Brian McMorris - New Year Financial Outlook - 2007

8/14/2019 Brian McMorris - New Year Financial Outlook - 2007

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To All My Investor Friends: Happy New Year 2007

2006 for me was a year of change (maybe that is true for all years!) It is

the year that my son left home and into his own condo. It is a year that saw

the passing of my wife Susans mother, Renae. My daughter turned 16 and is

now driving her own car. Such changes give me perspective on life in general

and make me more appreciative for the gifts I have been given for the

relatively short time I am here.

This is my sixth year writing an annual financial newsletter cum forecast.

It is my pleasure each December to work on this and share my ideas with you.

Whether or not you use any of the information and profit from it.

Here is what I said in last years newsletter in January 2006 (all myprevious newsletters are posted on my Wealth-Ed.com website for your review):

To summarize the theme for 2006: it is all about Bernanke. The big change

this year will be what the new Fed Chairman decides to do with the Federal

Funds overnight rate.

I think this two-sentence analysis for the coming year, made two months

before Bernanke took over Chairmanship, was very accurate. 2006 HAS been all

about Bernanke. But what has surprised most investors and me is how

successful Bernanke has been in managing the GNP and housing growth slowdown

without incurring either run-away inflation or a recession. I had factored

in a high likelihood that he would not pull this off and had become very

defensive by May. I expected the Fed to overshoot on the side of tightening,

precipitating a significant recession (which would have made my forecast of a

stock market low of DOW 8500 a reality). This is what previous Feds have

done in similar circumstances, where growth, speculation (real estate in this

case) and energy costs are above upper acceptable limits. Given my

underestimation of Bernankes Fed, I still did all right on my market

forecast:

Based on the above historical and current events analysis here is my game

plan for 2006: A range of 8500 to 11,500 for the DOW (just about the same as

2005 and the third year in a row for this forecast range), 900 to 1500 for

the S&P500, 1800 to 2500 for the NASDAQ Composite. I think that the weakness

this year will come in the first half of the year with a bottom during the

summer coinciding with acknowledgement of the mild recession brought on by

short term rates between 5% and 6%. After that, the pre-election fiscal

stimulus, and the end of interest rate increases coming into sight, will

cause a market rally during the fall and early winter, culminating in a

significant Santa Claus rally which went missing this past year (2005).

Other than being too conservative on the upper range for the DOW Industrials,

I would have to say this overview / prognostication was spot on, with highestprices at the end of the year (as of today, Dec. 27, DJI = 12,410, SP500 =

1415 and NDQ COMP = 2414). But I will admit to you that I didnt believe my

own words with enough conviction to get back into the market in a big way at

the summer lows in July. As often happens, in the heat of the moment, it

seemed that the problems in the economy (namely a weakening economy with

inverted yield curve, Israel-Hezbollah trouble and high energy prices) were

conspiring to delay the recovery. Also, we did not really get a mild

recession but only a slowdown in GNP growth, which continues today in the 4th

quarter of 2006 and into 2007. So, I did not benefit like I could have had I


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just reread my letter and acted on its words of advice. I may have given up

10% of return for the year on my portfolio, but was very safe in doing so.

Peace of mind can be worth lost opportunity (at least that is what I am

telling myself).

Last January, I was also very convinced of a real estate (housing)

correction. Speculating on real estate had become a national past time.

Pricing in many locations, especially on the East and West coasts, had lost

touch with reality. If rising interest rates didnt do the trick (at the

time, there was speculation that Bernanke would raise Fed Fund rates to 6%),

then low affordability would. There are logical limits on the percent of

income that a family can pay for mortgage payments and that would eventually

stop the housing price increases. I cited a new book by Dr. Robert Shiller

that provides academic research behind the theory of real estate pricing:

Dr. Robert Shiller (Yale University) precisely defined very long run real

estate growth at 1% over inflation in his new book, Irrational Exuberance

2. This number was arrived at by extensive historical research conducted

by a squad of graduate students. Second, I believe government and industry

data from the last couple months (nearly 20 year high in housing inventory on

the market, days on market at over 60 days, another 20 year high), showsthat the real estate bubble is in the process of being popped. This is due

in large part to the commitment of the Fed to raise interest rates and

discourage excess lending. We will know more next year at this time how

severely the real estate markets turn down, which geographic markets are most

affected and whether all of this precipitates a recession.

This observation / prediction has also proved accurate, though again, the

Bernanke Fed has done a better job containing the real estate market trouble

than I would have guessed based on historic examples. While the very short

term Fed Funds rate has been maintained at 5.25%, there has been no

accompanying liquidity squeeze / credit crunch like in 1990-91 or the early

1930s. This has made it relatively easy to obtain a mortgage for refinancing

adjustable or Option ARMs. And because of the re-circulation of US Dollars

earned by the Chinese and other net-export countries back into our economy,

the 10 and 30 year T-Bond interest rates most important to the mortgage

market, have been held relatively low. All this suggests that in the absence

of some large but unpredictable global financial accident, the Fed and

other central banks will be successful in managing economic growth and

credit. But if there is an accident where will it originate?

The unwinding of the housing bubble has yet to run its course. Only now the

sub-prime ARM and Option ARM mortgages are adjusting that financed real

estate speculation and marginal borrowers the past 3-4 years. Most sub-prime

borrowers were forced to exotic mortgages by the high price of real estate

and their inability to qualify for standard fixed rate mortgages (which goes

to the point of housing affordability as a lid on the market). Some say that

people with ARMs can always refinance to a fixed rate product at market rate(now about 6.25% for 30 years) if there is a need. But the flaw in the logic

is that it took a low 2% interest rate ARM to qualify those borrowers

originally. Now, they must requalify at the higher rate, and most likely

with a lower assessed value on their property. Those borrowers who cannot

meet the higher standards will be forced to default on their mortgages.

Because housing real estate is so illiquid (hard to sell), and because most

people will do anything to avoid foreclosure on their home and loss of all

their principal, mortgage defaults are a slow moving train. It will take up


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to two more years to see what damage the housing bubble will cause. If the

economy holds up, the damage may be light. However, if there is a recession,

even mild resulting in job losses, the damage to the real estate market and

the economy will be much worse.

It is the slow motion bursting housing bubble that might precipitate a much

deeper economic crisis than most are forecasting. Watching for an increase

in foreclosures will signal the crisis too late. Instead, watch the monthly

economic data on joblessness / unemployment rate and consumer confidence. If

those become negative the next 3-4 months, then we will have a much worse

correction.

