Fourth Quarter 2005

The U.S. economy continued to grow during the last quarter of 2005. Our Gross Domestic Product increased by 1.6% for the quarter, as reported by the U.S Bureau of Economic Analysis (BEA). Gross Domestic Product (GDP) is a mathematical expression of a nation’s private consumption, plus investment plus NET exports. Net American export is a negative number because we continue to import more than we export. Even with a negative export calculation, our GDP continued to grow. Should we some day begin exporting more than we import, our GDP numbers could look more like those enjoyed today by China and India. Both of those countries have been growing their economies at high single-digit percentage rates for several years, consuming increasing amounts of oil, natural gas and coal in the process.

Here in the U.S., retail purchases increased by 2.1% in the final quarter leading up to the holiday buying season. Net sales of new and existing residential homes slowed in the final three months of last year. Unemployment was measured at 4.9%, continuing the downward trend of the last few quarters. Looking at some of our trading partners for comparisons, a few are enjoying relatively full employment, defined by the Organization for Economic Cooperation and Development (OECD) as between 4% and 6.4% unemployed. Canada reported 5.8% unemployed. Japan was at 4.5% out-of-work. Other nations are under-performing America. Among those with worse employment rates were both France and Germany. Each of those countries reported less-than-stellar unemployment rates of about 9.5% in the final quarter.

Wages: Supply and Demand

For sake of illustration, consider labor wages a tradable commodity. We tend to think of steel, tin, copper and oil as commodities. In terms of what something can be bought or sold for, wages also act like commodities. High wages are offered for scarce, high-demand skills and lower wages for plentiful, low-demand skills. Hourly wages paid last year to those workers who make up roughly 80% of the non-supervisory work force in the U.S. averaged $16.34 per hour, according to data released by the U.S. Bureau of Labor Statistics. Last year’s hourly wage rates reflected the fastest gain in this wage category in the past three years, indicating a healthy direction for the overall domestic economy.

Wage disparities are widely covered in the major news media. Recently Wal-Mart opened a new store south of Chicago, IL. Store managers were overwhelmed with over 25,000 applications for 325 positions. The average salary paid by this huge retailer is about $8.00 per hour, nationwide. There are some 1.3 million Wal-Mart employees. Approximately half of those employees do not have company-sponsored health care.

If there is a greater demand for something than supply available, the price of that something is BID UP by the buyers. When there is more supply than demand for something, the price for it is OFFERED AT A LOWER PRICE by the sellers. This is how the stock market operates.

An abundance of workers willing to work for $8.00 per hour means that the buyers (employers) are not competing for a scarce commodity. Therefore, the price is not bid up and stays near $8.00 per hour. The fact that one can’t support a typical American middle-income standard of living on $8.00/hr. has little to do with the reality of this wage issue. That’s why we have minimum wage laws in America. A totally laissez-faire free-market economy would likely result in wide-spread poverty wages being offered for certain jobs. The prosperous nations are passing through the industrial era to the post-industrial or service era. This transformation is painful for some, but more beneficial for the majority. The economist Joseph Schumpeter called this force of change creative destruction.

An article from the November 7, 2005 edition of the magazine Engineering News reviewed the salary ranges for chemists. The average annual salary for chemists with Undergraduate degrees working in the profession during 2005 was $64,000. For those with Master’s degrees in chemistry, the average annual pay was reported to be about $74,000. Ph.D. Chemists’ average pay was $93,000. The U.S. free market system is willing to pay almost six times more for a doctoral chemist than a retail worker. Is this a bad thing or a good thing? Good, bad or morally neutral, this is the reality of the supply/demand labor market place.

The object of the example above is to demonstrate that the market place sets the price for labor as it does for all other goods and services. In order to flourish in a highly technical free market society one must be prepared to offer people the services and products they demand. The future belongs to the prepared. Study, learning and achievement pay generous dividends. Quoting Booker T. Washington “Learn all you can, but learn to do something, or your learning will be useless and your vision will depart.” Thomas Jefferson spent his student years at William and Mary College in Williamsburg, Virginia reading from sunrise to sunset. His life was filled with reading and writing. One of my favorite Jefferson quotes is “I cannot live without books.” How many of our students might say today “I can’t live without TV”?

Stock Market

Our domestic large cap stock market began the fourth quarter of the year little changed from the first quarter. The Dow Jones Industrials moved from 10535 on October 3 to 10717 on December 30th. For the full year, the Dow Jones Industrial Index was essentially unchanged. During 2005, growth occurred in markets other than our own large company, Dow Jones 30 Industrial stock market. The old saying is still true. It’s not a stock market. It’s a market of individual stocks. Stock selection is important. Many of the mid and small sized American companies out-performed the large capitalization companies. Does last year’s dull large cap performance portend a renewed interest in big companies this year? We all know that there are cycles in markets as in all things. Much of the stodginess in the U.S. market could be attributed to recent rising interest rates and the higher cost of energy.

