The US economy remains soft overall, but a recession is not the most likely scenario for 2007.  Economic reports over the last month have been mixed, with slightly more on the positive side.  Consumer confidence rose sharply (up 3.7%) in December, although retailers reported that the holiday shopping season fell slightly short of expectations.  The Index of Leading Economic Indicators rose 0.1% in November (latest data available) for the third month in a row.  The ISM manufacturing index rebounded to 51.4 in December after hitting a low of 49.5 in November.  The unemployment rate remained very low at 4.5% in December, unchanged from the November level.

So, we remain in an economic slowdown which could last another quarter or two.  The final GDP report for the 3Q was revised to +2.0%, which is consistent with an economic slowdown, but is clearly not warning of a recession in the near-term.  GDP growth of only 2% suggests that the Fed will not be inclined to raise interest rates this year, and if the economic data remains on the soft side for the next couple of months, I expect the Fed to consider lowering rates later this year.

In this newsletter, I will summarize the latest forecasts for 2007 and beyond from The Bank Credit Analyst.  Like me, the BCA editors do not believe a recession is the most likely scenario this year, and that the economy will rebound in the second half of this year.  I think you’ll be surprised at their latest thinking on the stock markets.  See pages 7-8 for more details.

I will also introduce you to the latest professional money manager to make it onto our recommended list.  The Columbus High-Yield Bond Program, managed by founder Steve Landis, is yet another very attractive investment program for those looking to diversify their portfolios beyond traditional investments.  While past results are no guarantee of future results, I think you will be impressed with the Columbus High Yield Bond Program which is described in more detail on the following pages, complete with actual performance information.

I have often written about how we are always on the lookout for good money managers for our AdvisorLink® Program.  We search far and wide to identify Investment Advisors who have the potential to be included in our list of recommended Advisors, and then we track their performance while we take them through our stringent due diligence process.

I have also discussed how we continually monitor our existing Advisors in order to identify any potential problems in their performance or trading strategies.  If we deem an Advisor to be no longer suitable for our clients, we recommend that you pull the plug.  Since there is no guarantee that a money manager's future performance will be as successful as its historical track record, I think the ongoing monitoring service we provide is a critical part of AdvisorLink®. 

Sometimes, the Advisors we identify provide a new approach to the market by using a different strategy or trading in a different market than our existing AdvisorLink® Advisors.  Other times, however, new Advisors are chosen to take the place of an existing program that has a strategy or performance that we no longer consider to be beneficial or suitable for our clients. 

The Columbus High-Yield Bond Program (“CHYB”) falls into this latter category as we have found it necessary, in our opinion, to replace the Capital Management Group (CMG) high-yield bond programs because of performance and structure issues.  However, it's not a case of our making a hasty substitution.  The CHYB Program has been a solid performer in its own right, though past results are no guarantee of future returns. 

So, in the pages that follow, I will introduce you to the Columbus High-Yield Bond Program and its manager, Steven Landis.  If you are looking for a high-yield bond exposure in your portfolio, or if you are looking for a program with the potential of producing reasonable returns with minimal drawdowns, CHYB may be just what you're looking for.

Manager Background

Steven Landis, CFP, owner and founder of Landis Financial & Investment Services ("Landis"), didn't start out to be a successful money manager. Steve obtained his B.S. in Zoology from Ohio University, and then went on to get his M.S. in Occupational and Environmental Health from the University of Cincinnati.  Out of college, Steve put his knowledge of industrial hygiene to work first at various employers, eventually winding up working for the federal government.

In these positions, Steve had the challenging responsibility of handling health and safety issues at a nuclear weapons "recycling" facility, as well as general industrial environments. However, after years of fighting endless government bureaucracy and red tape, Steve decided that he'd had enough. He considered various career paths, and ultimately opted to join IDS Financial Services (now Ameriprise) as a Registered Representative.  Steve worked for IDS as a financial planner and general securities broker from 1983 to 1988.

While at IDS, Steve earned his Certified Financial Planner ("CFP") designation in 1987. As Steve grew in knowledge and experience, he found that the company's need to "promote" certain proprietary investment products did not always line up with what he thought was in the best interests of his clients.  (Note: I‘ve been there and done that.)

Steve's strong sense of doing what is best for the client led him to leave the "sales oriented" type of brokerage environment and strike out on his own in 1988.  Steve had learned that a buy-and-hold investment strategy could lead to large losses during market corrections, so to help his clients reduce the risk of being in the market, he did extensive research on active money management strategies.  Eventually, Steve developed his own proprietary approach, and in 1999 he began employing these active management strategies on behalf of his clients.  Initially, Steve focused on equity programs, but in October of 2002, he launched his Columbus High-Yield Bond Program that actively manages high-yield bond mutual funds.

