Issue 12

10/18/04

How to Outperform the Markets

Issue #12 - How to Outperform the Markets

1. Commodities Bull Pauses
2. Nobel Prize Winner
3. How to Outperform the Markets

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Dear Friends,

Last week I forgot to mention that this issue would be published a
little late due to the State Cross-Country Meet having been run this
past Saturday. Needless to say my Friday and Saturday were quite
consumed with the meet and I was unable to finish up this edition
until Monday afternoon.

The slight delay however, allowed me to finish up a bit of research
that I wanted to share with you after the topsy-turvy commodities
market of the past week. Your nightly news won't give you the full
information I'll be sharing in today's issue, so let's get right to
it.

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Commodities Bull Pauses

Last week most of the major commodities had a dip in price. Copper
dipped 11% in just one day, it's largest drop in 14 years, and gold
dropped nearly 5% over a period of a few days.

Does this then mean that commodities have had their day in the sun
and will now decline? Not at all, rather it shows that the markets
are taking a few profits and reassessing the worldwide thirst for
raw materials, before pushing any higher.

This is a healthy sign, as it shows that these markets are not
trying to defy logic, as the late 1999 dot com stocks tried to do.
It also gives us a chance to enter positions in stocks that we
haven't already because they've been going up too fast.

This bull market in commodities isn't going anywhere but up over the
next 5 to 10 years. However, the occasional correction/breather is
necessary to keep Wall St. folks honest and to allow us small
investors continued opportunities to make ongoing profits every
chance we get.

Let me point out two major factors that will keep commodities going
for the rest of the decade, if not longer. The first is the decline
of the US dollar and the second is China and it's massive growth.

It is my belief, and has been for the last few months, that the US
will enter another recession at some point in the next 3 years.
Additionally, because of our historically low interest rates and low
inflation, one of the only practical ways the US will be able to
pull out of the recession will be a weaker dollar.

In fact, while you may not already know this, the dollar has already
dropped 16%+ since Jan., 2003. While you may be thinking, "Isn't
that enough? Does it have to go any lower?" The answer is yes and
no.

No it doesn't have to go lower, any more than anything else has to
do anything, but it will anyways. In fact, the number 1 reason why
the dollar will continue lower is simple, because that's what the
Federal Reserve and the Treasury Department want it to do.

For well over a year and a half now, both of them have been 'talking
the dollar down'. Usually it has happened with speeches and so far
the plan has worked, but eventually they may end up having to do
even more, and that's where it will get interesting.

It was Fed Governor Bernanke who made a now famous speech, in which
he stated that if necessary the Fed could "drop dollars from
helicopters". The imagery is powerful and it convinced many traders
that dollars may just be worthless.

The idea that dollars may in fact be worthless, so far is only
partially true, otherwise we would already be experiencing a
depression to rival the 1930's. (I realize that there are other
factors at work that are keeping the US out of such an enormous
hole, but I don't have the space to go into all of them here.)

For now however the dollar continues to trend downwards, just as
surely as China's thirst for raw materials is rapidly rising. China
is expanding at a rate not seen before, thus the Chinese are putting
pricing pressure on almost every commodity.

Over the last 2 years alone, China has caused 50% of the increased
demand for steel, 40% for coal and 40% for oil. Nor will this
enormous demand being placed on the worldwide distribution of raw
materials let up any time soon.

Just a week ago, I came across a prediction that by 2010 China's
consumption of raw materials will be greater than 30% of all
worldwide consumption in copper, steel and nickel. The prediction
went on to add that China would also be consuming 50% of the world's
iron by 2010.

While it's been 10 years since my family left China, I still
remember the blackouts and electricity shortages. It was not unusual
to oversleep in the mornings, because the power had been out
overnight and thus the alarm clocks were all blinking 12:00 instead
of waking you up.

Back in the mid 80's and early 90's, my family lived in the interior
of China and the understanding was that blackouts occurred, more
often than not because our locale wasn't important enough to receive
the juice whenever there was a shortage.

The nice way to call it is rationing, but in reality it was because
of politics more often than economics. Especially because that
wasn't the case in the politically powerful north of China.

These days however, blackouts are just as likely to occur in the
economic hotbeds of China's industries, simply because demand is
outstripping supply by such an enormous margin. Despite what China
has done recently to try and cool off their economy, the demand for
energy is outstripping supply by 7% annually.

To summarize commodities, will continue to be one of the best areas
of investment over the next 6+ years. The key is to pick your spots
and buy when most are worried that the profits are gone, because
that's when they'll be wrong.

This explains why we already have 3 energy stocks and 2 metals
stocks in our model portfolio, not to mention all the stocks that
relate to foreign currencies. I'll be adding more commodities and
currency stocks to the portfolio this week and I have my eye on even
more for the rest of this year.

