Brimmer Financial Newsletter
Third Quarter, 2002

"Good Grief!" ...Charlie Brown

The September quarter closed with the U.S. economy in a slow, job-neutral recovery and the stock market back to 1998 levels. This mega-bear stock market is the longest in over 60 years. It's been 30 months since the market reached the all time highs of March, 2000. The last bear market to exceed 30 months in length occurred from 1938 to 1942. As I'm writing this, the stock market has staged an impressive two-day rally. Bears hibernate in winter. Maybe, just maybe, this bear is sleepy.

We're all aware of the many problems we're facing. In this letter I'd like to offer some good news. For each of the challenges facing us as a nation, there is a solution. Here's my report on the progress I see. Since early 2000, investors have had to contend with a combination of knock-down punches including:

1) The Dot.Com Bubble bursting, 2) this generation's day of infamy, Sept. 11, 2001, and the War on Terrorism, 3) Anthrax in the mail, 4) a corporate crime wave a la Enron, etc., various high-profile insider trading scandals, and a betrayal of trust by many individuals in positions of leadership, including some in the Wall Street analyst community, and most recently, 5) the build-up to a second major confrontation with the dictator of Iraq.

The Dot.Com Bubble is over. We're in recovery, but the economy is not yet creating a large number of new jobs. Unemployment is stalled a little below 6% as it has been for several quarters. Corporate profits have improved slightly across a broad swath of industries. Managers of many large companies, fearful of a double-dip recession, have put off new hiring for the time being. They're also holding on to cash. Their mantra for the last few quarters seems to have been "no new jobs and no new spending."

We are at war with international terrorism. This one's a different kind of conflict. The enemy is secretive, hidden and scattered over the globe in as many as 60 countries. Knowing this makes us all unsure of the future. Uncertainty is poison on Wall Street. The first major battle on terrorism has been a victory for the people of Afghanistan, who are free from tyranny for the first time in almost 30 years. Boys and girls attend school. Women's rights are being reinstated. Mass starvation, widely predicted, did not occur. An elected government of sorts is in place. It will take a generation or more for the Afghan people to establish their own version of nationhood, but it's a beginning. The terror training camps have been destroyed and many of the trainers as well, with minimal civilian casualties. Medical help has arrived from around the globe. Many nations are assisting in the rebuilding of a country nearly destroyed by decades of war and oppression. I think this victory should be celebrated. The Afghanis are celebrating. So, where are the detailed nightly news reports from Afghanistan showing the improvements in the lives of the people? Is this too dull a topic for network news? Try FOX or CNN for more complete coverage.

For the last year or so there have been no new biological or chemical terror attacks, such as the anthrax killings. A renewed effort by federal, state and local governments to strengthen homeland security is in place.

The recent corporate crime wave stunned investors. We all depend on the honesty of corporate managers and Wall Street analysts for accurate information and truthful advice. Billions were lost when several of the nation's largest companies admitted to cooking the books. The good news is that most of the bad news is out. On August 14, 2002, Chief Executive Officers of the 1000 largest American corporations were directed by the government to personally guarantee the accuracy of their companies' financial reports. To date, no new offenders have been uncovered. Oh, there may be a few who have not yet been discovered. But, to date, the worst seems to be over. Criminal complaints and indictments have been handed down and personal assets have been frozen with the intent of returning the ill-gotten gains to defrauded employees and investors. We will see disgorgement of stolen money and serious jail time for these crooks. There are tens of thousands of publically owned and traded companies in America. Only a handful caused the crisis of trust we are working our way through. No matter. We all feel cheated. It will take time to heal this violation of trust.

The last time the U.S. and our allies went up against Iraq, the war lasted 100 hours. We don't know how this will conclude. Uncertain about war and its aftermath, investors are understandably skittish.

Any one of these five issues would be enough to cause a stampede. All of them occurring so close together seemed overwhelming. The good news is that these problems have our full attention. We are a nation of people who want to fix things. We're in the process of fixing what we can and working to prevent any more breakage.

A cheerful backdrop of low inflation and very low interest rates has kept this drama from becoming more tragic than it has been. Interest rates are still at 40-year lows. The Federal Funds rate is 1.75%. Inflation is also very low, though there are a few small signs of future inflationary pressure in energy, labor (the recent West Coast dockworkers strike), and continued increases in healthcare costs and higher education.

Residential home prices have been increasing recently in the Northeast and in several other regions of the country. Real estate inflation is good news for current owners and bad news for first time buyers. Increasing real estate valuations create additional household wealth. Homeowners have been tapping this resource by refinancing at lower interest rates. For many, this has yielded a double benefit: a home worth more and a mortgage that costs less. Much of the money saved every month because of lower mortgage payments has been spent. This additional disposable income is helping to support consumer spending, which is approximately two-thirds of the U.S. economy.

Many economists are predicting a growth rate for the U.S. this year in the 3% range. That's good, but not great. It's below most post-WW II recoveries. We're growing the economy slowly. Other countries are in the doldrums as well. Germany is in a slump with much higher unemployment than the U.S. Brazil and Argentina are both in distress. The Japanese export-based economy is feeling the pinch of softer demand for their goods. The Japanese are good savers but not generous spenders. Because of their conservative spending, their domestic consumption is too low to stimulate their own economy. Globally, the results are mixed. Some countries, e.g. Ireland, are enjoying fairly healthy growth, others are not. China and India, each with a population of over one billion people, are still growing their economies, though not as robustly as in prior years.

