NEWS AND VIEWS

Werlinich Asset Management, LLC
400 Columbus Ave.
Valhalla, NY 10595
914-741-6839
800-746-6926
Email: greg@waminvest.com
URL: www.waminvest.com

September 2003 Comments   |   Refer A Friend   |   Sign Me Up   


As the calendar flips to September, and thoughts turn to school, pennant races, football and Indian Summer, the market continues its upward trajectory. On September 2nd the Dow Jones closed at 9,523.27, thereby surpassing the midpoint of the market high and its recent low (see the chart below). This could be a very important event, and suggests that we may be poised to enjoy further market advances. If the Dow remains above 9,504 for the next week or so, it could eventually re-test the highs set in early 2000. The bond market, on the other hand, continues to suffer, with the yield on the 10-year t-bond hovering around 4.6%. While I would be very concerned about the affect on this fragile economy if the yield were to rise above 5%, I don't expect rates to rise much further for the remainder of this year.

I would like to highlight an expanded feature of this newsletter. Beginning this month, the "Monthly Tip" section will feature advice and ideas from experts in the fields of tax, law and estate planning. I am very excited to offer you this added benefit each month. Please let me know if you find these tips helpful.

Index

August

QTD

YTD

Description

S&P 500

1.79

3.44

14.57

Large-cap stocks

Dow Jones Industrial Average

2.08

4.79

12.88

Large-cap stocks

Nasdaq Composite

4.35

11.56

35.56

Large-cap tech stocks

Russell 1000 Growth

2.49

5.04

18.78

Large-cap growth stocks

Russell 1000 Value

1.56

3.07

14.99

Large-cap value stocks

Russell 2000 Growth

5.37

13.34

35.25

Small-cap growth stocks

Russell 2000 Value

3.80

8.98

26.94

Small-cap value stocks

MSCI EAFE

2.43

4.93

15.26

Europe, Australia, Far East

Lehman Aggregate

0.66

-2.72

1.10

US government bonds

Lehman High Yield

1.15

0.04

18.53

High-yield corporate bonds

The rally we're enjoying surpasses anything that I had envisioned for this year. While I am enjoying this prosperity, I remain skeptical of its breadth and duration. I plan to ride this wave for as long as it lasts, but I won't hesitate to quickly bail should the momentum begin to sputter.

Market Analysis...The Other Bull Market

While most of the media has been focused on the resurgent stock market,
Key Numbers To Watch
Bull Market DJIA Date/Comment
High 11,723 Mar '00
Low 7,286 Oct '02
Recent Midpoint 9,504 Sep 2 '03
Bull Midpoint 6,240 Key downside support

there has been a real bull market that has gone unnoticed by many observers and by most investors: gold. After a 20-year bear market, most investors left the shiny metal for dead. Well surprise, gold is far from dead. In fact, after bottoming at around $260 an ounce three years ago, gold now sells for about $375 an ounce. How much higher could the price of gold go? If the dollar were to dramatically devalue, or if the Fed continues it's policy of attempting to inflate our economy out of its doldrums, the price of gold could go a lot higher, depending upon what happens in the US and world economies. Just as a point of reference, in the late 70's through the late 80's, gold routinely traded between $300 and $500. It peaked briefly at over $800. It isn't unreasonable to think that gold could again reach, or exceed, those prices. Owning gold, or more likely, gold stocks, is both a good investment, and a good hedge against the economic judgement day that awaits us.

Important Trends...Show Me The Money

One very important trend that gets even less publicity than the resurgence in gold is the growth in the money supply. Yet this is possibly the biggest reason for the new bubble building in the stock market. The Federal Reserve has increased the amount of M-3 (the broadest definition of money) every single month for the past two years! That is an astonishing fact. Last year the M-3 increased by about $98 billion. After only seven months this year, the money supply had been increased by over $60 billion. At the current rate of monetary expansion, the Fed will inject another $105 billion or more this year. That is an extraordinary amount of money flooding the financial system looking for somewhere to go. And the rate of growth is increasing; while the growth in M-3 is 8.6% for the past 12 months, it is 14.9% for the past 3 months. One obvious home for all of those funds has been the stock market. What is very disturbing about this trend is that every month the value of the money that you hold continues to erode. This is a hidden, yet unavoidable, inflation. The Fed will be forced to discontinue this rapid expansion at some point or else risk the total ruination of our currency. Inflation is not dead; it is just hidden.

