If you listen to the media, you would think that all of the economic news over the last month has been negative.  While there were several negative reports, there were also some very positive ones that were largely disregarded.  The economy has certainly slowed down since the hot 1Q, but we all knew that.  The question is, are we headed for a "double-dip" recession?  We'll discuss that a little later.

Ever since the stock markets plunged, and an estimated $8 trillion in wealth disappeared, economists have warned that consumer spending would go in the tank.  Yet it hasn't.  In fact, consumer spending has continued to grow despite the terrorist attacks and the stock market plunge.  Consumer spending accounts for well over two-thirds of GDP.  Thus, if Americans continue to spend, a serious recession is not in the cards.

There are some credible bears who now believe the United States is headed down the path of Japan, with a long deflationary recession to follow.  Yet there are some stark differences between the US today and Japan in 1990 when their bubble burst.  This month, we look at why such a scenario, while not impossible, is not likely in the US. 

It remains to be seen if the equity market lows reached on July 23 will hold.  I'm optimistic that they will, but it remains to be seen.  September is historically the worst month of the year for stocks.  This suggests that the next few weeks will present a buying opportunity, especially for dollar-cost averaging and professional market-timing programs.  I also continue to recommend that you look at Capital Growth Management's very successful bond timing program, which is a great compliment to an equity portfolio.  

On again, off again, it now looks like we're going after Saddam Hussein.  I think this is the right move before he gets even stronger and kills hundreds of thousands of innocent people. 

Also this month, I want to tell you about some exciting changes that are happening at ProFutures and, in particular, with our Special Update e-letters that I started writing just after September 11th.  We've changed the name to Forecasts & Trends E-Letter, and these periodic e-letters will soon be going to more than 1 million people. 

Special Updates Get Noticed

As you know, I began writing my e-mail Special Updates shortly after September 11 last year.  I started them because of all the concern and confusion surrounding the terrorist attacks, in an effort to bring you information you might not have been seeing elsewhere.  As the weeks and months passed after 911, I expanded the subject matter to a host of other topics.

As I have noted to Special Update subscribers several times over the last year, I never had any idea what path the Updates might follow, or even if I would continue them permanently.  All I knew was that I enjoyed doing them and, apparently, most of you enjoy them as well.  We are now up to over 3,000 subscribers.

The Special Updates are free, and I pulled my copyright protection so that anyone could subscribe and/or forward them to whoever they might choose.  So in addition to most of our clients who read the Updates, we now have many subscribers that we don't know from a man in the moon (at least not yet). 

Major Internet Publisher

Earlier this summer I learned that one of our Special Update subscribers is an Internet publishing firm which has been reading my e-mail Updates since shortly after I began writing them.  I was not even aware of this until they contacted me in late June.  The company publishes investment and related information by e-mail to over 1 million high net worth individuals all across America, and even some abroad.  Their subscriber base is growing rapidly.

The president of the company so likes my Special Updates that he has asked my permission to distribute them to their entire subscriber base.  Wow!  I have spent a good deal of time thinking about this offer, and I have recently agreed to let this firm publish my Updates starting later this month.  As this is written, they are targeting September 18 as the start date.

Updates Get A New Name, Sort Of 

We have never particularly liked the name Special Update.  Not very catchy or creative.  As a result, we are changing the name to Forecasts & Trends E-Letter.  The Forecasts & Trends name has served us well for many years, so we will use it as we are introduced to a much larger audience. 

Whenever I write an F&T E-Letter, the Internet publishing firm will send it to its 1,000,000+ e-mail subscribers on Wednesdays.  To make sure that our clients get the E-Letters FIRST, we will send them to you on TUESDAYS.   That way, you will see them before the larger audience does.  If I make recommendations, you will be able to act on them first.