To avoid the pain of such a steep correction, my allocation today is to hold

50% cash and other short term funds, 15% equities, mostly large cap without

any housing exposure (exclude large banks that today seem cheap and have high

dividends, like Washington Mutual or Wells Fargo), 15% North American based

oil and gas trusts and 20% international equities, where economic problems

will likely be less severe than the USA.

Eight things to consider in 2007 for financial security (2006 suggestions in

Italics for comparison):

I believe this upward trend in commodities and gold will continue for some

time. It has only just started. The gold cycle is similar to the oil cycle.

Both benefit from both being valued as hard assets with intrinsic historic

value, even though the values are different to homo sapiens. As our trade

and budget deficits continue to weaken the dollar, it becomes less attractive

as the worlds reserve currency and gold becomes more attractive. This

change in thinking will take years to play out as gold continues its march to

$2000 per ounce.

1. After a great start to the year, gold and precious metals flattened out

during the second half, along with other commodities. I continue to hold

gold in a mutual fund, the Vanguard Precious Metals and Gold fund (VPGMX). I

have also bought mining companies from time to time, or speculated in their

options, such as Yamana (AUY) or Anglogold (AU). Long term, gold continues

to look good for all the reasons given in previous years. This is a long

term story, and while gold may not head straight up, it will continue to

appreciate in the face of a weakening US currency.

Stay conservative (Still True and will be until equities are again

cheapbelow 10x current earnings); I still think this is not a time for the

market to rally. The market price to earnings ratio is not anywhere near a

typical low in respect to valuation, at the current 17 or 18 times (even

higher once employee stock option expenses are deducted from earnings, which

will be required by July 1, 2006). But a 10x earnings factor would require a

significant inflationary environment. I am not as convinced of runaway

inflation as last year, especially with Ben Bernanke as Fed Chairman. So Iam changing the definition of a cheap stock market to 13 times in a 5%

inflation environment.

2. The stock market action in the past 4-5 months has suggested that an

extended rally may be around the corner. Still, the market has come a long

way off the summer bottom and it needs to take a little time off. Also, the

economy continues to cool and the market will not advance until economic

growth changes direction (or more accurately, until the market anticipates

the change). USA GNP growth is currently at around 2% and still declining


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(from 5.6% in Q1 2006). Assuming the Fed can avoid it dropping below 1%, it

should turn around by the Q3 (July) of 2007. Between now and then, it may be

a tough environment. But once it does turn, and assuming profits stay

relatively strong as they have since 2003, then we are set up for a very good

stock market run. The market P/E is now at close to its historic average of

15. If market price corrects in the first half of 2007 by 15% to 1200 on the

S&P 500 index, for example, with no decline in profits then market P/E will

be below 13.5. In this low interest environment, as stated last year, that

may be as low as it goes and will represent a great buying opportunity.

I predicted oil would move from $25 to $50 in 2005 and it did. This is why I

think that 5% inflation is baked into the cake, even though government stats

dont yet report it. Commodities of all kinds have increased 2-5 times over

what they were in 2000 (when oil was $10 for a time). Much of this is offset

by imports of cheaper manufactured goods from Asia. But going forward,

imports will not get any cheaper (higher commodity input prices and

increasingly higher labor costs are also a reality in China) and the higher

costs of commodities will work their way through the world economy.

3. Higher commodity prices in a growing world economy are a fact of life.

Though commodities are taking a break the past 6 months, with oil, silver andgold all flat and copper actually falling, I think this is a temporary

respite. There is no reason to believe that global resource supplies have

been dramatically increased, but demand continues growing keeping pace with

growth in world economies, especially the very large BRIC economies (Brazil,

Russia, India and China). These are enormous countries with commensurate

appetites for natural resources. That will not change for the rest of my

lifetime. I continue to be overweight oil and precious metals. Now is a

good time to increase positions as commodities have temporarily lost favor

with investors and are relatively cheap.

I have provided detailed explanations in past issues as to why oil can go to

$200 per barrel by 2010 and why gold can go to $2000 per ounce by 2015.

Limited supply and increasing global demand affect both. Gold is an

especially interesting situation given the need for China to diversify its

foreign reserves away from US dollars, so that it can de-link its currency.

Both oil and gold must go higher in US dollar terms if the dollar continues

to weaken against other currencies. Until we in the USA change the direction

of the national debt, commodities will be an attractive investment.

Sell REITs and any commercial real estate holdings; we are at the peak of a

20+ year real estate cycle; REITs will be hurt by higher interest rates and

an eventual economic downturn in 2006. I havent changed my views on real

estate since I said Cash out now; in 2004 and wont change until we get

those REIT dividend yields back to 7-8% like they were in 1995 through 2000.

What is required is for real estate to decline relative to other asset

classes and rents / revenues to increase. REIT yields are now less than

super-safe 6 month T-Bills.

4. Darn, wrong again! REITs continue to confound my expectations. The fly

in the ointment with this advice has been the avoidance of a recession.

While residential real estate is undergoing a predicted correction from its

lofty levels, as long as commercial real estate has high lease rates and the

ability to increase rents in a tight market, REIT prices will stay strong.

Still, with average dividend payouts remaining at less than 5%, much lower

than historical averages, the longer-term outlook for commercial REITs is not

good. Remember, that REITs must pay out 95% of their profits to shareholders


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(limited partners). A 4.5% REIT payout is not the same as a 4.5% dividend at

a bank like Wells Fargo or an integrated oil company. Those companies may

pay out less than 50% of profits and still have a lot left over to reinvest

in growing the business. The only way a REIT grows its capital base is by

issuing more shares, diluting current shareholders. Otherwise, the

appreciation must come from the value of the underlying real estate, which

may or may not continue in the future. Even if those values dont decline

they should only grow with inflation adjusted GNP over the long term (1%

annual). REITs will need to drop by 30-40% to go back to a historical 7-8%

dividend payout. A lot of money will be lost in REITs at some point.

Classic recession proof / defensive sectors like consumer staples and defense

did not do well because the economy held up well against all odds. But

defensive energy and healthcare proved to be very good sectors for 2005,

placing first and third out of the ten S&P sectors (utilities, another

defensive sector was No. 2). I wouldnt make any changes to this prediction,

since I think we will finally see the economy weaken in 2006, though I have

lowered my energy exposure since it has become fully valued at this time.

