The Commerce Department revised 1Q GDP upward to 4.4%, and most economic reports released over the last month were again encouraging.  The ISI manufacturing index rose again in May for the 12th consecutive month.  Unemployment is really improving with almost 1million new jobs created in the last three months.  Clearly, the economy is gaining momentum.   The Consumer Price Index rose 0.3% in the latest report and was 2.3% higher than a year ago.  With inflation rising and the improvement in employment, most analysts now believe the Fed will raise short-term rates by 25 basis points at the end of this month.  Maybe so, we’ll see.

The stock markets have continued in the broad trading range.  As I will discuss inside, there are good reasons to expect the equity markets to finish the last half of the year on a strong note - even if the Fed raises rates, which is already widely expected and discounted.  In presidential election years since 1900, the Dow has gained an average of almost 11%.  I continue to argue that you should be fully invested in stocks now, especially with the professional Advisors we recommend.  The boom in the economy should also boost high yield bonds this year, while Treasuries are likely to continue to underperform.

We also look at the surge in oil prices and whether this will short-circuit the economic recovery.  The short answer is NO.  Families earning $50,000 or more a year spend only 3.7% of their income on energy to heat/cool their homes and to drive their cars according to the DOE.  Plus, I also make a case for why oil prices could come down in the near future.

This month, we also look at new polls that show Americans are more optimistic than in many years, despite the constant negative drumbeat from the mainstream media.  One prominent new poll shows just how liberal the mainstream media is as compared to the general public - probably no surprise to my readers, but noteworthy nonetheless.

Finally, I pay my respects to former President Ronald Reagan and share with you what he has meant to me personally.  I believe he was the greatest president of my lifetime.  The mainstream media has been kind to him so far, but that is almost certain to change.  What else is new?

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.

Oil Prices &The Economy

Oil prices soared to new record highs recently 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 (http://www.balancedenergy.org/) which focused on how much American families spend on energy.  The study found that families making $50,000 or more  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 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.   Most people don’t think that will happen until after the peak summer season, but commodities have a long history of not doing what the crowd expects.

Longer-term, Higher Prices Lie Ahead

While oil prices will come tumbling down at some point, Iwould be remiss not to also point out that we have a serious long-term energy problem.  World production of oil is expected to peak, depending on who you read, between 2005 and 2010.  Yet global demand for oil is on a steady increase with no end in sight.  Again depending on who you read, we are discovering new oil finds of only 3-4 barrels for every 10 barrels consumed today.  Most of the new discoveries are small.  No Saudi-type finds have been made in over two decades.

The US consumes apprx. 20 million barrels of oil per day, over half of which is imported.  Over  the next decade, imports are projected to rise to 70% of US consumption.  We could drill in ANMR but full production there is estimated to reach only 1.4 million barrels per day, and it would take several years to reach that point.

So, while oil prices may take a tumble in the coming months, Iwould not expect prices to fall below $25 a barrel.  Longer-term, oil prices are almost certainly headed higher, perhaps much higher.  Space doesn’t permit this month, but I will discuss this more in a future issue.

The Latest Harris Poll

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 earlier this month 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% 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 and elsewhere. 

The Liberal Media Exposed

A recent poll by the well-respected Pew Research Center was conducted between March 10 and April 20 and was based on interviews with 547 national and local news reporters, producers, editors and executives across the country.  The survey asked media reporters to describe themselves as “liberal,” “moderate” or “conservative.”  

Now before we look at the numbers, I must tell you that the term “liberal” has been largely shunned by the media for the last several years.  For the most part, only those on the far left admit to being liberals.  The rest of the liberal crowd has chosen to call themselves “moderates” in an effort to mask their true leanings and avoid criticism by conservatives and others.  Simply put, when you hear the word moderate, think liberal when it comes to the media.  

Here are the latest Pew survey results of the media versus that of the general public:

Surprised? You shouldn’t be. Over one-third (34%) of the national media admits to being liberal.  That’s up from 22% in a similar survey nine years ago.  88% are either liberal or moderate, and remember that moderate has become the new code word for liberal.  Only 7% describe themselves as being conservative. 34% liberal to only 7% conservative - that’s nearly a 5 to 1 ratio!

The general public, on the other hand is 33% conservative and 41% moderate (74% total). Many in the general public consider the term moderate in its traditional meaning - neutral or fair - as opposed to its cooption by the national media in recent years.

Another interesting finding of the poll was the responses they received when they asked about the press' treatment of President Bush.  A whopping 55% of the national press believes the media has NOT been critical enough of the president, while only 8% of the national media believes they have been TOO critical of the president. This compares with 34% of the general public who believe the press has been too critical of the president.

