| |
by
Thomas G. Cloud - January 20, 2000
With Y2K passing,
we should now look ahead to try to make some reasonable assumptions
as to what will happen economically during the year 2000. It seems
many economists and writers are divided as to whether the huge amount
of liquidity that was put into circulation by the Federal Reserve
will lead to a more permanent inflationary growth. Some argue this
liquidity will dry up during the first six months thus continuing
the deflationary scenario we have seen unfolding for the past five
years. While Y2K does not seem to be a problem on the surface, the
world economic picture could be different in the next six to twelve
months as world economies and productivity slows due to computer
problems in other areas of the world. All one has to do is visit
the Internet to find the many problems that smaller firms are experiencing
worldwide.
In looking at an asset
allocation model for the first half of 2000, Turamali, Inc. is recommending
a few changes within the product areas we follow on a regular basis.
Generally speaking, we continue to believe a well-diversified portfolio
as mandated by Ecclesiastes 11:2 is the best way to manage the money
God has entrusted us with. While things are looking pretty good
for 2000, it is still prudent to keep one’s investments in
several different areas since "we do not know what disaster
could come upon the land".
INFLATION,
DEFLATION AND INTEREST RATES
Many writers and economists
are predicting a large increase in inflation while others continue
to believe it is only an inflationary interlude. Some believe that
the "real" trend is deflation. The huge liquidity that
the Fed put into the market in anticipation of Y2K problems has
caused interest rates to surge to the highest levels in thirty months.
As we watched the first quarter begin to unfold, Turamali, Inc.
issued a sell signal for bonds and bond funds since we believe the
velocity of money will cause interest rates to rise another one
percent on the thirty year Treasury bond. Additionally, this will
cause the Fed to raise the discount rate at least one-half percent
over the next three months (and possibly an increase up to one percent).
The twenty-four discount rate cuts we enjoyed from 1981 to 1998
are a thing of the past. We should adjust our thinking back to normal
business cycles that move in two to five year trends, rather than
the long secular trends we saw from ’81 to ’98. In other
words, a long-term view should be tossed out the window. Investors
should become more of a "trader" to survive the next decade.
Investors need to be ready to change their asset allocation models
as business cycles send interest rates up and down and inflation
and deflation cycles come and go. While I admit there is a possibility
of inflation doubling, I continue to believe the deflationary trend
we’ve seen since 1994 will once again prevail by the end of
the year. With commodity prices lower (except for lumber and cotton),
I do not foresee inflation in that area. Also I believe some deflation
will come due to the competition on the Internet. By the end of
the year, we will be closer to deflating than inflating.
DOMESTIC
AND ISRAELI STOCKS
After recommending
that one’s stock portfolio represent approximately 20% of total
holdings for the past eighteen months, I am now prepared to be more
aggressive even though I believe the stock market remains over-valued
and may still experience volatility. With the amount of money entering
the market, we will see a surge in the first quarter if interest
rates don’t increase too quickly. I recommend investors diversify
their stock holdings between large cap, growth, and Israeli stocks.
The two recommendations Turamali, Inc. made last year on Israeli
stocks resulted in increases over 40%. We continue to recommend
the AMIDEX35 mutual fund (already up over 8% in 2000) for those
interested in diversifying into several Israeli stocks (instead
of one or two). Visit amidex.com on the world net
or phone 1-888-876-3566 for more information.
As mentioned above,
Turamali, Inc. is recommending an increase in this area. However,
investors should watch irrational markets because anything can send
them down. Over the past fifteen years, we have seen sudden sharp
sell offs in markets for reasons like insolvency of major banks,
insolvency of financial institutions, or a spike in interest rates.
Any of these factors could lead to a mass exodus from the market.
As mentioned earlier, one must be willing to take a more "hands
on" approach the larger the percentage invested. Remember,
the long secular decline in interest rates is over and normal business
cycles will prevail for the next decade or longer.
GDP
The gross domestic
product is now back so that consumer spending is making up nearly
70%. We saw the first three quarters of 1999 taper off as the government
was spending large amounts of money on Y2K. Additionally, foreign
investors also were spending money on Y2K. The fourth quarter saw
a reversal with the consumer driving the GDP. At this point in time,
Turamali, Inc. is NOT expecting a recession during
2000. In fact, Turamali, Inc. is expecting a three and one-half
percent growth rate which is higher than the average of the past
decade. I reiterate my prediction that there will be a rebound in
productivity and that capacity utilization will return to the mid
eighties; therefore, I personally am expecting a good year overall.
I do believe the GDP will grow more during the first half of the
year than the second since I still believe there will be a Y2K impact
from other countries that will slow our economy at some point.
DOLLAR
VALUE
Turamali, Inc.
is dropping our recommendation in the foreign currency basket from
our July ’99 recommendation of 15% to 20% down to 5% to 10%.
Turamali, Inc. believes we will continue to have large trade deficits,
but that imports will increase in Japan and Europe as they continue
to rebound. The dollar will not have to be dropped as much as I
originally thought and therefore we are dropping our recommended
allocation in this area. Instead we are recommending an international
bond fund (for example, American Century’s international bond
fund at (800) 345-2021) or we recommend acquiring physical currency
in the form of Swiss Francs, British pound, or even the Canadian
dollar. These three currencies are poised for a moderate rise during
the first half of 2000 (and perhaps even during the second half
of the year). When buying physical currency, it should be held in
a safe place.
