First Quarter 2006 Review

The first three months of 2006 treated equity investors quite well. Stocks moved higher. Inflation, excepting higher energy and other costs, remained under control. We Americans are enjoying the 5th year of our current economic expansion. From January through March our economy grew at a 5.3% rate, which was more than expected. The official unemployment rate was 4.7% for the period, continuing the downward trend begun earlier in the decade. The number of persons working, but not on the payrolls of taxpaying entities, is unknown, but assumed to be in the millions. Official payroll employment, as calculated by the U.S. Labor Department, has increased by more than 5 million jobs since 2003. Corporate profits continued to improve. Dividends have been increased for many shareholders of public companies. As I'm writing this letter Enron defendants, Lay and Skilling, have been convicted. Long prison terms are expected. The $60 billion lost is gone forever. The lives they ruined they can not rebuild. We are again reminded that America is a nation of laws, not of men. Corporate governance is a sacred trust. Lest they forget, all CEOs work for the owners of the company who are the shareholders, their employees and their customers. Some are over-paid, in my opinion.

The Federal Reserve has now raised interest rates 15 times. Somewhere in the mix there is an optimum short-term rate. Unfortunately, it can not be predicted or achieved by skill or magic. The only way we will ever know if the rates were neither too high, nor too low, but just right, is by waiting a year or more. The results will be a growing or slowing economy.

We seem to be on the right economic track. But there are risks. Housing sales have slowed down. Home building accounted for about 6% of GDP for all of 2005. A slowdown in housing can affect many other industries negatively. Business spending accounted for over 30% of GDP last year. Again, any significant penny-pinching by the major firms could reduce the profits of the many smaller firms that supply big companies with materials and services. The U.S. Dollar could plunge. It is already low and may continue to drift downward for a while. Foreign banks do not want a dramatic drop in the U.S. Dollar. The present multi-billion dollar drain from the U.S. economy due to foreign workers sending their income back home, and thus out of circulation in our economy, may cause further dollar weakness in the future.

I often review quarterly economic data in more detail. For this letter, instead of a local economic weather report, I'd like to give my reading of the global climate. Four pages will not allow for much detail, so the list of topics will be shorter than I'd like. My conclusions are based on my understanding of what is happening around the world. I'll briefly discuss energy, taxation, immigration, war, education, religion and morals, and my favorite, politics. Have I missed anything that's taboo at any polite dinner party?

ENERGY    There's only so much of it available at any one time. Currently there is a greater world demand for energy than ready supply. Most people obtain needed energy from the burning of things that are, in my opinion, too valuable to burn: oil, natural gas and coal. These hydrocarbons, storage bins of millions of years of solar energy, can be used for the creation of materials such as plastics and synthetic fabrics. Until the 18th century, animal and human effort provided the power needed for agriculture and manufactures. Today we are burning carbon fuel because we have not developed better sources of energy. With each passing day the supply/demand forces which set prices are becoming more imbalanced. Enormous quantities of coal are burned every day in the world. It's not the cleanest fuel, but there's still a lot of it and it's reasonably priced.

Our energy future must be secure, renewable and clean. The best fuel on Earth may be hydrogen. Energy is released when hydrogen is combined with oxygen in the burning process. The only exhaust is pure water. Unfortunately, hydrogen is explosive. Once the safety issues are resolved, hydrogen fuel will likely power our trucks, cars, and lawn-mowers. A number of public companies are working on fuel cell technology. Practical applications will take years, but will arrive.

Until wind, solar, geothermal, nuclear, hydro and tidal forces are widely accepted by local licensing agencies, we will continue to burn something to make power to do work. The current technology in bio-diesel and ethanol allows properly converted vehicles to run well and run cleaner. Bio-diesel fuel is the product resulting from the conversion of a biologic substance, e.g. restaurant frying oil, into internal combustion engine fuel. A number of public and private companies are producing these fuels. Wind, the best solution depending on the location, is a NIMBY (not in my back yard) issue. Again, the technology exists and it's working in some European countries as well as in the U.S. Many farmers and ranchers are paid rent by the power companies to have wind farms installed on their land. The Chinese are completing the Three Gorges Dam, one of the largest in the world. The dam will provide millions with electricity and prevent downstream flooding.

Gasoline is becoming more costly in America. For years British and European drivers paid much more than Americans paid for gas. High demand, refining problems, the Gulf hurricanes and global political uncertainties have all contributed to the upward push in gas prices. A federal reduction in the sales tax would be lovely. Don't count on it.

