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COPYRIGHT © 2009 STANFORD WEALTH MANAGEMENT

STRANGE YEAR (GREAT YEAR!!) --

KEY LESSONS WE SHOULD LEARN

December 2003

                      The market has had a great rally this year.  Of course, the                           indications of future market direction were mixed earlier in the year, as they always are.  What did we, as investors, know early on and what have we learned since?  We knew, going into 2003, that the third year of the presidential election cycle is usually a great year for the market.  We knew from history that when there is a war in the third year of the presidential election cycle, it is an even better harbinger of a strong stock market.  And we could see, from rising commodity prices for basic metals, energy, and other raw materials, that inventories had been drawn down and price hikes were likely to result in better earnings.  We also knew from historical observation and trend analysis, however, that in most good years the market will move more smartly ahead in the first quarter, take a breather somewhere in the second and/or third quarter, and then move smartly ahead in the fourth quarter.

           And this year, I figured that, to get re-elected,  this administration needed to push the dollar down — even as they were claiming they wanted a strong dollar.

BOOMERS WITHOUT LITTLE GIRLS AND BOYS =

LOTS OF SALES FOR TRAVEL AND TOYS

 

          (January 2003)                

                     

                      Many market prognosticators (that’s a fancy word for “guessers”) bemoan the fact that the consumer is the only segment of the economy propelling it forward.  Without the manufacturing sector contributing, they say, we can’t keep this up.

           Actually -- we can.  While I will personally never be burdened with the travails of inherited wealth, most of my fellow leading-edge boomers are about to inherit the earth.  Their parents scrimped and saved and did not buy Internet stocks.  The result is that 76 million boomers are inheriting, as their parents move on to a Greater Reward, oodles and oodles of cash.  About $10 trillion over the next 18 years, to be exact.  Many Byuppies (Boomer Yuppies, the most onerous of the Boomer crowd) spend everything they make and everything they can borrow on toys and travel already -- and they are about to kick in to high gear.  And, get this: not only are they inheriting money but, now that their kids are gone, they are actually keeping more of what they make.  How will they spend these twin windfalls?  Will they save for their own children, contribute to worthy causes, join the Peace Corps?

           No one knows for sure, but we have some early indications: According to the 2002 Yankelovich Monitor, which plumbs the depths of what adult consumers are doing, nearly half of Boomer parents say that after their children leave home, they will splurge on a great vacation or buy themselves something they've always wanted.  Like what? Well, 43% of boomer men say they have or want a motorcycle!!  By God, ain’t no one in the Boomer Generation going “gentle into that good night.”  We ain’t getting older, other people are!  At a time when Boomers qualify for AARP membership and are just an unshaved whisker away from collecting Social Security, what do they want?  According to Yankelovich: Motorcycles.  Good news for Harley-Davidson (HD).  What else? Sportier cars.  They’re tired of Mom-mobiles.  Good news for auto companies that haven’t retooled everything for SUVs and still make sports cars.  FORD’s (F) Jaguar line comes to mind as does TOYATA MOTOR’s (TM) sporty line.  How about top-drawer audio and entertainment equipment, which benefits currently-depressed companies like BEST BUY (BBY) and a Japanese favorite of ours, SONY (SNE).

           What else will they spend all that dough on?  Their house and yard.  This is the public face they put on to their neighbors and we Boomers have always been known for our public persona (which some uncharitable folks have labeled “narcissistic,” the nerve!) 

           An AARP survey noted that, "...85% of respondents say they don't want to ever move; they want to stay right where they are," says Thomas Otwell, a spokesperson for AARP.  So Boomers are making the home their primary focus.  That again augurs well for companies like BEST BUY, but also should give a big boost to yet another currently-depressed and eminently-buyable industry, home improvement.  HOME DEPOT (HD) and LOWE’S (LOW) come to mind, as do tony Yuppie-appealers like Williams-Sonoma (WSM) and trendy bargain-shopper’s paradise Pier 1 Imports (PIR).  When Yankelovich asked what Boomers would do with the newly-vacated kid’s rooms, 40% said they would convert them into a gym or a home office.

           Staying, young, hip, and active has always been a big deal to Boomers.  (Again, some uncharitable and jealous observers have labeled it “self-absorbed” or “in denial.”  But what do they know?)  This means big sales for vitamin and supplement sellers and for any food company that can lay claim to healthy foods, like DANONE (DA) or ARCHER DANIELS MIDLAND (ADM).  It also means big sales for any reasonable or cockamamie weight loss deal.  Boomers will spend dollars on what makes them look young.  That means Botox, hair coloring, tummy tucks, whatever.

           The more healthy among us will continue to be active and continue to buy sports equipment.  The rest will take up golf.  (Just kidding!!  I’ve already borne the slings and arrows from my golfing friends; no need, golfers, to cancel your subscription!)  That means athletic apparel and equipment should do well as should NIKE (NKE) and all kinds of other purveyors.

           What are the implications for the industries I’ve identified as being key sectors immediately ahead — Defense, Energy, Financial, Health Care, and Utilities?  I didn’t recommend these sectors because of the Boomers, but I see only good things for them as a result of the current trends in Boomer.com. 