What planet are these people from? Don't they watch their own broadcasts or read their stories?

The latest Pew survey on the media has a lot more interesting data in it.  You can view all this  for yourself by going to their website at http://people-press.org/reports/display.php3?PageID=829.

There are those who argue that there are plenty of conservatives in the media, including Rush Limbaugh, Sean Hannity, William Saphire, Peggy Noonan, etc. The difference is they all admit they are conservative - it’s a well-known fact. They don't pretend to be non-partisan, or neutral like many members of the mainstream press do. If you listen to Rush, you clearly know the information you’re getting is from the conservative point of view. He doesn’t pretend to be otherwise. The same goes for most newspaper editorials; you know it’s someone’s opinion; and you generally know whether the writer is liberal or conservative.

Obvious Examples of Bias

There are many, many examples of the liberal bias that are pretty obvious.  Just watch the three major networks’ evening newscasts (ABC, NBC, CBS).  Their motto seems to be the same: “All Negative Iraq News - All the Time.”  

Rend Rahim, the Representative of the Iraqi Governing Council to the US, recently said about the Iraq coverage in the US, “the reality is nothing like what you see on television.”  She said the U.S. coverage was “extraordinarily one-sided.”

When was the last time you saw a report about the good things happening in Iraq?  It’s not that there is a lack of good news from Iraq. In fact, there are literally hundreds of press releases detailing the significant progress being made in Iraq, but the press is too busy rehashing stories of prisoner abuse at Abu Ghraib Prison and pushing their liberal anti-Bush agenda. If there’s a vehicle on fire anywhere in Iraq, you’ll see pictures of it on the national evening news.

Why do a positive story when they can focus on the negative, especially with an election coming up?

If you aren’t aware of the many good things going on in Iraq, check out the Coalition Provisional Authority website at http://www.cpa-iraq.org and then go to the “Press Room” section, and then to “New releases.” You’ll be amazed at all the positive things happening in Iraq, things the liberal press doesn't want you to know about.

Another excellent source for information on the liberal media bias is the Media Research Center at http://www.mediaresearchcenter.com. This is one of my favorite websites, and I receive their daily e-mail alerts on media bias.

During roughly the same time period as the Pew media survey (March 23 through April 15), MRC’s analysts reviewed all interview segments on the three network morning shows (ABC, NBC and CBS).  Amazingly, during that period, the three shows conducted 20 interviews with relatives of 9/11 victims who were critics of President Bush, and only 3 who were pro-Bush.   Neither ABC nor CBS featured ANY interviews with pro-Bush 9/11 relatives! If the lopsidedness of 20 anti-Bush versus 3 pro-Bush interviews doesn't convince you of the liberal bias, I don't know what will.

Like a well-trained hunting dog, the press seems to have a sixth-sense when it comes to sniffing out anti-Bush critics and putting them on the air.  Whether it be at a Young Republicans convention in Omaha, or a busy market in Baghdad, if there's someone who has something negative to say about Bush, you can be assured, they'll find them and give them plenty of air time to tell everyone else why they should hate Bush. In our diverse culture, it's not hard to find somebody that's against anything.  However, to present these people as being representative of the much larger general public group is simply wrong. Yet they do it shamelessly every day. 

Of course, Irealize that these revelations come as no surprise to most of you reading this.  Most of our clients are conservatives or moderates, and you are probably well aware of media bias.

A Summer Rally

In the May 11 issue of my weekly 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 that time, the Dow Jones was below 10,000.  It has since rebounded (10,400 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 that could change a great deal 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. 

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.

Action To Take

If you are still under-invested in equities, now may be a good time to consider investing with Niemann Capital Management and/or Potomac Fund Management.  As this is written, these two Advisors are essentially flat for the year, following their outstanding returns in 2003.  With the economy continuing to improve, now may also be a good time to consider investing with Capital Management Group.  Equity prices and high yield bonds should benefit from the stronger economy.

If you already have accounts with these Advisors, now may be time to add to your accounts.

What Ronald Reagan Meant To Me

I must take this opportunity to pay my respects to former President Reagan.  It was Ronald Reagan who 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 fall of the Soviet Union, the Iron Curtain, the Berlin Wall, the end of the Cold War, the top tax rate falling from 70% to 28%, his championing of free market economics, etc., etc.  These are just a few of the many accomplishments that make up Ronald Reagan’s giant legacy.  In addition, he was a man of such character, honor, 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.

As this is written, the media is in non-stop coverage of Ronald Reagan’s life, his presidency, his accomplishments, etc.  Almost 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.  Unfortunately, thay may be changing as Iwill discuss below.  Let us not forget that the media and most Democrats despised Ronald Reagan during his eight years as president. 