Protecting Your Privacy 

Let me assure you that your issues of F&T E-Letter will continue to be sent to you FROM US.  Your name, e-mail address and information remain secure and CONFIDENTIAL with us and not the publishing company.  Actually, this was an interesting part of the negotiation.  The Internet publishing firm and I both wanted to check their huge subscriber base to eliminate any duplications with our clients.  They, of course, asked me to send them our much smaller client list, and they would do the de-duplicating on their computers.  But due to my ongoing promise to you to never sell, rent or otherwise share your name or information with anyone, I insisted that they send US their much larger list, and allow us to sort that list for duplications on our computers, not theirs.  They agreed. 

Other Changes With Our Newsletters 

I envision writing 3-4 F&T E-Letters per month, and I hope to keep them apprx. four pages in length, plus the usual links to "Special Articles" at the end.  Because my first and foremost responsibility is to our clients and our investment programs, I do not want to significantly increase my writing load.  Currently, we write two 8-page newsletters every month (16 pages), plus our various monthly reports and the Updates.

What we have decided to do going forward is to write our Professional Investing and Between The Lines newsletters on an "as needed" basis.  If we have information that we feel is important to you, we will publish these extra newsletters, but in some months we will only publish our original Forecasts & Trends newsletter.  However, when you combine the 3-4 monthly F&T E-Letters, plus the Forecasts & Trends newsletter, plus the periodic issues of Professional Investing and Between The Lines, you will actually be getting MORE information from us in most months than you do now.  Because I have other talented people at ProFutures who help me with the writing, my work load should not increase.

Since most of my writing will now be in the form of F&T E-Letters, the information you read from me will be much fresher than what you read in our newsletters.  It's often a week or longer after we write the newsletters before you receive them in the mail.

If you are one of our clients who does not use a computer, or you do not use the Internet, maybe this is a good reason to get started.  Be sure to read my letter which is enclosed with this issue of F&T.  In it, I tell you how it's not that hard or expensive to get started.

If you do use the Internet, but have not subscribed   to my E-Letters yet, I strongly recommend that you do so.    This insures that you get my latest thinking, and that of the various sources I quote and review, in the most timely manner possible.

Let Me Pre-Answer A Question

Every now and then, I get a letter or an e-mail asking, Why do you write about politics, geopolitics and other topics?  Or, Why don't you just stick to investments?  There are two answers.  First, I very much enjoy analyzing world events and the political scene.  In our annual random surveys, clients rank my political and geopolitical writings at the top of the content list.  Second, and even more important, I very much believe that politics, especially geopolitics, have major effects on the investment markets.  I believe that in order to be a sophisticated investor, you have to have a political view, be knowledgeable on the geopolitical front and various other issues that affect the markets, either directly or indirectly from time to time. 

Keeping My Eye On The Ball 

I would very much like to assure everyone that I will keep my focus primarily on our investment services.  Don't forget that I have the vast majority of my net worth (more than I would ever recommend to anyone else) invested in all of our programs.  I can't afford to take my eye off the ball. 

Also, remember that I have been writing the Special Updates for almost a year now and, all in all, our investment results have improved this year.  Most of our market timing programs have side-stepped most of the damage in the equity markets.  And our futures funds are all up double digits this year, with one up over 23% as this is written.  All of this has happened while I was writing 2-3 Special Updates each month, in addition to 16 pages of newsletters each month.

Finally, I can always cut back if ever I think the writing is negatively impacting my focus on our investment services, or if it ceases to be fun anymore.

I'm Pretty Excited 

I would be lying if I told you I'm not excited about having 1 million+ people reading my F&T E-Letters starting next week.  Obviously, I am pleased that a major Internet publisher would consider my work to be so valuable as to send it out to their huge audience of high net worth subscribers.  They think they will be up to 2 million subscribers over the next year. 

The publisher has not asked me to change a single thing about my writing or content.  I have carte blanche. In fact, the president said, "Please, don't change anything."  They will not edit a word of my text, not even the occasional typo here and there. 

Getting my name in front of a million or more high net worth people should be an opportunity for us to gain some new clients, although that will take a while, I'm sure.  But I want you to know that my loyalty and accessibility will always be with our EXISTING clients!  That will not change.

