Second Quarter 2008
My Comments and Opinions
Oil! Oil! Oil! Oil!!! There. I said it. OIL. The economic boom that began with the Industrial Revolution in the 18th Century has been fueled by very old hydrocarbon molecules - coal, oil and natural gas, converted to productive work through the chemical process called burning. Following the immutable law of supply and demand these fuels have, until recently, been both abundant and inexpensive. Not so now. A truly amazing increase in global productivity in manufacturing and trade over the last few decades has helped to create a shortage of oil. Our own high standard of living is supported in large part by the availability of energy to power our homes, businesses and transportation systems. According to recent reports from The World Factbook published by the U.S. Central Intelligence Agency online at www.cia.gov.library, Russia and Brazil are energy independent and are exporting oil. Canada is energy rich, as is Mexico. North America has a vast supply of oil, natural gas and coal.
Environmental concerns have kept America from tapping certain reserves of American oil, gas and coal. Until quite recently the techniques used to drill and withdraw this energy were prone to accidents and spills. New advances in engineering have addressed many of these concerns. Let me refer you to the ads that oilman T. Boone Pickens is currently running. I agree with him. We need to develop alternatives to oil, gas and coal burning as soon as possible. But, even if Congress and the states passed the requisite legislation, it will take time to reap the full benefits that these alternatives offer. In the mean time, we must have the fuel to run our economy - oil, gas and coal - now. It's that simple.
I've said in prior letters that oil is just too valuable to set fire to, but we can't fly jet planes with wood chips. We can heat our homes with a combination of wind, solar and yes, nuclear power. The French began to address the threats to their energy supply years ago with the construction of nuclear power plants. They only use two or three different designs for their entire system of electric generation, not a unique design for each new plant, as we have often used here. There is no time left to dawdle. Before we can wean ourselves off oil, gas and coal, and establish nuclear, wind, solar, geothermal and other renewable combustible fuels, we need to become energy independent. We are trading with nation states which don't always share our political and social values. The Arab Oil Embargo in 1973 was a warning. It went unheeded. Let the politicians know your thoughts. Call and write. I do. I haven't been hauled away yet.
Is speculation the cause of high oil prices? Speculation is an activity that drives the future price of marketable things - stocks, real estate, commodities, etc. When market participants believe that the SUPPLY of a thing is going to increase they will sell thus lowering the price. If, on the other hand, the perception is that the SUPPLY of a thing is shrinking and the demand for it is going up, the price will be bid up. Thus has it always been and shall be unless free markets become suppressed by totalitarian governments. That's been tried. It didn't work. Compare South Korea with North Korea. From space at night South Korea is ablaze in light. North Korea is almost completely dark.
Supply must exceed demand before oil prices will retreat. The world demand for crude oil is a little more than 58 millions barrels per day. The amount being pumped out of the ground and sold to refiners is about 58 million barrels per day. Demand for fuel is increasing daily. A global recession will lower demand. No one wants a big recession. I believe we Americans will shortly answer the crisis call and increase development of alternative energy sources as well as domestic traditional reserves in an environmentally sensitive way.
The U.S. equities market was off to its best second quarter start in 70 years. (Dow Jones Industrial Average price history). On April 1st the market did what it does best - it fooled most of the people just as it does most of the time. On April Fool's Day, 2008, the Dow Jones Average was up 391 points (3.19%), closing at 12,654. NASDAQ gained a similar 3.67%. The S&P 500 Index finished the day with a gain of 3.58%. A good day was had by all. Then the Bears, smelling a feast, came out and ruined the picnic. The Second Quarter closed with the Dow Jones Industrial Average at 11,350, down 10.3%. Since the last high on October 9, 2007, the Dow Jones has officially entered Bear Market territory, which is generally defined by technical analysts and economists by a drop of 20% or more from the prior high. This occurred on July 2, 2008. The last high was 10/9/07.
Since 1950, as I've mentioned before, the U.S. stock market has usually started back up in the middle or near the end of each recession. If America is indeed in a recession (six consecutive months of declining gross domestic product) we won't know for some time until the numbers are tallied up by the various U.S. government agencies which keep track of our economy. Assuming that we are in a time of negative or flat economic growth, there is a better than even chance, in my opinion, that the equities markets will turn back up in the second half of 2008, if the patterns of the last sixty years hold. The stock market looks ahead.
George Washington was the only president who didn't blame the prior administration for his troubles. - Unknown
The political season is now in full swing. The claimants are testy and swear that they'll cling to the laws that we love, to the trust to be told, to the home of the brave and the patriots bold. These campaigners inspire, confuse and amuse. They try to remember how many states they've been in; the names of their patrons; issues needed to win; which advisor to hear and which made the blunder; who rides the bus and who gets thrown under.
Oh promises, promises! Who's got the guts?
Such talk of taxes and cuts from soup to nuts.
There have been three mania booms and busts in America since 1995:
1995-2000 Stocks, especially the dot.Coms
2002-2008 Real Estate, especially residential real estate, fueled by cheap and easy credit
2007- ? Commodities, especially hydrocarbon fuels (oil and gas) and basic
materials (steel, copper, etc.)
