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World Growth Continues Apace
During the quarter ended June 2007, the U.S. financial markets showed less concern about the sub prime mortgage market and a weaker U.S. dollar versus the Euro, British pound, and Japanese yen as continuing growth in world economic activity and increasing corporate profits took precedent in the minds of investors.
During the quarter, all major market indices produced strong gains: the Dow increased 8.5 percent, the S&P 500 rose 5.8 percent, the NASDAQ increased 7.5 percent, and the small cap Russell 2000 gained 4.1 percent. The traditional summer rally came in early spring this year. Thus far, the markets continue to show remarkable strength despite a war in Iraq that is going badly for the U.S., rising oil prices, a sliding dollar, and an unpopular U.S. president.
The optimism reflected in the growth and performance of U.S. and world financial markets are well founded as world economic activity is being driven by expansion in the economies of Brazil, Russia, India, China, and the Pacific Basin region in addition to the oil producing nations. Furthermore, the U.S. budget deficit has declined substantially and now represents approximately 1.5 percent of GDP as compared to about 2.5 percent of GDP a year earlier. I expect that the U.S. financial markets will continue to show high single to low double digit gains for the remainder of the year due in large part to increases in U.S. corporate earnings and active foreign investors seeking to benefit from relatively cheaper U.S. asset prices as the U.S. dollar moves lower.
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Ian Quan-Soon
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Go Global - Buy Local
The first quarter of 2007 was marked by investor concerns about the sub prime mortgage market, a weaker U.S. Dollar versus the Euro and Japanese Yen, a slowdown in the growth of U.S. corporate earnings, and inflationary pressures in the U.S. The major market indices reflected investor caution during the quarter as the Dow declined 0.87 percent, and the S&P 500 and tech laden NASDAQ managed relatively small gains of 0.18 percent and 0.26 percent respectively. However, mid-cap and small cap stocks as measured by the Wilshire 5000 and Russell 2000 indices increased 1.1 percent and 1.66 percent respectively.
U.S. corporate earnings results for the first quarter of 2007 indicate that the U.S. and global economies continue to show strength as earnings increased at a higher than expected rate of approximately 5.3 percent, quarter over quarter, as compared to earlier projections for a slowdown to about a 3 percent growth rate. As a result, the financial markets have resumed an upward trend during the first two weeks in April 2007.
For the remainder of the year, the outlook remains upbeat as the effects of the sub prime mortgage meltdown and substantial declines in the U.S. housing market ripple through the economy. The U.S. Federal Reserve Bank is expected to maintain or possibly lower interest rates in the face of a decelerating economy. The booming Asian and European economies are expected to continue to buoy corporate earnings however, especially for U.S. corporations doing business in the two regions. The safer bet is to buy international U.S. growth companies that pay dividends.
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Ian Quan-Soon
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Year 2007 Economic and Market Outlook
Year 2006 is ending on a happy note for investors, as the Dow, NASDAQ and S&P 500 indexes appear to be heading for higher closes versus 2005. On a year to date basis, the indexes increased 12.77%, 7.18% and 10.39%, respectively. The stellar results were propelled by the pause in Federal Reserve Board interest rate increases in response to a slowing US economy, declining oil prices that peaked at about $79 per barrel in June to approximately $59/barrel currently, and strong reported third quarter corporate earnings that continue to increase at a 14% annual rate.
During the third quarter 2006, the US economy slowed significantly as real Gross Domestic Product (GDP) increased 1.6% from 2.6% in the second quarter and down substantially from the 5.8% growth reported for the first quarter. For the year-over-year period, the US economy has grown 2.9%, the slowest growth rate recorded in three years. The slower growth stems from the after shocks of higher oil prices in conjunction with a marked decline in the housing sector. A slowing US economy benefited inflation as the Consumer Price Index (CPI) increased at a more moderate 2.1% pace in the September 2006 quarter as compared to the 4.7% rise recorded in the year earlier period.
For 2007, we believe that the US and international financial markets will continue to show positive results as the overall growth in the world’s economy continues, albeit at a slower pace, led by Brazil, Russia, India, China and the oil producing nations. We expect the S&P 500 index could increase in the high single digit to low double-digit range in 2007 out pacing its foreign counterparts as the US market has not kept pace with the spectacular gains seen in emerging and Asian financial markets over the past three years.
Valuations on larger capitalization value and growth stocks appear attractive relative to small cap stocks, which have had a substantial run up in prices generally outperforming large issues. The market as measured by the S&P 500 is also attractive on a historical basis, as multiples have contracted significantly from highs of about 25 in the late 1990’s to about 19 currently, despite projected annual earnings growth of 16.0% for 2007. In addition, US corporations are awash in free cash that is available for announced share buybacks and expansion into the burgeoning Asian consumer markets.
Our constructive outlook for the US economy and stock market in 2007 is premised on oil prices remaining within the high-fifties to low-to-mid sixties price range, after-tax corporate growth rates of about 14-16%, relatively strong corporate capital expenditures, and higher real incomes for wage earners that increased 3.3% in the third quarter of 2006. Further the Congressional Budget Office (CBO) estimated that the federal budget deficit declined approximately $68 billion in fiscal year 2006 as compared to the shortfall recorded in FY 2005. The federal deficit was equal to 1.9% of GDP down from 2.6% of GDP in 2005. The good news on the budget deficit is attributable primarily to better-than-expected growth in corporate tax receipts in September 2006, the third straight year of such growth, and to a lesser extent increases in individual tax receipts of about 7.0%, or $ 103 billion, versus September 2005.
