The US economy grew less than expected in the 1Q, with GDP rising only at a 3.1% annual rate according to the Commerce Department.  Most other reports were mixed, suggesting that the economy may have hit another “soft patch.”  Yet consumer spending remains robust, so the economy should still manage a 3% pace for the next year, and no recession is in sight.

The Fed raised interest rates for the eighth time at the latest FOMC meeting, putting the Fed Funds rate at 3%.  But with the economy slowing a bit, the Fed may be able to end its rate-hiking cycle later this summer at the 3½% level.

If the Fed stops raising rates, this could present another excellent buying opportunity in stocks later this summer.  The next two FOMC meetings are in late June and early August, when we could see the Fed Funds rate at  3½%.  If they stop there, stocks could get a real boost.  But most people will miss the buying opportunity.  BCA continues to recommend market timing and sector rotation strategies for the stock markets.

Interestingly, the latest stock market advice coming from Wall Street is changing - at last.  Increasingly, the talking heads on the financial channels, and even some of the cheerleaders on Wall Street, are advising investors to become active traders of stocks.  With the stock markets stuck in a broad trading range, the talking heads are slowly abandoning their “buy-and-hold” mantra.  Now they say we need to use “active” strategies and buy and sell stocks on a short-term basis.   For most investors, this is a recipe for disaster!  I continue to recommend that you use professional Advisors who can get out of the market, or “hedge” their positions as needed.

You may not have heard about this, but Hillary Clinton’s former campaign finance chairman is on trial for fraud.  Allegedly, he under-reported the cost of a 2000 campaign event, which resulted in Hillary having a lot more “hard money” to spend on her Senate race.  The question is, did Hillary know?  The trial started this week, and it remains to be seen if this guy and the other witnesses will implicate Hillary - and possibly derail her aspirations to become the next president.  See pages 7-8 for details.

GDP Below Expectations

Economic growth was a bit slower than expected in the first three months of this year.  The Commerce Department reported last week that GDP rose at an annual rate of 3.1% in the 1Q.  Economists had expected a rise of 3.5% or better, so the latest report was a bit of a disappointment.  The latest GDP report followed a 3.8% annual rate in the 4Q and a 3.6% gain for all of 2004. 

Keep in mind that the latest GDP report was the first of three reports on 1Q economic growth.  It will be adjusted higher or lower in two subsequent reports, but it is apparent that the economy is slowing a bit so far this year, which is consistent with higher interest rates and soaring energy prices.

The latest Commerce Department report also showed that consumer spending remained buoyant in the 1Q, rising 3.5% versus 4.2% in the 4Q of last year.  Exports and housing activity remained strong in the 1Q, while business investment spending fell significantly and inventories rose in the first three months of the year.  Durable goods orders were unchanged in the 1Q.

The report also placed domestic inflation at a 3% annual rate in the 1Q as compared to 2.9% in the 4Q.  The year over year rate of domestic inflation still remains around 2%, however.  The latest inflation data in the GDP report has to concern Fed chairman Alan Greenspan, but there are reasons to believe the Fed will not have to raise interest rates as high as previously expected, as I will discuss below.

“Soft Patch” Or Is A Recession Looming?

The gloom-and-doom crowd no doubt relished the latest disappointing GDP report, and I’m sure they are already preparing new materials warning of the impending recession and a crash in the investment markets.  But the latest economic report should not come as any surprise for my readers.  In my weekly E-Letter on February 1st, I stated:

“Growth is not likely to match last year’s pace, but a recession does not appear to be in the cards as the gloom-and-doom crowd promises (over and over again).” 

As noted above, consumer spending remains strong, although not as strong as in the 4Q.  New home sales set another new record high in March.  Retail sales were up 0.3% in March and were up 5.8% over March 2004 according to the Conference Board.  Durable goods orders rose 2.8% in March (latest data available), and personal income was up 0.5% last month.

On the negative side, consumer confidence in April dropped for the third consecutive month.  The Index of Leading Economic Indicators fell 0.4% in March.  The ISM Index which measures manufacturing activity declined from 55.2 in March to 53.3 in April.  This was the fifth consecutive decline in the ISM Index, but keep in mind that any reading above 50 indicates a growing manufacturing sector.

Of course, the economy continues to face stiff headwinds in the form of rising interest rates and soaring energy prices.  Still, the Conference Board’s CEO Confidence Index rose in the 1Q, indicating that chief executives of major corporations expect economic growth to remain favorable this year.