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Nobel Prize Winner

In light of my previous remarks regarding taxes, I found recent
comments by Edward Prescott, this year's Nobel Prize winner for
Economics, to be quite illuminating. He appeared on CNBC last week
and made a number of comments regarding the Bush tax cuts.

Prescott was quoted as saying that President Bush's tax rate cuts
were "pretty small" and should have been bigger. "What Bush has done
has been not very big, it's pretty small," Prescott went on to say,
"Tax rates were not cut enough."

Lower tax rates provided an incentive to work, Prescott said.
Prescott, who is a professor at Arizona State University and a
researcher at the Federal Reserve Bank of Minneapolis, pointed out
that President Reagans 1986 tax cut lowered overall tax rates while
collecting the same revenue.

What I find interesting is that President Bush's tax cuts have still
managed to stimulate enough revenue generation to increase tax
receipts in fiscal year 2004, which ended Sept. 30th, by a very
healthy 5.5%. This compares quite favorably to last year's decline
in tax receipts, so while not quite enough, the tax cuts have
helped.

Having mentioned the Clintons and their prediliction to raise taxes
back in issue #3, I found Prescott's final comments to be just as
interesting as any other he made. "In the early '90s the economy was
depressed by the tax increase in '93 by about four percent, and it's
right at that level now," Prescott said.

In other words, Hillary's idea that the government should stop
giving us our money back, "on behalf of the common good", is
actually built upon faulty logic. If anything even deeper tax cuts
are needed to continue to stimulate the business environment in the
US.

After all I've still not met a poor person who ever hired a single
employee.

To view the original article, you can find it at Yahoo.com.

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How to Outperform the Markets

I launched Investing With Mom, because I didn't want my mom to have
to suffer through market returns like those most have suffered
through this year. Through the end of last week, the S&P 500 Index
is down 0.30 percent for the entire year. In other words, you would
have been better off investing in a boring ol' money market fund
with a one-percent yield.

But I can't let you suffer like that, so I decided to share the
returns generated by this newsletter since the inaugural issue on
Friday, June 11th. Because the markets were closed that day in honor
of President Reagan's passing, I took the closing prices from
Monday, June 14th and proceeded to decipher our rate of return v.
all 3 of the major market indices.

To do so, I have created the IWM Index, which is a weighted average
just like the major indices. However, to protect my mother's privacy
I will not be revealing the exact weightings at any time in the
future, but it will be adjusted each time we add new positions to
her portfolio, so that it is always accurate. The IWM Index will
always be based upon a starting value of 1500 on Oct. 1st, 2003, so
that anyone can see the complete actual returns at anytime.

So without further ado, here are the returns through the market's
close today, Monday, October 18th, 2004, with total returns and
annualized returns also included:

total annualized
Index 6/14 10/18 returns returns
S & P 500 1125 1114 -0.98% -2.83%
NASDAQ 1970 1936 -1.73% -5.00%
Dow Jones 10335 9956 -3.67% -10.62%
IWM Index 1712 1850 8.07% 23.38%

As you can see, the ONLY positive returns have resulted by investing
in the recommendations included right here in Investing With Mom.
For those of you who have still not signed up for the Advisory
Newsletter, you should do so before I make my next recommendations!

I can't say that all my recommendations will always go up, but I'm
trying to find excellent opportunities so that anyone, no matter how
small their portfolio, can make money. All I ask is that you
subscribe to the Advisory Newsletter, for as little as $7/monthly or
$79/annually.

Just go here, to view all the amazing bonuses you receive, worth
over $1700, just for subscribing! Over the course of the first 2
years, the bonuses are worth in excess of $4000. Thus before you
ever invest, you will be getting a 2 year return of 2531.6% on the
cost of your subscription!

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Wrap Up

The next issue of Investing With Mom will be coming at you pretty
quickly because of the delay in getting this issue out. That said, I
really appreciate your patience as I was able to enjoy an excellent
State CC Meet on Saturday.

While our school failed to have a full team of 5 boys or 5 girls,
we're a pretty unfocused school, the end result was the second
fastest individual time ever on the current State course. In
addition, the young man also finished in 14th place, just barely out
of the All-State designation, which only goes to those in the top
10.

Fortunately for him, and me as his coach, he's only a Junior, so
he'll be back next year to avenge his near miss. Hopefully, next
year we'll be able to place a full team around him, so that there'll
be more to run for than just individual glory.

As a reward, I've got him lined up to run for an All-Star team that
should have no trouble qualifying for the Junior Olympic National
Meet coming up in December, and I'll be sure to keep you all
informed as he progresses.

That's all for now, but keep your eyes peeled for the publication of
the next issue of the Advisory Newsletter, which will occur during
the next 24 hours.

Investments good for my mom and you,
Andy Prior