Utilities, which I never bought, are also fully valued.

5. The market finally began moving towards large caps the past 3-4 months of2006. This is typical of a late stage market that sees a narrowing of

participation and eventual divergence between market sectors. The move to

large cap is also consistent with a more defensive posture by investors as

economic growth diminishes, which it has. While large cap industrials have

been moving up, the DOW Transportation index has been moving down, which is a

long known technical warning sign for the stock market (based in original DOW

theory). This last happened in 1999, and we know what happened next. If we

are in the last stages of this cycle and a significant correction is around

the corner in the first half of 2007, then large cap Value stocks are a

good place to be. It is also a good time to reduce stock market exposure and

move towards cash or short term bond instruments.

Gold mining stocks increased over 40% in 2005 after years of doing nothing.

All the commodities did well in 2005, especially the first half. We are in a

bit of a pullback in most commodities as they have become over-owned and the

target of speculation, but I think this is a significant long term trend and

will add to my positions on price weakness.

6. The commodities and precious metals theme turned out to be my best call

for 2006, especially early in the year. Gold went from $530 an ounce on

January 3 to $725 on May 12. From that point, it has moved down and then

sideways the past six months. Gold and precious metals mining funds were the

best domestic sector in the stock market for all of 2006. As stated a couple

pages ago, this upward cycle in gold prices is a long-term process that has

major global economic themes underpinning the move. It continues to be a

good investment for 2007, even if short-term economic weakness results in

flat or slightly lower prices through mid-summer. Once the economy regainsits footing, gold prices will move up with economic growth.

Hi-yield or junk bonds are at cyclical high prices and will only go down,

especially with increasing defaults at the next economic downturn; wait for

the next recession to rebuild junk bond positions; This was the proper

recommendation for 2005, though the long bonds did not get hammered as

expected. So anyone who did not shorten duration or improve quality got a

break. Given the economic environment and the flatness of the yield curve as

of this date (January 2, 2006), in 12 months, either long bonds will be at 5%


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and maybe much more, or we will be in a recession, at which point, short term

rates will be on their way down. Neither scenario is good for high risk

bonds. Stay short.

The yield curve has remained remarkably consistent and flat for all of 2006.

The Fed concluded its rate increases in July at 5.25%. Shortly after that

the prospect of economic weakness in the second half of 2006 into 2007 caused

long term rates (10 and 30 year) to move down towards 4.5%. This resulted in

an inverted yield curve that presages economic declines or recessions.

While we have avoided a recession so far, a decline in the economic growth

rate has come to pass. Normally during an economic decline, some poor

quality bonds (junk bonds) go into default and are written off. This process

causes junk bond funds to reverse direction and decline in price / increase

in yield to compensate the higher risk.

That has not happened. But there are some antecdotal signs that the process

is just starting. Several small sub-prime mortgage lenders have recently

been downgraded or have been closed. To the extent they default on any

borrowings of their own, this should start to drive junk bond prices down.

If the lending problems spread to the general economy, then more and larger

borrowers will be affected. This would help move the spread between supersafe Treasuries and junk bonds back to its historical average of 4-6%.

Junk bonds should be avoided, but secured senior obligation debt funds,

like Nuveens JRO might be considered. Secured asset funds have a senior

position to even bonds. So, default is unlikely, even if the funded company

declares bankruptcy. Another good option as longer-term interest rates go

back to their normal relationship to short term rates will be Treaury

Inflation-Protected bonds (TIPS). These have been poor investments the past

two years as the real return has been under 2%. But during times of economic

growth and increasing long term interest rates, it is not unusual for real

returns to approach 4% (as was the case in 2003). With inflation at 2%, any

TIPS return over 5%, for a 3% plus real return, should be locked in.

A simple way to protect against a declining dollar is the purchase of

unhedged international funds; this is another good strategy that has paid off

big time for me. I have particularly liked Asian stock markets that are

benefited by the Chinese economic juggernaut. The (weakening) dollar

situation did not work (in 2005), as earlier noted, so there was not a boost

from exchange rate changes. But even with a strengthening dollar, the Asian

markets had a very good year. My ETFs in Korea (EWY, 53.89%) and Japan (EWJ,

24.34%) were especially rewarding. This is a good time to sell half of my

Asian stocks to take profits and protect against a sell-off, but keep half

for continued exposure to the worlds best growth market for the next 20

years. And I still believe the dollar will eventually devalue against other

currencies, so that stock price boost is yet to come.

8. Other than gold and commodities, international stocks have been the bigstory in the markets for 2006. I have been pounding the table for an

overweight in international for as many years as I have written this

newsletter. For that entire six year period, international markets were

underpriced compared to the US markets. Now, that may have changed.

International markets, especially Asia-ex Japan, were big winners in 2006.

China was up 100%, Hong Kong 40%, South Korea 30% and so on, as compared with

15% for the broad USA market.


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The China and Asia growth story will continue for many years. Those growing

and exporting economies will greatly affect our future. Interest rates,

inflation, and employment will all be subject to the Asian growth story. It

will be a great challenge for the Fed to steer us through the obstacle course

presented. In the next 3-4 years, the dollar will continue to weaken as

Asian central banks gradually de-link their currencies from the dollar and

let those currencies float. As the Asian economies buy less US Treasury

products to exchange for their dollar reserves, it will put upward pressure

on interest rates (more supply to finance our national debt but less demand

from foreign borrowers). A weakening dollar is implicitly inflationary. A

weak dollar requires a higher price to buy imported goods (including oil and

gold). Those price increases on all imported goods result in inflation.

Higher goods prices put pressure on labor markets to demand higher wages.

The deflationary pressure from cheap imported goods from Asis that kept a lid

on inflation the past 10 years is over.

As the dollar weakens and devalues the paper holdings of Asian central banks

and businesses those entities will trade their dollars for hard assets, such

as American businesses and real property. We have seen this all before in

the late 1980s when Japan went on a buying spree in America, for the same

reason. But our debt to China and Asia is many times the size on a percapita basis as it was for Japan. We will be required to sell a large

percentage of America to pay our bills. But in the long run a free market is

always what makes our country stronger.

After several years of out-performance, the international markets no longer

deserve an overweight, but should be reduced back to a more typical 10-20% of

a portfolio. The USA is now one of the cheapest markets in the world and

should have an overweight in equities, at least after we have passed through

the expected correction. The only major market that is now cheaper than

America is Japan. So, an overweight in Japanese stocks or indexes is called

for.