The bottom line is that the economy should continue to grow this year with no recession in sight.  GDP growth should average around 3%. The latest data merely suggests we’ve hit another “soft patch.”  

Yet as discussed below, the latest softness in the economy may be good news with regard to interest rates.  The Fed may be able to end its series of interest rate hikes sooner than expected.

Fed Raises Rates For The 8th Time... But

As expected, the Fed raised interest rates an eighth consecutive time on May 3, putting the Federal Funds rate at 3%.   Recent statements by several Fed governors indicate that the Fed is not going to stop raising short rates anytime soon.  The minutes from the March 22 FOMC (Fed Open Market Committee) meeting indicated that the governors intend to continue raising rates at a “measured” pace – most likely in quarter-point increments at each meeting this year.

However, with the latest disappointing economic news, there is a good chance that the Fed will not have to raise rates as much as is currently expected.  The minutes from the March FOMC meeting indicate that the Fed governors anticipated stronger growth than we actually experienced in the 1Q, and they no doubt considered the latest economic reports at the FOMC meeting earlier this month.

While the Fed did not give us any clues in its public statement after the meeting on May 3, there may be a very good chance that the Fed Funds rate could top out at 3½% later this year.  That could be very good news for the stock markets as I will discuss below.

The next FOMC meeting is on June 29/30, and the meeting following that is on August 9.  If in fact the Fed stops raising rates at 3½%, the upward rate cycle could be over before the end of summer.  That, of course, will depend on how the economy is faring at that time and the level of inflation.

Ideally, the Fed would like to see the economy continue to grow at a rate of 3% or better, with inflation around 2% or below.  It remains to be seen if the Fed can make that happen, but recent action in the bond market is encouraging.  Treasury bond prices have been rising steadily since mid-March.  If inflation was poised to move significantly higher, we would not be seeing this kind of strength in the bond market.

Another Good Buying Opportunity In Stocks

Stocks have taken a beating since early March.  While the Dow Jones is still at the low end of the trading range over the last year and a half, the S&P 500 fell below its trading range.  The Nasdaq has been in a downtrend since the first of the year.  The Dow and the S&P have actually held up very well given the multitude of negative news in recent months – soaring oil prices, rising interest rates, higher inflation and the gradual slowdown in the economy.

But investors can only take so much bad news, and many decided to throw in the towel during the latest sharp decline.  Given that the S&P 500 has broken out of its trading range to the downside, I would expect the Dow to follow suit sometime over the next few weeks.  If the Dow falls below 9,700, the next level of good support is around 8,000.  The next level of good support for the S&P 500 is in the 1,050-1,100 range.

Should we get a selloff down to those levels later this summer, I believe that will present another good buying opportunity, especially if the Fed decides to lay off the interest rate increases once they reach 3½% in August.

If my line of thinking proves to be correct, the stock markets should bottom well before the August 9 FOMC meeting.  Stocks could have the potential for a meaningful recovery once the bottom is in. 

The news could be a lot more positive by August.  The economy may be coming out of the soft patch by then.  Oil prices could be lower as we near the end of the peak summer demand period.  In fact, as this is written, oil prices have already dipped below $50.  Likewise, the current concerns over rising inflation could be subdued by then.  And the Fed should tip its hand on interest rates by then, and I’ll bet that they stop raising rates sooner rather than later.  Thus the environment could be quite positive for stocks by the end of this summer.  

For those of you who are out of the market, or are under-invested in equities, you may want to pay more attention to the stock markets this summer in case the buying opportunity I envision develops.  Sadly, if I am correct, many investors will miss the buying opportunity this summer – more on this below.

If you are overweight in equities now (which you shouldn’t be if you’ve followed my advice), you may want to reduce your exposure now that the trend has turned lower.

Knowing When To Get Back In The Market

If you have read this newsletter for long, you know that one of my biggest issues is avoiding large losses in your investment portfolio.  I ‘preach’ on this issue at length and frequently (too frequently, some might say) but it is the key to investment success.  A few large losses in your portfolio can ruin your chances of reaching your retirement goals.

As I’ve also probably written too often, following Wall Street’s “buy-and-hold” strategy virtually assures that you will suffer large losses from time to time.  The stock markets go down periodically as we’ve seen in recent years (and in recent weeks).

While avoiding large losses is the #1 goal, in my opinion, there is another part of the equation – knowing when to get back in the markets and be fully invested.

