Brimmer Financial Newsletter Archive

Third Quarter 2003 Review

A rising tide lifts all boats. So it is with the stock market. During the past three months the American financial markets have continued their recent advances. The 30-stock Dow Jones Industrial Average, along with all of the other major indices continued to move up, ending substantially higher by the end of September. Early October marks the passing of twelve months of improving stock market results. The last market bottom was recorded on October 9, 2002, with the Dow Jones Industrials closing the day at 7286. Today the Dow is trading over 9700, a gain of about 25% in a year. Based on prior bear and bull market swings, it's reasonable to expect that the old market highs of March 2000 will not be revisited for another two years or so. Of course, there's no way to know how long the market will stay on the recovery track. The future of any market, as always, depends on the growth of the economy in general, and the health of each company in particular.

The U.S. economy, widely predicted to falter because of our many domestic and international problems, actually grew at a respectable annualized pace of about 3% during the last quarter. Final adjustments will be published by the U.S. Labor Dept. in a few weeks as the data is studied. But even a small change up or down from 3% growth should not alter the consensus that the trend is improving. The good news is not just limited to the U.S. Many of our trading partners around the globe are sharing in better times. You may not know about the positives from the glum assessments on the nightly news. As I've often reminded my clients about news reports, they're almost all negative. Only bad news sells. Good news is boring. A closer look at trends as reflected in the prices investors are willing to pay for securities tells a more upbeat story.

The business cycle is still operating. Our recent experience with the stock market during the late 1990s felt like the thrill of victory. Stock prices of any number of firms soared, regardless of company profitability, price/earnings relationships or common sense. The assumptions at the time of the Hi Tech Mania focused on a new paradigm, a belief that earnings would flow quickly as soon as markets recognized the genius of this or that invention, software application, etc. Unfortunately, reality didn't arrive on time. Eventually, many of these great ideas will no doubt be commonplace. Now, with 20-20 hindsight, we can see that many brilliant, underfunded ideas arrived on the public stock market scene way too early.

There was another time when a great number of new ideas created upheaval, threw many out of work, but ultimately helped create a middle class in those countries that embraced the new ways of doing things. It started some 200 years ago during the great Industrial Revolution. The changes came quickly. Within a century the industrialized societies mastered water power and steam power which increased the production of finished goods exponentially.

We don't have to look any further back than the middle of the 20th century for examples of new ideas that changed the world. By the 1940s electricity was in almost every American home helping to wash clothes and dishes, light up the night and run any number of machines and labor-saving devices. GE's motto some years ago was "Progress is our most important product." In only two centuries many nations had moved from agriculture and cottage manufacturing to nuclear-powered electricity, nano-technology, open heart surgery, life-saving drugs and thousands, if not millions, of products and services never imagined in 1790.

Not every new idea won broad acceptance early on. There are notable examples of contemporary work tools, now commonly found in most offices and homes, that were once thought totally impractical. Consider this famous quote: "I think there is a world market for maybe five computers." Thomas Watson, Chairman of IBM, 1943. Mr. Watson couldn't have foreseen the Information Revolution in 1943. The most complex computer of the 1940s was the secret coding machine invented by the Nazi's called the Enigma Machine. Here's another quote from the early years of high tech: "Computers in the future may weigh no more than 1.5 tons." Popular Mechanics Magazine, forecasting the relentless march of science, 1949. Computers that operate our children's games, weighing ounces, outperform any of those early room-sized punch card progenitors of today's mechanical brains.

In the years following World War II, technology has come to dominate many aspects of life in much of the world. Technology, loosely defined, encompasses an enormous range of gadgetry, mechanics and science, as applied to the needs of any number of manufactures, processes and discovery (called pure science).

The New York Stock Exchange, NASDAQ and the other worldwide trading systems could not operate without technology in the form of powerful computers. When I began in the financial services field in 1975, the average trading volume on the New York Stock Exchange was about 18.5 million shares per day. In 2002 the average daily trading volume was 1.4 Billion shares. Computers and their many peripheral attachments are everywhere. My grandparents saw an early experimental television in New York when it was just newly created. No one in the 1930s or 1940s could have predicted we'd have two, three or more of these in our homes. Televisions are everywhere and our entertainment industry is now one of America's profitable exports.