Still, Asia is where the growth in the world will be the next 20 years. So,

it is no time to get out of Asia / China. Also, China has begun the process

of de-linking its currency, long discussed in this newsletter. That will

allow the US dollar to weaken against China and will mean appreciation in US

dollars for China stocks, even if there is no significant home market

appreciation.

PORTFOLIO PERFORMANCE AGAINST BENCHMARKS:

Annually I measure my portfolio performance against two benchmarks, the

Fidelity Freedom Fund 2020 (FFFDX, an asset allocation fund designed for

people like me, who will retire around the year 2020) and the Fidelity

Spartan S&P 500 index fund (FSMKX). Really a balanced portfolio, with its

lower risk bonds and cash should logically under-perform a higher riskequity-only portfolio like the S&P500, but I still aim to beat the stock

market with my lower risk asset-diversified portfolio, by making correct

asset allocation decisions (picking the right sectors). Here are the past

eight year results. I have achieved my goal in each of the past eight years.

Though, this year my portfolio which was heavily in cash, benefited from the

sale of my employer and the subsequent exercising of my stock options. That

same stock (STIZ) hurt my performance in previous years, so I dont mind

counting it now:


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1999 2000 2001 2002 2003 2004 2005 2006

McMorris

FFFDX

FSMKX

PROGNOSTICATIONS for 2007:

The story line to watch in 2007 is Where Goes the Housing Market? If

housing bottoms soon and the Fed is able to keep the economy humming, with no

increase in unemployment and somehow with all the required economic stimulus

keep inflation low, then housing will recover and not be a story by year-end

2007. It may not be impossible, but it is a very tall order. More likely,

in my estimation, is the Fed will find itself in a corner and will not be

able to lower interest rates when needed instead holding the Fed Funds rate

at 5.25%. This could prevent the Fed from averting a significant economic

decline, because of its concern over inflation.

This lack of flexibility could lead to a harder landing for the economy, and

specifically the housing market, than hoped for. As discussed earlier, our

national debt has locked us into an inflationary future with the Fed working

hard to manage the inflation to acceptable levels. It is not just the

Treasury and our government doing the deficit spending. The public is also

borrowing and spending freely. Consumer spending has helped prop up the

economy the past 4 years since the 2000-2002 economic downturn. But now, the

consumer is fully indebted with no housing ATM to finance the debt.

How bad is the consumer debt fueled expansion in a historic context? Here is

a chart of government data on the average savings rate for Americans showing

the rate going negative in 2005 for the very first time in history:

Personal Savings Rate vs. 10 Yr. Treasury(data from St. Louis Federal Reserve)

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Jan-59

Jan-62

Jan-65

Jan-68

Jan-71

Jan-74

Jan-77

Jan-80

Jan-83

Jan-86

Jan-89

Jan-92

Jan-95

Jan-98

Jan-01

Jan-04

Jan-07

Jan-10

Chart by "Wealth-Ed.com"

10 Yr. Treasury Rate

Personal Savings Rate


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10

100

1000

10000

Dow Ind 1925-1940

Dow / NASDAQ 1967-1982

NASDAQ COMP 1995-2010

Pre-Election 1935-36,

1975-76

Jul 1924

Jan 1967

Jan 1995

Jul 1936

Jan 1979

Jan 2007

Jul 1929

Jan 1972

Jan 2000 Chart by "Wealth-Ed.com"

Primary Market Decline

(post election) 73-74, 30-

32

2006 brings secondary

correction followed by

new Bull?

In 2006, the negative saving continued its downward trend and how is at 1.0%

(meaning that the public spends $101 for every $100 earned). This decline in

personal savings is really unprecedented in history. It is not known how

this will turn out. But it is only reasonable that there must be some period

of excess saving to offset the excess spending. What happens then is the

transfer from consumption to savings the dollars needed to balance the

equation. That will spell hardship for the economy. When will this happen?

Again, it is hard to know. The Rest of the World continues to finance and

encourage American consumption, to aid their domestic economies and further

full employment. American consumption puts people to work in China. So,

this phenomenon may continue for some time to come.

Because the declining housing market will impair the American consumer, the

burden to maintain economic growth will fall to the capital goods sector.

The good news is that a weakening American dollar encourages capital goods

export as much as it discourages consumer product import. America remains

(for now) the world leader in technology innovation. Capital equipment

benefits from technology improvements, so America should be able to supply

the global economic expansion with equipment and engineering expertise.

I update the following chart each year to draw comparisons to previous

economic cycles that experienced the same economic rotation from one sector

to another. History does repeat its patterns because they are based on human

nature, which does not change.

The 1920s and 30s were punctuated by the Great Depression that was

exacerbated by a housing crisis in the early 1930s. The late 1960s

experienced a technology boom similar to the 1995-2000 period that ended in

an Oil Crisis in 1973/74 which then precipitated a period of high inflation

in the late 1970s and early 80s. The major elements of each period are


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100

1000

10000

100000

J

an-67

J

an-72

J

an-77

J

an-82

J

an-87

J

an-92

J

an-97

J

an-02

J

an-07

J

an-12

Dow Ind 30

Real GNP- Red channels show

20 Yr. trends.

- Blue arrows show

average slope of

major bull market and

acceleration to the

late 1990s bubble.

- Pink arrows show

long term slope of

GNP growth and

sustainable market

slope.

- USA Stock Market

in 2007 is breakingout of the sideways

channel since 1997.

If it continues

breakout over next 2-

3 years, it can

challenge upper limit

of growth channel at

Dow 20,000 in 2008,

otherwide, 7500

continues to be the

lower limit in trading

range

Chart by "Wealth-Ed.com"

almost identical in amplitude and duration (I have used a logarithmic scale

to demonstrate this phenomena). As with any physical upset, there is first

wild gyration followed by a significant period of stabilization, followed by

a gradual recovery period (starting slowly, and then accelerating into

another frothy period 20 years out). The chart shows we are ending the

stabilization period and heading towards a possible long-term upward period

starting between 2007 and 2010.

What happened to the USA stock market in 2006 and where does it go from here?

Another chart I use to show historical trends is focused on the idea of

Channels. Market trends tend to move within a channel on either side of a

trend line representing a price average over a period of time. The trend

line and its associated channel only change slope at significant points in

time, such as the Great Depression or the Oil Crisis. This market analysis

shows we are in a flat trend coming off the Tech bubble blowoff, perhaps

moving on up beyond the upper boundary that was at 11,500 on the DOW

Industrial index. In the past three months we have moved to 12,400, which


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will either establish a new upper limit to the flat trend channel, or will

represent a breakout to a new upward sloping channel.

