WHISTLING THROUGH THE GRAVEYARD.

I'm Not Afraid. Like hell I'm not. Its been a tough market and there are several sticky problems that just won't go away. This situation could be with us for awhile. On the other hand, there are some who are in a state of panic to the point that they believe that our country is rapidly declining and in danger of becoming a second rate power. John McCain's economic advisor Phil Graham said last week that we aren't in a real recession, just a psychological one. Shades of President Carter and his "crisis of confidence" speech. While I don't necessary agree with Dr. Graham, he has a point. This recession, like many others before this, is accompanied by a feeling of gloom and pessimism. While I don't want to understate the problem we're having, it may not be all that bad compared to others. I did a bit of research to compare our financial markets with several other large countries. You can draw your own conclusions as to how we are doing.

We Aren't The Only Ones With Falling Markets. Several of our clients have urged us to move money from the US markets to overseas markets, especially China and India. Here are some statistics to consider.
Using the S&P index as a guideline, our stock market has dropped 15.9% year-to-date.
The Chinese market has dropped 45.7%
India's market is down 34.9%
Great Britain is down 18.5%
France is down 27%
Germany is down by 23.7
So much for transferring our investments overseas. Our gross domestic product, while not growing as rapidly is more than the next three countries combined.

Even Gasoline Hasn't Increased That Much. We're all nervous about the high price of fuel and how badly it is going to affect our economy. In 1974 we were paying 40 cents per gallon. Now we're paying four dollars. Sounds horrible doesn't it. In fact, an increase of that magnitude amounts to only a 7% compounded rate of return. The real difficulty is that the increase has not been gradual but has occurred in the past 2-3 years. I sound like Phil Graham when I say that much of the impact has been psychological. We've stuck our heads on the sand and took advantage of unrealistically low prices. We squandered our money on great big cars and bought houses that were way too large and luxurious for our needs. Many, like myself decided they could have two homes. Its been fun but now we have to pay for it. Reminds me of a song written in the 70's when gas prices rose rapidly. It was written by Jerry Jeff Walker and entitled, "Goodbye Easy Street." We thought our way of life was ruined back then but it turned out not to be not such a big deal after all.

I Believe Oil Prices Will Come Down or Level Off. This will happen either for the wrong reasons or the right ones. The wrong reason will be a huge drop in demand due to a worldwide recession. The right reason will be similar to what occurred in the 1980's when the car companies increased the mileage of the cars they produced. Many small measures were taken by consumers to reduce their energy consumption and exploration and production activity increased dramatically. We can do this again. In addition, we can get serious about renewable energy sources.

All Is Not Sweetness and Light. I am aware of the seizure of Indy Mac Bank. I also know the Federal Reserve has announced strong measures to prevent the failure of Fannie Mae and Freddie Mac. This is unfortunate but not a total disaster. Remember the RTC (Resolution Trust Company) formed to deal with the Savings and Loan crisis of the late 80's. Strong measures are often called for and these don't mean that we are "going to hell in a handbasket".

My Investment Policy Remains Intact. 1. Emphasize investments that provide cash flow. 2. Increase cash allocation. 3. Re-invest prudently. I am currently diversifying into areas expected to be more recession resilient ( I bought Pfizer at 17.5 and a 7+% yield). We are buying REIT preferred stocks. (These have higher yields than most stocks and a preferred claim on earnings to be distributed as dividends). Like many others, I will spend more time at home. (I have virtually everything I want right here.) I will be back in Colorado at the end of August for an extended stay. Contact me by e-mail or call our office if you want to arrange a meeting.