Fourth Quarter 2004 Review

There's a lot to report about the economy and the financial markets. In this letter you'll find a number of data points. Each one discusses what's happened in the last quarter or in the last year. The indicator most of us follow is the performance of the stock market. The last quarter produced positive market gains in most of the major categories of public companies, some better than others. The Dow Jones Industrials gained a meager 4.6% for the full year. The S&P 500 showed a healthier 10.7% gain and the NASDAQ 100 closed the year with a 12.7% annualized improvement. Our domestic economy mirrored the markets with broad, but muted gains. Overall inflation, with the exception of oil and certain coastal real estate, was tame.

Interest rates are closely followed by both savers and borrowers. The Federal Reserve continued on the path of gradually increasing interest rates. At year end, the Federal Funds Rate stood at 2.25%, the Discount Rate was 3.25% and the Prime Rate moved up to 5.25%. Savers were collecting less than 2% on many bank one-year certificates of deposit. The Federal Reserve Board reported that there is over 4 Trillion Dollars sitting in low-yielding accounts. Many of these money market funds don't pay enough to stay even with inflation. U.S. Treasury Bills of one-year duration were paying 2.72%. The Five-year Treasuries were yielding 3.56%. In general, the past quarter, much like the rest of the year, offered investors low returns in savings instruments and moderately better returns in many stock markets, both U.S. and foreign.

Low interest rates keep the cost of borrowing down and contribute to growth in the economy. During the month of November the current economic expansion celebrated a quiet third birthday. With our attention focused on international conflicts, our November elections, and all the noise leading up to it, most of us may not be aware of improving global conditions. Corporate earnings have been up both here and abroad. Jobs are being created. Our American economy has been growing at an annual rate of somewhere around three to four per cent over the last few quarters.

Americans are beginning to accept the fact that our country is in the Post-Industrial Era. Manufacturing represented about 50% of our economy in the 1950s. It was 15% of our Gross Domestic Product (GDP) in 1998. Today it is less than 13%. Keep in mind that 13% of a $9 Trillion U.S. Gross Domestic Product is still a big number. Manufactures did not disappear. The other industries simply grew larger. America is now a service and information economy.

There are a number of good sources of economic data available to anyone interested in studying historic facts or current conditions. The U.S. Dept. of Labor web site offers us a glimpse into the health and status of the economy from the workers point of view. In November our national unemployment rate was down to 5.4%. Our forty-year average unemployment rate is 5.9%. The lowest rate was in 1968, at under 4%; the highest was in 1982-3, over 10%. Average hourly pay for U.S. workers was $15.63 at the end of 2004. Our current inflation rate across the broad economy has not been high enough to derail the growth in our domestic economy. That's not to say that inflation will never again become a problem. Whenever governments print "too much" money, price inflation logically follows the inflation of the money supply. The Bureau of Labor Statistics publishes a large volume of information about our national financial life. One interesting page on their web site has an inflation calculator. Today it takes $229.25 to buy the same goods and services that $100 bought in 1980.

The American dream of home ownership is increasingly important to our economy. Last year approximately two million housing units were built in the U.S. Average prices across the country as reported by the National Association of Home Builders for December, 2004 point to the inflation in housing values. The selling prices for each region were: Northeast, $214,800; Midwest, $152,000; South, $173,000; West $281,900.

There's also good news about the economies of the rest of the world. Michelle Kessler and Jefferson Graham, writing in the Jan.19, 2005 USA Today quoted reports demonstrating that fourth quarter results point to a strong world economy. The domestic economy of India grew by about 6% last year. China's grew by about 8%. Business spending is picking up. International trade is healthy. Further encouraging news comes from The United Kingdom's Dept. of Enterprise, Trade and Investment . In their recent quarterly review they quote the International Monetary Fund (IMF) which reported that global economic growth averaged 5% during 2004, the best performance of this world-wide measure in thirty years.

Most of us are aware of the recent run up in oil, now trading in the mid to upper $ 40 per barrel range. As high as this is, it's still only half of the inflation-adjusted price the world paid in the decade of the 1970s. Oxford Economic Forecasting estimates that oil could rise to $68 a barrel and still not tip the world economy over into recession. The Organization of Oil Exporting Countries (OPEC) has a vested interest in keeping the price of oil high enough to keep their money rolling in but not so high that we, the consumers, begin to seriously create conservation and alternate energy projects. In my opinion, oil is too valuable to burn. But it's cheap and available. We'll eventually have to seek alternatives to burning hydrocarbons. It's very likely that all the oil that has yet to be discovered is less than that which has already been discovered and converted into electricity, gasoline, and plastic. The phrase for this phenomenon is "peak oil.".

