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WILL OIL SPIKE TANK THE ECONOMY & STOCKS?

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
June 8, 2004

IN THIS ISSUE:

1.  Godspeed Ronaldus Magnus. 

2.  The Economy Just Keeps Booming.

3.  Will Gas Prices Tank The Economy?

4.  The Case For Lower Oil Prices.

5.  Survey Shows Americans More Optimistic.

6.  Stock Prices & The Election Year Cycle.

Godspeed Ronaldus Magnus

Before delving into the economy and where to invest, I must first pause and pay my respects to former President Ronald Reagan.  It was Ronald Reagan that molded my political ideology and made me a conservative.  In 1975 at the age of 23, I attended a Republican political rally in Dallas.  I was apolitical until that evening.  I don’t even know why I went.   Then Governor Ronald Reagan spoke for over an hour, and I was mesmerized.  I will never forget it.  I agreed with everything he said.  In that one evening, he made politics an important part of my life.

I consider Ronald Reagan the greatest president of my lifetime.  I believe history will agree.  The Berlin Wall, the fall of the Soviet Union, the Iron Curtain and the end of the Cold War, the top tax rate falling from 70% to 28%, his championing of free market economics, etc., etc.   In addition, he was a man of such character and honor and grace and most of all, optimism and a keen sense of humor.  He made us all feel better and stronger, about ourselves and about America.

The media is in non-stop coverage of Ronald Reagan’s life, his presidency, his accomplishments, etc.  Everything I have seen so far has been fairly to very positive.  Even John Kerry, Ted Kennedy and other Democrats have been complimentary to Reagan.  Let us not forget, however, that the media and most Democrats despised Ronald Reagan during his eight years as president.  Yet they cannot now ignore the great accomplishments of this very popular president, less they lose all credibility.

Finally, I am not sad that President Reagan passed away on Saturday.  His disease in effect took him from us a number of years ago.  Most of all, I know he is in a better place.  Surely God must be very proud of Ronald Reagan.  We owe him a huge debt of gratitude and our prayers as he is laid to rest this week.  God rest his soul.

The US Economy Continues To Improve

As expected, the Commerce Department revised its estimate of 1Q economic growth upward from 4.2% to 4.4% (annual rate).  Inventory rebuilding and government spending were higher in the 1Q than previously estimated.  Also in the latest GDP report, consumer spending increased a bit more than earlier estimated, rising 3.9% in the 1Q.  Consumer spending also increased another 0.3% in April (latest data available).

The inflation rate component of the latest GDP report was revised downward.  The so-called “personal consumption price index” (which excludes food and energy) was revised down to 1.7% from the previous report’s 2.0%.  The Consumer Price Index rose 0.3% in April (latest data available) and was 2.3% above April 2003.

Even better than the upward revision in 1Q GDP was the latest report on manufacturing activity.  The Institute For Supply Management’s manufacturing index rose from 62.4 in April to 62.8 in May.  It was the 12th consecutive monthly increase in the ISM index.  If the index were to remain at 62.8, it would signal annual GDP growth of apprx. 7.3%.

ISM’s manufacturing employment index showed an even more impressive gain in May, rising from 57.8 in April to 61.9 last month.  That was the strongest monthly increase since April 1973. 

Still, manufacturers are not adding jobs as fast as new orders are rising, and inventories remain low in most industries.  All this strongly suggests that the national unemployment rate will fall in the months ahead. 

The latest unemployment report last Friday contained more good news.  While the overall unemployment rate remained at 5.6% in May, the government reported that 248,000 new jobs were added to the economy across many business sectors.  The government also revised upward the new jobs added in March and April.  Over the last three months alone, 947,000 new jobs have been created.  This is very good news for President Bush and it should only get better.

Will Soaring Gas Prices Tank The Economy?

No.  Oil prices soared to new record highs last week following the attacks in Saudi Arabia.  This has led many investors to wonder if sharply higher energy prices will send the economy into a tailspin.  As is widely known, consumer spending accounts for over two-thirds of GDP.  With gasoline prices above $2 per gallon in many parts of the US, some wonder if consumers will cut back sharply on other purchases. 

The Department of Energy (DOE) recently released the findings of a five-year study ( www.balancedenergy.org) which focused on how much American families spend on energy.  The study found that families making $50,000 per year spend apprx. 3.7% of their income on energy costs, including both gasoline and home energy expenditures.  This was actually slightly less than a similar study showed in 1997.

The point is that while gasoline prices have soared, higher energy costs are not likely to tank the economy.  According to the Department of Housing and Urban Development (HUD), the median family income in the US was $56,500 in 2003.  While families making less than $50,000 per year pay more than 3.7% of their income on energy, the recent increases in gasoline prices are not as great a drag on the economy as many Democrats and the media would have us believe.