           Defense?  As we get older, we typically become a bit more conservative. After all, “If you are not a socialist when you are young, you have no heart.  If you are a socialist when you are old, you have no head.” (Variously misattributed to Benjamin Disraeli, George Bernard Shaw, Winston Churchill, Lloyd George, Georges Clemenceau, Otto Von Bismarck, Woodrow Wilson, Wendell Willkie, Bertrand Russell, and Aristide Briand; in truth, no one knows.)  And that conservatism means we have a greater desire to protect what we have worked so hard to obtain and attain.  This speaks well for a national defense posture that actually protects.

           Energy?  Travel and toys are the two things empty-nest, flush-with-money Boomers say they want to spend their money on.  Last time I checked, if you wanted to get from “here” to “there”, unless you were walking, you needed jet fuel for the airplane, diesel for the cruise ship, or gas for the family flivver.  I have been a booster of gas and oil, alternative energy, solar, and fuel cell technologies and companies for some thirty years now and they’ve allowed me not to depend on an inheritance for my future well-being.  I think they’ll continue to.

           Financial?  Gee, do you think the Boomers will need more investment help or less after their experience of the last three years?  Do you think a few at least had the awareness to accept that they are not Masters of the Universe and that’s okay as long as they are masters of their own domain?  Think they’ll need better health insurance and business insurance and terrorism insurance and banking relationships and brokerage relationships?  me, too.

           Health care?  If you’ve read one or more copies of Investor’s Edge in your lifetime, I don’t even have to go there!  You know that as people age, their health care needs increase.  The great companies I’ve been writing about all these years are still great companies -- and now the rest of the world is noticing, too...

           Utilities?  If people are going to make their home the centerpiece of their world, but do more traveling from it, that bodes well for utilities.  They provide the power to light our way at home, in the hotels we stay at, and at the airports we visit along the way.

           I haven’t mentioned names in our core portfolio areas because any reader of Investor’s Edge knows them by heart. I promise we will continue to do the research needed to uncover the best in each area.  For a pretty good overview of the ideas that work best to enjoy the rest of the Boomer Bull, read on.  You’ll see lots of familiar names, as well as all kinds of other great companies that we’ve uncovered using good old basic fundamental analysis and our proprietary technical indicators.  <  >

           I figured right on one and wrong on the other — and therein lies an interesting lesson.  I couldn't have been more wrong in figuring the market would be strong in the first and fourth quarters and weaker in the second and third quarters.  This year the market never took a break.  It was strong in every quarter and just kept going up, up, and up.  Because we sold in May, you'd think we'd have seriously under-performed this year.  Not so.      It’s true that we took money off the table, reducing our risk profile to virtually zero.  But we then made side bets on the dollar and income plays that resulted in a fine return -- without the risk.  As Damon Runyon noted, "The race doesn't always go to the swiftest, nor the battle to the strongest, but that's the way to bet."  Well, the market doesn't always have a pullback in the summer and early fall (only about five years in every eight, as a matter of fact) - but that's the way to bet.

           I'd rather go with the trends that history shows to be in effect five of every eight years, than to have no discipline other than chance.  This year, fortune smiled on the perma-bulls, just as it smiled last year on the perma-bears.  We are neither.  We are students of history in all things financial, psychological, and behavioral.  Let's see what it cost us to be good students rather than dumb-lucky.

           Lesson one: it was dumb to short anything, no matter how over-priced it seemed.  It's too late in the economic and market cycle to short big companies with impunity.  We shorted AMAZON, YAHOO, AT&T, PLMO, PSRC, QQQ, IBM and EBAY.  To date,  AMZN, QQQ, and YHOO have gone against us, while T, IBM, PLMO, PSRC, and EBAY have failed to move up even as the market soared nearly 2000 points.  The first three hurt our performance, while the others are neutral, going neither up nor down more than a fraction of a point.  The lesson?  Don't short this late in the cycle. 

           The course of action now?  Look to cover all these shorts in December or early January.  Usually, when the market comes this far this fast after a bear market, there will be a tax-selling correction.  I don't want to go into 2004 short anything.  Not when I have every historical reason to believe the federal economic and financial statistics will be ”massaged.”

           Lesson 2:  When you take your money off the table, make some good side bets in other areas.  We left the equities markets from June to October, only buying rock-solid quality issues.  But while we were not fully invested, what we owned was energy limited partnerships, utilities, and foreign-government bond funds.  So while those who bought stocks made out better in terms of total return, we just plodded along and - virtually risk-free - made a good clean return.  As it turned out, this was a year it was OK to risk your capital.  But without risking it, we still made the right side bets and increased your net worth.  The lesson?  There's always some class of assets worthy of your consideration, no matter what the market does.  The course of action now?  We'll stick with these decisions — I still expect the Fed to talk about the perils of deflation, while really inflating the money supply.  I will probably buy some gold stocks on any decent pullback, but won't chase them here.  We don't have to.  The same factors that make gold rise -- inflation, supply and demand, a declining dollar -- are already benefiting us via our less-leveraged, but also less-risky, investments in foreign bonds, base metals, energy partnerships, etc.  For specifics, just turn the page!  <  >

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2003