Preparing for Rocky Times
By Thomas G. Cloud - August 22, 2002

As we head into the last four months of 2002, the economic world has changed as we’ve known it for the past twenty years. We no longer can pick up the business section without reading about shocking accounting scandals that devastate our confidence as investors. Our portfolios are crashing while the FED and Alan Greenspan continue to try to find ways to put a spin on the economy trying to make Americans believe that things aren’t really as bad as they seem. Over the last few months, we have seen global scandals involving Global Crossing, World Com, Qwest, and many others. Trillions of dollars have been lost in the stock market; yet we are being told to sit tight that things will be turning around. In 1968, the DOW hit 1000 for the first time. Investors flocked to the stock market based on promises that the DOW was just beginning to rise. Almost immediately, the DOW fell to 683. It didn’t hit a 1000 for another 13 years. While I am not predicting that the DOW won’t ever hit 11000 in a 13-year span, I do believe it could take quite a while. As we go through our normal indicators and asset allocation adjustments for the remainder of 2002, it is important to note that the economy has decreased dramatically since the beginning of the year. It is imperative that each investor make those necessary and tough decisions as to where one’s money should be as we feel the games have just begun! Now for a look at our normal indicators:

INTEREST RATES
If you go back to our website (turamali.com), you will find my prediction for interest rates for the year 2002 in my January 24, 2002 “Market Update”. Interest rates have done exactly what I predicted. Now comes the question, “Will interest rates move up as the Fed fights to save a declining dollar?” The dollar will be addressed below. It is my belief that the long-term mortgage rates have bottomed. They are at their lowest level in 30 years. If you are looking to refinance, this might possible be your best chance for quite a while. Therefore, we believe that interest rates will begin to move higher in late September through November as more and more liquidity is pumped into the market by the FED. The M1, M2, and M3 money supplies have grown anywhere from 8% to 30% and all it takes is a little velocity and interest rates may take quite a jump.

THE DOLLAR
Perhaps our best call of the year was the important trend change in the dollar. At one point several weeks ago, the dollar was down 17% from its high during the summer of 2001. We continue to believe that England will eventually join the other EURO countries and trade their currency as we’ve mentioned on several occasions. As you will find by reviewing our asset allocation model, this is one of the areas where double-digit returns are in fact possible for the next 12 to 18 months. We continue to recommend the English pound and the EURO as a small part of all portfolios. As I have discussed many times, the EURO is beginning to look like the Yen did in 1988 when it took off actually rising four times against the dollar in a six year period. In other words, if you had acquired $10,000 in yen, you would have cashed out for $40,000 in 1994. I believe we are in the beginning of a dollar sell-off that will last for some time.

RECESSION
No indicator has been more volatile than the growth and contraction in the U.S. economy. After a two-quarter recession in 2001 that was caused and blamed on the terrorist’s attack of September 11th, the economy grew for the first quarter of 2002 at the rate of 5%. Suddenly when financial scandals broke, the growth for the second quarter was only at an annual rate of 1.1%. As we are now halfway through the third quarter, figures again show we are on the borderline of returning to a recession. Unemployment is climbing, personal bankruptcies have hit all time highs, credit card debt is breaking records, the FED is pumping liquidity into the market, and interest rates have hit their lowest level in 30 years – yet, we still have a stagnant economy (and things may get worse). Watch for us to return “officially” to a recession in either the fourth quarter of 2002 or the first quarter of 2003.

STOCKS
Since its peak in January 2000, the DOW has had five major bear market rallies. These rallies have been sold hard by the FED and have caused most investors to throw good money into the market while the real direction continues to be down. Many times in the past we have talked about mean-reverting. I personally believe mean-reverting is a truth of stock investing. The long-term real return on stocks has been around 6%. The long-term price earnings ratio has been between 12 and 14 times earnings. There is much more mean-reverting due until we reach the bottom of this current bear market. It is my opinion that while the overall market will fade, there will be areas in foreign bonds and foreign stock markets that will be an excellent opportunity for a small part of one’s portfolio. Please check with your personal money manager or financial planner to discuss these opportunities in more detail.

GOLD
I will make my bonus prediction in the area of gold. It is my belief that gold is about to explode in price. Last Thursday, the cover story of USA Today was about the dollar being an IOU for nothing. The article stated the dollar was an unsecured liability of the government. Further, Doug Casey stated the government was bankrupt. In his article, Casey predicted that gold would not be going through the roof, but “to the moon”. As I’ve stated on numerous occasions, I believe we are in the decade of gold and that it is poised for a large move. In April 2000, gold hit a low of $256 per ounce. By September 2001, it was back to $258 per ounce before starting the current move that brought it to the range of $315 per ounce.