Not unlike our current president, many in the media considered Reagan to be an intellectual lightweight, and that he just happened to be in the right place at the right time.  Wrong on both counts.  When Reagan won the presidency, many believed he would ignite a new world war with the Soviets.  Wrong again.  Instead, he ended the Cold War without firing a single shot. Even after he left office, many in the media refused to acknowledge that fact.   Again, they maintain that Reagan just happened to be in the right place at an historic time.  They failed to mention the things Reagan said at the time.

In 1981, Reagan told the students and faculty at the University of Notre Dame: “The West won’t contain communism. It will transcend communism. We will dismiss it as some bizarre chapter in human history whose last pages are even now being written.”

In 1982, Reagan told the British Parliament in London: “In an ironic sense, Karl Marx was right. We are witnessing today a great revolutionary crisis. . . . But the crisis is happening not in the free, non-Marxist West, but in the home of Marxism-Leninism, the Soviet Union.”

Reagan added: “It is the Soviet Union that runs against the tide of history by denying freedom and human dignity to its citizens” and he predicted that if the Western alliance remained strong, it would produce a “march of freedom and democracy which will leave Marxism-Leninism on the ash-heap of history.”

In March 1983, Reagan gave perhaps his most famous speech - the “Evil Empire” speech - in Orlando at the National Association of Evangelicals convention.  He said:

“So, I urge you to speak out against those who would place the United States in a position of military and moral inferiority. You know, I've always believed that old Screwtape reserved his best efforts for those of you in the church. So, in your discussions of the nuclear freeze proposals, I urge you to beware the temptation of pride -- the temptation of blithely declaring yourselves above it all and label both sides equally at fault, to ignore the facts of history and the aggressive impulses of an evil empire , to simply call the arms race a giant misunderstanding and thereby remove yourself from the struggle between right and wrong and good and evil.

I ask you to resist the attempts of those who would have you withhold your support for our efforts, this administration's efforts, to keep America strong and free, while we negotiate real and verifiable reductions in the world's nuclear arsenals and one day, with God's help, their total elimination.

While America's military strength is important, let me add here that I've always maintained that the struggle now going on for the world will never be decided by bombs or rockets, by armies or military might. The real crisis we face today is a spiritual one; at root, it is a test of moral will and faith.”

In 1987, Reagan spoke at the Brandenburg Gate in West Berlin.  He said: “In the communist world, we see failure, technological backwardness, declining standards. . . . Even today, the Soviet Union cannot feed itself."   Thus the “inescapable conclusion” in his view was that “freedom is the victor.”

Then President Reagan spoke perhaps his other most famous words: “General Secretary Gorbachev . . . Come here to this gate. Mr Gorbachev, open this gate. Mr Gorbachev, tear down this wall.”

Not long after this, the wall did come tumbling down, and Reagan’s prophecies all came true. These were not just results Reagan predicted. He intended the outcome and implemented policies that were aimed at producing it.  In the end his objective was achieved.  Margaret Thatcher remarked a few years ago that Reagan would go down in history as the man who “won the Cold War without firing a shot.”

Yet as noted above, Reagan was denounced for his Cold War policies at the time by the media and many Democrats. They severely criticized him for all of the quotes I have listed above.  But now that he is dead, they are praising him. They cannot now ignore the great accomplishments of this very popular president, lest they lose all credibility.

Yet the question is, what will they say of him after he is buried this Friday? There are some who believe that the media and some of the more outspoken Democrats may change their tune after the funeral. Some on the far left began the attacks just after his death (see www.slate.com). Dan Rather and Bill Plante of CBS News were the first out of the network blocks on Monday, June 7th when they tried to link the 9/11 terrorist attacks with the Iran/Contra scandal during the Reagan administration. Plante said: “An arms control agreement with the Soviet Union refurbished President Reagan's image, but U.S.efforts to deal with the tough issues in the Middle East went on hold, helping to set the stage for the first Iraq war and the rise of Islamic fundamentalism.”  They just can’t help themselves!   They hated Reagan just like they hate George W. Bush.

May He Rest In Peace

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. I think it is most appropriate to end this discussion of Ronald Reagan, and this newsletter, with what the 40th President said in one of his last major appearances.  It was at the Republican national convention in 1988 when he said”

“I have always believed in you and in what you could accomplish for yourselves and for others. And whatever else history may say about me when I'm gone, I hope it will record that I appealed to your best hopes, not to your worst fears, to your confidence, rather than your doubts.”

He did.  What a leader.  God rest his soul.