The economic growth rate slowed in the 4Q but still managed to grow at a 4% annual rate according to the Commerce Department’s preliminary report in late January.  That followed the red-hot 3Q gain of 8.2% (annual rate).   Some of the economic reports released in January were consistent with the slowdown in GDP, but overall the data continue to point to a firm economy in 2004.  The unemployment rate fell to 5.6% in January, and new jobs created were the highest in three years. Most economists still expect growth to be in the 4-5% range for all of 2004.

The Bank Credit Analyst remains very optimistic about the economy for 2004 and even beyond as discussed at length last month, barring any major negative surprises.  They expect that the Fed will have to raise interest rates at some point this year but only by a modest amount.  The Fed paved the way for a rate increase at the late January FOMC meeting, but such an increase is not likely until mid-year or later.

BCA continues to forecast higher equity prices this year, but they do not expect the markets to match their gains in 2003.  This seems to be the prevailing view for stocks in general.  While 2004 may not be a repeat of last year, and will almost certainly be more volatile, we should not rule out the possibility that stocks will again surprise on the upside this year.  

In this issue, I focus on the performance of two of our recommended stock mutual fund programs - Niemann Capital Management and Potomac Fund Management.  Both of these professionally managed programs had an outstanding year in 2003, and also beat the S&P 500 Index over the last three, five and seven-year periods.  I also review the performance of Capital Management Group, our recommended bond fund program.  CMG also had a fantastic year in 2003.  Details are on the following pages.

In my weekly E-Letters last year, I predicted that the 2004 election season would be one of the “ugliest” on record.  That prediction is certainly coming true!  This month, I look at some of the prevailing political issues - the economy, tax cuts, Iraq, WMDs, the War On Terror and others - and give you my thoughts on those and the election.  See pages 7-8.

The professionally managed mutual fund programs I have most recommended over the last two years had outstanding performance in 2003.  The performance results below are for Niemann Capital Management, Potomac Fund Management and Capital Management Group (CMG) over various holding periods. 

Niemann and Potomac invest in well-known stock mutual funds, while CMG invests in large, diversified bond funds, as discussed in more detail below.   As you can see, Niemann and CMG have two different programs that we recommend.  I will discuss the differences below.

These are their ACTUAL results in real accounts for 2003 and the three, five and seven-year averages (net of all fees and expenses), along with the S&P 500 Index and Lehman Brothers T-Bond Index for comparison purposes. 

** Central Plains Advisors is another
bond fund manager that we recommended in years past before we found CMG.

      Past performance is not necessarily indicative of future results.  The programs shown above are not suitable for all investors.  See “Important Disclosures” below.

Your eyes aren’t fooling you (nor am I)!  Again, these are ACTUAL performance results in real accounts managed by these Advisors, after all fees and expenses were deducted.  Niemann, Potomac and CMG all had a great year in 2003, and all handily beat the market indexes shown over the last three, five and seven year holding periods.  In the next couple of pages, I will briefly describe these successful managers and their highly recommended programs.

Niemann Capital Management

Niemann had one of their best years ever in 2003, and they handily beat the S&P 500 Index in every period shown.  They even made very respectable returns during the bear market in 2000-2002 when they averaged over 8% annually during that very difficult period. 

As shown above, Niemann has two different equity mutual fund programs that we recommend.  Both are based on the same proprietary fund selection system.  Niemann’s “DYNAMIC” program is normally fully invested in selected mutual funds and moves among funds in various market sectors (“sector rotation”).  Niemann’s “RISK-MANAGED” program is virtually identical to the Dynamic program, except that Risk-Managed will move partially or fully to the safety of a money market fund if the system signals that overall market conditions are too risky. 

Obviously, Niemann’s upside returns have been very impressive, but that is only half of the story.  Niemann has also been able to limit its losing periods (drawdowns) during difficult market periods such as the recent bear market.  In Niemann’s “Risk-Managed” program, the worst-ever losing period was -17.2%; in the “Dynamic” program, the worst-ever loss was -20.4%.   While these drawdowns occurred during the recent bear market, compare them to the S&P 500’s worst losing period of -44.7% and -77.1% in the Nasdaq, which also occurred in 2000-2002.

During sideways or down markets, Niemann can  move into mutual funds that have a more defensive strategy, or they can move 100% to cash.  In the last few years, Niemann has used so-called “short” funds to partially hedge their long positions during downturns.