Sixty Times in Sixty Years

The year 2006 marks the 60 th birthday for the first group of over 70 million American Baby Boomers. I am among them. By the time I could crawl around the house, our former ally in WW II, the Soviet Union, had begun a campaign to overthrow global capitalism, by force if possible. Their totalitarian dream was World conquest. By 2nd grade my classmates and I were drilling “Duck and Cover” under our school desks to protect us from Soviet nuclear annihilation. Our old school house had floor to ceiling windows. I don’t think this was an effective strategy- certainly not if they dropped the big one on us.

In junior high school we watched President Kennedy address the Nation on the Cuban Missile Crisis. That was scary. We all remember where we were when we heard the news from Dallas. Then in 1968, a watershed year in so many ways, both Bobby Kennedy and Rev. Martin Luther King, Jr. were shot. All the while there was war, racial strife and a shift in public mores that sent the country reeling. Great Society and defense spending began a forty-year increase in public debt. Interest rates and inflation went out of control in the mid 1970s. A president resigned. American Diplomats were taken hostage. Throughout most of human history the jailing of diplomats would have been considered an act or war. On the day of the new president’s inauguration, our diplomats were released by the foreign government who held them for over a year.

During the 1980s inflation was tamed. The stock market held a great rally. Then in October, 1987, the stock market crash took us by surprise. Oops! It took a year and a half to make up the 508 point one-day drop. During the 1990’s we witnessed a once-in-a- lifetime stock market boom. The stock market bust that pushed many stocks down by as much as 40% from the highs in March, 2000, to the lows of October, 2002, was one of only three such great market dips in 75 years. In 2001 America was attacked by a foreign enemy on our soil for the first time since the British burned the White House in the War of 1812. War again.

I remember many of the negative news reports. But, did you know that over these 60 years of inflation, booms, busts, wars and civil unrest the S & P 500 increased by SIXTY TIMES? In 1946 the Standard and Poor 500 Index stood at 20. Yes, twenty. Not two hundred- Twenty. With all of the turbulence, misery and mess reported daily in the press for the last SIXTY YEARS, the S & P Index INCREASED SIXTY TIMES TO 1200. How could that happen? It just doesn’t make sense that the U.S. stock market could increase by so much during a 60-year period of such obvious difficulty. The answer lies hidden in all of the unreported or under-reported good news that never made it into the newspapers or television or radio news broadcasts. The many thousands of new inventions, improvements in productivity, the creative genius of America- much of this was ignored by the news media, but not by the savvy investors who noticed the profit reports and bought the stocks of the profit-making companies. Throughout these sixty years millions of us went to work and built the greatest economy in the greatest country on earth. If this were not so, why would so many tens of millions want to move here, by whatever means? You only need to know this about a country: are people trying to get in or get out?

Going ahead, I am recommending various combinations of bonds and bond funds, domestic stocks and stock funds and global stocks and global stock funds. Each of these groups of investments tends to behave differently than the others. Every asset class has its own risk/reward characteristics. Call me if you have a question about your portfolio. Never let a question “stew” overnight. I try to get back to each client as soon as possible.

Reminders

It’s that time of year again. Remember to retain your trading records. I tell my clients to retain the buy and sell tickets forever. You might need the information to determine what you paid for a security years ago if you sell it. This information is called the cost basis. Even after selling a security, maintain your records for at least 7 years in case your tax returns are audited by the I.R.S.

We continue to offer client meetings here in our office. The next session will be held on Wednesday, March 29. The topic will be INVESTING GLOBALLY. There will be two sessions, one at 10:00 am and the other at 12:00 noon. Call to reserve seating. Light refreshments will be served. Please invite some friends to join us.

Lastly, one of our very own, Account Executive Debbie Kane, is the mother of 11-year-old Tyler Kane. Tyler has been selected to represent America along with 19 other Cape and Island students in a People to PeopleStudent Ambassador Program visit to China this July. People to People is an international organization which was established in 1956 by President Eisenhower to promote good will and understanding among the peoples of the Earth. I’ve enclosed an article from the Harwich Oracle.

Tyler has been trying to raise money for his visit. Contributions are NOT tax deductible because the funds are directed to specific individuals and not the organization. Should anyone want to help Tyler, please make your check payable to: People to People Student Ambassador Program. Indicate “Tyler Kane” on the check and send the checks to us at P O Box 2806, Orleans, MA, 02653; or to Debbie Kane, 14 Lydia Bangs Way, East Harwich, MA. 02645.

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