The bottom line is that the strong economic recovery has increased personal income, on average, by more than the increased cost for energy.  Disposable family income rose 4.4% over the last year according to the Commerce Department.  As a result, consumer spending has actually increased this year as noted above.

The Case For Lower Oil Prices

With all that said, however, it remains to be seen how high oil prices will go and how long they stay at these historically high levels.  Clearly, if oil prices rise significantly higher and/or they remain high for an extended period of time, there will be more negative consequences for both consumers and the economy.

Yet while virtually everyone expects oil prices to stay at high (or even higher) levels at least through the peak summer demand period, there is a case building for a meaningful decline in oil and gasoline prices later this year – assuming, of course, there are no serious terror attacks in the energy sector.

There is no question that the oil market is tight.  Yet production is rising and inventories of crude are rebuilding slowly.  Saudi Arabia agreed last week to increase production by two million barrels per day.  The United Arab Emirates also announced an increase in daily production.  Together, they can lift OPEC’s output by apprx. 2.5 million barrels per day, up to 30 million bpd.  Then there is Iraq which should continue to increase its daily production.

Global demand for oil is at or near an all-time high.  Much of the increase in demand in recent years has come from China and other parts of Asia.  Yet we have seen widespread reports and forecasts over the last couple of months predicting a slowdown in the Chinese economy.  Some forecasters are predicting more than a minor slowdown in China, which would also affect much of the rest of the world.  This would reduce the demand for oil.

Finally, bullish sentiment in the oil and gasoline futures markets is back to near record high levels.  As noted above, virtually everyone believes oil and gas prices are going higher. There are HUGE speculative long positions in the energy futures markets.  As a 28-year veteran of these markets, I can tell you that prices could drop significantly if bullish sentiment turns queasy. 

As with all bull markets, it is impossible to predict the top.  Prices could continue higher this summer.  If there are terror attacks that hit oil production facilities and/or transportation, then oil could spike a lot higher.  However, oil is still a commodity, higher prices will reduce demand and the market will top out when it’s least expected.  At that point, look out below!

New Data Show Americans Are More Optimistic

The Consumer Confidence Index rose slightly again in May, reaching 93.2 versus 93.0 in April.  But even more encouraging, new polling data released last week revealed that most Americans are very optimistic about the future.  The Harris Poll is one of the longest running, most respected series of surveys measuring public opinion.  Here are the latest results:

68% of Americans polled said they expect their personal situation to improve over the next five years as compared to 63% a year ago.  56% of Americans polled said their personal situation had improved over the last five years as compared to only 49% a year ago.  Only 16% said their personal situation had worsened over the past five years as compared to 21% a year ago.  93% of Americans polled said they were very satisfied or fairly satisfied, on balance, with the life they lead.  Only 7% said they were not satisfied.

What, you didn’t hear about this in the mainstream press?  Surprise, surprise!  If you did happen to see this in the media, you didn’t see it for long.  They quickly moved back to reporting the bad news in Iraq.  As I reported in detail in last week’s E-Letter on media bias, the mainstream media doesn’t want us to see good news, especially not data like you just read above.

[Editor’s NoteWe received more than the usual amount of responses to last week’s E-Letter on media bias, especially from our liberal-leaning readers.  One of their main points was that the mainstream media is largely owned by large, “conservative” corporations, and therefore they could not be guilty of liberal bias.  Excuse me, but CBS is owned by Viacom which also owns MTV and Paramount Pictures.  ABC is owned by Disney which has an increasingly liberal agenda.  NBC is owned by General Electric which was headed from 1981 to 1999 by Jack Welch, arguably a conservative; however, Welch did relatively little to influence NBC News or programming content; Tom Brokaw is a liberal with the best of them. 

Speaking of CBS, NBC and ABC, can anyone name me a single conservative program on any of these major TV networks, particularly in prime time?? 

I guess these same readers consider the New York Times Company and the Los Angeles Times and its parent, the (Chicago) Tribune Company, to also be “conservative” corporations! 

Some other readers wrote saying that I must want all media programming to have a conservative bias.  Absolutely not!  What I would like to see is fair, factual and balanced reporting of the news – with no liberal or conservative bias – and PLEASE some evening network programs that my kids can watch without the sex, sleaze and increasingly filthy language! 

Next, a few readers claimed that the Pew Research Center is a tool of conservative Republicans.  Not hardly.  The Pew Research Center is funded by the Pew Charitable Trusts which have been frequently cited by conservative organizations as having a very LIBERAL agenda.

Dear readers, we love to get your feedback, whether you agree or disagree with me.  We love a spirited debate, and we try to answer all reasonable responses.  We only ask two things: 1) try to get your facts straight (ie – the NY Times, CBS and ABC, for example, are not conservative corporations); and 2) don’t send us profanity and/or mindless personal attacks.]