INTEREST
RATES AND FIXED INCOME PRODUCTS
The thirty-year Treasury
bond hit 6.52% during the first week of January. At that point,
Turamali, Inc. issued a sell signal within our e-mail update recommending
that investors move out of this area while interest rates due to
Fed liquidity continued to climb. Turamali, Inc. believes the Fed
will raise rates at least one-half percent (probably closer to one
percent) over the next four months. For that reason, we suggest
exiting all bonds and bond funds as one could have anywhere from
an 8% to 15% loss if interest rates rise as expected. As mentioned
earlier, Turamali, Inc. may recommend acquiring bond funds in the
second half of the year – especially if deflationary pressures
return. Certainly if the GDP drops, we would recommend returning
to bonds. For now, to exit bonds is in our opinion the best strategy.
PRECIOUS
METALS
Precious metals have
been resilient, as gold and silver have dropped only about two percent
after Y2K. There are rumors circulating that large purchasers are
waiting to buy gold and silver on drops that were expected from
Y2K liquidations. While there have been heavy liquidations, prices
remain stable. In fact, they appear poised to rise as interest rates
and inflation rates climb in the first half of the year. For this
reason, Turamali, Inc. is leaving the recommended percentage for
tangible assets at 10% to 15% as was recommended in our last asset
allocation model in July 1999. In any kind of environment, Turamali,
Inc. believes that precious metals always have a place within a
well-balanced portfolio. Now that the secular trend in interest
rates is over, we especially feel precious metals should not be
forgotten.
ASSET
ALLOCATION
In adjusting Turamali,
Inc's asset allocation model for the first half of 2000, please
note the increased percentages in stocks and real estate. The percentages
were lowered in fixed income products and in foreign currencies.
Remember, when building an asset allocation model according to Ecclesiastes
11:2, the idea is to first be good stewards in maintaining one’s
principal, while secondly striving to make a profit. The asset allocation
model provided below is being offered as a recommendation for the
first six months of the year 2000. Turamali, Inc's hypothetical
asset allocation model is as follows:
-
Stocks (U.S.
and Israeli only) – 25% to 35%
-
Gold Mining
Stocks – 1% to 3%
-
Fixed Income
(bonds) – 40% to 50%
-
Foreign Currency
(foreign bonds and physical currency) – 5% to 10%
-
Tangible Assets
(precious metals, gemstones, and historical documents) –
10% to 15%
-
Cash –
10% to 20%
-
Real Estate
– 10%
*While
the above asset allocation model is designed to help balance risk
and give investors security, Turamali, Inc. strongly recommends
consulting with your own personal financial advisor before making
any type of change to your personal, retirement, or profit sharing
portfolios.
FURTHER
CLARIFICATION
To further clarify our recommendations
above, please note the following:
(1) Stocks – No less than
10% in Israeli stocks with the remainder placed in domestic
stocks only. Turamali, Inc. continues to stay clear o the other
foreign stocks.
(2) Gold Mining Stocks –
The same gold stocks listed in Preserving Wealth II (released
in August 1999) should be used for this small area.
(3) Fixed Income – 40%
to 50%. (Of this percentage, save at least 10% to 15% if planning
on re-entering the bond market should interest rates drop later
in the year.)
(4) Foreign Currency –
No load international bond funds continue to be our preference
along with the Swiss Franc, British pound, and Canadian dollar.
(5) Tangible Assets - The bulk
should be positioned into gold, silver and platinum.
Gemstones should make up approximately 3% of one’s overall
portfolio.
(6) Cash - Monies can now be
put into standard money markets to increase the interest rates.
If holding the Capital Preservation Fund, do not close it as
it is impossible to say when that type of fund will be needed
again. Our recommendation is to simply drop the balance in the
Capital Preservation Fund moving more funds into higher paying
commercial paper money markets.
(7) Real Estate – Turamali,
Inc. now feels a 10% position in real estate in either REITS
or rental properties could be purchased for long term.
CLOSING
REMARKS
The next communiqué
from Turamali, Inc. will introduce and feature our newest fixed
income products. Scheduled to be written in early March, watch for
these exciting details.
Also, please don’t
forget that my weekly radio show has been moved to ICRN.com.
The show should be at this location for a while, but will eventually
be moved to OnePlace.com. We’ll keep you posted.
We
implore you to sign up for Turamali, Inc's bi-monthly
email updates. They have been a real blessing to our clients.
Both Tommy and myself write an email update once a month. I continue
to focus primarily on economic trends, while Tommy tries to explain
finances and the economy from a biblical position using scripture
to support his findings. You are missing out on a blessing if you
do not receive this encouraging, free, and timely update sent to
over 1100 of our clients and friends.
Additionally, my wife
and I will once again be taking the BibleLands cruise to Israel,
Turkey, Greece and Egypt in November. We are hosting a bus. If you
would like to be a part, please contact me and I will send you a
brochure. Sponsored by Compass Ministries, we have had the privilege
of participating in this event for two years. This cruise truly
is a trip of a lifetime.
Lastly, we are asking
for your prayers over the next few weeks as Tommy and his wife,
Alix, are expecting their first child (and my first grandchild).
Many have asked if we know the gender – but we don’t…so,
we’ll keep you posted on the arrival of our new family member.
TURAMALI, INC
CONSULTING, INC.
8735 Dunwoody Place, Suite 0
Atlanta, GA 30350
www.turamali.com
(770) 642-6702 or fax (770)
642-0137
|