Niemann invests in large, well-known mutual funds including Fidelity funds.  Fidelity is where client accounts are established and held.  The annual management fee is 2.3%. The minimum account is $100,000. (See “Important Disclosures” below.)

Potomac Fund Management

Potomac has been successfully managing mutual fund portfolios for many years and was one of the first managers we selected in the mid-1990s to recommend to our clients.  Potomac’s “Conservative Growth” program had one of its best years in 2003, gaining 21.7%.  As its name suggests, this program is not designed to be one of the top performers every year, but rather seeks to deliver steadier gains without the wild swings so common in the major market indexes.  As noted above, the seven-year average return was just over 12% with a worst drawdown of only 8%. 

Potomac’s system seeks to find the stronger mutual fund sectors during market uptrends.  They select from hundreds of popular funds.  During sideways or down markets, Potomac moves into mutual funds that have demonstrated the ability to limit losses, or they can move 100% to cash.  In the last few years, Potomac has also begun to use so-called “short” funds to partially hedge their long positions during downturns.

Potomac can be an excellent choice for more conservative investors who want a professionally managed program that has the flexibility to hedge against losses or move fully to cash in a downward market.  Potomac is also a good complement to Niemann which is more aggressive.  Client accounts are established and held at Fidelity.  The annual management fee is 2.5%. The minimum account is $25,000. (See “Important Disclosures” below.)

Capital Management Group

As we entered 2003, I was convinced that the economy would rebound, perhaps strongly.  My best sources agreed.  History has shown that long-term bonds usually suffer during economic recoveries.  Yet investors were herding into Treasury bonds and related mutual funds in the first half of 2003.  I warned repeatedly during this time to lighten up on bonds, especially Treasuries.  Instead, I recommended that investors consider high-yield bond funds. High-yield bonds historically do well during economic recoveries.

I specifically advised that readers seriously consider Capital Management Group (CMG), our recommended bond fund manager.  CMG specializes in large, diversified high-yield bond funds offered by several well-known mutual fund families.

As noted above, CMG has two different high-yield bond programs we recommend. One is called their “MANAGED” program, and the other is their “LEVERAGED” program.  The Leveraged program is the more aggressive of the two. Both programs use the same proprietary fund selection system.  Both can move partially or fully to the safety of a money market fund if market conditions become too risky. 

As you can see in the actual performance results above, CMG had another outstanding year in 2003, at the same time when many investors were frustrated in Treasury funds.  Because of CMG’s active management, their returns have rivaled those of stock mutual funds over the years.  Perhaps “rivaled” is not the proper word, since CMG’s returns shown above beat the S&P 500 Index handily over the last several years. 

But even more impressive than CMG’s returns on the upside is their remarkable ability to limit downside risk.  In CMG’s “Managed” program, the worst-ever losing period (drawdown) was only -3.3%.  In the “Leveraged” program, the worst-ever loss was only -7.3%.   Again, these are the worst periods in CMG’s history of managing these programs. 

Treasury bonds have exhibited far greater volatility than CMG.  The worst-ever losing period in the Lehman Brothers Treasury Bond Index was -19.2% in 1980/81, along with losses of -11.7% in 1994 and -13.7% in 1987.  While not devastating, these significantly greater losses must be weighed against the disappointing returns in T-bonds in recent years.

It is rare to find upside returns like CMG’s (+11.7% and +14.8% average over the last five years) in a bond program.  It is even more unusual to find a bond program with such limited losing periods.  In fact, we’ve never seen another one like it.

Yet despite CMG’s outstanding performance record, many investors are still hesitant to invest in high-yield bonds, also known as “junk bonds.”   Even though CMG invests in large, highly diversified and well-known mutual funds, some investors won’t consider them seriously.  It is true that high-yield bond funds have greater risks than certain other mutual funds and are therefore not appropriate for all investors.  But for investors who understand the risks (and are suitable), CMG can add some real octane to their investment portfolios.  

Finally, it is not too late to get started with CMG, even after the outstanding year they had in 2003.  The economy is still growing and as a result, high-yield bond funds should still have upside potential.  CMG is off to another strong start this year, with nice gains in both programs in January.  CMG accounts are held at Trust Company of America.   The annual management fee is 2.25%.  The minimum account is $25,000.  (See “Important Disclosures” below.)

How To Invest Following
A Hot Year Like 2003

The bull market in equities in 2003 was typical of what happens following bear markets.  There have been nine bear markets since WWII.  According to a  study by BCA, the S&P500 Index rose an average of 36.1% in the first year following the end of those bear markets.  In 2003, the S&P500 Index rose 28.7%, consistent with historical standards.   Just as important, in the second year following bear markets, the S&P 500 gained an average of only 8% (not including 2004 since we don’t know yet) .  This doesn’t mean stocks can only go up 8% in 2004; it just means the risks are higher now after following the big year in 2003.