The U.S. supports and encourages the prosperity of others by encouraging trade and discouraging protectionism. When investors of other nations prosper, they tend to invest more heavily in the U.S. We're all linked together. On balance, the global economy is just muddling along. An absence of good news has helped depress global stock markets. The U.S. has a particular gift for self-correction. As we regain our footing, the rest of the world will follow us into better days.

Based on historical models, we should already be in the early stages of a new bull market. I know I've been saying this for months, and each quarter the account statements have disappointed. I continue to believe that with each passing month, the pent-up demand for goods and services builds up economic potential energy, like a coiled spring waiting for something or someone to release the trigger that's holding it down. Eventually old things wear out and have to be replaced. Consumers have been buying. Corporations have not. Sooner than later firms will begin to replace, retool and rebuild. When this spending arrives, the many companies that supply corporations will see a jump in profitability. Any increase in business, even a modest increase, shows up quickly on the bottom line after such a lean time as this.

I feel that the stock market is extremely oversold. Alternative investments are either priced too high or pay too little. Real estate has gone up beyond the ability of many people to afford their first homes. Interest rates are at 1962 levels. The amount of cash on the sidelines is immense - at least $4 trillion in America alone! Tax rates have been lowered.

If everything is so favorable for stocks, why is this market still down? I believe that it's still in the cellar because of fear. The average investor lacks enough confidence in the future to buy, even at these 1998 prices. Most investors have never seen any bear market. This one is one of the three worst in 75 years! The New York Stock Exchange estimates that there are about 85 million U.S. investors. The market affects the majority of adults in the country. The economy affects all of us.

Investors are people with the same emotional makeup as everyone else. Fear of loss is stronger than desire for gain. Markets go down because the crowd sells, and the crowd sells because the market is down. The famous humorist, Will Rogers said something like this: "Don't speculate in the stock market. Only buy good stocks that go up. If they don't go up, don't buy 'em." Bear and bull markets are like self-fulfilling prophesies. As the selling or buying continues, more and more people are compelled to act, further exacerbating the downward or upward pressure. The stock market goes down because we sell and push it down. It goes up because we buy and push it higher. It stays in a narrow trading range until one force or the other prevails. Markets do whatever it takes to confuse the greatest number of people.

Since I can't time the markets and I do not know of a single soul who can consistently time the markets, I have to fall back to my old position. It's "time in the markets" that determines the success of our long term goals. Most of my clients have not sold their shares. The shares we hold are mostly lower, but, and this is important, we still have about the same number of shares now as we did in March 2000. When the recovery arrives, most of these shares should go back up. Can I prove this? No. But I believe it. It's always worked this way. When you visit me in Orleans, I frequently refer to the charts on the wall in my office. They record the past and, I believe, point the way to the future. The market will climb out of the valley and again find the uphill path it has followed for over two centuries.

Earlier I listed five major issues and events that will be in the history books. We're living through these events aware that the world has indeed changed for us. We Americans are very adaptable. We are a self-correcting society. As we have fixed many of the problems of the past, we'll find ways to fix the problems of today. We're all in this together. I believe most human beings want peace, prosperity, freedom from want, hunger or disease and the freedom to choose how to live. A few don't. That's a problem. We're working on it.

Year-End Planning

Now that the year is coming to a close, we should all review our finances: taxes, insurance, retirement plans, wills, trusts, etc. Since the market hath taken away recently, you may want to consider taking your tax losses soon. You can sell a stock or fund now and book in the realized loss. You can also offset up to $3,000 in ordinary income with capital losses and carry losses forward from this year into future years. I don't give tax or legal advice, so be sure to check with your tax preparer regarding specific tax strategies.

If you want to hold certain securities long-term, but they happen to be in the loss column now, sell them now and buy the same securities back after a 31-day wait to avoid the wash-sale rule. This locks in the capital loss and resets a new cost basis.
Enclosed is a checklist for your year-end planning. Be sure to return the enclosed card as soon as possible to let me know if there's anything that needs attention.

Sincerely,

Robert W. Brimmer, CFP

Annual Financial Check List

As we enter the fourth quarter of the year, I'd like to again remind you to take inventory of the components of your financial plans. Here's a checklist for your review. Please call me if there's anything that needs attention.

_________ Up-to-Date Will
_________ Up-to-Date Trust
_________ Current Durable Powers of Attorney
_________ Health Proxy or Living Will
_________ Adequate Health Insurance: Hospitalization/ Major Medical
_________ Adequate Long-Term Disability Insurance
_________ Adequate Long-Term Care Insurance
_________ Adequate Property/Casualty Insurance: home, car, umbrella coverage
_________ Adequate Professional Practice/Business Owner Insurance
_________ Adequate Life Insurance
_________ Annual Charitable Contributions Made Before Year-End
_________ Annual Gifts Made to Family Before Year-End
_________ Collect Cost Basis Information on Sold Securities/ Real Estate for Income Tax Filing
_________ Portfolio Review
_________ Portfolio Adjustments to Minimize Taxes
_________ Timely Contributions Made to Retirement Plans
_________ Tax Planning with Your Tax Advisor Before Year-End
_________ All Those 'Other' Things You Meant To Do Before Year-End

I work for people who need and want help with their financial lives. If you know of others who need help, have them call me. I'll be happy to meet with them in person or on the phone to answer questions or make referrals to other professionals, when appropriate.

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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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