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Special Update #19

IN THIS UPDATE

1. The Economy Clearly on the Rebound.

2. Budget Deficit, Then Surplus, Now Deficit Again

3. Stimulus Package -- Do We Really Need It?

4. Iraq -- Next in the War On Terror?

5. Did Iraq Play a Role in September 11th?

6. Special Report on Gold Now Available.

THE ECONOMY ON THE REBOUND

Based on our sources, we predicted an economic recovery back in November when the gloom-and-doom crowd was promising a long recession/depression.  Now it is clear the economy is on the rebound.  I analyzed the economy in much detail in my March newsletter, so I won't belabor it in this Update.  However, we continue to get good news on the economic front.  You will recall that the Commerce Department increased its estimate of 4Q GDP from +0.4% earlier to +1.4% on March 1st.  This was surprising as most analysts expected the government would revise the GDP estimate down to a negative number. 

The Index of Leading Economic Indicators (LEI) rose for the fourth consecutive month, as of January (latest report available).  Durable goods orders increased 2.6% in January for the second straight month.  Believe it or not, orders for high tech durable goods have risen for four consecutive months. Housing starts rose 6.3% in January, the fastest pace in two years.    Existing home sales hit a new record and are on pace to reach 6.04 million units this year.

The manufacturing sector rebounded in January and February after a year-and-a-half slump.  Industrial Production rose in January and again in February.  Capacity Utilization increased in both months as well.  The Purchasing Managers Index has now risen 37% since its low last year.

Unemployment dropped to 5.5% in February.  Retail sales rose 0.3% in February.  Consumer confidence is up so far in March.  These, plus other positive reports, suggest that the recession, if we can call it that, has ended.

Unless there are more significant terrorist attacks, we believe the economy will continue to recover.  So does the economic community as analysts are scrambling to revise their forecasts upward.  We do not expect the economy to surge back to the 4-5% growth rate in GDP, as some economists are now suggesting, but we think 2-3% growth may be possible, as we have been saying for several months.

BUDGET DEFICIT, THEN SURPLUS, THEN BACK TO DEFICIT AGAIN

The Congressional Budget Office, which only weeks ago was predicting that the federal budget would plunge back into deficit this year, has now REVERSED itself.  The CBO said on March 6th that the economy is "currently rebounding in a remarkable fashion," and forecast a SURPLUS of $5 billion to $6 billion this year.  Earlier, the CBO had predicted a deficit of $21 billion.

However, just days after this report, the Congress passed a $42 billion economic stimulus package that President Bush wanted, so we're back in red ink again.  Budget projections show another deficit in 2003 and 2004, but a net surplus of $681 billion over the next 10 years.

THE STIMULUS PACKAGE: DO WE REALLY NEED IT?

Some conservatives argue that the $42 billion stimulus package was not necessary, now that the economy is rebounding.  Yet President Bush continued to press for a relief package, actually one even larger than the $42 billion he got.  But whether you like the bill or you don't, it was NOT a victory for the Bush administration.  More on that below.

Here's what the bill includes.  The recession-relief package extends regular 26-week unemployment benefits by 13 weeks and allows additional automatic extensions in states with high unemployment rates.  The bill also creates a "Liberty Zone" in the lower Manhattan section of New York in which $5 billion in tax breaks will apply over the next 10 years to help the city recover from the attacks.

The law also provides new tax incentives for companies to expand and invest in plants and equipment.  But the tax cuts fell far short of what the Bush administration wanted.  The Senate Democrats, led by Tom Daschle, were not willing to budge on the additional tax cuts, so Bush had to settle for what he could get.

The Senate passed the legislation by an 85-9 vote last Friday, less than 24 hours after the House had passed it by 417-3.  We are told that that Republicans and Democrats reached a compromise after five months of gridlock on recession relief because March 11th was the six-month anniversary of the 911 attacks. In an election year, members of Congress didn't want that day to pass without acting.  There you go!

Whether the economy needed it or not, the politicians wanted to SPEND MORE so they can tell their constituents that they "did something" to help the economy.  What else is new?

IS IRAQ NEXT IN THE WAR ON TERROR?

Everyone's speculating as to whether or not we will attack Iraq next.  What follows is a different look at the question of attacking Iraq.

When America declared a cease-fire to end the Gulf War, President Bush (41) declared that we had defeated the aggressor, Saddam Hussein had agreed to weapons inspectors and the war was over.  With the benefit of hindsight, we all know now that Bush should have listened to General Norman Schwartzkopf and finished the job, rather than listen to our allies and Colin Powell.