What this says to me is that it is now more important than ever to have at least a  portion of your equity portfolio invested with professional managers who can either hedge their positions or move partly or fully to cash if market conditions warrant. 

The same goes for bonds, in my opinion.  With the economy continuing to improve, Treasury bonds and other high-grade bonds may struggle again this year.  Yet high-yield bonds, which tend to do well during economic recoveries, could have another strong year.  This is why I continue to recommend CMG.

If you have not taken a serious look at the professionally managed programs featured in the previous pages, maybe now is the time to do so.  Call us at 800-348-3601 or visit our website at www.profutures.com.

Time To Add To Your Accounts

For those of you who had accounts with Niemann, Potomac and/or CMG last year, Irealize I am “preaching to the choir.”  You saw your accounts jump in 2003 as shown on the previous pages.  You know the value of having professionals manage a part of your money.  Given that, let me suggest that now may be a good time to consider adding to your accounts.

If BCA is correct, we probably have another year or two when the stock markets have a good chance to make some additional gains, and could even surprise on the upside yet again.  If the economy continues to grow, high-yield bonds also have the potential to do well over the same time.  Even if these forecasts are too optimistic, keep in mind that Niemann and Potomac have implemented “hedging” strategies using short funds in the last couple of years to help control the downside risks.  CMG, of course, could hardly improve on its downside record! For these reasons and others, you may want to add to your accounts.

Money Floods Into Mutual Funds,
Chasing The Hot Returns In 2003

It never seems to fail.  Investors herd into stock mutual funds after the market goes up and its performance is hot.  They dump them when the market is down, often selling near the lows.  Purchases of stock  mutual funds have exploded again in recent months as investors became aware of the hot returns most equity funds posted last year. 

Last month (January), for example, an estimated $40 billion poured into equity and balanced funds - a monthly inflow level not seen since the height of the great bull market in February 2000, according to data from Strategic Insight, a fund researcher.  This came immediately after investors learned that the average “growth” fund gained just over 30% in 2003.

Net inflows to US mutual funds last year rose to almost $300 billion, the highest amount in seven years as investors flocked back following the stock market's recovery.  Much of this money came in during the last few months of the year after the market was up significantly.  What else is new?

In this case, there is something new: the mutual fund scandals of 2003 .  The mutual fund scandal broke wide open in early September when New York Attorney General Eliot Spitzer blew the whistle on several prominent mutual fund families for allegedly allowing after-hours (“late”) trading and other illegal activities by certain large customers.  The scandal continued to draw increasing attention in the months after Spitzer’s initial announcement.  By late last year, at least 20 mutual fund companies were under investigation.  The final fallout is yet to be determined.

There were widespread fears last year among mutual fund families that investors might be so disgusted and distrustful that they would pull enormous amounts of money out of the funds.  Yet as you just read in the paragraphs above, investors poured more money into mutual funds in 2003 than at any time in the last seven years - even including the go-go bull market years in the late 1990s.  While they were fearing the worst just a few months ago, today most mutual fund families are licking their chops!

Yet as discussed on the previous page, the stock markets maye not repeat the lofty returns of 2003 this year.  If the history of mutual fund inflows of money is any indicator, the wave of investors who herded in during the last few months will be greeted with a difficult year in 2004.  That is not to say stocks won’t be higher at the end of this year, but it does suggest it could well be a rocky ride with some potentially significant downturns along the way.

This again argues for professional management of at least a part of your equity portfolio.  In my own case, I prefer that most of my equity portfolio is in the hands of professional Advisors who can either “hedge” their long positions with short funds, or move partially or fully out of the market if conditions get too risky.

Important Disclosures For
Programs Discussed On Pages 2-4

Whenever I write about the investment programs we recommend and include specific performance numbers, there are various required disclaimers that must be included.  Please read the following.

ProFutures Capital Management, Inc. (PCM) and the other advisory firms discussed above are Investment Advisors registered with the SEC and/or their respective states. Some Advisors are not available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. This publication is not intended as personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. PCM receives compensation from Niemann (NCM), Potomac Fund Management (PFM) and CMG in exchange for introducing client accounts. For more information on PCM,  NCM, PFM and/or CMG, please consult PCM Form ADV II, NCM Form ADV II, PFM ADV II or CMG Form ADV II. at www.profutures.com or call us at 800-348-3601 for complete information.

