Brimmer Financial Newsletter
First Quarter, 2003

The mood on Wall Street became more optimistic in the last quarter of 2002. After 30 months of market declines, a significant number of individual and institutional investors stepped up to buy stocks. From a close of 7286 on October 9, 2002, the Dow Jones Industrial Average has gained over 1200 points, closing at 8523 on Friday, Jan.17, 2003. The NASDAQ and S&P 500 indices are also enjoying higher valuations. More likely than not, it will be a happy new year for investors. I strongly believe that much better days lie ahead. For the last two years, I've been reporting on weaker consumer confidence, lower stock prices, fear, greed, and crime. There are compelling reasons for investors to take heart and, yes, feel confident enough in our future to begin buying again.

We've just endured the toughest stock market since the Great Depression. We survived it. We may not be happy about the disappointments the bad years brought, but we got through it - - - bruised, but not beaten. Our country has survived similar market misery on several occasions over the last 200 years. The market has gone down, but it has never stayed down. In the aftermath, it has always gone on to achieve greater heights. Even during those times when it felt like we might never see another sunny day in the financial markets, the investment weather always improved. It did in the 1800s and in the 1900's. It will for us. We just can't predict exactly when.

We've turned the corner. There's now more opportunity than risk in the stock market. The economy is emerging from a mild recession. Business activity for all of 2002 was about 3% greater than it was during the prior year. Interest rates are still at 40-year lows. Inflation is nearly nonexistent. The Federal Government is spending liberally. Federal benefits for those who continue to be unemployed were recently extended. Proposed tax relief for investors in the form of tax-free stock dividends (to eliminate the arguably unfair double taxation of dividends) is now under serious consideration. So is accelerated depreciation to encourage more business spending. Other economic stimulus package proposals are also making the rounds in Washington. I expect passage of a number of these aids to recovery by midyear. Removing the double tax on corporate dividends, which is overdue by many decades, will do wonders for the market, in the opinion of many of the most experienced professional investors.

As an illustration of what's going on in the country today, imagine the economy and the financial markets as a car driven by a person who has one foot on the gas and the other foot on the brake. It's not a smooth ride. Pressing the economic "gas pedal" to move us forward are the following forces: 1) low inflation and low interest rates; 2) trillions of dollars in cash on the sidelines ready to be reinvested; 3) the Federal Reserve's efforts to pump billions into the banking system to encourage growth; 4) robust consumer spending, which is about two-thirds of the economy; 5) continued strong real estate sales and valuations; 6) a weaker U.S. Dollar against our important trading partners' currencies, which helps our exporters compete internationally (but makes some foreign travel more expensive); 7) a rising Federal budget deficit which will eventually help create mild inflation (a little inflation is helpful since it allows companies to raise prices and increase profits, which produces higher stock prices, and helps the government pay off current debt with cheaper dollars in future years, an old trick most governments use); 8) accelerating corporate profits; and 9) proposals to reform the tax structure to reward entrepreneurial efforts and increase total employment. The forces that are hitting the brakes on the economy and the markets are, among others, these: 1) concern about geopolitical uncertainties: mainly Iraq, North Korea, and global terrorism; 2) lower confidence in domestic corporate governance, but that is improving; 3) a slower-than-expected recovery in corporate earnings; 4) high levels of personal debt; 5) an overall sense of uncertainty that can be summed up thusly, "I've never been here before. I don't know what to expect."

Most of us have not been "here" before and, as a result, are ill at ease. The "here" is the vexation of being an investor during an unsettled state of global economics and politics. The period in recent history that bears closest resemblance to the present occurred during the pre-WW II years, 1938 to late Dec., 1941. During that time of anxiety, Americans wanted nothing to do with the foreign wars. Pearl Harbor changed all that. During the four years prior to America's entering that conflict, the U.S. stock market slowly drifted lower. It may surprise many to learn that the market started recovering in mid-1942, just a few months after we joined the battle, and continued climbing through the war and into peacetime. The previously prevailing uncertainty was replaced with the certainty of the immense national effort to survive the threats of tyranny.

We have a similar situation currently. Conflicting forces of acceleration and drag have us in an economy that is again on the road to recovery. Yet, as before, the news is always a combination of good and bad. Mood swings often play a far greater role than underlying business trends in the short-term movement of stock prices. So, for example, a week of preponderantly good news may be a difficult one for the markets if the mood of the moment is pessimistic. Conversely, there have been, and will continue to be, times when a raging bull market will move strongly higher despite barrages of bad news. And now, since so many of us own shares, the day-to-day swings can be unusually broad even though there's little or no fundamental justification. Fifty years ago, in a smaller, poorer America, there were not nearly as many investors. The New York Stock Exchange estimates that there are now more than 80 million American shareholders.

I believe wholeheartedly in our future. I believe in the "can do" spirit that is so typically American. Is this generation so different from those of the past? Most of us believe that we can improve our lives through work and study to better the world for future generations. Americans are overwhelmingly optimistic. I believe that most Americans believe that what we conceive, we can, with effort, achieve. The cost of our freedom is often uncertainty. Democracy does not guarantee success, nor does it mean that every day will be a pleasant one. By the same token, capitalism, as practiced in our country, is not a Utopian economic system, but it's still notably better and more successful than others in place on this planet. We have come through a difficult period. There have been difficult periods before. Difficult periods do not last forever. Neither does pessimism. Those who have the wisdom to be aware of these truths will be well-positioned to benefit from the rebound that is now in its early phases. An assessment of the key political and economic factors makes it clear that the stage is set for the next major upward move for the U.S. stock market.

The critical message that comes from all of this is that the seeds of a more prosperous future always emerge from periods of widespread negativity. They are already beginning to emerge and we must take note accordingly.

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