Recently Rick Rule appeared on CBS Market Watch. He told Tom Clandra that it was his view the 20-year bear market in gold coincided exactly with the 20-year bull market in the dollar. As I mentioned above, the dollar which is down 15% from its height, corresponds directly today with gold that is up 15% during the same time frame. I continue to believe that investors need to acquire one-ounce gold bullion coins in the form of Gold American Eagles, Maple Leafs, Australian Kangaroos, Krugerrands, and Austrian Philharmonics. In fractional gold, I suggest British Sovereigns and Swiss 20 Francs. At the very minimum, gold should comprise at least 5% of every client’s investable portfolio.

As we look today with gold up 15% for the past year, gold mutual funds are up 37% on an average for the past 12 months, while the S&P stock index is down 23%. Now should be the time for a serious look into either starting or beefing up your gold basket within your asset allocation model.

ASSET ALLOCATION MODEL
In adjusting our asset allocation model for the last four months of 2002, we are assuming a very conservative posture since we believe the probability of a moderate recession is likely during late 2002 or early 2003. 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 last four months of 2002:
For the next six months, my hypothetical asset allocation model is as follows:
Stocks (U.S. and Israeli only) - 10% to 20%
Gold Mining Stocks - 4% to 10%
Fixed Income (bonds and annuities)- 30% to 40%
Foreign Currency (foreign bonds and physical
currency) - 20% to 25%
Tangible Assets (precious metals, gemstones, rare coins
and historical documents) - 15% to 25%
Cash - 15% to 25%
Real Estate - 15% to 20%
*While the above asset allocation model is designed to help balance risk and give investors security, we 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 - The Israeli situation remains explosive, but the stock market there is undervalued and could explode upward with any sign of cease fire or temporary peace in the Middle East. In your stock mix, you should also have foreign stocks and foreign mutual funds that equal to your investment in domestic stocks. Certainly, this has proven true for 2002 thus far.

(2) Gold Mining Stocks - Every investor should increase his holdings here given the past year's outstanding performance. Many gold mining shares rose 10% to 25%. We continue to recommend 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 - Part of a fixed income portfolio can be positioned into fixed annuities which are paying 5.5% or better currently. Part should be placed into domestic bonds or domestic bond funds. While interest rates can't fall much further, the bonds and bond funds still offer a deep recession hedge and should be kept in your portfolio.

(4) Foreign Currency - This area may be the most intriguing, as we look at all the reasons the dollar could drop in 2002. In addition to owning the EURO, we also recommend British pounds and possibly Swiss Francs. Investors can also buy foreign bonds by investing in the American Century International Bond Fund (1-800-345-2021).

(5) Tangible Assets - The bulk should be positioned into gold and silver. Turamali, Inc. feels that both gold and silver will enjoy another profitable year. While platinum has dropped back, we do recommend it as a small part of one's tangible portfolio. Maybe the most under rated tangible asset continues to be colored diamonds. These stones are available at "below wholesale" prices which are coming from Israeli cutters who are liquidating to pay bills.
(6) Cash - With all the uncertainty, your cash holdings should be increased until a more clear direction is seen in interest rates, stocks, and bonds. As we mentioned in July, one cannot use standard commercial paper money markets to get higher rates than are generally offered by Treasury bill money markets. Again, keep that cash basket a little higher for the next six months and be ready to take advantage of any market opportunities.

(7) Real Estate - While real estate is not climbing at the rates of the past several years, there are still opportunities in REITS, select rental properties along with standard duplex investments and triple net leases.
CLOSING REMARKS
There have been many changes at Turamali since my last newsletter. First, I’d like to advise you that we have a new address. It is 5805 State Bridge Road, Suite G336, Duluth, Georgia, 30097. Further, our new local phone number is (770) 441-1550. Our toll free number remains (800) 247-2812. Please also change your records to reflect my new e-mail address which is tgcloud@bellsouth.net. My old e-mail address will work for another month or two, but please go ahead and make this change in your records so we can stay in touch!

Also for those of you I have not spoken to personally by phone over the last several months, I’d like to encourage you to set up a conference call with me so we might discuss opportunities within the tangible asset area. Many abound and we feel the upward potential for gold, silver, and other crucial tangible assets is outstanding. As always, we are happy to answer any questions you might have. And finally, we appreciate the daily e-mails and information that you, our readers, send us! Keep them coming!