Fourth Quarter 2006

It was a delicious quarter for the U.S. stock market. Shareholders of many companies were treated to generous helpings of healthful gains in the final quarter of 2006.

The Menu:

Appetizer: A better-than-expected Christmas shopping season helped boost retail sales.
The Main Course: Heaping plates of corporate profits in comfortable surroundings. Our northern dining rooms were cheaper to heat as oil and natural gas prices continued to fall. Supplies of our basic energy sources remained adequate, thanks not only to mild weather but also due to the elimination of some oil speculators from dinner party guest lists.
Dessert: A double scoop of renewed market optimism. A happy select few received seconds when a number of Wall Street firms dished out humongous year-end bonuses for their best chefs.

The Dow Jones Industrial Average began the final quarter of '06 at 11850 and closed the year out at 12463, a gain of 613 Dow points, or about 5%. Not a bad quarter. For the full year the Dow Jones Industrial Average, made up of 30 mega-sized companies, was up over 16%. Some are wondering if this market might be a repeat of the Dot.Com Mania Market of the 1990s. Of course, past performance of anything can never predict the future performance of anything. The market is indeed going up. Money still goes where it's best treated. Our stock market is attracting domestic and foreign money because equities offer the potential of greater returns in the near term. Money is also fickle. Investors are picky eaters. The economic and investment menu of any country must have attractive items to keep their customers coming back for more. Today the U.S. stock market's All You Can Eat Diner is drawing in the crowds.

Our domestic economy continued to grow in 2006. The Bureau of Labor Statistics, the scorekeeper for the U.S. Labor Dept., reported a 4.5% unemployment rate for December. This is a very low number. The labor force participation rate is the highest in five years, 63.4%. Home builders, still in a slump, did not add to the workforce. The U.S. economy lost another 72,000 manufacturing jobs in 2006, further proof that we are no longer as much makers of things as we are makers of ideas and services. Two primary factors, productivity gains and outsourced foreign labor, contributed to our factory job declines. As more and better machines do more of the work that people once performed, gains in productivity, the increased output per hour worked, is the result. Illegal immigrant labor, seldom or never reported, continues to skew the data. The Labor Dept. also reported an increase of 50,000 additional professional and services workers in December, offsetting some of the manufacturing job losses. Health care added 30,000 more jobs in the same month. Worker income has been growing as well. The U.S. Census Bureau reported that our national median income for 2006 was $43,000. This means that one-half of those employed in America earned more than $43,300 per year. The other 50% of the work force earned less than that. Median is not the same as mean, or average. Median is the point midway between one set of numbers, things or people and the other set. Of course, the Census Bureau counts only those who play by the rules; who report the correct income on their income tax forms.

With the huge number of millionaires, multi-millionaires and billionaires in America, the mean or average income per worker may be something quite different than the median. Forbes Magazine keeps track of such things. Last year the number of America's wealthiest on the Forbes 400 List with a net worth of LESS that one billion dollars was ZERO! That's right. All of the men and women on the top 400 list are worth at least One Billion Dollars! What a country! Politicians talk about soaking the rich while most of us would like to be the rich.

Progress has been made during the last quarter and the last year both here and around most of the world. An economic smorgasbord of dishes, tasty and tart, sweet and sour has been offered up. With the exceptions of Afghanistan and Iraq and the Global War against Islamo-Fasicsm, genocide in Darfur inflicted by Muslim extremists on innocent people there, and a few other insurgencies, most of our world's 6 billion people are at peace. "A World at Peace" is not reported by Main Screech Media, but the statistics describe a pacific planet. War is the ultimate human failing. I hope to live to see just one entire year without war anywhere. However, as much as we hate war, in order for there to be no hostilities there must be no hostile aggression. Unanswered aggression invites more of the same. The lessons of history are clear. Appeasing tyrants usually results in enslavement, or worse, extermination. This oft told tale of the dark side of human nature through the millennia is in the history books for all to read and is, sadly, irrefutable. There is no twelve-step recovery program for maniacal would-be conquerors. Does the Devil ever take a vacation?

With peace comes prosperity. A steady improvement in the standard of living of people the world over is the under-reported good news. Growing global productivity is propelling countries out of poverty into self-sustaining economic growth. In support of this assertion I refer you to the Cato Institute's Economic Freedom of the World: 2006 Annual Report available at www.cato-store.org. Working with researchers from Canada's Fraser Institute, authors James Gwartney of Florida State University, Robert Lawson of Capital University and William Easterly of New York University, gathered data from 102 countries from the years 1980 to the present. Of those 102 nations, 98 showed improvements in economic freedom and only four declined during the past year. The great majority of the world is at peace and experiencing growing prosperity.