The Columbus High-Yield Bond Program

The CHYB Program moves in and out of the high-yield bond market based on signals generated by Steve's proprietary methodology. Client accounts will either be 100% in the market or 100% out, with no graded or partial positions.  The CHYB Program does not currently “short” the market.

It is important to note that CHYB currently invests primarily in traditional high-yield bond mutual funds where a discretionary fund manager carefully evaluates and selects each bond issue. There are index mutual funds that seek to track the high-yield bond market, but Steve feels that the fundamental analysis employed by a traditional fund manager provides a greater potential for gain during up or sideways markets.

Steve may use a high-yield bond index fund in certain circumstances, but usually only for investors who come into the program close to the end of a buy signal.  Since the holding period is more likely to be short, putting new money into the index fund will prevent any early redemption fees that might result from moving the account to cash.

Steve's system uses technical indicators to determine the high-yield bond market's potential future movements. If his system indicates there is a potential for gain, the next step is to determine what high-yield bond mutual fund may have the best potential in the current market environment. Further technical analysis is applied on up to 30 high-yield bond mutual funds in an effort to select those with the greatest potential for gain.

The Program usually invests in one high-yield bond mutual fund at a time, though future growth may require the use of two or more funds. When Steve's proprietary system indicates a sell signal, he moves to the safety of a money market fund.

CHYB does not use leverage in its trading activities. It also does not anticipate using specialized mutual funds to short the high-yield bond market, though Steve does reserve the right to use such funds as a "hedge" if necessary to escape early redemption fees now being charged by many high-yield bond mutual funds. To help control risk, Steve employs trailing stop orders that close out trades should losses exceed a certain percentage of market price.

The Case For High-Yield Bonds

With the increased volatility in the stock markets the last few years, many investors have been looking for alternative investments that have delivered good past returns with potentially lower risk and volatility.  The Columbus High-Yield Bond Program seeks to provide this type of performance by actively managing high-yield bond mutual funds.

Steve has found that, over the years, high-yield bonds are typically less sensitive to day-to-day swings in interest rates than government bonds. High-yield bond price movements also tend to be less volatile than higher quality "investment grade" corporate bonds.  Historically high-yield bonds have had a relatively low correlation to government and investment grade bonds.  Steve believes that this historical stability and low correlation help to offset some of the increased credit risk inherent in high-yields.

Because of the low historical correlation to both investment grade corporate bonds and stocks, adding high-yield bonds to your portfolio may be a good way to reduce overall risk. The Columbus High-Yield Bond Program seeks to reduce this risk even further by moving into the market when Steve's system indicates there is a potential for gain, and going to cash when the risk of loss is high.

Performance Evaluation

The goal of the CHYB Program is not to "beat the market," though this may occur from time to time. Instead, it seeks to provide near-market returns with less risk. From the historical performance information on the following page, it is evident that CHYB has attained its goal in the past, though past performance is not necessarily indicative of future results.

We feel that one of the primary advantages of the CHYB Program is its ability to access traditional high-yield bond mutual funds. These days, many active money managers are opting for index mutual funds or exchange-traded funds (ETFs) that offer unlimited trading and no early redemption fees. We feel that Steve's use of primarily traditional high-yield bond funds allows him to leverage his active management skills with the bond selection skills of the fund managers.

See the performance information on the following page for more comparisons and detailed monthly returns. All performance information is provided net of all fees and expenses. Past performance is not necessarily indicative of future results. Be sure to read Important Notes on page 6.

The Trading Platform

Since Steve's business operation is essentially a one-man shop, he has formed a business relationship with Purcell Advisory Services of Tacoma, Washington, with whom we are also associated.  Steve communicates his trading signals to Purcell each day, and they execute the trades and maintain client accounts. Purcell is highly experienced when it comes to providing back-office operations for professional money managers, and currently does so for another AdvisorLink® Advisor we recommend.

Client funds are held in individual accounts at Trust Company of America (TCA), and clients have online access to their accounts via the TCA website. Both TCA and Purcell Advisory Services issue quarterly statements, and TCA produces year-end tax reports. 

The minimum account size for the CHYB Program is $50,000. TCA charges a Custodial Fee of 1/10 of 1% of the account balance (10 basis points). Management fees are billed quarterly in advance, based on the following annual percentages for various assets under management: 

First $500,000.........................2.50%

$500,000 to $1 million............2.25%

Over $1 million.......................2.00%

It is important to note that all performance information shown on the following page is net of all fees and expenses, including the above Management and Custodial Fees.