A number of years ago, I was in Philadelphia conducting a due diligence visit on a professional money manager we were considering for recommendation to our clients.  I was in the office of the president and founder of the firm, asking my usual list of questions, when he related the following to me.  His point went as follows:

Investors think they pay us management fees to get them out of the market and avoid major declines.  But that’s the easy part.  Anyone can get out of the market.  The hardest part – and what investors really pay us for – is to get them back in the market so that they participate in the good times.  It’s much easier to design a system to get you out and avoid the bad times, and it is much more difficult to create a system that gets you back in the market for the good times.

This is such an excellent point, and for several reasons!  Over my 28 years in the investment business, I have consistently found that most investors tend to be overly cautious and frequently expect bad things – rather than good things – to happen in the markets.  In following, they tend to be much more attuned to jumping OUT of the market rather than focusing on when to be IN.

The buy-and-hold crowd loves to refute the “active management” strategies I recommend by touting various studies which show that if you miss some of the good (up) days in the stock market, your returns will suffer dramatically.  This is the cornerstone of their buy-and-hold argument, and many investors buy it hook-line-and-sinker – at least until a bear market comes along and they lose 20-30-40% or more.

What the buy-and-hold crowd purposely ignores is the equally important fact that if you can miss some of the worst (down) days in the market, you can also improve your investment returns significantly.  This is precisely why I recommend that you use professional money managers that have the flexibility to move out of the market (and/or hedge their positions) periodically to limit losses during bear markets and major downward corrections.

But as the money manager noted above points out, getting OUT of the market is only part of a successful strategy.  Having a strategy to get you back IN for the good times is just as important, and in his opinion, is the more difficult part of a successful investment program.

As you know, ProFutures serves thousands of clients all across the country.  In addition, my weekly F&T E-Letter goes out to over 1.5 million people every week.  As a result, we are talking to clients and prospective clients all the time.  Based on those conversations, we know that there are untold numbers of investors who got OUT of the stock market during the bear market of 2000-2002 but never got back IN to enjoy the good times in 2003-2004. 

Many people have been sitting on the sidelines since the bear market, earning next to nothing in money market funds, and are far behind in meeting their retirement goals with time running out.

Stocks Stalled In A Trading Range?

The latest Barron’s includes the results of the magazine’s twice-yearly survey of leading money managers across the country – the so-called “Big Money Poll” – and their predictions for the major investment markets, interest rates, etc.  The most surprising statistic in the latest survey is that 40% of the money managers polled believe the major stock indices (Dow, S&P, Russell) are going to remain in a broad trading range for the next year or longer.  They are neutral on the markets’ direction.  A neutral number that large has never happened before.   Normally a majority of the money managers polled is bullish.  Not today.

If this proves to be true – that the major stock indices will remain in a broad trading range - then it will be more important than ever to use active management strategies, such as those I recommend, that have the flexibility to be out of the market (or hedged) from time to time.

Many Wall Street types and the buy-and-hold crowd argue that it is impossible to “time” the stock market.  THEY ARE WRONG and they know it.  It is true that it is difficult to time the stock market.    It is true that most Investment Advisors who try to time the market don’t do it very successfully.  But it is also true that there are professional money managers out there who have timed the stock markets successfully for many years.  The problem is in finding those very successful managers.

Since the first of the year, I have introduced you to two highly successful money managers who employ active management strategies that appear well-suited to the current market environment -  Third Day Advisors and Scott Daly’s Asset Enhancement Program. 

Both of these managers have delivered outstanding results, with limited losing periods, through various market cycles, including the current one.  If you have not considered these managers, I highly recommend you call us at 800-348-3601 and request information on their programs.  Or you can go to www.profutures.com to see their actual past performance records, net of all fees and expenses.  (Past results are not necessarily indicative of future results.)

My advice is that you consider BOTH of these managers – especially in the current market environment – since their performance records have a very low (almost zero) correlation to each other. 

Conclusions

The economy has hit a soft patch, but there is no reason to believe that we are headed for a recession.  GDP growth should be in the neighborhood of 3% for all of 2005.  While the Fed raised interest rates for the 8th consecutive time, I continue to believe there is a good chance the Fed will end the higher rate cycle when the Fed Funds rate gets to 3½% in August, if not before, depending on the strength of the economy and if inflationary pressures cool off as I expect.

