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by
Thomas G. Cloud, President
June 28, 2000
As we enter the second half
of the year 2000, the economy seems to be stuck in somewhat of a rut.
Rising interest rates, falling bond prices, falling stock prices have
all been the norm thus far for 2000 (all due primarily to rising interest
rates since September ’99). With Alan Greenspan taking a "wait
and see" attitude during his recent Congressional testimony, the
economy should be fairly stable until the Federal Reserve meets on August
22nd. While I do not expect a rate hike at this time, that
could certainly change if the Fed determines there is a need to slow the
economy. Even if rates do not increase as I anticipate, I still don’t
expect a stock market rally until perhaps November or December. The earning
predictions for stocks for 2001 will be dependent on the future of interest
rates. As we look at our asset allocation model for the remainder of the
year, Turamali, Inc. is recommending very few changes for those product
areas we monitor on a regular basis. Generally speaking, C&A continues
to recommend a well-diversified portfolio as mandated in Ecclesiastes
11:2 as the best option for managing the money that God has entrusted
us with.
INTEREST
RATES
Interest rates overall continue to be the
number one indicator for evaluating the stock and bond markets. As stated
earlier, we will be watching the August 22nd meeting closely
to see if the discount rate will be raised once again for the fifth time
since September 1999. The LIBOR rate has risen 1.40% since September and
the three-month Euro dollar deposit rate has also risen 1.45% in the past
twelve months. With the bond market hit hard in 2000 and the stock market
down 8.5% thus far this year and down 10% since its peak in ’99,
it is imperative we realize that every time interest rates rise it is
quite expensive to the corporations that are heavily leveraged. Most corporations
in America are highly leveraged and depend on falling interest rates to
drive their stock. In fact, American corporations now have forty-six cents
in debt for every dollar of total production in the entire country. This
is the worst ratio ever as explained in a New York Times
article on July 7th. While I am not predicting a
sharp sell-off in stocks, we must watch the huge debts that are being
amassed by corporations if interest rates continue to rise. Overall, interest
rates are nearing a top. C&A will be watching closely for a potential
buying opportunity in bonds when we feel the economy is slowing.
TRADE
DEFECITS AND THE DOLLAR
U.S. goods and services trade deficits continue
to be a worry for our economy. The U.S. trade deficit in 1999 totaled
a record $270 billion and was over $85 billion larger than the deficit
for 1998. For 2000, we are seeing a trade deficit that will be somewhere
between $350 and $400 billion. In other words, due to the strength of
the dollar we have been buying cheaper goods and sending our money out
of this country. Certainly we always come to a point when the U.S. economy
slows and the dollar is forced down by American corporations in an attempt
to make their goods more affordable. This time will be no different. When
trade deficits first became a big problem in the 1980’s, the Japanese
were buying American real estate with the huge amounts of money that we
were then shipping out of this country to buy goods. At that point, trade
deficits totaled less than $50 billion annually. Any turn in the U.S.
dollar could result in some very interesting scenarios. Currently, the
U.S. dollar is slightly off of its May 2000 peak, but I believe by year
end the dollar will break down sharply generating some very good profits
in the foreign currency area. (Please see the asset allocation model which
follows for our currency recommendations).
INFLATION,
DEFLATION AND RECESSION
There are many ways to gauge inflation. One
gauge is by definition which is the increase in the money supply making
goods and services rise in cost due to the increased money in circulation.
We also follow the commodities index and we look at the consumer price
index (which is probably the poorest gauge in determining the real inflation
rate). We have seen a surge early in 2000 in the creation of money (or
fiat currency as it is called). We have also seen the DJ-AIG commodity
index rise approximately 10% for the first half of this year. Additionally,
we have seen the CPI double - giving us a healthy dose of inflation within
all three areas. However, with rising interest rates, C&A does feel
Greenspan will be able to put inflation in check and we therefore are
not expecting deflation as we previously predicted earlier this year.
It does seem the Fed has been able to balance these fears even with the
strong numbers which have shown inflation growing much quicker and in
light of the inflationary interlude we discussed for nearly nine months.
As we stated in January, C&A is not expecting a recession and we hopefully
predict there won’t be a recession in 2001. These are factors we
will continue to monitor closely.
DOMESTIC
AND ISRAELI STOCKS
C&A continues to recommend the same percentages
be held in domestic and Israeli stocks (i.e., 25% to 35%). While the DOW
is down 8.5% for 2000, the AMIDEX 35 mutual fund is up 35.33% for the
year. We continue to be extremely bullish on Israeli stocks for the future.