Statistics to Watch...The News Continues To Improve

  • The US trade deficit was $39.5B in June, down slightly from $41.5B in May thanks to rising exports that benefited from a weaker dollar.

  • New orders for durable goods rose 1% in July, continuing a recent trend.

  • Factory orders rose 1.6% in August, marking the third month in a row of growth.

  • The Consumer confidence Index rose to 81.3 in August, up from 76.6 in July, but still below the 83.5 mark set in June.

  • The actual Q2 GDP rose to 3.1%, up from the earlier reported rate of 2.4%. This growth was still dominated by defense spending, which rose 45.9%.

  • Consumer spending rose 3.8% in August.

  • Unemployment continues to be a problem. New weekly jobless claims for the last week of August were 413,000 after holding fairly steady at just under 400,000 for the prior four weeks.

  • New home sales dropped 2.9% in July and mortgage applications are slowing.

Monthly Tip - Accounting for Capital Gains and Losses

According to Allan Ratafia, President of Ratafia and Co., "We are often asked about how capital gains and losses can offset each other, especially when trying to offset short-term losses against long-term gains, and vice versa. Don't worry, the news is good. Here are the key issues:

  1. Losses can be used to offset any capital gains you have. When offsetting, you don't have to worry about long- and short-term. Thus long-term gains can be fully offset against short-term losses and vice versa.

  2. If you have more losses than gains, the excess can be deducted on your taxes up to $3,000 per year. The remainder gets carried forward to future years.

  3. If you have a carryover from a prior year it can be used to offset a gain in the current year."

If you would like addtional information or assistance on tax-related matters, please visit www.ratafia.com or click here to contact Allan directly.

Financial Planning Suggestion...Write (or Update) Your Will

If you are married, are contemplating marriage, have children, are contemplating having children, or would just like to control the disposition of your assets in the event of your untimely death, it is time to write, or update, your will. I know many people don't like thinking about their own mortality, or what life for their decendents would be like without them. But consider for a moment what that life for them might look like without the proper planning and documentation. You don't want the courts to decide who will care for your children. And you don't want your children fighting over who gets the jewelry. It's best if you leave clear instructions describing exactly how you want your family and your estate taken care of after you're gone. Concurrent with writing the will, you should also draft a living will and/or a health care proxy. All of these documents are an integral part of a complete LifePlan. Don't put this off any longer. If you don't have a will, write one immediately. If you have one, but haven't updated it within the past three years, you should consider revising it. To do this, you should engage an estate attorney to help you with the language. If you need a referral, give me a call and I will point you in the right direction.

Poll Question:

On September 4th the DJIA closed at 9,587.90. What do you think will be the Dow's closing price on October 3? The person whose guess comes closest to the correct number will receive a special prize. To respond, please click here and type in your best guess. I will post the winner of this poll, and the secret prize, in next month's newsletter. All entries must be received no later than September 15 to be eligible for the prize.

Last month I asked whether or not the Bear market was over. 80% of you said yes, the Bear has been sent back into hibernation.

Share This Newsletter and Tell Me What You Think

If you found this letter to be interesting, or just want some friends to have a crack at the poll, feel free to forward it to as many people as you would like. I would only ask that you please copy me so that I know to include that person on subsequent mailings.


As I promised, this month's letter has arrived much earlier in the month. I hope to have this out in the first half of every month going forward. I want to thank each of you who took to time to comment on the first issue. It was very gratifying to have such a favorable response. I'm already looking forward to the next issue. Again, I welcome your feedback on what you liked, what you didn't like or what you would like to be added to future newsletters. As always, if I can be of any assistance, please don't hesitate to call me at 914-741-6839 or 800-PHON-WAM.

Personal News and Notes

Many of you have asked me how I did at the Masters National Swimming Championships. I competed in four events and earned a 6th, two 8ths and a 9th. I am now enjoying a much needed break from training. Also, my mother's broken ankle is healing nicely. She is already looking forward to burning her crutches sometime in October. I hope wherever you live the weather is sunnier and warmer than it is here in New York. For those of you like me who have young children, I congratulate you on surviving another summer and sending your children back to school. Today I celebrate the beginning of my 40th year on this earth. I look forward to celebrating with my friends and family over the next few days.

Best regards from your older (and wiser) advisor,


Greg Werlinich
President
Werlinich Asset Management, LLC
400 Columbus Ave.
Valhalla, NY 10595
914-741-6839
800-746-6929
greg@waminvest.com
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Copyrightę 2003, Werlinich Asset Management, LLC and /, All Rights Reserved.