The trend over the last two centuries toward labor-saving technology is a mixed blessing. The wool carders of England who worked in the large wool industry in the late 1700s and early 1800s were replaced by machines. In our time, factory jobs have disappeared both because of improvements in "productivity" and lower-priced foreign competition. Productivity is the measure of work produced in a unit of time. Technological advancements enhance productivity, lowering the need for workers per unit of output. Certain emerging economies have more workers than jobs for them. They attract work into their lower-priced markets from higher-cost labor markets. Eventually, assuming the trends of history remain intact, workers in countries with low labor costs will demand higher wages. They will create a middle class in their native land with higher-paying jobs. Then their country will lose low-paying jobs to other, lower-cost labor markets somewhere else in the world. Welcome to the world economy.

Not every factory worker can retrain for a higher paying job in another industry. What benefits one person, say a consumer, because foreign goods are bought at lower prices, hurts the American who used to produce those goods. This trend will continue, in my opinion, because the benefits of low prices for a greater number of people far outweigh the losses of jobs by individuals who number only a few percent of the work force. In the past, displaced workers were able to move laterally from one production job to another. Today, the jobs are more complex and technical. Our current unemployment rate of 6% or so is 100% if you're one of the unemployed. Federal, state and local government efforts to retrain displaced workers have had some success to date. Our many community colleges and outreach programs sponsored by both public and private higher education institutions are answering the call to prepare the workers of the next generation for the needs of a world in which the rate of change is accelerating.

Fortune favors the prepared mind. The future of our economy is in the management of vast stores of information. This is the Information Age. Workers in the 18th Century worried about losing their livelihoods to machines. Workers in this century worry about losing jobs to foreign competition and computers. The Industrial Revolution created millions of jobs, even if most of them were in dusty, dirty, noisy, unsafe factories. We've made great strides since then. Our workplaces are safer, cleaner and quieter. Though there will be some displacement in the short term as we race along the information speedway, a fast-growing economy will produce a demand for good workers. In just the last two weeks, the jobs reports have boosted confidence in the U.S. economic recovery, moving the stock market up to levels not seen since June of 2002. The trend appears to be positive.

Financial Planning Topics and Seminars

The last quarter of the year is a good time to take stock of personal financial issues. I'm enclosing the annual checklist of reminders. Call me if anything on the list needs attention. Also, Rick Pike and I are sponsoring a series of informal seminars about a wide range of topics of interest to our clients.

Here's the list for the rest of 2003:

"How To Structure An Investment Portfolio For Your Needs"
Sat., Nov. 15, 2003 - 12 Noon
Location: Brimmer Financial Group 19 Brewster Cross Road Orleans, MA

"Keeping The Holidays Safe"
Sat., Dec. 13, 2003 - 12 Noon
Location: Pike Insurance Agency, Inc. 8 Main Street Orleans, MA
The hazardous Grinches that can spoil the holidays.
Speaker: Lynn Pike, President Pike Insurance Agency

Please call Susan Lemieux at 508-240-0320 or 800-237-9322 to reserve seating.

We'll continue to offer various programs throughout the year. If there's a subject you'd like to have presented, please let me know. You are welcome to invite friends and family. Just let us know how many to expect.

Financing Long-Term Care

The States are under pressure to reduce their budgets. Many of them, including Massachusetts, have begun changing the Medicaid rules regarding asset recovery from the estates of those whose nursing home costs were paid in full or partly by the state. This continues to be a thorny issue. I am strongly recommending long-term care insurance to those of my clients who qualify for it and for whom it is appropriate. I expect the premium rates to increase in the near future. I own this coverage myself and recommend it to many of my clients. Call me regarding this important issue.

Income Sources

Interest rates are still at forty year lows. With low inflation, investors can't expect to receive much return from money market funds or short term, safe investments such as U.S. Treasury Bills or bank CDs. Ask me about income-producing investment opportunities.

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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