Technical analysis suggests we should have had to retest 7500 DJI, if this

were indeed the lower limit of the channel, reached last in early 2003. It

may be that 10,000 was the more reasonable lower limit as the market trended

between 10,000 and 11,500 for several years. If so, then the test of that

line in mid 2005 was the beginning of a new upward trend.

The pink lines are parallel to the slope of GNP growth the past 20 years.

The steeper GNP growth in the late 60s to late 80s was due primarily to

inflation that was above the long term average. Over the longest periods,

per capita GNP for a mature economy like Americas will grow at around 1%,

which can be attributed to improvements in productivity, aka technology. All

other growth is due to inflation that does not generate any economic

benefits. The stock market will grow only as fast as GNP plus average

inflation over the longest periods, or around 3 to 4% per year (the Feds

target for a stable economy), plus a risk premium that varies with time. The

risk premium is as low as 1% and as high as 4%.

The light blue lines show stock market growth rates above trend (steeper thanthe pink lines). That rate is not sustainable and will result in a

correction when experienced. Over long periods, the stock market will average

the same growth rate as the economy. This chart helps us to recalibrate

reasonable expectations.

Another useful chart because it has a strong fundamental basis is the

Presidential Cycle chart. It is very instructive primarily because of the

power that presidential politics has in the economy. The President, through

Congress, is able to have very positive or negative effects on the economy

through taxation and spending policy.

Compare the History Repeats chart with the chart of the Dow 30 average for

the past (18) Pre-Election periods. It shows the benefit that is derived

from positive efforts by the incumbent government to stimulate the economy.

This average picture of the market is also identical to both the pattern and

size of the past actual 18 months in terms of appreciation of the Dow 30

averages:

Dow 30 Performance -

Average of past (18) Pre-Presidential Elections

0.00%

5.00%

10.00%

15.00%

20.00%

1 3 5 7 9 11 13 15 17

Months Chart b McMorris F.P.


12/20

In 2007 we move into a pre-Presidential period by July. It is one of the

reasons I forecast the market recovering its first half correction during the

3rd quarter. On average, the following 12 months (until July 2008) see a 17%

market appreciation. Note the yellow circles on the History Repeats chart.

The circles are the 18 month periods before a Presidential election (1935-36,

1975-76 and 2007-).

On the other hand, the 18 month period we have just completed, the Post

Presidential Election period, often results in a negative or flat market

period. We experienced that from January 2005 till the middle of 2006.

Then, on cue, the market began its upward move into the 2008 election, though

10-15% corrections cannot be ruled out, especially early on as in the first

and second quarter of 2007.

Dow 30 Average -

(18) Post Presidential Elections

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

1 3 5 7 9 11 13 15 17

Months Chart by McMorris FP

My Forecast for 2007

Based on the above historical and current events analysis here is my game

plan for 2007: A range of 10,500 to 13,500 for the DOW (a move out of the

range established the past nine years since 1998). We will see a range of

1200 to 1700 for the S&P500 and 1500 to 2300 for the NASDAQ Composite. I

think that the weakness this year will come in the first half of the year

with a bottom during the summer coinciding with acknowledgement of the mild

recession brought on by Fed Funds rates held between 5% and 5.5%. After

that, the pre-election fiscal stimulus, will cause a market rally during the

summer and fall. This will defy the conventional wisdom of a weak September

to October period for the second straight year.

Asset Allocation:

Asset allocation / diversification, along with identifying the best sectorsand skewing the portfolio to those sectors are the key to financial success.

I learned this lesson in 1997 and 1998 as my relative performance showed. I

badly under-performed the late 90s market by having my eggs in too few

baskets (too much STI company stock) and also being overweight the wrong

sectors (commodities, value and REITs before their time).

Here is my relatively conservative base asset mix: 60% stock, 20% bonds,

10% real estate (excluding our home), 10% cash. In 2006, I changed this mix


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for the first time in seven years by decreasing bonds to 0%, reducing the

overpriced real estate segment to near 0%, increasing cash or stable value

money market funds to 40%, and maintaining most of the 60% equity weighting

in energy, international and small cap value.

Equities / Stocks:

Stocks rotate by cap size along with the economic cycle. Historically, the

rotation begins with Small Caps at economic recovery (more nimble) and moves

to Large Caps (better global exposure and able to acquire small caps as the

business cycle generates cash flow). There is also a rotation in terms of

risk, from Growth at the beginning of an expansion, to Value at the beginning

of a contraction. Stocks can be lumped by industry or sector into these

groups of value vs. growth and small vs. large cap, to assist with the

selection process.

The current environment favors large cap value, or at least Growth at the

Right Price (GARP) stocks. A GARP Stock will have a Price Earning ratio

divided by growth rate of less than 1.2. Good candidates in 2007 by a stock

screen with minimum $20B cap size, High ROE, and a P/E ratio that is right at

or less than the forecast growth rate. This screen will generate stocks witha Low Cash Flow multiple and Low Relative Strength (to capture out-of-favor

stocks) accounting for the low PEG. First, lets see how the 2006

recommendations worked out: Diageo (DEO) 39.0%, Annheuser-Busch (BUD, note

Warren Buffet is accumulating this company) 16.7%, Exxon (XOM) 36.9%, Johnson

& Johnson (JNJ) 11.8%, Coca-Cola (KO) 23.4%, Merck (MRK) 40.1%, Altria (MO)

18.4%, Wyeth (WYE) 12.8%, Conoco-Philips (COP) 25%, Pfizer (PFE) 15.5%, Dow

Chemical (DOW) 6.1%, Dupont (DD) 18.3%, and Verizon (VZ) 32.4%.

On average, that was a pretty good list. The list will be similar in 2007

but the highest gainers will not repeat in 2007, the consumer staple and

telecom stocks. Here is the stock list for this coming year: Johnson &

Johnson (JNJ), Merck (MRK) 40.1%, Wyeth (WYE) 12.8%, Pfizer (PFE) 15.5%, Dow

Chemical (DOW) 6.1%, and Dupont (DD) 18.3%, are retained and we will add:

Home Depot (HD), Aetna(AET), Aflac(AFL), Texas Instruments(TXN), CSX

Rail(CSX), Target(TGT), Walmart(WMT), Applied Materials(AMAT), Burlinton

Northern(BNI), Genentech(DNA), Intel(INTC), Johnson Controls(JCI) and United

Healthcare(UNH). The stocks are in sectors that did poorly in 2006:

pharmaceuticals, chemical, semiconductor, transportation (dropping the past 2

months) and discount retail. Because there might be a correction soon in the

market, it would be good to buy 1/3 now, 1/3 in May, and another third in

September, but many of these stocks have already been corrected and wont

fall hard in any case.

