What I'm Doing Now...Looking for Opportunities

I haven't changed my general investment stance at all since last month except that I'm sitting on more cash than usual as I look for new opportunities. In my key sectors, I'm maintaining my positions in precious metals, commodities, oil and gas and drugs. While the precious metals and commodities sectors continue to be weak right now, I'm very confident in their long term prospects. The precious metals sector I view as "investment insurance". As such, I'm willing to just sit with it until I no longer need the insurance, or until that insurance pays off. My oil and gas and drug positions are "core" holdings and I therefore expect to hold them for the foreseeable future. My "special situations" holdings also remain unchanged, although I have substantially increased my holdings in one stock. I'm now looking at a couple of new stocks in which I may purchase an initial stake. The key is to identify a sector that will benefit from the current events or economic environment, then either buy that sector or buy one or more of the leading companies in that sector. That is what I do every day.

Trend...Explosion in the Money Supply

This month I'm going to talk a little about something that is little talked about, and even less understood - the national money supply. Please remember that the supply of money in this country, such that the paper you and I pay for our goods and services can be considered "money", is currently controlled by the Federal Reserve. First, a couple of simple definitions:

• M1 - the most liquid forms of money; basically cash and checking accounts;
• M2 - M1 plus savings and money market accounts;
• M3 - M2 plus institutional money market accounts, time deposits and Euro dollars held in the US.

For the purposes of this discussion I will be using M3 statistics.

Right now, the Fed is creating new money at a very alarming rate. From June '03 through June '04, the Fed created $316 billion in new money. Yet in the first five months of this year alone, the Fed has printed $366 billion in new funds. Even more astonishing, in the last three months, the Fed has created $253 billion, which works out to an annual run rate of $1 trillion in new funds. This makes you wonder what crisis the Fed sees in our future. As Robert McHugh of Safe Haven asked recently (click here for the entire article),

"There must be a crisis of historic proportions coming, and the Federal Reserve Bank of the United States is making sure that there is enough liquidity in place to protect our nation's fragile financial system. The amazing thing is, the Fed's actions mean they know what is about to happen. They are aware of a terrible, horrific imminent event."

While I don't think things are as bleak as that (at least I sure hope not), I am concerned by what's going on. If there is no dire event in our future, then this money creation is horribly inflationary and is destroying the value of our currency. This could have a dire impact on our stock and bond markets as foreign investors slow or withdraw their investments due to mounting losses from negative currency translations. If this massive money creation continues unabated and with no explanation for a few more months, I will grow even more concerned about our future.

Statistics to Watch...Mostly Positive

• The labor department recently announced that 248,000 non-farm payroll jobs were added in May, which was more than expected. They also revised the April and March numbers upward to 346,000 from 288,000 and to 353,000 from 337,000, respectively. There was job growth in almost all sectors. Hourly wages increased by 0.3% from April and 2.2% from last May.

• Roughly 8.2 million people remain unemployed in May, the same as April. The number of part-time workers rose slightly to 4.665 million from 4.52 million. The number of "marginally attached" workers remained constant at 1.5 million. That means with a labor force of 138.8 million, my "underemployment" rate rose slightly to 10.35%, while the unemployment rate reported by the government held fast at 5.6%.

• The four week average for initial jobless claims is holding fairly steady at around 335,000, although there has been a slight uptick over the past few weeks.

• Personal income rose 0.6% in April after a 0.4% rise in March.

• The Consumer Confidence Index inched up in May to 93.2 from a revised 93.0 in April. This survey indicates that people remain upbeat about the economy.

• Eight months into the fiscal year, the Congressional Budget Office (CBO) estimates the federal budget deficit to be $347 billion. Their full year estimate is for a $477 billion deficit.

• According to the Census Bureau, the federal trade deficit set a second consecutive record high of $48.3 billion in April, up from $46.6 billion in March.

• The Labor Department reported that the Consumer Price Index, which measures changes in the prices paid by urban consumers for a representative basket of goods and services, rose 0.6% in March, while the "core" CPI, which excludes food and energy, rose 0.2%. These numbers continued to fuel fears of inflation.

• The Labor Department also reported that the Producer Price Index (PPI), which measures the average change over time in the selling prices received by domestic producers for their output, rose 0.8% in April, due mostly to increase in the prices of food and energy. The "core" PPI rose 0.3%.

• According to an article in the June 7 issue of Business Week, gasoline prices, adjusted for inflation, are still 36% cheaper today than in 1980. Gas would have to cost $3.50 per gallon to cost as much today as it did back then.

• The American Association of Individual Investors' (AAII) bullish sentiment fell from 39% for the week ended May 8 to 33.3% for the week ended June 5.

• The University of Michigan consumer confidence index fell to 90.2 in May from 94.2 in April.

• Same store retail sales grew a robust 5.7% in May, continuing the strong results posted by retailers this year.

• According to the Census Bureau, sales of new single family homes in April fell 11.8% to a seasonally adjusted annual rate of 1.093 million units. This was the largest one month drop in 10 years. The increase in mortgage rates is having a clear impact on the housing market as mortgage applications continue to fall.

• The Institute for Supply Management (ISM) index of manufacturing activity stayed essentially flat again in May as it rose to 62.8 from 62.4 in April. That figure still suggests an expanding economy.

• The first quarter GDP was revised upward to 4.4% from the initial estimate of 4.2%.

So what does all this mean to you? It seems to indicate that the economy is firing on all cylindars right now, thanks to historically low interest rates and the Fed's easy money policy. I have to admit that I was wrong with my somewhat gloomy forecast for the economy this year. While I'm still somewhat concerned about the staying power of this economy, it's hard to argue with the current numbers. As long as the Fed retains it's highly accomodative stance, there's no reason to believe that the good times can't continue. The only things that may slow things down are rapidly rising interest rates (which I don't think will happen) and the fear of an escalation of the war in Iraq or another terrorist attack on our soil. Barring such an event, it would appear the economy should continue to power ahead for at least the next few months.

Personal News and Notes

I am pleased to announce that after months of work, my brand new website is finished and available for your viewing pleasure. Please go to / and take a look. I would greatly appreciate hearing any of your comments and suggestions. I'm always looking for ways to improve your experience on my site.

Earlier this month I appeared again on "Your World with Neil Cavuto". We managed to make it through the entire segment without having to discuss the war, Martha Stewart, or any other breaking story. What a pleasure! If you missed the show, I have that video, as well as my nine previous appearances, available for viewing on the "WAM on TV" section of my site.

After a month-long hiatus, I plan to complete the chapter that I'm writing for The Black Book on Personal Finance by the end of July. I should have excerpts from that chapter, titled "Dynamic Sector Rotation Investing: How To Make Money In Good Times and Bad", available on my website shortly thereafter. With the publishers help and permission, I hope to have e-books of the chapter available for sale by the end of the summer.

For those of you who live or work in the Westchester/Fairfield County area, I would like to introduce you to a business networking organization called Contact Advocate, and more specifically, their Westchester County Exchange chapter. I recently agreed to be one of the organizers for this Chapter. Our next meeting is scheduled for 7:45 a.m. on Tuesday, June 29. This is a great opportunity to meet and network with other local business professionals. Please click here for more information about this event. If you would like to attend, or would just like additional information about the group, please let me know as soon as possible.

As always, I thank you for your interest and consideration, and invite you to write or call me if you have any questions, or if I can be of service to you in any way.

Best regards,

Greg Werlinich
President