The Latest Data - Not All Negative 

If you listen to the talking heads on cable financial shows, you would think that all of the economic news over the last month or so was negative.  There were indeed several negative reports.  Perhaps the most negative was the Index of Leading Economic Indicators (LEI) which was down .4% in July (latest data available) and has declined in three of the last four months.  The indicator would suggest that the economy will slow further before turning around. 

The Conference Board's Consumer Confidence Index fell for the fourth consecutive month in August.  This led many analysts to conclude that strong consumer spending is about to come to a halt. 

There were several other negative reports in the last month, but the two discussed above were the most notable.  Nevertheless, the media made things sound much worse than they were.

There was actually quite a bit of positive news over the last month.  The following reports were released in August for the July period: 1) durable  goods orders rose 8.7%; 2) factory orders rose 4.7%; 3) industrial production rose 0.2% for the 7th consecutive month; 4) the manufacturing index was unchanged from June; 5) retail sales rose 1.2%; and 6) consumer spending was up 1%.  Auto sales and home sales were also strong in July. 

The Commerce Department released its second estimate of 2Q growth, which was revised upward from 1.1% initially to 1.5%.  This surprised most analysts.  Another surprise was the August unemployment rate which fell from 5.9% to 5.7%. 

Consumer Spending Continues To Rise

The latest data from the US Bureau of Economic Analysis shows that consumer spending has increased in every quarter but one since the beginning of 1999.  Only in the 3Q of 2001 - mostly before 911 - did consumer spending fall in any quarterly reporting period.  Even in the 4Q of 2001, just after 911, consumer spending increased.  In fact, it has accelerated sharply higher ever since 911.

What. . . you didn't hear about this in the media?  Not from the talking head shows?  Neither did I.  I found this data buried in the Wall Street Journal on August 12. 

We know that consumer spending accounts for at least two-thirds of GDP.  So, if consumer spending continues to rise, the economy is NOT going into a serious recession.  While this is very good news, it may run contrary to what you might have been thinking up to now.  Most economists believe that consumer spending is tied to consumer confidence.  Confidence is a factor, but not the overriding one.  It also runs contrary to the many theories that consumer spending would take a dive due to the recent plunge in the stock markets. 

What the data show, however, is that consumer spending is tied most directly to personal income, not the confidence index or the latest dips and curves in the stock markets.  As the WSJ admitted:

"By far the biggest driver of consumer spending is personal income, the $9 trillion a year flowing to U.S. households in the form of wages, salaries, interest, dividends and government payments.  This is what really determines how much the U.S. consumer will spend in the months ahead."

For many years economists estimated that personal income accounted for 75% of consumer spending, while the so-called "wealth effect" (from stock market and other investment gains) contributed only 25% to overall consumer spending.  But now, in light of the latest figures, the government's Conference Board estimates that personal income accounts for 90% of consumer spending. 

Bolstering consumers' willingness to spend more, in addition to rising incomes, is the continued rise in home values.  The latest report from the National Association of realtors showed that home prices nationwide rose 7.4% in the 12 months ended June.  Many major markets saw double-digit gains in home values, and several of the hottest markets saw gains of 20% or more in the last year.    

There is no doubt that the recent plunge in equity values has had a negative effect on consumer confidence.  Yet that has been more than offset by the continued rise in incomes and the appreciation in home values.  This could change, of course, but these figures suggest the economy is in much better shape than the gloom-and-doom crowd would have you believe.

BCA's Latest

In their September issue, The Bank Credit Analyst editors say they believe the economy will manage to stay positive for the rest of the year, barring any new negative surprises.  They expect corporate profits to slowly begin to improve and this, they believe, will lead to higher equity prices.  They feel there is a good chance that the July lows in the equity markets will hold.  They say they expect to recommend an "above average" position in equities soon, but they want to wait for more confirmation of a bottom before doing so. 

They continue to recommend "above average" holdings of bonds (corporate bonds, especially), but they warn that long-term interest rates could bottom-out and begin to move higher at any time, especially if the economy begins to expand at a higher pace.

