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Friday, February 06, 2004

This is a recent email I sent to my father. The day before I sent him an email telling him I was going to start selling some stock investments and I thought it was a good idea if he and my mother (both turning 55 this year) start moving some of their retirement funds to more conservative accounts. My parents have always took a conservative approach to investing, which may help to explain some of my approaches to risk. But nevertheless, my father wanted to know why I have such a bearish outlook on the economy and stock market (one and the same in my book). Below is my father's question and then my response.

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Jason,

You obviously feel very strong about the future of the stock market. I
have never been a market timer and over the long haul stocks have always
been the way to go. What is the basis for your prediction and why am I not
seeing anyone else giving this advice. I am not saying you are wrong but I
sure would like to know why you feel so strong about this. Like you said our
retirement rides on this decision. We have always had an extremely
conservative investment strategy but your are telling us to put everything
into an even more conservative position.

Dad

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Hi Dad!

First of all, I don’t want to scare you or Mom with what I’ve said. It’s only one man’s opinion. But here’s the reasoning…

I’ve been reading some behavioral finance books which, by nature, tend to be bearish. But I have to tell you Dad, the authors are making a lot stronger arguments that we are due for a correction, than the bulls who think the market can keep going up and up and up. But even some bulls say they expect a market downturn within the next 12 to 24 months. Don’t get me wrong, I’m not saying to sell everything and keep a shoebox full of gold coins under your bed, but I really don’t see the markets going much higher without a sizeable correction. Not everyone agrees, but one prediction puts the DOW at 2500. I’m not so sure of that one, but I could easily see the DOW back down to its recent lows in the 7500 to 8000 range (it’s currently at 10,500) within the year.

I agree with you that over the long haul stocks are the way to go, because historically they have always gone up. And with a good, conservative money manager like the ones at T Rowe Price, we’ll all be ok. But the problem with mutual funds is that they have to have a certain percentage of assets invested at all times. They can’t just hold cash if they want. And, you and Mom don’t have much of a long haul left.

Luckily, I found out that you can transfer money from one IRA (Roth) fund to another without any tax or withdrawal penalties (unless the particular fund has redemption fees). What I am getting ready to do is just take my profits from sci/tech fund and others and just put them into a prime reserve account which I have already set up.

The reason you haven’t been “hearing anything” is that the mainstream media is always optimistic. It’s their job to be. And especially since it’s an election year, no one in the media wants to be talking about a sour economy. History has shown however that the media, and accordingly the public, doesn’t fully recognize a major market top until after it has happened. And usually by then it is too late. People are always optimistic that their investments will increase in value, even after a downturn. Now, more than likely, those investments will come back, but as we both agree, you are Mom are nearing that age where it’s dangerous to “gamble”. I could loose a fair chunk of my investments and still make it back in 10 or 20 years. But within 10 years your income may very well be zero and you will be living off of you investments.

Also, I wouldn’t bet on the value of your house increasing at the same rate it has just since you moved there. In fact, a lot of people are starting to think that real estate will actually come down in value in the next few years. It’s a simple matter of credit extension. Mom always wonders how these “young people” can have nice houses, cars, etc on the salaries they make. Well the fact is, they really can’t. They’re up to their eyeballs in debt, but the super-low interest rates currently available allow so many people to borrow so much without a second thought.

But what happens when interest rates rise? You might have read how Greenspan and the FED changed their “language” from their last meeting at the end of January. Have no doubt, a rate increase will happen and when it does a large number of people will have a hard time making their monthly interest payments.

It’s a tough pill to swallow, and obviously no one can predict the future. But I just don’t want to see you and Mom struggling when the markets turn down again. You both are too close to retirement and have worked too hard. All I’m saying is “one in the hand is worth two in the bush”. I think a reasonable strategy would be to start moving small pieces of your money into more conservative vehicles. That way, you still have some exposure to the upside while protecting your nest egg.

For example, maybe move some money now to a more liquid fund and then a bit more within 3 months. At the worst in 3 months you’ll be at the same spot you are now. But then again, the DOW and SPX are still below where they were at the end of 2000. The DOW is back up close to its all time high of 11,722 and the S&P 500’s all time high was 1,527 (currently 1,139). The DOW is still down 20% and the S&P is still down 25%.

I’ll try and give you a better recommendation this weekend. But like anything else, do your own homework and make your own decisions. I’m just a little concerned is all.

I hope this helps to explain.
Please let me know if you have any questions.

jasonK.

Thursday, February 05, 2004

Well, I hate to admit it, but I think we might be there. After a slew of bad earnings reports yesterday and today and an article I read today about the tech bubble, I think we are very near the top of this most recent "credit" bubble. Which side of the curve we are on I can not say. The article I am referring to was posted today on the Daily Reckoning (a recent favorite of mine). The author points out that the DOW peaked on January 14 during the first bubble. So far this year the DOW peaked on Jan 27 and on the 28th the FED released their now famous comments with the "considerable period of time" phrase absent. The markets were obviously waiting for the announcement, but I can help but be bearish with the continual stream of disappointing Q4 earnings releases. Perhaps the end of 2003 was as great as we were all lead to believe.

I can only repeat what I have already said. The ship has taken on water and she is sinking. How quickly is another story. But undoubtedly, she is going down... way down.

jasonK.
I need to make a correction from my last posting. I mention that the major indicies were down for the month of January. In reality the Q's closed at 36.46 on 031231 and 37.07 on 040130, a gain of .61. Also the DIA and SPY rose .58 and 2.2 respectively from the close on 031231 to the close on 040130. When I was writing the last post the indicies were all down. But nonetheless, a lackluster January. And considering that the SPY rose to a high of 115.87 on 040126 and then fell back to month end, I feel the outlook for the rest of the year is tepid at best.

More to come this week.

jasonK.

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