Conclusions

We feel the Columbus High-Yield Bond Program may be a suitable investment choice for the investor who wants to have an actively managed high-yield bond portfolio exposure. It may also be appropriate for investors who want an allocation to a  program with a past record of low correlation to stock and investment grade bonds, or those who want an investment with a reasonable historical return with low drawdowns.

As always, I have my own money invested in the Columbus High-Yield Bond Program.  I believe it is a good replacement for a program like Capital Management Group which we no longer recommend. 

If you have questions or would like to talk to one of our experienced Investment Consultants about how the Columbus High-Yield Bond Program may fit in your portfolio, please give us a call at 1-800-348-3601, or e-mail us at info@halbertwealth.com.  You can also learn more about this program on our website at www.halbertwealth.com.

IMPORTANT DISCLOSURES: Halbert Wealth Management, Inc. (HWM), Landis Financial and Investment Services (Landis), and Purcell Advisory Services, LLC (Purcell) are Investment Advisors registered with the SEC and/or their respective 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. 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. HWM receives compensation from the Advisors in exchange for introducing client accounts to the Advisors. For more information on HWM or any other Advisor mentioned, please consult their respective Form ADV II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) and the Lehman High Yield Credit Bond Index were used. Both represent unmanaged, passive buy-and-hold approaches, and are designed to represent their specific market. The volatility and investment characteristics of these indexes may differ materially (more or less) from that of this program. The performance of the S & P 500 Stock Index (with dividends reinvested) and the Lehman High Yield Credit Index is not meant to imply that investors should consider an investment in the Columbus High Yield trading program as comparable to an investment in the "blue chip" stocks that comprise the S & P 500 Stock Index or the investments that comprise the Lehman High Yield Credit Index. Historical performance data from inception through December 2005 represents a tracking account managed by Steven D. Landis and audited by MoniResearch, an independent corporation, Steve Shellans, President. Performance from January 2006 forward is from an actual account in Purcell Advisory Services Columbus High Yield Bond Program. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Columbus High Yield Bond Program. The actual performance of your account may differ substantially from these results, based on several factors, including but not limited to, account restrictions, differences in transaction costs and other expenses.

Purcell utilizes research signals purchased from Landis, an unaffiliated investment advisor. The signals are generated by the use of a proprietary model developed by Landis. Assets in the program are allocated 100% to the appropriate high yield mutual funds or 100% to the money market according to the purchased research signals. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Columbus High Yield trading program. In addition, you should be aware that (i) the Columbus High Yield trading program is speculative and involves risk; (ii) the Columbus High Yield trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Purcell will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Columbus High Yield trading program's expenses will reduce an investor's trading profits, or increase any trading losses.

Any investment in a mutual fund or money market fund carries the risk of loss. Mutual funds and money market funds have 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. Returns illustrated are net of the maximum annual management fee of 2.5%, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. Individual account results may vary based on each investor's unique situation. No adjustment has been made for income tax liability. Performance for individual accounts may differ materially (more or less) from the results illustrated. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

Recession Not Likely This Year

In late 2005, BCA predicted that the US economy would experience a "mid-course correction" in the last half of 2006 and extend into the first half of 2007.  The first half of that forecast has come true.  GDP was 2.0% (annual rate) in the 3Q, down from 2.6% in the 2Q and 5.6% in the 1Q.  BCA expects the 4Q GDP number to be below 3% as well, and looks for similarly soft figures for the 1Q of 2007, with a recovery emerging by mid-next year.

BCA has been very consistent in their view that the most likely scenario is that this mid-course economic correction will not devolve into a recession, barring any major negative surprises.  So far, there is no reason to believe they are wrong, or that we will have another mild recession this year.  Beyond the first half of 2007, BCA sees another economic rebound - they don't speculate how strong, other than a return to GDP growth of 3% or above.

BCA believes that inflation will continue to trend lower in 2007, and that should give the Fed the flexibility to halt its interest rate hiking cycle, if it hasn't already.  Furthermore, the editors believe that inflation will tame to the point that the Fed will be able to lower short-term interest rates a couple of times in the first half of 2007.

As for stocks, BCA believes that the bull market will continue in 2007.  Their most likely scenario is that stocks will have another year like 2006 in 2007, with decent gains on the upside, but with continued high volatility on the upside and downside.  BCA also believes there is a potential WILD CARD looming in the equity markets this year, which I will discuss below.

As for interest rates, BCA believes that rates - both long and short - will be in a trading range in 2007.  This is not particularly good news for bond investors, but it is what it is - more of the same.  Likewise, BCA expects the US dollar to remain in a trading range for 2007.  As for markets such as oil and energy, precious and base metals, and other resource commodities, BCA continues to believe that we are in a long-term, demand-driven bull market that will see these commodity prices move higher than the highs seen in 2006.  However, in the short-term, BCA warns that precious and base metals and certain other resource commodities could get hit more on the downside - thus providing some good buying opportunities sometime this year.