The summary above is BCA's "most likely" scenario.  The editors caution, however, that there are still risks out there which could render this forecast too optimistic.  One of those risks is the threat that deflation could spread to the US from abroad.  Currently, inflation is only around 1% in consumer prices, and it has actually declined slightly this year in wholesale prices.  On balance, then, inflation is already near zero.  Obviously, it is easier to fall into deflation at these low levels than when inflation is running at a 3-4% clip.

The BCA editors believe that the Fed is very much concerned about a deflationary trend and will not hesitate to act quickly if they feel that deflation is taking hold.  The editors tell subscribers not to be surprised if the Fed cuts rates by 50 basis points at its September FOMC meeting.  Currently, the markets are hoping for a 25 basis point cut later this month.  BCA suggests that the Fed knows a 25 basis point cut would have only minimal results on the economy and the equity markets, whereas a 50 basis point cut would send a clear message that the Fed is very serious about reviving the economy and heading-off deflation.

While the editors are optimistic that we will avoid  a new deflationary cycle, they caution that if the economy languishes, with slow or no growth for 2-3 more quarters, that this would significantly increase the odds of deflation setting in.  This is precisely why they expect the Fed to be proactive in reducing interest rates further and increasing liquidity for the rest of this year.

In summary, BCA remains cautiously optimistic, especially if no new negative surprises occur.  They expect to alter their official investment position from "below average equities and above average bonds" to just the opposite - "above average equities and below average bonds" - very soon.

Many of you will recall that BCA was also cautiously optimistic about equities earlier this year.  That optimism was based on many of the same factors and assumptions they are relying on today: 1) economy will recover; 2) profits will rise; 3) the Fed will act aggressively if need be; etc., etc.  Yet as we all know, the equity markets fell off a cliff in May-July.

One clarification:  BCA has not changed its official investment recommendation on equities all year.  While the editors expected a rise in equities earlier in the year, just as they do now, their official recommendation has been "below average equities" all year.

Clearly, BCA was wrong in its forecast earlier this year, that equities would begin a slow uptrend.  This has led some clients to ask me if perhaps the BCA editors have lost their touch.  Actually, I have seen BCA err on its predictions on several occasions in the past.  They have been early or late on several economic and market calls in the past.  Despite that, they have been the most accurate at calling major turns in the economy and the markets of all of my sources over the last 25 years.  Obviously, I can't guarantee they will continue to be so accurate in the future, but they certainly have not lost my confidence.

Is The US Headed Down The Path Of Japan?

As we all know, Japan has been in a deflationary spiral for the last decade.  Their equity markets imploded in 1990, and Japanese stock prices have plunged almost 70% since the peak.  Currently, Japan is in yet another recession and, once again, their banking system is on the ropes. 

A growing number of analysts, including several I consider to be credible, are now predicting that the US is headed down the same path as Japan.  They predict that: 1) our economy will fall back into a recession which will last several years or longer; 2) Fed monetary policy will be unable to reverse the economic slump; 3) deflation will set in; and 4) equity prices will grind significantly lower for several more years. 

As always, the credible bears can make a compelling case for their forecasts.  Yet there are some important differences between Japan in 1990 and the US today.  Let's briefly review them. 

First, a few general observations.  There is a huge difference between the US and Japan, at least on the part of the people.  In Japan, they are habitual savers.  Much of their government intervention has been to try to get people to spend money on consumption.  In the US, we have the opposite problem; our population likes to consume more than save.

Japan has a real crisis with its rapidly aging population, with not enough young people to take their place.  In the US, even with the baby boomers moving into the age where they consume less and save more, we still have plenty of population left to spend money. 

Next, even though we've seen some corporate corruption in the US, it pales in comparison to Japan's.  Japan's banking system, for example, is a crooked "good-ol'-boy" network that is condoned, and even encouraged in some cases, by the government.  We don't have that here.  If we have overkill here, it will be on the side of restricting business, not abetting it.

