The economic recovery is undeniable to all but the gloom-and-doom crowd. 1Q GDP was revised downward from 5.8%, but only to 5.6%, well above expectations once again. Based on reports released over the last two months, growth should be at least 3-4% for the 2Q and perhaps even higher. Industrial production rose again in the latest report. Talk of a "double-dip" recession is all but gone, at least among credible analysts. About the only negative news over the last month was unemployment which rose to 6% as has been widely expected.

Barring more major terrorist attacks, the economy is set to expand for the next several years. In their latest analysis, The Bank Credit Analyst suggests that the US economy will expand for the next decade, although not without some periodic setbacks along the way. This can occur, they predict, even in the face of a falling US dollar (so long as it falls gradually).

BCA continues to believe stocks will trend higher in the second half of the year. They continue to recommend stocks over bonds. The stock markets have all the ingredients in place for a bull market - stimulative monetary policy, lots of cash on the sidelines, low inflation, rising consumer confidence and improving earnings - yet the markets continue to languish. This is disappointing, but it makes the case once again for market timing.

In this issue, among other things, we will examine the issue of consumer debt. For months now, we've been told that consumers are "tappedout" with record debt. As you will see, there is plenty of evidence indicating that consumer debt levels are not as troublesome as many would have you believe, which explains how the economy has rebounded so strongly.

Along with this abbreviated issue of Forecasts & Trends, we have included our latest SPECIAL REPORT on GOLD. This new 12-page Report gives you an unbiased look at the bullish factors, the bearish factors and the wild cards that could affect the price of gold. Investors are rushing into gold now, but will they be disappointed once again (as they have for the last 20+ years)? I suspect they will. In our SPECIAL REPORT, we offer a strategy to make money whichever way gold prices move.

Growth Slowing, But Still Strong

Many analysts believed that the government's estimate of 1Q GDP growth, up 5.8% (annual rate) was a bogus number that would be significantly revised downward. Yet in the second report, the Commerce Department only reduced the number to 5.6%. The third and final number should be very close to that. So, despite all the predictions to the contrary, the economy was indeed very strong in the 1Q.

Since March, the economic reports have been overwhelmingly positive. Manufacturing has expanded for the last five months in a row. Capacity utilization (factory operating rate) is up to 75.5%, the highest in four months. The housing sector has set new records. Durable goods orders are up significantly. Auto sales have been strong, despite all the concerns over the zero interest deals last year. Consumer confidence has continued to rise and thus, consumer spending and retail sales have been strong. About the only negative news was unemployment edging up to 6%, which was widely anticipated. Unemployment always lags the recovery.

Only the gloom-and-doom crowd is denying these strong developments. Most of their negativism is based on the high debt levels of US consumers. But as discussed in last month's issue, the level of consumer debt is greatly overstated. Another point the naysayers make is that the US dollar is going to collapse. While that can't be categorically ruled out, the dollar is over-valued, and a gradual decline is the more likely outcome. Along with a collapse in the dollar, the gloom-and-doom crowd pathologically promises another crash in the stock markets.

Short of another major terrorist attack, the gloom-and-doom crowd will once again be wrong, just as they have for the last 20 years or longer. They entirely missed the greatest bull market in history (1982-2000), but this time they promise they're right. The fact is, gloom-and-doom sells, whereas a positive outlook does not. That's why they keep sending all that junk mail and flooding the Internet. . . Oh well.

BCA's Latest Forecast

As usual, BCA's long-term forecast is much more optimistic than the junk that graces your mailbox or the scary predictions you see on the Web. In their latest report, the BCA editors predict the following (assuming no more major terrorist attacks, major wars, etc.):

1. The US economy will average growth of 3-3½% over the next 5-10 years. Specifically, they project that US productivity will increase by 2-2½% per year on average over the next decade, and the labor force will grow by 1-1½% on average over the same period. They do expect periods of economic slowdown or even a mild recession or two along the way. Despite that, they say: "Thus, it is reasonable to expect long-run economic growth in a 3% to 3½% zone."

2. They expect interest rates and inflation to remain low over the next year. While the editors fear that the Fed may wait too long in tightening monetary policy, and hence inflation could be a mild problem by this time next year, they believe interest rates and inflation will remain low for the next year.

3. They expect the stock markets to trend higher over the next year, or at least until the Fed starts tightening monetary policy significantly. They will recommend increasing equity holdings when the major market indexes rise above their 200-day moving averages. Beyond the current "window of opportunity" in the next year or so, the BCA editors believe that stock and bond returns will be below their historical norms over the next 5-10 years. If you recall, it is precisely this long-term outlook that led the editors to recently recommend market timing strategies for equity investments going forward. This was the first time I can ever recall that BCA recommended market timing for equity holdings.

4. The editors continue to advise below normal holdings of bonds and recommend corporate bonds over Treasuries. While they expect interest rates to remain generally low over the next year, they still believe that Treasuries are overvalued for now.

5. While the US dollar is currently oversold, the editors expect a continued, gradual decline over the next year. A decline of apprx. 20% from the peak over the next year or two is what they consider most likely.

6. The BCA editors turned mildly bullish on gold a couple of issues back, but they have not made any prediction as to how high the yellow metal will go. On a short-term basis, the editors feel that gold has become overbought in the last few weeks, and they warn that the market could reverse sharply at any time, especially if geopolitical tensions should ease.

Conclusions

Long-time readers of this newsletter know how highly I value BCA's opinions and forecasts. I know of no other economic and financial research firm with a record that matches BCA's when it comes to calling major turns in the economy and the stock and bond markets. This does not mean, however, that BCA is perfect. Sometimes, they are early (or late) in making their calls. Despite that, their record is superior to any others I have seen over the last 25 years.