There are several established and highly regarded mutual funds covering these

same stocks. Several good and diverse funds are with 2006 performance:

Vanguard Value (VIVAX, 19.3%), Dodge and Cox (DODGX, 16%), Clipper (CFIMX,

12.8%), American Funds Washington Mutual (WSHFX, 16.2%), and Oakmark (OAKMX,15.6%). We can now use Exchange Trade Funds (ETFs) to select sectors. A

good ETF for large cap value, based on its low annual expenses and large

cross-section is: Russell Value 1000 (IWD, 21.37%) or DVY, (18.81%).

There is also a need for some small cap stock exposure in any portfolio. I

choose to change the allocation based on place in the investment cycle. Now

should be the worst time for small caps after seven years of outperformance

since the early 2000 decline in large caps. Since small caps are hard to

pick, unless you know something about a company based on personal experience,


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it is good to use mutual funds or ETFs for small caps. As mentioned, two

good ones (according to Morningstar) that I have owned are Neuberger Genesis

(NBGEX, 8.3%) and Fidelity Low Price (FLPSX, 15.6%). There are several

others that can be researched by using Morningstar. Look for low volatility

(beta) and high relative return. Again, we now have an index ETF to help us

in this category. I suggest: Russell Small Cap 2000 (IWM, 16.87%). There

are also Value and Growth only versions of this Russell indexed ETF series.

Emerging Markets: This is a stock (and bond) theme that should be playing a

large role in any portfolio (5-10% of total). Emerging markets are the

source of future long term growth in the world economy. They provide a good

hedge against dollar weakness, and will increasingly provide a hedge against

the domestic economy (as Asia, for example, becomes a net consumer of

products). The best way to play the Emerging Markets is with managed funds.

Emerging Markets Fund (EMF, 23.5%) has a broad EM scope and provides

exposure to East Europe and Russia. We also now have the option of (EEM,

28.64%) which has been a very good choice. (TEI, 14.5%) is a closed end bond

version of the Emerging Market funds, better this year than last as the

dollar weakened. Pimco also offers a good emerging markets bond mutual fund

(PAEMX, 8.4%). There is also a Fidelity bond fund for foreign emerging stock

markets, with a (FNMIX, 10.9%) ticker.

High Beta / high return stocks: A small dose of speculative, high-beta

stocks can add some performance to ones portfolio. An industry that has

many stocks that fit this requirement is Biotech. If you look at investing

themes that will do well over time, the first thing to consider is the

sectors that are driven by basic human needs.

The best time to buy high-beta is normally at end of a recession, Biotechs

and small tech stocks can be hazardous to the investors health at the top of

a market cycle. They are extremely volatile which is the source of the tag

high beta. Maybe only one of ten biotech companies will actually produce a

viable medicine. No one, not even the founders of the biotech, knows what

the successful compounds will be. The Biotechs were flat in 2004 and 2006

and had small to very good gains in 2005. During the same period, biotechs

have fared much better than large cap pharmas, which until the second half of

2006, had price declines due to patent expiration and litigation. Biotechs

are cheaper today than they have been since 2002. A good biotech ETF that

owns many companies and is capitalization weighted (and includes profitable

Amgen, Genentech and Biogen) is either Ishares (IBB, 3.68%) or HOLDRS (BBH,

-6.61%). The difference in the 2006 return between these two similarly

structured ETFs shows the degree to which active stock picking matters in

high beta funds. BBH tends to have the smaller caps, higher volatility so

does better coming out of an industry slump.

At some point in time, after the market has gone through the multi-year Bear

phase, small cap, high beta technology stocks will again be interesting, as

they were in the mid to late 1990s (peaking on March 10, 2000) and again in2003. It is possible that later in 2007 may be another such good entry

point.

The Hedge:

I added stock options to my portfolio starting in the mid-year of 2004. I

continue using both option contracts and shorts to provide insurance for my

portfolio. Trading options is a difficult craft to learn and you are

competing with the best in the business. I make my share of mistakes, but


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keep options exposure limited to less than 5% of my total portfolio as it can

be a higher risk approach to investing (done correctly, options will actually

lower portfolio risk). I had a slight profit on my options strategies this

year, but that includes owning put contracts (which expire at zero value)

that I am using for portfolio insurance. If I can insure my portfolio at

zero net cost, I am happy with that result.

I started the year using Covered Call options to take advantage of a rising

market and the option premiums that are available by selling Call options

against existing stock. I receive a premium or payment in return for putting

up my stock that will be sold at a predetermined price. But during the year,

price volatility in the market continued to decline. Option premiums are

highest when market volatility is high. With the current low volatility, it

has become increasingly difficult to find good returns (24% annual or better)

by selling covered calls, the most popular of option strategies for the

average investor.

Later in 2006, I began trying more complicated option strategies. One

strategy was selling naked puts that are Out-of-the-Money (OTM) by 5-10%,

which typically have higher premiums than a Call option on a stock at the

same expiration date and strike price. This is due to fewer participants inthe option (lower demand = higher premium). But selling naked puts carry the

risk of getting assigned requiring purchasing the stock when its price is

falling. I have been caught on the naked put strategy a few times this year,

but contained damage by holding the stock until the price recovered (which I

did in spades with Conoco (COP) in April and Apple (AAPL) in July). At

times, I also rolled forward the contract to a later expiration month, or

just took my lumps with a loss that will offset other gains for tax purposes.

Lately, because of my cautious posture on the overall market, I am buying

long term LEAP put contracts In-the-Money (ITM) rather than selling puts

one month out, which is a bullish strategy. By buying puts, I am making a

bet that a stock or the market will decline during the next 12-14 months.

The current low market price volatility makes buying puts less expensive and

also is an indicator for a possible correction. For this strategy, I

typically choose high P/E stocks like Amazon or broad market index ETFs like

S&P 500 (SPY) or NASDAQ 100 (QQQQ). If I think the stocks or index funds

will go up in the near term, I may sell an at the money put contract on the

same stock or fund to help pay the premium for the long term LEAP contract

purchased.