There will be volatility, but the trend continues upward. We will also
have information forthcoming in future newsletters about money management
within the stock area. If you have not visited the AMIDEX web site, please
do so at www.amidex.com or phone
them for more information at 1-888-876-3566.
ASSET
ALLOCATION MODEL
In adjusting C&A’s asset allocation
model for the second half of 2000, we have basically used the same model
that has been in place since the beginning of 2000. There are a few minor
changes which appear below. Remember when building an asset allocation
model according to Ecclesiastes 11:2, the mandate is first to be good
stewards by diversifying allowing the time to serve God and not be completely
caught up in worshiping our investments. The second, of course, is to
make a profit realizing that every area cannot and will not always go
in the same direction. The hypothetical asset allocation model below is
being offered for the remaining six months of 2000:
For
the next six months, Turamali Inc.’s hypothetical asset allocation
model is as follows:
Stocks (U.S. and Israeli
only) – 25% to 40%
Gold Mining Stocks – 1% to 3%
Fixed Income (bonds) – 35% to 45%
Foreign Currency (foreign bonds and physical
currency) – 10% to 15%
Tangible Assets (precious metals, gemstones, and
historical documents) – 10% to 15%
Cash – 10% to 15%
Real Estate – 10% to 15%
*While
the above asset allocation model is designed to help balance risk and
give investors security, C&A 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
(1) Stocks –
No less than 10% in Israeli stocks with the remainder placed solely
in domestic stocks. At this time, C&A believes other foreign stocks
and mutual funds should be considered based on our belief that the
dollar will drop later in the year.
(2) Gold Mining Stocks
– The investor should use individual gold stocks or use a well-diversified
mutual fund. Recommended funds include American Century’s Global
Gold Fund at (800) 331-8331, INVESCO Strategic Gold Fund at (800)
525-8085, or Franklin’s Gold Fund at (800) 342-5236.
(3) Fixed Income
– While we are not quite ready to recommend bonds, that time
may be close if the Fed does not increase interest rates. Therefore,
10% to 15% of one’s portfolio could be added to one’s cash
account awaiting this potential buy signal later in the year.
(4) Foreign Currency
– This area could be the biggest winner for the remainder of
2000; however, there is always risk when betting on the dollar to
go down. As mentioned in the past, historically the dollar has generally
fallen until the last five years. We do believe things are changing.
Investors could buy foreign currency in the form of the British pound
or Swiss franc or diversity into a foreign bond fund (like American
Century’s International Bond Fund which historically has done
well in those years in which the dollar drops). To order a free prospectus
on this particular no load fund, phone American Century at (800) 345-2021.
(5) Tangible Assets
– The bulk should be positioned into gold and platinum. C&A
feels silver needs inflation to drive its price upward. Therefore
80% to 90% of one’s metals portfolio should be positioned into
gold and platinum. Gemstones should comprise about 3% of one’s
holdings. Remember, gemstones are a long-term investment and do not
provide instant liquidity.
(6) Cash – Money
should be placed into standard money markets to get the highest rate.
The Capital Preservation fund which we have recommended for years
in times of uncertainty can now be moved to standard commercial paper
money markets as they pay higher rates. If you are in the American
Century family, you might want to consider the Prime Money Market
as it pays about a half percent more than the Capital Preservation
fund.
(7) Real Estate –
For the industrious, consider select rental properties for the long
term. Keep in mind, if interest rates continue to climb, prices may
stall for sometime.
CLOSING
REMARKS
Our next C&A newsletter will take an
in-depth look at tangible assets. We have had many requests for an update
on where the markets for gold, silver, platinum, gemstones, and historical
documents are headed. Please expect this newsletter during the first two
weeks of September. I will be speaking at the Steeling the Mind
conference to be held in Keystone during the last weekend of August. If
you have never attended this particular conference, I encourage you to
make the effort to do so. The blessings you will receive will be incredible!
To find out more about the conference and the speakers, visit www.compass.org
or www.steelingthemind.com.
Also remember, if you are not receiving C&A’s bi-monthly e-mail
updates, visit our web site at www.turamali.com
and click on the "updates" icon to sign up for our free updates.
You can also hear my weekly radio show on www.icrn.com
in which I answer a variety of "frequently asked questions".
Lastly and as always, if I can answer any questions or if you want to
hold a free thirty-minute conference call with me, please phone my office
at (800) 247-2812 and our receptionist will find a mutually convenient
time for us to talk.
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