Gary D. Halbert has accounts in each of the programs illustrated above, and other officers, employees, and/or affiliates of PCM may also have investments managed by the Advisors discussed herein or others.

Returns illustrated above are net of the maximum Advisor management fees, custodial fees, mutual fund management fees, and other fund expenses such as 12b-1 fees. Dividends are reinvested. Performance is based on actual accounts which are considered representative of the majority of client accounts with similar investment objectives. To the extent possible, PCM has attempted to verify the performance by examining selected customer account statements and/or independent custodian statements, and by comparing to the performance in Gary Halbert’s accounts with each Advisor. However, since only selected accounts were analyzed there can be no assurance that the performance in these accounts was consistent with all others. In all cases, performance histories reflect a limited time period and may not reflect results in different economic or market cycles.

Individual account results may vary based on each investor’s unique situation. No adjustment has been made for income tax liability. Performance for other programs offered may differ materially (more or less) from the programs illustrated. Investment returns and principal will fluctuate so that an investor’s account, when closed, may be worth more or less than the original investment. Any investment in a mutual fund carries the risk of loss. Mutual funds carry their own expenses which are outlined in the fund’s prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. 

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

As a benchmark for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends) and
the Lehman Brothers Long Term Treasury Index repre-sent an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of the S&P 500 or other benchmarks cited may differ materially (more or less) from that of the Advisors.

The individual account performance figures for Capital Management Group reflect the reinvestment of all dividends and capital gains, and are net of applicable commissions and/or transaction fees, CMG investment management fee, and any other account related expenses. In calculating account performance, CMG has relied on information provided by the account custodian. The CMG Risk Management Plan is a technically based strategy. The performance illustrations are based on actual account performance from 2000 to present (Trust Company of America client accounts), and the results from November 1992 to 2000 are based on actual trade signals applied to the funds. The above accurately reflects the blended results of an assumed investment in the funds when applying CMG’s actual trade dates for the period indicated and under the conditions stipulated when applying the risk management techniques to the actual price movements of the funds. The results shown are net of CMG’s 2.85% annual management fee.  CMG invests in various high yield bond funds.  High yield bond funds have greater risks than many other mutual funds and are therefore not suitable for all investors. This illustration should not be construed as an indication of future performance which could be better or worse than the period illustrated.

The “Bush Haters”

During 2003, Iwrote several articles in my weekly E-Letter about the increasingly ugly trends in national politics, especially among the Democrats.  Late last year, as the presidential campaign was starting to heat up, I predicted that 2004 would be the meanest, ugliest election year many of us have ever seen.  As the weeks tic by, that prediction is proving to be true. 

Whether it’s a Republican or a Democrat in the White House, there are always the “fringe” groups on the far right or far left that spew hatred and venom against the President.  Yet the crowd of “Bush Haters” has expanded to the point that it now includes even many mainstream Democrats.   The Democratic leadership has done nothing to stem this movement, and some would argue they have even encouraged it.

I remember how many conservatives, including myself, loathed Bill Clinton during his eight years in office.  However, even many conservatives like me had to acknowledge that Clinton was one of the best pure politicians ever to come down the pike.  We also acknowledged that Clinton veered from his very liberal leanings to the middle ground on numerous issues in order to deal with the Republican Congress.  The point is, that aside from the fringe groups, most of us didn’t “hate” Bill Clinton.   Speaking only for myself, there were actually  times when I wished the Republican leadership had been as smart as Clinton.

For whatever reasons, there seems to be almost no acknowledgment on the Democrat side that Bush has done anything good.  Even his leadership just after 9/11 and his handling of the War On Terror have been attacked viciously by the Democrats, the media and of course, the Bush Haters.  This has occurred despite the latest polls in January showing that over two-thirds of Americans support Bush’s handling of the War On Terror and believe we are “safer” as a result of his leadership.  Yet these public polls have been ignored by the Democratic leadership and the presidential wannabes.  They continue to attack Bush, not only on national security issues, but also on a very personal level.

Tired, Old Arguments & Lies

Aside from the personal attacks, the Democrats are using the same tired, old arguments against Bush.  Every day, they claim that the economy is in shambles, and it is all Bush’s fault.  They never admit that the recession unfolded in early 2000 when Clinton was still in office.  Likewise, they never acknowledge that GDP soared 8.2% in the 3Q, the fastest pace in 20 years.  And they refuse to mention that unemployment has fallen and job growth is now on the upswing.