The weapons inspection program never worked very well.  Yes, they did confirm that Saddam had stockpiled large quantities of chemical and biological weapons along with conventional weapons.  But we also knew that Saddam played a game of hide and seek with the weapons inspectors from the United Nations.  They didn't see everything.

When the time was right, Saddam kicked them out.  The UN claims to have withdrawn them, but if that were true, they could have just put them back.  Neither the UN nor the US did anything but squawk about it.  Since then, it is presumed, he has rebuilt his stockpiles and may even be working on nuclear weapons.

Subsequently, Saddam got the UN to agree to a "Food for Oil" program by claiming the sanctions were starving his people. The UN was supposed to control the sale of Iraqi oil and where that money would have been spent.  It sounded good on paper.  Yet again, Saddam continued to rebuild his military instead of feeding the starving Iraqi people.

The UN also could not control the two million barrels of oil a day that is smuggled out of Iraq, with thousands of trucks passing through Turkey, and barges traveling in Iranian territorial waters, all loaded with Iraqi oil.  In addition, Iraq smuggles 300,000 barrels per day out in a pipeline through the Port of Banyas in Syria.

Like the Food for Oil money, Saddam's substantial revenues from oil smuggling are not used to feed his starving but to increase his military.  And no one seems to care. 

The US State Department has stated that Saddam Hussein supports dozens of terrorist groups with several maintaining offices in Baghdad, such as Arab Liberation Front, Palestine Liberation Front, Mujahedin-e Khalq and Abu Nidal, just to name a few.  Again, no one seems to care.

I could go on and on with more examples of Saddam's many violations and his continued build-up of weapons of mass destruction.  But the bottom line is, if President Bush is serious about ending terrorism, when it comes to Iraq, the question is not IF but WHEN

DID IRAQ PLAY A ROLE IN THE SEPTEMBER 11 ATTACKS?

Most Americans are not aware of the volume of evidence which indicates that Iraq may have had a direct or indirect role in the September 11th attacks.  If you search the Internet for "Saddam Hussein" you will find numerous stories about Iraq's possible involvement.  For example:

Saddam Hussein reportedly put his troops on their highest military alert since the Gulf War ("Alert G") two weeks before the suicide attacks on America, perhaps the strongest indication yet that the Iraqi leader knew an atrocity was planned.  The CIA reported that there was no known reason why he put his military on the highest alert at that time.

It was also reported that Saddam went into hiding in his network of bunkers in August when the military went on highest alert, and moved his two wives away from the presidential palaces in Baghdad to Tikrit.  One CIA official said, "He was clearly expecting a massive attack, and it leads you to wonder why."

The CIA is thought to have evidence that Mohamed Atta, perhaps the ringleader of the suicide bombers, met one or more Iraqi intelligence officers in Prague shortly before the 911 attacks. 

It is also alleged by numerous sources, including the CIA, that Saddam provided the Al Qaeda with funding, logistical back up and advanced weapons training before and after 911. 

Further evidence of Iraqi complicity emerged earlier this month.  It was reported that over the past four months at least three high-ranking Iraqi intelligence officials visited Pakistan to meet representatives of Al Qaeda and took large sums of money with them. Other funds have reportedly been forwarded through banks in Lebanon.

The "operational brains" behind the September 11 attack have been named by an Israeli intelligence official as Imad Mugniyeh, the head of special overseas operations for Hezbollah, and Ayman al Zawahri, an Egyptian and a senior figure in Al Qaeda. The official quoted by JANE'S, the military journal, said they "were probably financed and got some logistical support" from the Iraqi intelligence service.

Zawahri was indicted in New York in 1999 in connection with the 1998 bombings of the United States embassies in Kenya and Tanzania. Mugniyeh organized anti-American attacks in Lebanon in the 1980s, including the suicide truck bombing of the Marine barracks in Beirut in 1983, and led a network of kidnappers who held dozens of Westerners hostage.

Do these and other stories prove that Iraq had a direct or indirect role in the 911 attacks?  Not categorically, because we don't know how much of the evidence is true and how much is not.  But we learned even more in just the last week or so. 

