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Savvy Investor Column-Fall 2002

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Stocks are up. Stocks are down. US Airways seeks bankruptcy. United Airlines considers bankruptcy. American Airlines set to downsize.

Asset acquisitions in the go-go days are rapidly depreciating, causing large corporations to take major write-offs. For example, Vivendi plans to charge up to $9.78 billion to account for asset depreciation due to the steep drop in its share price. WorldCom comes up with additional multi-billion dollar accounting issues. Corporate executives are being indicted and charged.

Is it little wonder that the financial markets have a lack of investor confidence?

Many economists have said the stage is set for corporate profits to recover. Yet, the equity markets have a crisis due to investor confidence. Many economists are alleging there is a resurgence in the domestic economy. Gross national product growth has clearly slowed. For example, the second quarter showed that productivity increased a mere 1.1% in the second quarter for non-farm business, whereas the first quarter gross national product growth was at a 6.1%, projected rate. The first half year, actual growth will be somewhere between 3% - 4%. That is not that bad.

Industrial production continues to increase, showing that manufacturing productivity grew at 4.9% in the second quarter and actual output rose as well. Yet the current rate of unemployment is still unchanged through July at about 5.9%. This is a historically low rate for an allegedly post recession period. One of the biggest issues happens to be cash in the economy. Are companies going to increase their capital spending budgets after a downturn of almost two years? Without upgrading, installing and purchasing new plants and equipment, the lack of significant capital projects means that there are less jobs, less money, and less opportunity for growth.

What does that mean for investment? Investors are looking clearly more for quality than quantity. Quality not only in shares of stock, but dividend paying stocks that have an increased yield appear to be the issues that are receiving more attention. For example, with money markets paying approximately 1.1% - 1.4%, why wouldn’t a stock dividend of 4% - 6% look attractive? For example, short term bonds are actually paying the 3% - 4% range. Currently, an opportunity to increase investment yield while obtaining equity in quality companies exist. Remember, though that should a company file for bankruptcy, which is becoming more the order of the day in Chapter 11s than previously, equity holders usually get wiped out, whereas bond holders normally receive something. This is something to consider, but one must also look at diversification of their equities and their bonds to increase their rate of return.

All the leading indicators through the second quarter on stocks indicate a year to date decrease. For example, the Dow is down 7.8%, the S&P 500 is down 13.2%, the NASDAQ is down 25%, and the Russell 2000 is down 4.7%. Whereas a bank account, once thought to be only for the foolish, looks like a great place to have money parked in the current economy. For example, rates of return on certificates of deposit range from 2% to 4%.

As always projected, the market will rebound, but no one seems to know when. If I did, I’d sure let you know. However, I am as perplexed as everyone else is relative to why we have so many differing factors affecting the economy.

If one tracks capital spending as well as consumer confidence, we will have an easier time realizing where the economy should go. Statistically, when 10 year bonds are paying 5.1% and stock dividends exceed that amount on many fine companies, it makes us realize that we must pursue alternative strategies in our portfolios and that conservatism makes sense if one errs on the side of value, quality companies and a diversified portfolio of stocks, bonds and oh yes, cash.

Don’t panic in the market, but don’t be foolish believing that everything will turn around tomorrow.

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