Bush’s tax cuts, of course, were a disaster, and they would have us believe that only the “rich” got a tax cut.  Excuse me, but ALL Americans who pay taxes got a tax cut!  Likewise, the Democrats claim it was the tax cuts which caused the huge budget deficit.  And the Democrats are even criticizing Bush for being a big spender.  On this issue, there is some merit (see below), but how ironic is it that the Democrats would criticizing anyone for being a big spender??

These are just a few of the arguments and lies the Democrats are using to advance the hatred of Bush.

The Misguided War & WMDs

Howard Dean vaulted to the head of the pack of  Democratic wannabes with his attack on Bush for the war in Iraq.  Dean was outspoken about his opposition to the war, calling it misguided and unnecessary.  He pinned responsibility for the 500 dead US soldiers solely on Bush’s shoulders, despite the vote in Congress to approve military action against Iraq.  Dean opened the door for other Dem candidates to openly criticize Bush over the war.

Dean was also among the first to claim that Bush lied to the American public about weapons of mass destruction in Iraq.  This ignored the fact that many prominent Democrats were on the record that they believed Saddam Hussein had WMDs.  These names include Bill and Hillary Clinton, John Kerry, Dick Gephardt, Joe Lieberman, Wesley Clark and others.

As we are now coming to learn, at least some of the intelligence Bush relied on regarding WMDs in Iraq was probably in error.  Actually, some of the critical intelligence Bush relied on came from British sources.  Even British Prime Minister Tony Blair believed there were stockpiles of WMDs in Iraq.  This whole WMD issue is far from resolved, and will remain in the news for months to come.  Yet the Democrats want us to believe that Bush knew there were no WMDs in Iraq, and that he purposely lied to the American people.   This completely ignores the fact that many prominent Democrats believed there were WMDs in Iraq.

“Blood For Oil?”

Remember how the Democrats and the media claimed we were only going to war in Iraq to confiscate the oil fields and the vast underground reserves? Remember the headlines: “Blood for Oil?”  The story was that Bush was sending US troops to die so that he could “give” the oil to his cronies at Haliburton and other big corporate sponsors.  Some Americans, especially on the left, actually believed this hogwash.

As should have been obvious all along, the American people paid for the war in Iraq, just as we have paid for every other war.  The Blood For Oil rhetoric was just another in the string of lies.

The Big Question: Is America Safer?

We can argue honestly about whether the war in Iraq was the right thing or not.  There are intelligent people who genuinely believe it was a mistake, and there are arguments on that side.  We can also argue about whether America is safer today, now that Saddam Hussein is locked away.  Icontinue to believe that the war was the right thing to do.  There is no question that the Iraqi people are safer today.  And I believe America is safer.  So do over two-thirds of Americans based on the latest polls!  How much safer is yet to be known. 

There are also  those on the left, including some of the Democratic presidential wannabes, who are arguing that Bush has overblown the threat of additional terrorism in the US for political purposes.  The Dems are being very cautious so far in advancing this point, but they are pushing it out there.  The truth is, no one knows for sure how great the terrorist threat is today.  Just because there hasn’t been another attack since 9/11, that in no way suggests that Bush has overblown the threat, and we should not let down our guard.  Will it take another attack to convince these people?

Bush has certainly made his mistakes, and he has  irritated even many within his conservative base.  For political reasons, he tried to capture several key Democratic issues: steel tariffs, the farm bill, Medicare, etc.  The Bush administration failed in communicating about the war in Iraq and WMDs.  If the intelligence was wrong, they should have emphasized that plenty of prominent Democrats believed it as well. 

Bush has made his mistakes, and some conservatives are disgruntled.  Yet I believe the fundamental election issue will come down to the question: Is America safer and should we let down our guard?  The latest polls show that over two-thirds of Americans believe America is safer, and that Bush has done a good job in the War On Terror.  I agree.  Yet none of the Democratic wannabes have any use for continuing this war.  As far as I can tell, any of the contenders at this point would bring our troops home as soon as possible.  And the War On Terror would once again become just so much “talk” as it was under Clinton.   

I believe conservatives will vote for Bush in November, despite his missteps.   The Bush Haters will obviously vote for whoever is the Democratic nominee.  The battleground is for those in the middle.  They will decide who wins in November.  By default, they will decide whether to continue the War On Terror.  I predict it will be a close election.  For national Security reasons and others, I hope Bush wins.