BCA's Potential Wild Card For Equities

In the world we live in today, almost any forecast has to include some potential wildcards, caveats and risk factors.  Typically such wildcards and caveats are on the negative side: terror attacks, new wars, major government defaults, currency crises, financial/banking breakdowns, hedge fund debacles, market meltdowns, etc., etc.  All of these risk factors are a part of our world every day.  For most of these risks, the odds are fairly low of them happening, or at least it would seem.  Yet each of these risks is factored into market prices and investment valuations on a continual basis, at least as best as possible.

In all of BCA's forecasts, they also include all of the caveats noted above, as they cannot be ruled out.  But BCA has always been good about suggesting what they consider to be the "most likely scenario" in case no major negative surprises occur.  BCA's most likely scenario is what I have summarized above for 2007 and beyond.  However, BCA subtly makes a point regarding yet another Wild Card that could rear its head in 2007, and this is a point I have seen no other market research group make, at least among those I follow.

There is currently a flood of global liquidity.  Space does not allow me to elaborate at length, but suffice it to say that a combination of windfall oil profits and the excess personal savings rates in Asia and elsewhere has created a monumental level of global cash looking for a place to invest. BCA believes there is the potential for a huge influx of this global cash to the US this year, when it is clear we have avoided a recession, and thus there is the real possibility that this potential tidal wave of cash could drive US equity prices into yet another bubble on the upside.

This may or may not happen.  BCA is just warning us not to be surprised if it does.  If it does, it could mean another potentially huge leg up in the ongoing bull market in US equities.   

To Ride, Or Not To Ride, The Equity Bubble

Many analysts, and most investors I talk to, were surprised by the strength in the equity markets in 2006 - even though BCA predicted that stocks would rise all year.  What with oil prices soaring and the Fed raising interest rates in the first half of the year, and with the economy slowing down in the second half of the year, most people did not expect the market indexes to take off on an upward rampage in the last half of 2006 that sent the Dow Jones to a new all-time high.  The 2006 bull market in equities also occurred at a time when the war in Iraq turned deadlier and public opinion on the war turned negative, so much so that the Democrats swept both houses of Congress in the mid-term elections.  Even that didn't phase the equity markets.

So, despite a lot of real and perceived negatives, stocks moved higher than most anyone expected in 2006.  The Dow Jones Industrial Average gained over 16%, and the S&P 500 climbed over 15% in 2006.  While some analysts argue that US stocks are overdue for a downward correction, BCA believes that such a correction would likely be limited, in large part due to the continued influx of global capital to these same markets.  And as discussed just above, BCA also believes that we could see the influx of global capital accelerate this year, especially if it becomes clear the US will avoid a recession.

Most of the investors I talk to are under-weighted in stocks and equity mutual funds.  Most have been in this position for the last several years, in many cases having never gotten fully back into stocks and equity mutual funds since the bear market of 2000-2002.   Investors in this position have left a great deal of money on the table since the current bull market began in 2003.

This brings up a difficult decision for many investors, especially in light of BCA's forecast for another positive year in equities, and the possibility that we could see another equity bubble in 2007.  Yet despite that forecast and BCA's long and enviable history, many investors are likely to conclude that it's just too late and too risky to move back to a fully-invested position in equities.  A major reason for this hesitance, I believe, is the memory of how many nest eggs were wiped out in the tech bubble that burst as we entered the new millennium.  I think investors do see the potential for participating in up markets, but fear that they may not get out in time if the markets start to decline.  Thus, some will decide to just stay on the sidelines and continue to watch.

There is, of course, an alternative.  You can invest with the professional money managers Irecommend that use “active management” strategies that are designed to be IN the equity markets when the trend is up, and OUT or HEDGED when the markets are trending  lower.  Obviously, these systems are not perfect, and past result are no guarantee of future results.  However, Ibelieve most investors would be well served to have a portion of their portfolios with active managers such as those I recommend, especially given that negative surprises can occur at any time - especially with the Democrats running Washington and new tax policies that can impact the markets.

If you are under-invested in stocks and/or mutual funds, Ihighly recommend that you consider the professional money managers Irecommend, especially in light of BCA’s suggestion that we could see another bubble in equity prices later this year.  The minimum investment is $50,000 (although some programs are higher). To get started, give us a call at 1-800-348-3601, or e-mail us at info@halbertwealth.com.  You can also learn more about all of the managers Irecommend on our new website at www.halbertwealth.com.  Don’t procrastinate!

WISHING YOU PROFITS IN 2007!!