Will Stocks Sizzle Or Fizzle This Summer?

In the May 11 issue of this E-Letter, I wrote: “A further decline in equities is not the most likely scenario as I see it.  I view the current selloff in the stock markets as a buying opportunity.  Current fears about an interest rate hike have been overblown in the markets in my opinion.  Good economic news is eventually good for the equity markets.”  At the time, the Dow Jones was below 10,000.  It has since rebounded (above 10,300 as this is written), even though crude oil prices soared above $42 per barrel.  

Historically, the summer months are not good for stocks.  There is actually a popular saying on Wall Street – “Sell in May and go away.”  Indeed there are some investors and even professionals who do sell or lighten-up on equities in May and then reinvest in late September or October.  While it can be shown that this strategy worked out fairly well over long periods of time, I don’t recommend it, certainly not this year.  I happen to think stocks will do well this summer.

As discussed above, the economy continues to gain momentum and confidence is growing, this despite record high oil prices.  Maybe we get an interest rate hike this month, maybe we don’t.  If we do, it will be a small one, and just about everyone on the planet knows it’s coming, sooner or later.  You may actually be surprised to see stocks rally whenever the Fed finally raises rates.

June 30 is a BIG date just ahead.  The Bush administration is determined to hand over “control” of Iraq on that date (although at least 130,000 of our forces are staying).  The Fed Open Market Committee could also announce a quarter-point rate hike that day.  Problems in Iraq and fear of a rate hike have both been weighing heavy on investors for the last few months.  But those concerns could be largely gone by the end of this month.  Thus, the equity markets could be poised for a run on the upside afterward, especially if we get a break in oil prices.

The Bullish Election Year Cycle

Finally, there is the election year cycle in stocks.  Equities tend to rally from June through December in presidential election years.  Since 1900, the Dow Jones has rallied an average of almost 11% from June to December in election years (source: Ned Davis Research).  The strongest rallies generally have occurred in years when it looked like the incumbent would be re-elected (as I expect will be the case this time around, although that remains to be seen).

If you took my advice in early May and increased your exposure to stocks and/or mutual funds, I would hold on.  If you didn’t, I don’t think it’s too late to get on board.  Based on what we read and hear from subscribers of this E-Letter, many of you have little or no money in the stock market now.  So far this year, being on the sidelines in equities has not created a lot of lost opportunity costs as the market has moved sideways to lower.  However, that may be about to change, especially if this is a typical election year.

Hand It Over To The Professionals

Since September of 2002, when I began writing this E-Letter, I have been encouraging you readers to consider investing with three of the professional Mutual Fund Advisors we recommend.  Niemann Capital Management and Potomac Fund Management both invest in carefully selected equity mutual funds, using their time-tested proprietary systems for fund selection.   Both can be 100% invested or “hedged” or in cash (money market funds) depending on market conditions.

Capital Management Group invests in high yield bond mutual funds, which were the big winners in 2003 when most traditional bond funds got hammered.  Like Niemann and Potomac, CMG can be 100% invested or “hedged” or in cash depending on market conditions.

All three of these professional managers have long, actual performance records.  All three of these managers knocked the lights out in 2003!   CLICK HERE to see their actual performance results.  Past performance is not necessarily indicative of future results.

One of the reasons why I can be bullish on the markets, even in the face of some potentially troubling issues (oil prices, interest rates, the war, etc.), is that these professionals have the ability to “hedge” their market positions by using specialty mutual funds that “short” the markets.   Or, if their systems indicate, they can move partially or fully to cash.

I have a sizable investment portfolio of my own.  All of it is managed by professional Advisors.  The bulk of it is with managers, like the three recommended above, that can hedge their positions and/or get out of the market if need be.

What Are You Waiting For?

The old saying, “procrastination kills,” is very appropriate when it comes to investing.  There is reportedly over $3 trillion of cash still sitting in money market funds earning next to nothing.  Much of it is money that came out of the stock markets in 2001 and 2002 in the depths of the bear market – but has never gotten back in.

The S&P 500 gained over 28% in 2003.  If investors had only bought an “index fund” when I recommended moving back to a fully invested position in equities in late 2002, they would have at least made about what the S&P made last year.  Many professional money managers did even better, some did a lot better.

If you are still under-invested in equities and/or bonds, maybe you should call us today at 800-348-3601 or visit our website [CLICK HERE] to see the information on the professional managers we recommend. 

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES

Kudlow: The Economic Boom – Why Can’t The Naysayers See It?

How Reagan, Thatcher & the Pope won the Cold War.

Ronald Reagan’s Legacy – George Will.

A thoughtful, interesting piece on Ronald Reagan.


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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, 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, Halbert Wealth Management, 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.

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