What goes up too fast comes down too fast as a general rule. Slow and steady still wins the race. My favorite long distance investment runner is Steady Eddy, an investment that performs well during good market times and doesn't embarrass me too much during bad market times. In other words, I tend to favor the Value Style of investing. The bad news ghouls have been telling us that we are in the worst of all times. Suffering abounds and hope has evaporated. Ignore these people. They're trying to sell advertising space by attracting a crowd to their media. To be poor in America is to be rich is so many other countries. This time of market turbulence will pass. This time it is NOT different. It is like all other times of market volatility. No one complains when the investment statement goes up each month. The down has to be endured to enjoy the next up. This is the time to buy more shares at lower prices. Don't wait until the skies are blue and the all-clear bell rings. There's no such bell.
Do you have an Adjustable Rate Mortgage? If so, I believe you should immediately refinance to a fixed mortgage. Costly energy is a warning shot across our national bow that inflation is on the way. There is a direct relationship between the price of oil and the value of the U.S. Dollar. Irwin Keller in the July 7, 2008 edition of MarketWatch explains this relationship. According to his analysis there are too many Dollars in circulation. As more Greenbacks are printed each one is worth slightly less. Oil is priced in U.S. Dollars in much of the world. As the Dollar declines in value each buck buys less oil. When the Dollar increases in value, oil drops in price. One of the important duties of our Federal Reserve is to control inflation. They do that by increasing the cost of money (raising interest rates) and/or decreasing the number of dollars in circulation. If the Fed increases interest rates, those holding Adjustable Rate Mortgages would be hurt as their monthly payments increase.
I personally think that we will not see these low interest rates again for a long time. Take advantage of them and refinance now if you have an Adjustable Rate Mortgage or any type of variable interest debt. Of course, my advice remains the same: Get out of debt as soon as possible. There is power in being debt-free. If at all possible be out of debt by retirement age.
Each one of us, you and I, and everyone in America, owe ourselves and everyone who owns U.S. Treasury Bills, Bonds and Notes, over $31,000. That's because our national debt is over $9,535,931,332,261 (National Debt Clock on July 24, 2008). Divide this by 300,000,000+ people in the country. It's over $31,000 each. Go ahead. You write your check first. There's no law against giving the IRS a gift. In my opinion, the Congress will be looking for more tax money to pay for spending programs in place and soon to be proposed. More spending creates higher taxes. Higher taxation on your savings and income leaves less to spend. Ask me about tax-free municipal bonds. In my opinion, this is the environment that favors tax-free investing.
OK, so you decided not to give the IRS an extra $31,000. Instead, why not give yourself a gift of financial security? One of my favorite sayings is: "If you don't know where you're going, any road will take you there." Do you have a formal, written personal financial plan? If not, why not? Most of you know me in my role of investment broker. I have several other professional hats. In 1982 I became a Certified Financial Planner Practitioner™. I'm the president of Brimmer Financial Group, Inc., a Massachusetts Registered Investment Advisor and I'm also an affiliated person of National Asset Management, Inc., the Registered Investment Advisor of my broker/dealer, National Securities Corporation.
If you feel that you need help organizing the financial aspects of your life, a financial plan can help you get where you want to go. It's a complicated world. We all make our own mistakes. I believe it's better to learn to avoid mistakes before you make them. Your own personal financial plan is intended to point you in the right direction, help you avoid financial pitfalls, tune up your existing investments and budgets and help you plan for the legacy you'll leave to future generations. I'm enclosing my brochure for you. Answer the questions I pose. My motto is: OUR GOAL IS TO HELP YOU ACHIEVE YOUR FINANCIAL GOALS. Too many people leave their financial future to chance. I'm very lucky to live in this great country, but I'm not leaving my future to the whims of the government or good luck.
Sir John Marks Templeton, pioneer global investor, author, founder of the Templeton Prize for Progress Toward Research or Discoveries about Spiritual Realities and founder of the Templeton mutual fund family, has died. For so many of us he was a mentor, if only from afar. I had the good fortune to meet Sir John on two occasions. He had profound influence on me and many of my colleagues and continues to guide us with his writings.
Securities offered through National Securities Corporation, Member FINRA/SIPC. Investment Advisory Services offered through National Asset Management, Inc., a Registered Investment Advisor and an affiliate of National Securities Corporation.
The views expresses contain certain forward-looking statements, although they are forecasts and actual results may be meaningfully different. This material represents an assessment of the market at a particular time and is not a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any security in particular. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. Past performance does don't guarantee future results. The S&P 500 is an index that tracks the performance of 500 widely held large-cap stocks in the industrial, transportation, utility, and financial sectors. The DJIA in an index that tracks the performance of 30 blue chip U.S. stocks.
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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Securities offered through National Securities Corporation, Member NASD / SIPC
Investment Advisory Services offered through National Asset management, Inc., a Registered Investment Adviser
Accounts carried by National Financial Services LLC, Member NYSE / SIPC