As you have just read, BCA continues to believe that the US economy is in a long-wave upturn, and that growth will average 3-3½% over the next 5-10 years. Again, this assumes no more major terrorist attacks and no major wars. Given the current environment of excess liquidity, they believe stocks will rise for the next six months to a year, or until the Fed gets serious about raising interest rates. They recommend increasing equity holdings when the major market indexes rise above their 200-day moving averages.

They believe that the US dollar is oversold currently, but that it will continue to fall gradually over the next one to two years. And lastly, they believe gold is in a bull market (how high, they don't speculate), but that gold is currently overbought and could have a nasty sell-off or two before resuming the uptrend.

What Could Go Wrong?

As noted above, it has rarely been a profitable move to go against BCA's forecasts. In this case, however, even the BCA editors themselves admit that their positive long-term scenario could be too optimistic. Obviously, the threat of more terrorism still looms. The government has been issuing new terror threats just about every other day for the last few weeks. We don't know how real, or how likely, these threats are. Some have suggested that the government is so gun-shy now that it is issuing warnings about even the weakest intelligence information regarding possible threats. The point is, we simply do not know.

There is also the looming threat of a major war between India and Pakistan. Defense Secretary Donald Rumsfeld is headed to the region this week in an effort to head-off what could be a disastrous conflict. There is an al Qaeda connection in this India/Pakistan situation. As you probably know, there are high level al Qaeda cells based in Pakistan, and they now consider President Musharraf an ally of the United States. There are numerous strategic reasons why al Qaeda wants a war with India, even if India should win. Space does not permit elaboration here, but I will do so in an upcoming SPECIAL UPDATE. The point is, the threat of war is very high in that region. Once again, we do not know if it will happen.

These threats and others on the domestic side could derail BCA's more optimistic long-term forecasts. But this is nothing new or unusual. There have been other negative threats and potential surprises that could have derailed BCA's prescient predictions over the last 25 years I have been reading them.

Investing In An Uncertain World

In the post-911 era, the potential for negative surprises is certainly higher than it was before September 11. Yet as investors we cannot put all of our money under the bed. We all have financial goals, whether they be a comfortable retirement, saving for kids' or grandkids' education, or other objectives. Most of us do not have the luxury of being able to put all of our money in CDs, T-bills or other so-called "safe" investments. All kinds of statistics show that Baby Boomers are far behind in saving for their retirement.

BCA has recommended that investors consider market timing strategies to deal with the uncertain markets conditions we now face. I couldn't agree more.

Two Market Timing Programs To Consider

Many previously successful market timers have struggled over the last two-and-a-half years of bear markets. A few, however, have done well despite the awful market conditions. In recent issues of F&T I have written about Niemann Capital Management. Niemann has done an outstanding job of dealing with the bear market. Take a look at their recent numbers:

1999 2000 2001 2002

Niemann +26.9% +29.1% +5.4% +5.0%

S&P 500 +21.0% -9.10% -11.9% -7.1%

These performance numbers are for Niemann's "Risk Managed" program and are net of all fees and expenses. The 2002 return is as of May 31. As you can see, Niemann has beaten the S&P 500 in good markets and bad. Most impressively, they have done this with a worst-ever drawdown of less than 10%. (Past performance is not necessarily indicative of future results.)

If you have not looked at Niemann, I seriously suggest that you do. BCA thinks there's one more good leg up in the stock market over the next year, then to be followed by several years of below normal returns. You will need a professional like Niemann that has a history of making money even when the stock market is down. Niemann's minimum is $100,000. Call us today for more information on how to get started.

Another market timing system that has done well, even in this bear market, is Potomac Fund Management's "Fidelity Conservative Growth" program. Like Niemann, Potomac's program has been profitable over the last several years and has beaten the S&P 500 handily during the bear market. Potomac's minimum is only $15,000.

If you have money on the sidelines, or you're tired of trying to do it on your own, I highly recommend these two programs.

Gold Special Report

We have prepared a 12-page, comprehensive, unbiased Special Report on gold, which is included with this newsletter. We examine the bullish factors, the bearish factors and the wild cards that will drive gold prices in the weeks and months ahead. You will find this Special Report to be very straightforward, easy to read, and you can draw your own conclusions.

As you know, gold prices have now risen to the highest level since 1999, and many gold stocks are soaring. Right now, gold prices are being driven higher, not primarily by specific supply/demand fundamentals, but because investors are searching for any alternative to traditional stocks and bonds. This new love affair could continue. Given that gold is a relatively small market, prices could be pushed considerably higher if more and more investors throw in the towel on stocks and bonds and jump on the gold bandwagon.

The problem is, without strong supply/demand fundamentals (as you will read in our Report), the new bull market in gold will be fraught with periodic downturns. While the new bull market may continue, I don't view it as a buy-and-hold kind of investment. You will need to take profits now and then. Unfortunately, most of us aren't good at doing that. This is why I recommend Dorset Financial Services which has a gold timing program utilizing the Rydex Precious Metals Fund. Dorset has an excellent track record, even in the boring gold market of the last several years. Call us for more information.

Special Updates & Newsletters Online

I continue to write several e-mail Special Updates each month with lots of unusual topics and analysis. You can receive them free of charge by subscribing at our website www.profutures.com. You can also receive our newsletters more than a week earlier on our website. We automatically send you the Special Updates, and we send you an e-mail when the latest newsletters are posted online. Check it out!