It is possible to hedge a portfolio with this strategy and rather than sell

the long positions in the portfolio, use long term option puts to protect the

portfolio. This strategy is also known as buying portfolio insurance.

Bonds:

During the current period of rising interest rates and the potential for

higher inflation, I have favored short term and inflation-protected bonds

(Treasury Inflation Protected Securities called TIPS) in past years. Since

TIPS are real rate instruments, with a guarantee of a nominal market return

over CPI inflation, the TIPS did not do well in 2005 or 2006, even compared

to a simple money market account. Vanguard provides the low cost TIPS fund,

(VIPSX, 0.94%). The return has been low this year, but is finally looking

promising for next at a lower price basis of $11.84 and with a current 6.0%

dividend rate.


16/20

Seeing the problems with TIPS, early this year, I moved out of TIPs and into

higher return Stable Value funds available with mutual fund companies, and

variable rate secured asset funds, ETFs Closed-End funds like Nuveens

(JRO 19.95%). Both Stable Value and Secured Asset funds purchase shorter-

term commercial paper that allow the investor to act like a commercial bank

loaning at or above prime. Because the paper has a short term or variable

rate structure, rising interest rates do not hurt its value. Stable value

funds also buy some short term government bonds to lower risk (source of the

stable value title) returns are near the 10 year Treasury rate, now at

4.6%.

Just like a bank, secured asset funds like JRO borrow some portion of the

money they lend and therefore have leveraged returns that exceed the actual

interest collected. They typically use very little government paper and have

somewhat lower rated commercial paper, if it is even rated (secured

commercial notes are not rated by the agencies like S&P because the secured

assets provide protection, making risk less than unsecured AAA). Closed-end

funds trade at premiums and discounts to the Net Asset Value (NAV) of the

underlying financial instruments. It is my rule to never buy a C-E at a

premium, but only at a discount. About half the return on JRO this year wasdue to the discount of 8% available early in January reducing to a 1.78%

discount as of 12/26/06. But it is still worth owning JRO for its 9%

dividend payout.

The downside of a fund like JRO will be experienced if there is a deep

recession that causes significant loan defaults. Unlike unsecured bond and

junk bond funds, some percentage of JROs secured debt will be collectible,

but it will get marked down. And because JRO is a closed-end, it will also

sell at a deeper discount to NAV, which will also hurt the share price.

Longer term bonds (over 3 years) should be avoided for the immediate future,

though, if 10 year Treasury bonds make a move to 5.5% (from 4.6%), it would

be a good bet to buy those, as the next move in interest rates would likely

be flat to down. But my bet is that inflation due to commodities and the

eventual devaluation of the USD is structural and baked-in. Inflation always

is poison for long bonds (10 or more years). Because the economy is likely

to weaken, high yield or junk bonds should also be avoided. They are still

at historical low spreads over safe 10-year Treasuries, less than 2.5%, as

has been the case for over two years. A good time to own junk bonds is when

the spread is over 8%, typically during a recession.

Real Estate:

Real estate has seen better times. It was at its best in the late 1990s when

the market thought the internet would replace the need for commercial real

estate. But since 1998, real estate has become expensive by most measures.

But there are many benefits to real estate under different valuationcircumstances. It has low correlation to the stock market, but a high

inverse correlation to level of interest rates. Real Estate Investment

Trusts (REITs) are the best way for the average investor to participate in

the real estate asset class. It is also possible to own individual

properties, but management of those properties requires time and effort.

Also, it is hard to gain adequate diversity by owning individual real estate.

A minimum of 15-20 properties in severalgeographic locations and different

property classes (e.g. apartments, shops, offices) would be required to

become truly diverse.


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Because of the so-called real estate bubble in the housing market and the

coincident runup in the price of the average REIT, it is not a good time to

own REITs. REITs were yielding over 8% in the late 1990s, when the asset

class was out of favor. Subsequent price increases in REIT stocks (and their

underlying real estate) has reduced the return of as low as 1.29% (FRESX),

much less than many dividend paying industrial equities that often pay out

less than 35% of their cash flow. REITs, on the other hand, must pay out 95%

of cash flow according to the tax code. As the housing market has become

overpriced with the availability of low interest rates and high liquidity, so

too has commercial real estate market.

In a period with higher interest rates and less liquidity, and a less robust

business environment, rents and building occupancy will suffer. That will

drop the price of REITs and eventually set the stage for higher REIT yields.

This time is at least 2-3 years away. When that time comes, Fidelity (FRESX,

35.8%) and Vanguard (VGSIX, 37.6%) are good REIT funds, as is Cohen-Steers

Realty (CSRSX, 39.0%). The Cohen Steers REIT fund has a sister ETF fund that

can be traded intra-day (ICF, 41.7%). Fidelity introduced an international

REIT in 2005 (FIREX, 32.9). This might be a good place to pick up strong

real estate returns the next few years while hiding from a declining dollar.

REITs have returned well above their average trend line and the overall

market for the fifth year in a row. Returns have been 300% since January

2002. This cannot continue indefinitely and there will be reversion to the

mean. That will require a very big price drop. A price decline of 50-70%,

would return REIT prices closer to their long term total return trend line

(12% annual total return) and increase dividend yields to back over 6%, where

they were in the late 1990s.

Hard Assets / Commodities:

I have been promoting Oil as an investment now since 2002 (actually, I made

my first oil investment in 1997 with Freeport-McMoran with its 14% dividend,

but was very early on the secular move up. I sold that one for a small loss

when the dividend was cut to 4% during the oil price decline of 1998). In

the 2005 letter, I pushed the oil theme harder than ever and followed it up

with a repeat for 2006. If you went along with the recommendation, you are

today very happy. It turned out to be a solid bet, with average appreciation

over 40% in 2005 and 20% in 2006, depending on whether it was drilling

equipment, producers, natural gas or integrated oil stocks that were

purchased. This will continue to be a good market sector, all though there

may be a short term pull back early in 2007 if the economy sees a downturn.

That will imply lower demand, and hence a lower price for oil. However, the

long term trend favors much higher prices, so a pullback will create another

buying opportunity.