One of the most powerful future determinants of future global economic sustainability is the health of the planet. The subject of global climate change seems to be in the news every day. Is it us? Is it Mother Nature? Is global warming a problem caused by a combination of Sun Spots, humans and gassy cattle? Is this just another of one of thousands of warming and cooling trends that our planet has lived through for millions of years? Politicians are circulating plenty of their own hot air as we await consensus and solutions. My guess is that global warming is caused in part by global drying. When a tropical part of the earth loses its plant life the result is a hot, dry desert. Much of the world's equatorial belt is now desert, especially Africa and the Middle East. Why not suggest this to the oil producing nations of the world, most of which are in desert areas: "We want you to work with other nations to build desalinization plants which will bring fresh water from the oceans to the deserts of our shared planet." Reforestation will "sink" tons of carbon from the atmosphere into plants, producing more oxygen every year. Crops can be grown. Desert creatures of the Sahara can be moved to other deserts. We won't be able to irrigate everywhere, after all. In the process, desert climates might become wetter and cooler. The Middle East and North Africa were greener only a few thousand years ago. Israel has already turned some of its desert land back into productive gardens, farms, fields and orchards.

Water held in the atmosphere, in the soil, in aquifers and in ponds and lakes is water that is not in the ocean. We're becoming more concerned about rising sea levels. If the sea level rises, it will rise everywhere. If water is moved to the dry places, it may help cool the planet and feed more hungry people. There are many companies developing alternative energy sources. Better sooner than later.

Baseball's great philosopher, Yogi Berra, said: "Predictions are hard to make, especially about the future." No one can accurately predict the future, at least no one I know. Without a clear, dependable crystal ball to gaze into we are left with the more common tools of forecasting. To every thing there is a season. A number of market indicators predict a prolonged sunny growing season for our economy. Among the metrics used in making this cheerful forecast are low interest rates, relatively low inflation, adequate supplies of cash, healthy consumer confidence, a steady demand for goods and services, reasonable price to earnings ratios and broad participation by individuals and institutions in the equity markets. Improving demands for goods and services creates economic growth. Growing economies are good for financial assets.

My long range forecast predicts that we will all need more money in the future. There is a big problem with our national savings rate. It's too low. The U.S. Commerce Dept. reported that our savings rate actually fell into negative territory, a minus 0.5%, early last year. That means that we Americans spent more than we earned. A person who earned $40,000 and spent $42,000 went $2,000 in debt, or had to liquidate $2,000 from savings and/or investments to balance the annual household budget. The saving rate statistic does not count our investments in IRAs, 401(k) accounts and real estate. It measures earning and spending for the overall population. Another concern is that many American families could be three or four missed paychecks away from deep trouble. One of my jobs is to let my clients know that you and I can not change America's saving, investing and spending habits, but we can modify our own financial planning behavior. Try this: Calculate your savings and investment rate by adding up the net amount that you put into your short-term savings and long-term investments over the last year. If you're not happy with your results, call me. I'll help you make a plan to set aside a certain amount regularly. If you need help with your budget, give me a call. Each of us can either make more and/or spend less to make a positive difference in our saving and investing program. There is no shortage of available investment vehicles. Without a good budget, however, there might be a shortage of money some day. Money you don't save and invest will not return to you later.

Income can come from interest-paying instruments such as bank accounts, insurance company "fixed" annuities and various types of bonds. Dividends paid by common stocks produce monthly or quarterly income. In addition to interest and/or dividends, many investment company mutual funds allow for systematic withdrawal plans, which can work quite well if the rate of growth of the mutual funds exceeds the rate of withdrawal from the mutual funds.

The U.S. Congress created the Individual Retirement Account law over thirty years ago. To date, multi-billions of dollars have been invested in these accounts. Current law allows someone younger than age 50 to deposit $4,000 into a traditional or Roth IRA. For those age 50 or older, up to $5,000 can be invested. "Simple" IRA plans allow up to $10,000 or $12,500 for those 50 and older. Small business owners can now set up 401(k) plans. Certain companies have created 401(k) plans for one-person companies that are affordable and quite easy to manage with "turn-key" administration. Saving for college is also easier these days. The new "529" plans allow a person to deposit money in an account for higher education. The investments accumulate income tax-deferred and will be paid out income tax-free for qualified higher education expenses. You can also change the beneficiary from one family member to another if the beneficiary gets a full scholarship, for instance. It is an excellent tool for grandparents who want to help their grandchildren with college expenses.

For those now in retirement, a properly designed combination of interest, dividends and capital gains may help produce income with some inflation protection. As with any set of generalities and brief guidelines, these ideas are broad concepts only. To apply any specific set of recommendations to an individual the investor's specific needs and circumstances must be considered carefully. Only after gathering sufficient information to make a reasonable evaluation of an investor's needs, risk tolerance, age, investment experience, and income and net worth, can an advisor make suitable recommendations. There is no BEST investment or financial planning solution for any of us. Rather, an advisor with a fiduciary attitude toward his or her clients works to craft suitable optimum, not perfect, recommendations, matching the person, family or small business to the available financial options available. If you don't want to do it yourself, ask for help. If you haven't been in the office for a while, call to set up a review appointment. You may recall the Financial Checklist in last quarter's letter. If it's already in the circular file go to my website www.brimmerfinancial.com and click Archives. Review the list to see if there is anything that needs your attention. Also, a note about Corrected 1099s. Do not file your income taxes early if you own securities which are likely to recalculate their income for the past year such as real estate investment trusts, mutual funds and partnerships that create Form K-1. Gather your tax information for your tax preparer as soon as possible, but delay filing until later if you expect a late K-1 or 1099.

Wishing you success,

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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