If I’m correct, there will be another excellent buying opportunity in the stock market sometime this summer.  Unfortunately, many investors will miss it once again.  Like the money manager noted above said, it is much easier to know when to get out of the market than to know when to get back in.  If you believe that the stock market will remain in a broad trading range, then you should definitely take a close look at Third Day and Scott Daly.

Abandoning Buy-And-Hold?

As discussed earlier, the major stock market indices have been in a generally sideways trading range for over a year now.  Over the last couple of months, it seems that the talking heads on the financial channels have concluded that this sideways trading range is likely to continue for some time to come.  Even the cheerleaders on Wall Street seem to be coming around to this view that the major stock markets may continue to go generally sideways.

So what do they recommend now?  That we all need to become individual stock pickers.  If the stock market is going to continue to go sideways in a broad trading range, then about the only way you can make money is by selecting those certain stocks that will do well even in a sideways market, or so we are told.  So forget trying to figure out which way the market is going, and just pick stocks that are currently out of favor but are likely to become the next darlings of Wall Street.  In other words, we all need to become short-term stock traders.

Don’t Become A Stock Speculator

As you might expect, I watch a lot of financial and investment programs on TV.  In recent weeks, an interesting trend has emerged.  Investment advice is starting to change.  Here’s how it goes: 

The stock markets are in a broad trading range, and they’re likely to stay that way.  As a result, you can’t simply buy a basket of stocks or an index fund and just sit on them for the long run.   No, the market has changed and you have to seek out under-valued stocks that are likely to go up more than the major averages, and then sell them when they come into favor.  

Sounds good, right?  No problem.  We all know how to do that, don’t we?  Of course not!  

Now, after almost a year and a half of telling us we should be fully invested in equities – because the market was going to go up – the talking heads now tell us we need to sell the stocks we bought on their former advice and become stock speculators.  We are now advised to go out there and find under-valued stocks that are likely to get over-valued sometime in the reasonably near future. 

We are supposed to be able to identify such under-valued stocks that are likely to go up sometime fairly soon, AND we are supposed to know when to sell them if they do go up.  Most people aren’t good at doing either!

Of course, most of these talking heads have several stocks that they recommend, but my experience is that, as a group, they are usually wrong about as often as right with their particular stock picks.  Interestingly, they almost never tell you what to do with their losers.  Losers are conveniently just forgotten about on most of these financial programs.

Their latest advice to become stock pickers is so flawed!  If we want to be perfectly honest about it, most of us are not good at determining the stock markets' overall direction (up or down), and most of us are even less capable of selecting the next "hot" stocks.  Even if we knew which stocks are likely to become the next winners, we wouldn't know when to sell them. 

So I beg to differ with the latest advice from Wall Street and the talking heads on cable TV.  Do not fall into the trap of trying to be a short-term stock trader.  Don't line the brokers' pockets with all those commissions.  It's a losing proposition for most of us.  And the losses can be large.

So the bottom line is, the latest market advice from Wall Street and the financial show talking heads - that you need to become a short-term stock trader - is a disaster for most of us.  Don't go there.

A Story You May Not Have Heard About

In my April 26 E-Letter, I included a link to a story about Hillary's former campaign finance chairman, David Rosen, being sued by the government for breaking federal campaign law in 2000.  I didn't write about it in the E-Letter at the time, but the story has since heated up. 

Last year, Rosen was indicted for deliberately reporting that the cost of an August 2000 Hollywood fundraising gala was only $400,000 when the actual tab was $1.2 million (or more) - which allowed Mrs. Clinton to spend an extra $800,000 (or more) in "hard money" for her Senate campaign. You may recall that Hillary and her opponent Rick Lazio had agreed to ban soft money, so both camps were scrambling to maximize their hard money.

Rosen’s criminal trial began on May 10.  Until recently, Rosen was expected to claim that it was just an honest mistake, and that Hillary knew nothing about it.  But new information has leaked out in recent days which suggests that this trial is going to get national attention at some point, and will no doubt be troubling for Mrs. Clinton.  It could even derail her plans to run for president in 2008.

The story revealed this week is bizarre to say the least.  The New Orleans Times-Picayune has reported on a transcript of a September 4, 2002, audiotape of a dinner conversation between Rosen and Ted Kennedy's brother in-law Raymond Reggie, who was wearing a wire. Reggie cooperated with the Feds in return for a reduced prison sentence for bank fraud.  [Those Kennedys are a special bunch aren't they!?]