SADDAM HUSSEIN PAYS FAMILIES OF SUICIDE BOMBERS

On Tuesday, March 12th, Iraqi Deputy Prime Minister Tariq Aziz said that Iraq has increased payments to families of Palestinian suicide bombers from $10,000 to $25,000.  He said Saddam Hussein has been making such payments since the start of the violence in September 2000. Not only are the suicide bombers seen as heroes in their homeland, their families are also glorified and paid a wad of cash from Iraq.

This was news to me as I had not seen it before.  I figured the networks would jump on this news, since Tariq Aziz is not some Internet crackpot.  Yet the story has not gotten much play in the mainstream media.  Perhaps that's because the media doesn't want the US to attack Iraq.

As you are well aware, the hot topic in the War on Terror is whether or not the US will mount another attack on Iraq.  Well, if we are to believe President Bush's constant statements about terrorists and terrorist nations, then the answer is, ABSOLUTELY.  The question is when and how.

Assuming space permits, we will look more deeply into the subject of the Palestinian suicide bombers in the next SPECIAL UPDATE.  These people believe they are sacrificing themselves in defense of their religion. But are they really?  Does committing suicide and killing innocent, defenseless people make one a martyr in the eyes of their god?  We will revisit this issue at a later date.

WHY DID CHENEY GO TO THE MIDEAST & NOT COLIN POWELL?

Did you wonder why President Bush sent Vice President Dick Cheney on the latest 11-nation Middle East trip and not Secretary of State Colin Powell?  The standard protocol for a foreign diplomatic trip such as this is to send the Secretary of State.  Yet Bush chose, in this case, to send his VP instead.  The administration has been reluctant to talk about it, but you have to know that Colin Powell WAS FUMED over this!

As discussed in previous Updates, Powell has been slow to get onboard the War on Terror.  He has been opposed to attacking Iraq.  He has argued that an attempt to topple Saddam Hussein could wreck the coalition (what coalition?) by driving away our allies and Arab countries whose support will be needed.

President Bush wanted to make sure that the 11 nations got the strongest possible word from the US in the form of the Vice President.  He did not want to risk possible "soft speak" or "a wink and a nod" from the Secretary of State.

By the next SPECIAL UPDATE, we should know a lot more about exactly what Cheney requested (or more likely demanded) from the 11 nations he visited.  At this point, it is not clear just how much support he engineered.

SPECIAL REPORT ON GOLD

Gold prices rose from $280 to above $305 briefly in early February.  This is nothing new; gold has done this several times over the last several years; and each time, the result has been the same.  Gold quickly retreats back to the $260-$280 range. 

This time, however, there has been more interest in gold than has been seen in many years.  Most analysts seem to be puzzled as to why there is so much new interest in gold.  I think the reason is simple: the stock market has been a tough arena for the last three years, and bonds have been beaten-up over the last several months.  People are looking for other places to invest.

Because of this increased interest in gold, we have prepared a new SPECIAL REPORT on gold.  In our latest 12-page Special Report, we look at the supply/demand factors, new developments on central bank selling of gold and other factors that affect the price of gold.  We look at the bullish case, the bearish case, the wild cards and the possibility that gold could remain in a trading range in our latest SPECIAL REPORT. 

We also look at the various ways you can invest in gold, ranging from bullion, to coins, to mining shares, to precious metals mutual funds.  We give you the pros and cons to each of these approaches.

To receive your FREE COPY of our latest report, simply click on the following words:  GOLD SPECIAL REPORT.  That will take you directly to the Report and you can download it.  Or you can click on the first link in the SPECIAL ARTICLES section below.  I hope you enjoy our unbiased examination of the forces affecting the yellow metal.

Finally, if you know someone who is a "gold bug," you are free to forward our Special Report to them.

HALF-CENTURY MARK

Your Editor marked his 50th birthday this week.  It's hard to believe I am really 50 years old!  I don't feel like it, but I have not been able to find any "funny math" to let me avoid it.  Oh well.

All the best,

Gary Halbert (aka, the Old Guy)

SPECIAL ARTICLES

Gold Special Report

http://www.profutures.com/gold/

Saddam says Iraq is ready for any attack.

http://www.mirror.co.uk/news/allnews/page.cfm?objectid=11697186&method=full&siteid=50143

Saddam pays $25,000 to families of suicide bombers.

http://www.mycfnow.com/sh/news/stories/nat-news-aptv-129901020020312-090307.html

Bush says we will take action against Iraq.

http://www.washingtonpost.com/ac2/wp-dyn/A22091-2002Mar13?language=printer


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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.

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