Monetary officials in Japan were oblivious to the collapse and the deflationary threat.  They waited far too long before they acted to lower rates significantly and reflate their economy.  Couple that with their consumers' unwillingness to spend, and it was a recipe for a long, painful deflationary trend.  In the US, on the other hand, the Fed has acted very aggressively in its monetary policy, and American consumers are still spending aggressively as discussed on page 4.

Japanese banks, even today, are believed to be holding $300-$500 billion in bad loans that they refuse to write off.  As noted above, the Japanese government just looks the other way.  We don't have a bad loan problem remotely of that magnitude in the US due to aggressive banking regulation.

These are just some of the reasons why the US should avoid a decade-long, Japan-style recession and a powerful deflationary trend.   

Real Estate & Home Prices Are Key

While all of the comparisons above are important, there is one other difference which could hold the key to our fate, particularly as it relates to the economy, the stock markets and deflation in the US.  When the Japanese equity bubble imploded, so did property values.  Many of the bad loans at Japanese banks were made on property that is today worth only a fraction of the original loan value.

Property values have held firm in the US despite the recession in 2001, despite 911 and despite the latest slowdown in the economy.  Yes, there have been pockets in the country where property values have fallen somewhat, but overall real estate prices remain firm.  Nationally, the price of residential homes has increased by apprx. 7% so far this year.

The deflationists argue that it's just a matter of time before US real estate prices crack.  Once again, there are some compelling arguments that real estate prices are in a bubble, and that they will return to their historical valuations.  Maybe so, but as I reported in the July issues of F&T, the latest Harvard study revealed that the number of US households will increase by over 22% in the next 20 years.  Based on the demographics, that study concluded that while home prices might decline in the near-term, they will continue to rise over the long-term.

A Possibility, Not A Foregone Conclusion

The gloom-and-doom crowd has predicted a deflationary depression for at least the last 25 years that i know of.  Ignore them!  However, a growing number of credible analysts have concluded that a deflationary trend is unavoidable.  In following, they predict a return to recession, a plunge in real estate values and a lot more on the downside for stocks.

It would be naive for me to dismiss these predictions, especially with inflation at 1% or less.  Even BCA, which is still guardedly optimistic, admits that deflation could set in if certain things happen.  Yet at the same time, I believe it would be equally naive to assume that the worst has to happen.  We should not assume that if the economy dips into mild deflation, fora short period, that somehow guarantees that we will go into a serious recession.

Let's also keep in mind that the Fed is very much concerned about avoiding deflation.  If you go to the Fed's website and look under "working papers," you can find a study entitled, "Preventing Deflation: Lessons from Japan's Experience in the 1990s."  The Fed is committed not to make the mistakes of Japan.

I can't guarantee you we will not fall into a deflationary spiral.  But neither can the bears guarantee you that we will.  It's just a possibility, not a foregone conclusion.  Real estate prices hold the key.

Stocks: Record Redemptions - Is This A Sign Of A Major Bottom?

Stock mutual funds saw a record-large net outflow of $52.63 billion in July.  That followed June outflows of $18.28 billion. Bond funds had a record inflow of $28.14 billion in July, along with an inflow of $12.21 billion in June.  August figures are not out yet, but outflows from equity mutual funds are expected to have been very large once again last month.

Is this the classic "capitulation"?  It could be.  $70 billion out of equity funds in only two months is a huge number!  Compare that to September 2001 when $30 billion bailed-out in the panic after 911.  According to the Investment Company Institute that tracks mutual fund inflows and outflows, there is still apprx. $2.8 trillion invested in equity mutual funds.  Obviously, more money could come out, and probably will.  Yet if the July lows in the markets hold, it will mean that a great many investors sold at the bottom. 

The Best Times To Buy

88% of New York Stock Exchange stocks are trading below their 10-week moving average, indicating that they are aggressively oversold. Historically, the best recent times to buy were - September 2001, August 1998, August 1990 and October 1987- when 80%+ of stocks were below the 10-week moving average.  September is historically the worst month of the year for stocks, meaning it's often the best time to buy. 