At the reported dinner, Reggie got Rosen to talk about the Hollywood fundraiser in 2000.  According to the New Orleans Times-Picayune, which quotes from the Fed transcript of the audiotape: Rosen admits that the fundraiser cost more than he reported on the federal campaign forms; he even admitted that the gala could have cost up to $2 million as some of the Feds witnesses apparently allege, which would have meant that Hillary could spend an extra $1.6 million on her campaign.

The New Orleans newspaper goes on to report that, on the tape, Rosen told Reggie that he considered himself a “guinea pig” for the Clintons’ attorneys.   According to the paper, Rosen said:

"…the former Clinton White House wanted to hire, or to argue the [Rosen's] case in a certain way… And I did it for them. Like, I bit the bullet and went in as a guinea pig and argued their argument for me. Instead of freeing' and runnin' and coverin' my ass, I was a good soldier… So far it's worked out, but I coulda done it a lot different."

That was before Rosen was indicted by the government.  Things aren't working out for him now.  His criminal trial began on May 10, but few details have surfaced as of this writing.

The issue, of course, is whether Hillary knew about the alleged under-reporting of the cost of the event.  According to the article, the government has two witnesses that organized the event who will testify that Hillary DID know what the event cost. 

The New Orleans paper also says that Rosen told Reggie that he spoke frequently with then-President Bill Clinton - at least once a week - during Hillary's campaign, and that they regularly talked about how the fundraising was going. This raises the question of what Bill Clinton knew and what he may have told Rosen to do.  Both of the Clintons have a stake in this one.

As noted above, it was previously thought that Rosen would claim it was an honest mistake and hope for acquittal.  Now, however, if this taped conversation between Rosen and Reggie is for real, Rosen may have a different story.

Here's what columnist, and former Clinton advisor, Dick Morris had to say about it in a recent editorial in the New York Post:

"Did Hillary know? Paul and Tonken [event organizers and witnesses] say she did, and it seems obvious that she must have: Hillary followed every dime in her campaign, personally calling donors for most of it. How could she possibly not have known of a decision that saved her $800,000?

But the person who knows if she knew is David Rosen. If found guilty, he faces a potential sentence of 15 years. If the feds threaten him with jail - and it's hard to see how they wouldn't -Rosen faces a choice: Tell the truth or go to prison.

Rosen is no long-term Clinton loyalist like Webb Hubbell… And there is no Clinton in the White House to pardon him if he goes to prison. David Rosen is a young man in his late 30s, with a life ahead of him. He would be a fool to go to jail to protect Hillary."

I don't know how much of the information that has leaked out is accurate.  Likewise, I don't know if the trial will get much publicity, but I doubt it.  But we can rest assured that Internet Blogs will follow it closely.

As more information becomes available, it will be interesting to see if a Senate investigation will be called for.  You would think the Republicans would jump on it, since many are worried that no one in the GOP can beat Hillary in 2008.  We'll have to see.

Whatever happens, I find it more than a little interesting that a member of the Kennedy clan (Ted's wife's brother) was used to set up David Rosen and possibly implicate Hillary herself.  Wouldn't you like to know the real story behind that one!?

Late Update On The Trial

Just as I’m about to send this to the printer, Newsmax.com posts an article on the first day of the trial.  According to the article, the prosecutor said in his opening statements that he would not present any evidence that Mrs. Clinton knew about the alleged violation of campaign finance law.  This comes as no surprise to me, although it is interesting that he made such a point on the opening day of the trial.  But you have to believe that the Clintons have been in close contact with the prosecution, since this case has such potential to damage Hillary.

Yet it is not the prosecutor who would implicate Hillary in this scandal.   It’s the defense attorney for Rosen, and his witnesses, who have the goods on Hillary - if in fact she knew.  So, we’ll have to wait and see if Rosen and/or his witnesses implicate Hillary in this trial.

It would seem very likely that Hillary (and Bill) would have known about a campaign under-reporting that added $800,000 to $1.2 million to her hard money coffer.  But the question is, will it come out in court?  Will the witnesses implicate her and be credible?  I wouldn’t bet on it .  The Clintons have survived worse scandals than this one!

If this scandal doesn’t sink Mrs. Clinton, I think there’s a very good chance she will be the next President of the United States.  Barring a major surprise, she will have a lock on the Democratic nomination in 2008.  And the Republican bench is terribly weak: McCain, Frist, Giuliani, Jeb Bush, Ridge?? 

Some of my Republican friends insist that Hillary is not electable.  Sadly, I disagree.  Unless something happens to knock her out, she could indeed be president, at least based on the polls.