Money Matters

by Robert Hernandez




The Mid-Year Economic Outlook - 7/2002



The first half of 2002 has been very challenging and disappointing for investors seeking to outperform inflation.  In most cases investment returns trailed inflation, and therefore most investors are looking at a negative return on their liquid assets and equities, so far in 2002.  Among the few exceptions are real estate, gold/precious metals, short and intermediate investment grade bonds, aerospace and defense, and a handful of other industries (i.e. food and agriculture, and consumer non-cyclical companies).  Although the economy continues to show signs of recovery, there remain several significant issues which continue to dampen consumer confidence.

Negative factors and challenges for the second half include:

- Continued corporate accounting scandals and bankruptcies.  This has created a significant lack of trust among investors.
- The weakening U.S. dollar may dampen foreign investing in U.S. Equities and debt.
- A continuation of layoffs across many industry sectors.
- Corporations continue to resist investing in equipment and inventory.
- Consumer debt and bankruptcies remain at all time highs.
- Stock valuations remain high - relative to historic standards.
- The threat of war in the Middle East and South Asia continue to worry us all.
- And of course, the fear of another terrorist attack continues to keep investors and consumers on the sidelines.

Despite all of the aforementioned challenges, rates remain very low.  This should help the economy gradually recover, and it may help sustain the real estate market as more prospective homebuyers continue to qualify for home mortgages.  The FED continues its easy credit policy in its effort to revitalize our economy.  

The excesses of the late 90's and of early 2000, are gradually being drained out of the equities market.  The Technology and Telecommunications industry has taken the brunt of the impact of this major market correction for obvious reasons.  These sectors were the main beneficiaries of the "Bubble", and monies continue to flow out of technology and telecommunications and into companies that have realistic expectations for providing an acceptable rate of return for investors.  These are companies with positive cash flow, low price to earnings ratios, low debt to equity, and an above average return on equity.   

Indeed, there are many great companies out there, in healthy sectors, with the potential to reward investors with a 7 to 10% annual return (over the long term - 10 years or longer).  It is now common knowledge that we Americans were spoiled in the 90's, and we simply need to lower our expectations, relative to our return on our money, over the near and intermediate term.  We need to settle for a more realistic return on equity than we received during the good old bubble years (when 20% annual returns, or higher, were the norm rather than the exception).  Berkshire Hathaway's founder and chairman, Warren Buffet feels that a 7% return on investments over the next 10 years is probably a more realistic expectation.  Since he has made a lot more money than all of us, probably all of us combined, I also agree that 7% is an acceptable rate of return for the near and intermediate term (at least over the next year or so).  

Diversification among as many asset classes as possible, structured in accordance with your specific risk tolerance level and investment time horizon, remains the most prudent strategy for the second half, as it was during the wild and generally disappointing first half of 2002 (and all of 2001, and 2000, for that matter).  Until next time, your Galaxy neighbor, wishes you well….

Best regards;

Robert Hernandez



DISCLOSURE:  

The comments made by the author are meant to educate the Galaxy community on general investment, economic and financial matters and principals, and to entertain.  In no way should these comments be construed as a specific recommendation or investment advice.  Any actions that you decide to take relative to the comments pertained in this authors article, will be at your peril.  This article is not intended to definitively answer any specific investment questions nor does it attempt to give every possible outcome to the issues discussed. Because investments depend on your specific needs, and circumstances, and because your needs are subject to change on a regular basis, the author advises you to seek counsel from a licensed financial advisor on any financial/investment issues or questions that you may have.  Investments are not bank guaranteed, not FDIC insured, and may lose value.

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