As this is written, stocks are once again under pressure.  However, they have so far failed to fall below either the recent intermediate lows on August 5 or the major lows on July 23.  If these lows hold once again, the technical picture will become much more positive.  If so, we could see the beginning of a meaningful upturn, as suggested by BCA.

Also, it now appears that the US and its allies are going to attack Iraq. (more discussion on this below).  In January 1991, when the US attacked Iraq, the stock markets fell briefly, but then they staged a very powerful rally that lasted for over a year.  The same could happen just ahead.

I continue to recommend that the best way to participate in the equity markets is in market-timing programs.  Granted, even most market-timers lost money this year, but some of the programs we recommend are only down in the low single digits, far better than the market indexes.  If the market goes into an uptrend just ahead, our market-timers' performance could be very attractive over the months ahead.

I continue to recommend Niemann Capital Management's "Risk Managed Program" and Potomac's "Fidelity Conservative Growth Program" for those of you looking to get back in the equity markets.

A Top In Bonds? 

Bonds have soared this year as interest rates fell, and more recently as stock investors have bailed-out and gone into Treasuries.  As a result, the 10-year Treasury yield plunged below 4%, a 40-year low.  While this trend toward lower rates could continue, those people who sold stocks recently and bought T-bond funds could be taking on yet another huge risk.  If the economy begins to recover, bond yields could snap higher, and those who bought bond funds recently could be looking at even greater losses.

BCA has recommended that investors get out of Treasuries and into corporate bonds.  I agree.  But even corporate bond yields could move higher if the economy improves.  Here again, this argues for market-timing.  For this reason, I want to once again highly recommend that you take a look at Capital Growth Management.  CGM has a 10-year performance record with very attractive returns with very low drawdowns.  CGM invests in high-yield bond mutual funds offered by some of the largest fund families.

Best of all, CGM will go 100% to cash if its systems indicate that yields will trend higher.  If the economy recovers and rates turn higher, most bond investors will be caught flat-footed and be stuck with losses.  If you are looking to diversify beyond stocks, CGM  may be a wise decision.  Call us for more information while their investment minimum is only $25,000 for ProFutures' clients.             

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US To Attack Iraq

After months of seeming uncertainty, it now appears all but certain that the US and our allies are going to attack Iraq in the near future.  Just a few weeks ago, it looked like the Bush administration was going to scrap plans to hit Iraq, due to growing pressure from our allies and the media.  However, in the last couple of weeks it seems they have received new information which suggests that Saddam Hussein may not be far from nuclear bomb capability.  As a result, we're told, the plan to attack Iraq is back in full swing. I believe that we should use military force to enact a regime change in Iraq.  The liberal media argued that we should wait until Hussein actually uses weapons of mass destruction before we take military action to remove him.  Whether one is a conservative, a liberal or apolitical, this argument is ridiculous!

We're supposed to sit by and let Hussein kill hundreds of thousands (millions?) of innocent people before we act to stop him?  I don't think so!  Bill Clinton said recently that we should not go into Iraq because that would cause Hussein to unleash his deadly weapons.  DUH!  If we were to follow that line of reasoning, it would send a message to all tin-horn dictators and terrorists: Get nukes and/or weapons of mass destruction as soon as possible, and the US will not attack you.  Typical liberal, anti-military thinking! 

I'm glad to see the Bush administration moving forward on the plans to remove Hussein.  Better now than later when he is much more dangerous.  I also think we will build an allied coalition to help us, despite all the media hype to the contrary.                            

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Visit Our Brand New Website

If you haven't visited www.profutures.com lately, you should take another look.  Our totally new website contains much more information about all of the products and services offered by ProFutures.  You will also find our latest newsletter and e-letters, plus archives of past issues.  And there's lots more good information.

I encourage you to go to our new website and take a look around. If you have any comments or suggestions, good or bad, we would love to hear from you. You can send your comments and suggestions to us via the "Contact Us" section of the website, or e-mail us directly at mail@profutures.com.