TAXATION    is the method by which we all pool some of our money and turn it over to the 535 members of Congress, who spend it any way they want. Article I. Section 7 of our Constitution states "All Bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills." It goes on to explain how the President can sign into law or veto a budget bill. Many of us think that the President of the United States raises or lowers our taxes. Only the Congress can raise or lower taxes. The President can approve by signing, or disapprove by veto. It is amazing to note how so many citizens hold Members of Congress in low esteem, even to the point of contempt. And yet over 90% of them are returned to office when they run for re-election. I call this the recidivism rate.

The tax money the Federal government collects today does not pay for the money spent today. The short-fall is called the Deficit. Every president and Congress after Andrew Jackson has had a public debt. The current debt could be paid off if every person in America paid the U.S. Treasury about $28,000. Who wants to go first?

What began in the 1930s as a retirement security net has grown into a vast network of programs including Social Security, Medicare, Medicaid, SS-I and many other entitlements. An entitlement-rich society is called Socialist because of the large percentage of GDP that is consumed in transfers to individuals. The only problem with socialism, which is a wonderful idea, is this: it doesn't work. Eventually all of the bills come due. Needed social services must be paid for. A promise made must be kept. How we pay for these promises will be the big problem for decades here and for the rest of the world. The economic model that appeals to many financial planners involves a combination of modest taxation, perhaps the so-called Fair Tax, and a healthy, growing economy. This is what the politicians fight over daily. How do we provide for our people and not bankrupt the country?

IMMIGRATION    Either we follow the law or we don't. There are immigration laws on the books. As I'm writing this letter the Congress is completing work on yet another immigration bill. An un-enforced law is, de facto, not a law.

WAR    The "War on Terrorism" is not a war on terrorism. Terror is a tactic used by criminals and aggressors on civilian populations. This is a war on terrorists. One can not understand the world's recent troubles without studying the teachings of the 18th Century Muslim cleric, Mohammad ibn-Abd-al-Wahab. Neither Sunni nor Shi'a, Wahab preached aggressive violence against anyone who was not a true believer, meaning anyone who didn't agree with his interpretation of the Koran. This ultra-fundamentalist, totalitarian view of the Prophet's message is at the center of the turmoil in Islam today. I urge everyone to gain understanding about the global Wahabbist movement.

EDUCATION, RELIGION AND MORALS    A civilization can only remain healthy and prosperous if the individuals who are the members of that society are healthy and prosperous. To my mind the prerequisites of a healthy society include an educated population, a strong work ethic throughout the population and a sense of the greater good. Religion and moral teachings have provided civilizations of the past with a sort of civic glue. We are enjoying a high degree of prosperity today, but our moral fiber is showing wear. Congress can only pass laws, it can not legislate morality.

That said, I remind you that Americans have an unusual ability to fix problems. Many of the problems of yesterday, having been solved and forgotten, find us now concentrating on the problems of today, seldom asking, "Whatever happened to that problem we used to fret about?" A friend often quoted this quip "The big problems you personally can't fix and the little problems go away."

Look around the world. Seasoned world travelers report about the petty and grand larceny of foreign government officials. In Mexico it's called la mordita, the little bite or bribe, which is imposed on native and foreigners alike by police and officials of various government agencies. Russia is a good example of a nation without a firm and fair rule of law. Ask international investors which countries they plan to invest in. They will most likely give you a list of stable governments in peaceful countries.

THE SOLUTION    rests with each of us acting together for the greater good. No one of us, not the President, the Governor nor any one of us alone can fix much of anything that troubles the world. But together, using the creative freedom that republican democracy nurtures, we have fixed many problems in the past and can do much good in the future. We know that most of the world's problems will require money. That money will come from taxpayers. That's you and me. We will need to have money to fix problems as individuals and as communities, nations and as a world. If you and I are poor, we will be part of the problem, not part of the solution.

My message is this: regardless of what happens this year or next or in twenty years, I want my clients to be individually prepared for the future, whatever it may bring. I want to be sure that they are protected against unforeseen loss; I want to help them accumulate a diversified portfolio of assets to generate an adequate income; I want to help my clients realize their financial goals and in so doing, help them realize their larger hopes and dreams for themselves and their families and friends.

Our national savings rate is too low. Too many of us are not prepared for retirement. There is not enough money in the U.S. Federal piggy bank to take care of everybody and every problem. Over time, Social Security checks may represent an ever smaller portion of our needed retirement income. In the future, taxes may be raised on income, assets and profits. I don't know the future any better than anyone else, but I do believe that each of us needs to be prepared for what the future may bring.

Financial planning is the process I use to help people prepare for the future. Contact me with your financial questions or call me to set an appointment.

Robert W. Brimmer, CFP™

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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