STRATFOR ON THE ECONOMY & THE ELECTION
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Economy Soars Ahead In The 3Q, Report Shows.
2. Stratfor Analyzes The Economy & Election Race.
3. Terrorist Threat May Be Greater In Next Six Months.
4. More Money Managers Are Using “Short” Funds.
On Thursday of last week, the government released its first estimate of 3Q economic growth. Gross domestic product, the Commerce Department estimates, surged by a whopping 7.2% (annual rate) in the 3Q, the largest quarterly gain in 20 years. That followed growth of 3.3% in the 2Q and 1.4% in the 1Q. This comes as no big surprise to readers of this E-Letter. Surveys of economists and my best sources have been predicting for months that this economy is in a strong recovery.
From a political standpoint, the latest economic news is a blow for the Democrats. For months they have blasted President Bush over the economy, but the latest data should quiet these criticisms for the most part. In the weeks ahead, look for the Democrats to increase their criticism of Bush’s handling of post-war Iraq and other foreign policy issues.
If history is any guide, Bush should easily be re-elected in 2004, given that we are still at war. At this point, odds-makers would say it’s Bush’s election to lose. This week, I am reprinting some analysis from Stratfor.com, the widely respected global intelligence firm, regarding the economy and the political landscape as we move closer to the election year. I think you’ll find it interesting.
Stratfor On The Economy & Next Year’s Election
“Continuing to confound conventional wisdom, 2003 is turning into a great economic year while U.S. President George W. Bush's foreign policy is foundering. The decision on Oct. 28 by the U.S. Federal Reserve Bank not to raise interest rates sent the stock markets soaring. Of greater interest was a statement by Bank of Canada Gov. David Dodge that U.S. Federal Reserve Chairman Alan Greenspan told him Washington would announce on Oct. 30 that the U.S. economy had grown at a sizzling 6 percent rate during the third quarter. Greenspan also reportedly predicted that the growth rate would slow down to a mere 4 percent in the fourth quarter -- but he has been consistently conservative in his forecasts.
Check out Stratfor at their website, www.stratfor.com. They have a free section that includes some good information. Their “basic” service is $99 a year, and their “premium” service is $449 a year. I highly recommend Stratfor. (Note: I am not associated with Stratfor and receive nothing for recommending them.)
The Threat Of More Terrorist Attacks
In Stratfor’s last paragraph above, they note that the terrorists desperately want to see Bush voted out of office. He is, after all, the Commander-In-Chief of the War On Terror. They do not want to see him re-elected.
[I find it interesting that, according to Stratfor (and others), the terrorists we are fighting against would welcome a Democrat to replace Bush, thinking that life would be easier for them. Look at the positions of the Democratic front runners: almost all have said invading Iraq was a mistake, even though this contradicts earlier comments and positions and even votes in Congress. No wonder why the terrorists would rather see a Democrat in the White House.]
Stratfor has written more extensively on the continued threat of another major terrorist attack in the US in recent weeks. Stratfor stresses that they have no specific intelligence on any particular terrorist plot, or any particular location. However, they very much believe that the next six months or so, as we move toward the elections, will be the most likely time for another major attack in the United States.
As you know, my outlook for the US economy has been very positive for the last year, and that has proven to be the correct forecast. I have also been positive on the stock markets this year, and that has also proven correct. With the latest scorching economic news (GDP up 7.2% in 3Q), the economy would appear to be on a sound growth path for the next year, and stocks will likely continue at least mildly higher as well.
Yet all that could change if there is another serious terrorist attack in the US. Like Stratfor, none of my other sources have any specific intelligence regarding another attack. Yet if the terrorists are intent on driving Bush out of office, they probably need to strike in the next six months or so.
On the bright side, there has not been a serious terrorist attack on US soil since 9/11. Clearly, the increased security measures we have adopted since 9/11 have lessened the likelihood of another major attack, but they have not eliminated the threat.
As investors, we should not pull all or most of our money out of the markets just because another terrorist attack “might” happen. On the other hand, we should also be ever mindful that another serious terrorist attack in the US could have major negative implications on the economy and the equity markets, just as it did after 9/11.
Another Reason To Use Professional Managers
Most investors I talked to immediately after 9/11 had no idea what they should do, even though the stock markets were closed for several days after the attacks, and they had some time to think about it. Investors didn’t know whether they should bail out when the markets reopened, or just ride out the decline that followed.
Before going any further, let me state the obvious: there is no assurance that a professional money manager will be out of the market and in the safety of cash if another serious terrorist attack occurs. No one saw 9/11 coming.
It is, however, worth pointing out that the equity mutual fund managers we recommend were largely out of the stock market and in the safety of cash on September 11, 2001. Some were 100% in cash; others were 75% or more in cash; and one was 50% in cash when the 9/11 attacks occurred.
There was a reason for this; it was not a chance occurrence. The stock market was in a downtrend in the summer of 2001. These professional Advisors were simply following their systems which try to avoid the downtrends. So, their systems had moved them either fully or partly (at least 50%) to cash ahead of 9/11. As a result, their clients avoided all or part of the carnage in the stock markets just after 9/11. (Past performance is not necessarily indicative of future results.)
I should also point out that, were a serious terrorist attack to happen today, the outcome would be worse. Today, most of our equity managers are fully invested, or near fully invested, in mutual funds (and we’re having a great year). So, if the stock market were to be in an uptrend when a serious terrorist attack occurred, our recommended Advisors might not do any better than individual investors. Still, I would rather have these professionals directing my investments in a potentially chaotic market.
More Managers Using “Short” Funds To Control Risk
Actually, an increasing number of professional money managers are now using “short funds” to hedge their downside risk. How does this work? In recent years, we have seen the development of new mutual funds that actually go up when the stock market falls. The Rydex fund family has its “URSA” (Latin for bear) fund that rises apprx. the same amount as the S&P 500 falls. If the S&P drops 10%, Ursa goes up apprx. 10%. The ProFunds family has its “Bear Fund” which also goes up if the stock market goes down.
Over the last few years, we’ve seen a growing number of professional money managers who invest in mutual funds start to use these “short” funds as a hedge in their portfolios. Rather than sell out of the various mutual funds they own, they simply purchase Ursa or one of the other “short” funds to partly or fully “hedge” their long positions.
Several of our recommended money managers have begun to use these short funds in recent years. If their systems indicate that a downtrend is coming, they can purchase short funds to soften or counterbalance the losses that will occur in their long funds.
I should point out that the use of short funds does not mean that losses will not occur from time to time. No system is perfect and timing the use of short funds is not a perfect science.
With that said, I believe the growing use of these short funds is a good thing, especially for professional managers with long-standing, successful track records such as those we recommend. The availability of the short funds merely gives them one more way to attempt to control downside risk during market downtrends.
The availability of short funds may also prove to be key if regulators place new restrictions on mutual fund trading frequency as a result of the recent short-term trading scandal. If money managers cannot trade as frequently, but see a downturn coming, they can simply buy short funds to hedge their long positions. I will write more about this in the near future.
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Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.