fallen. This presents a problem for those very cautious investors and savers who don't feel confident putting their money into anything other than government guaranteed bank deposits or U.S. Treasury bonds, bills or notes. There is an increase in price risk associated with securities that don't come with a government guarantee. This risk can be reduced with proper diversification and asset allocation. For those who are seeking income opportunities, I have some recommendations.

Many of my clients own GNMA "Ginnie Mae" (Government National Mortgage Association) bonds or bond funds. GNMA is an agency of the U.S. Department of Housing and Urban Development whose securities are afforded the full faith and credit of the United States. It is the only agency to be granted this highest credit quality rating. GNMA guarantees the mortgage payments of vast numbers of home mortgages in America. They pay monthly principal and interest to investors. Most of my clients prefer to own GNMAs through mutual funds because the fund companies collect both principal and interest from the GNMA bonds, but pay out only interest. The monthly principal repayments are invested in additional GNMA bonds. This saves investors the trouble of accounting for the remaining outstanding principal repayments of the many amortizing mortgages in each GNMA bond. Eventually every mortgage is paid off and the payments of principal and interest cease. This has, in the past, been the source of many unpleasant surprises when individuals who owned early GNMA bonds discovered that they had been spending not only interest but principal as well. Thus the convenience of mutual funds. Current distribution yields are in the 5% to 6% range. As with any investment, upon liquidation you may receive more or less than you invested. Call for specific information.

A second option is dividend-paying stocks and mutual funds. It's generally true that higher returns mean higher risks. The way to offset the increased risk associated with owning higher paying securities is to diversify. Own a number of them. Currently there are a number of dividend-paying stocks and funds yielding over 7%. I have considered a number of candidates, narrowing the field to those that I believe offer the highest return with the lowest risks in their respective categories. Let me know if you';d like a copy of my current list of recommendations.

Another opportunity for investing lies in immediate and deferred annuities. Immediate annuities are insurance company contracts that guarantee to pay the depositor (the annuitant) an income for life starting as soon as the investment is made. I advise clients who select immediate annuities for their investment portfolios to consider one of the lifetime income options that includes a minimum number of years of payments. Since a lifetime of payments might be a short time for some of us, it's wise to include an option that sets at least a minimum number of monthly payments, insuring that someone in the family will collect if the annuitant dies sooner than the actuarial tables indicate. Conversely, deferred annuities, which many of my clients own, are contracts which have not yet begun to pay out a life income and are still in the accumulation phase. The general rule for annuities is that the older the annuitant is when the payments begin, the higher the monthly annuity payments. Insurance companies issue deferred annuity contracts to investors who wish the certainty of lifetime income at some time in the future. The longer you wait before requesting a lifetime stream of payments, the higher your monthly check. During the deferral period, all the interest earned and credited to the contract is tax deferred, that is, the interest isn't taxed until the annuitant begins receiving the monthly lifetime income. A primary advantage of an annuity is that is the only financial vehicle to guarantee to pay as long as the annuitant is alive. The quality of this guarantee, however, is only as good as the insurance company. I recommend only contracts issued by insurance companies with excellent reputations and ratings.

Also available are systematic withdrawal plans. This is the income-producing method most often used with required minimum IRA or retirement plan distributions. Typically, a portfolio of stocks, bonds or mutual funds consists of a number of shares (or units if a variable annuity). Each month some shares of the portfolio are liquidated. A sufficient number of shares are sold to create the cash flow needed for distribution. In months when share prices are up, fewer shares are sold to create the cash flow. In months when share prices are lower, more shares are sold. It's the reverse of dollar cost averaging (the methodical periodic addition of funds to an investment program during the years of accumulation). As long as the rate of withdrawal over time is less than the rate of growth in the portfolio, the funds will last. There will be some years, such as last year, when the rate of withdrawal exceeds the annual growth rate. That's to be expected. What counts is the long-term success of the plan. It should provide needed income, and outlast your lifetime. Unlike the above mentioned annuity payments, this method is not guaranteed. But when the withdrawal rates are monitored and kept under control, it has proven very effective.

Lastly, the government recently promulgated regulations that have markedly improved college savings plans. There are substantial tax advantages for families who open one or more of these new 529 College Savings Plans. If you have college bound children or grandchildren, call me for information about this greatly improved benefit.

If you have any questions regarding any of the investing opportunities I have discussed, or any other financial concerns, I would be happy to assist you in any way I can. I like to describe my career in terms of working for investors who want some help with the details of their financial lives. I've been in the financial services industry for 26 years. Usually every year gets better. There are a few exceptions, and last year was one of them. It was a tough year for all of us. But for me, it was also professionally very rewarding. A number of your friends and family members have become clients over the past year. They came in looking for help during a trying time. Thank you for recommending me. I'll do everything I can to continue to earn your endorsement.

Robert W. Brimmer, CFP

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BRIMMER FINANCIAL
rbrimmer@nationalsecurities.com
P.O. Box 2806 - 19 Brewster Cross Road - Orleans, MA 02653
tel. 508-240-0320 fax 508-240-2309 toll free 800-237-9322
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