Matt Simmons is an industry expert who wrote a book last year calledTwilight in the Desert. He stated at that time in a Barrons interview

(January 2, 2006 edition):

I've placed a $5,000 bet (with a NY Times reporter) that oil prices

will average $200 a barrel in 2010. I don't have any idea where oil

prices are headed (next week) but they could easily be above $200 a

barrel. At $65 a barrel, or 10 cents a cup, we are still grossly under-

pricing oil, which is why it (high prices) doesn't have any impact on

demand. As the markets get tighter, sooner or later we are going to


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have shortages. And the two times we have ever had shortages in North

America within 90 days, the price of oil went up threefold.

Master oil investor T. Boone Pickens is also public with similar theses

regarding the trend for the price of oil, as is industry consultant Tom

Petrie and consultant Robert Wulff of McDep Associates (www.mcdep.com).

Energy should be a large portion of any portfolio for the next 10 years or

more, during the time Chinese and Asian economic expansion puts supply

pressure on marginal production.

Also in 2004, I began suggesting gold for the first time. Like oil, this

turned into a good bet and the gold thesis continues to look promising. Gold

bottomed at $250/ounce in 2001. Since then, it almost tripled to over $715

in May of 2006 but has declined to around $625 as of this writing. As

reported in 2004, gold has been the Anti-dollar since 1971, when the USA

went off the gold standard and onto a paper based standard (the USD).

Two years ago I wrote: Even if the worst case does not come about (a dollar

collapse), it is likely that the Chinese must de-link currencies in the next

2-3 years (a process subsequently begun in 2005). Our problems are becoming

their problems. Our devaluing currency is expanding their money supply at atime when the Chinese government would like to throttle back to avoid hyper-

inflation, over-investment and ultimately an economic crash. When China de-

links, it will cause their exports to cost more in USD terms, and we will

undergo accelerating inflation. The end result of these concerns is the need

to own either commodities (in the form of mining, energy or other natural

resource companies), and rare metals (gold, silver, platinum, etc) in

certificate or in fact.

About this paragraph, I will not change a thing. In fact, the Chinese did

de-link in 2005 for the first time. They have elected to link to a currency

basket that they will not define. They will gradually decrease their

dependence on American assets. Because there are no other really good fiat

currency alternatives, I am betting they will be adding more and more

precious metals to that reserve basket. What does this mean for us as

investors? Vanguard Gold and Precious Metals (VGPMX, 35.1%) was recommended

two years ago in this space as a low cost way to get the needed exposure to

the precious metals that China will seek as part of its currency basket.

VGPMX has a current 3.3% yield. It returned 43.79% in 2005, well ahead of

actual gold. There is operational leverage in the mining stocks that

comprise VGPMX. The fund manager is also free to move between countries for

exchange rate advantage and types of precious metals depending on what is

most undervalued. Individual mining stocks like AU (-6.5%), Yamana (AUY,

89.9%), Newmont Mining (NEM, -15.0%), or the gold ETF (GLD, 19.52%) are also

available to provide a hedge against inflation. The volatility of the

individual stocks versus the funds argues for the diversification of funds.

The other important Hard Asset investment class is Energy stocks. Again, Iwouldnt change anything, other than to recommend more natural gas and

producer stocks. We have had our pullback from the highs of $78 per barrel

of oil and $14.50 per million BTUs of natural gas ($62.41 and $6.64

respectively as of 12/22/06). Because of long term global demand and limited

supply the energy markets are set for a strong 2007.

The large cap integrated oils came through in 2006 for the first time in many

years, after being left behind by exploration / production companies in the

2002-2005 period. The integrated energy companies are disadvantaged in that


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much of their oil reserves are in countries where the government receives a

large portion of the profits resulting from increasing prices over the

production cost. These same third world locations may even nationalize the

oil reserves and kick out the producing companies. So there is much risk

here. The best integrated companies own large domestic natural gas reserves

and refining capacity where margins are high. Most trade at less than 10x

earnings. Large cap integrated energy companies like Exxon (XOM, 36.9%),

Chevron (CVX, 32.3%) and British Petro (BP, 7.0%) may be the most exposed to

the negatives of this segment. Conoco (COP, 25.0%) which bought natural gas

producer Burlington Resources in 2005 and has a position in Russian oil and

gas, continues as a good bet. It has just had a terrific two-month run.

There are several diversified ETFs in this sector. (IYE, 19.73%) is a good

domestic and diverse choice with a 31.74% return in 2004 and 34.67% in 2005.

(IXC, 19.68%), up 26.47% in 2004 and 29.47% in 2005, provides more

international exposure, and possible benefit from the resulting currency

trade. (OIH, 9.77%) up 37.21% in 2004 and 51% in 2005 is focused on only the

energy equipment manufacturers. This provides a higher beta in the energy

group, which means higher return as long as energy does well. There are also

many energy mutual funds including the Fidelity Natural Resources, (FNARX up

18.82%) that also provides some mining exposure and Vanguard Energy (VGENX up18.92%).

Throughout 2006, I added to my positions in oil and gas producers that trade

as Canadian royalty trusts. This proved a good move until September when

they began to decline as a group. At the end of October, we found out why.

The Canadian government announced it would change the tax-free status of the

royalty trusts and they promptly dropped by another 25% on average. Now that

the stocks have been revalued by the market, that risk is out of the price,

and all that is left is great dividends of over 12% per year and the

potential of appreciation as the tax situation works itself out. There is no

more downside as long as energy prices dont collapse.

I increased my positions in the trusts by over fourfold after the re-pricing

to lock in the great returns with limited downside risk. I own Petrofund

(PTF) even after it was merged with PennWest, (PWE, 3.4%). I also own

PrimeWest (PWI, -29%), Penngrowth (PGH, -17.3%) and Provident (PVX, 12.6%).

All should do better in 2007 while providing a terrific dividend pay out that

is now over 12%. The high dividend pay out makes them best for tax

advantaged accounts like IRA or 401K. They will continue to perform well as

their domestic North American oil and gas reserves gain in value. They are a

strategic hedge against more trouble in the Mid-east. If you buy these,

dont forget to take the Foreign Tax Credit on your tax return, for the 15%

tax currently withheld on dividends by the Canadian government.

Cash:

Cash is good. The good thing about the 17 consecutive increases in the FedFunds rate is that it has brought a decent rate of return back to money

market funds and other short term bond funds like stable value. Now, you can

get 4.5% sitting on your cash until the next buying opportunity in the stock

market. Have a lot on hand for investing opportunities later in 2007.

Have a Prosperous and Secure 2007.

Brian McMorris


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Brian McMorris - New Year Financial Outlook - 2007

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