Many observers of energy, global warming, and consumption point to water as the next oil. The earth is getting drier and warmer according to many reports from climatologists, the scientists who study global climate. The abundance or shortage of clean water could very well be cause for conflict in the not too distant future. Development of economically feasible alternative energy production and water delivery, storage and purification is of interest to all of us.

On balance, it appears that the U.S. and our major trading partners are on the road to recovery. Stock markets around the world are reflecting more optimism. World events over the next year could actually turn out well with the cooling of several global hot spots. We'll never be free of problems. For thousands of years humans lived out their lives with the same tools used in hunting and gathering. Some five thousand years ago "civilization" arrived in the Middle East. Technology advanced. Life spans increased. Some two hundred and fifty years ago there was an explosion of discovery and learning during the Industrial Revolution. In the few years I've been alive, human knowledge has expanded and is growing exponentially. Every year more advances are made in all fields of human endeavor. We have the ability to change the face of the earth. I'm rooting for the problem solvers.

Personal Notes

This year I look back on thirty years in financial services. My thanks go to you, my clients, friends and family, mentors and co-workers. Without you I would not have marked even one year in this profession. You helped me help others. For this I am ever mindful and always grateful.

I didn't enter the working world as a financial planner. My first love was music. My second was natural science. At age 10 my mother brought me to my first live symphony concert, held in the Worcester (MA) Memorial Auditorium. A performance of the fabulous Philadelphia Orchestra was my introduction to the joys of great music played by musicians I could both hear and see. Trumpet lessons followed. My mom had a good friend who was a professional trumpeter and played in a few "all-girl" bands during WW II. She recommended trumpet to help cure my childhood asthma. It worked. By my early twenties I was free of breathing problems and studying music on a scholarship at Catholic University in Washington, D.C. I completed an undergrad degree in music education in 1968 and continued with my work at the University, finishing a Master of Music program with 30 credit hours toward a Doctorate of Music Arts in 1974. I had been teaching, conducting and performing during my last three years of undergraduate school and continued very full-time, seven days a week, with my music career. In 1975 I decided that the music business was not as much fun as music. A chance discussion with a fellow musician who had entered financial services led me to my second career.

The lessons learned while practicing, practicing, practicing never left me. I had the very good fortune to know and study with a virtuoso, the principal trumpeter of the National Symphony Orchestra for almost forty years, Lloyd Geisler. He would remind me often of the old saw "If you don't practice for one day, you'll know it. If you don't practice for two days, everyone else will know it." How true. This applies to so much in life. Music making is all about honesty; being true to the composer, to the music and to yourself. How can one play badly and then tell the listener it was great? The results are obvious.

As I gained confidence in financial matters I was able to gradually leave music teaching, choir directing and performing. It took several years to make the transition. In 1979, new to Cape Cod, I again found good luck and was hired by one of the oldest and largest investment firms in the country, Bache Halsey (later merged into Prudential and now part of Wachovia). I had put the trumpet away for a few years, but in the early 1980s took it up again and volunteered to play in the Cape Cod Symphony Orchestra. At that time many of the members were volunteers. Royston Nash had arrived only a couple of years before. This year marks his twenty-fifth with the CSO. I stayed for three years, leaving as my career demanded more time which meant less time to practice, practice, practice. Over the last twenty years I have been involved in playing in or directing The Lower Cape Concert Band, The Brewster Town Band, the Harwich Congregational Church Orchestra and singing and in my church choir. What was once a profession for me is now my avocation. It's a lot more fun as a hobby.

I can't devote the time to keep up the skills needed to perform at a professional level, but that doesn't mean I'm not active in music. My love of music has led me to the Cape Symphony Orchestra again. For a number of years I've served as a trustee of the CSO Board. I want to give back a little that music has given me. Let me share with you my enthusiasm for the work of the orchestra, its board and friends. The mission of the Cape Symphony Orchestra is "to enrich and further the cultural, educational, and economic interests of our region through music."

Please join me in support of my first love, music, by sharing in the mission of the Cape Symphony by attending the concerts, telling others about the orchestra, encouraging young people to attend, and contributing with gifts of cash and/or appreciated securities. The CSO offers a wonderful income option for those who are suitable who want to convert highly appreciated assets into a lifetime of income while enjoying the substantial tax benefits of a gift annuity. All of the arts require patrons. Please consider becoming a patron of your local symphony, art gallery, dance company, etc. by becoming an annual season ticket subscriber. Give tickets you can't use to students, friends and family who might not otherwise experience the joys of symphonic music performed so they can hear it and see it being made. Great art, music and literature is food for the soul. Join in the banquet. Cape Symphony Orchestra 1-508-362-1111.

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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