We caution, however, that advances in US stock prices hinge on the Fed’s responses to inflationary pressures from higher-than-expected increases in oil prices coupled with a tight labour market and increases in real wages for hourly workers. However, higher hourly wage pressures can be moderated somewhat by increases in worker productivity that rose 1.6% in the recent quarter. Uncertainties about the war in Iraq and near-term results in congressional elections could negatively impact on specific industries such as the health sector (large pharmaceuticals) and giant oil if the latter continue to show outsize profits from prices at the gas pump.
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Ian Quan-Soon
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Ending On a High Note
For the full year 2006, the U.S. financial markets showed substantial gains for all classes of securities as measured by the following major indices. The Dow Jones 30 Industrial increased 16.29%, the large cap S&P 500 index rose 13.62%, the technology stock laden NASDAQ gained 9.52%, and the small cap Russell 2000 index increased 16.99%.
Looking ahead to 2007, I remain optimistic that the markets could continue to show positive results due to a relatively strong U.S. economy. U.S. employment data indicate a tight labor market and rising real wages for workers. The combination of higher wages, low unemployment, low interest rates, declining U.S. Federal budget deficits, and continuation of the Bush administration tax cuts bode well for U.S. investment securities.
Internationally, continuing strength in the economies of the Asian and Pacific Basin regions plus expected expansion in the European economies, albeit at a much slower pace as compared to Asia, we anticipate that foreign financial markets could continue to reward investors. However, we caution that higher oil prices, continuing downward pressure on the value of the U.S. dollar, and negative surprises in the war in Iraq could temper our optimism particularly for the U.S. equity markets.
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Ian Quan-Soon
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Federal Reserve and Oil Hurt Economy
For the year to date, the US financial markets, with the exception of the tech-laden NASDAQ, which fell 1.51%, showed some resilience in the face of continued increases in interest rates and oil prices. During the six-month period ended June 30, the Dow Jones industrials (DJIA) gained 4.0375%, the S&P 500 rose 1.755%, the small cap Russell 2000 increased 7.64% and the mid-cap Wilshire Index increased 2.65%.
The year-to-date gains were muted by a relatively poor second quarter showing as markets were pressured by investor concerns about inflation and continuing increases in interest rates by the Federal Reserve Board. The second quarter saw declines across all sectors, except the cyclical stocks as represented by the DJIA that eked out a 0.368% gain. For the quarter, the S&P fell 1.9%, NASDAQ declined 7.17%, and the Wilshire and Russell indexes dropped 2.32% and 5.29%, respectively.
For the remainder of the year, I expect the US and international markets will end on a positive note as I anticipate the Federal Reserve Board will cease to raise interest rates at its next meeting in response to a slowing of the US economy, continuing increases in worker productivity and an easing in core inflationary pressures. Further, corporate profits in the US should continue to show strength as earnings for the third quarter are expected to increase at an annual 14.0% rate. Currently, the market, as represented by the S&P 500 is priced to reflect a 12-13% annual corporate earnings growth rate.
Internationally, China and India continue to show strong growth in their economies while the pacific and oil producing regions remain buoyant. As a result, natural resources, materials and strong consumer demand could continue to drive world growth into the foreseeable future. Now is a good time to commit additional funds as the US market represents good value.
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Ian Quan-Soon
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World Growth Buoys Stocks
The US and international financial markets continue to show remarkable resilience despite high energy and commodity prices, and higher interest rates. For this year’s first quarter ended March 31, the large cap S&P 500 index rose 3.73%, the tech laden NASDAQ increased 6.10% and the small cap Russell 2000 index gained 13.65%.
Asia and the Pacific Rim countries; Australia, India, China and Japan continue the pace world economic growth as consumers worldwide benefit from liberation of their economies, cross border trade and US industry outsourcing of manufacturing and services.
The US Federal Reserve Bank is expected to raise interest rates at least once more when the Board convenes in May. Further, consumers are expected to slow discretionary spending due to higher interest rates for variable rate mortgages and consumer loans, and higher prices for gas at the pump. Notwithstanding, strong corporate profits, stock buybacks by cash rich corporations plus government and industry spending for the Iraq war and rebuilding Katrina ravaged New Orleans could buoy stock prices in the US. I expect the S&P, NASDAQ and Russell 2000 to show double-digit gains by year’s end.
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Ian Quan-Soon
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First Quarter 2006 Results and Outlook
During the first quarter, the financial markets continue to trade within narrow ranges. The S&P 500 traded between 1164 and 1230, ending the quarter at 1180.59, down 2.9% from 1215.81 at the start of the year. The NASDAQ, the Small Cap Russell 2000 Index, and the Morningstar Mid-Cap Stock Index registered declines of 8.49%, 5.60%, and 1.14%, respectively.
High oil prices and increases in interest rates by the Federal Reserve Bank in an effort to mitigate inflationary pressures were the primary contributing factors to the first quarter’s poor showing.
Notwithstanding the foregoing, I believe that a buoyant US economy, increasing corporate profits, and a slowdown in the rise in home prices due to higher interest rates will eventually convince inventors to return to the financial markets. I recommend using current weaknesses in stock prices to add to your long-term holdings.
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Ian Quan-Soon
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2006 Economic Outlook Report
I remain sanguine about the outlook for the US and international financial markets for the remainder of the year and into year 2006. The increases in energy prices year-to-date, in combination with the disastrous impact of hurricanes Katrina, Rita and Wilma may temporarily slow the US economy as consumers rein in discretionary spending by driving less, reducing Christmas spending and turning down their thermostats during the upcoming winter season. The substantial increases in energy and commodity prices were fueled by strong global demand primarily in China and India rather than shortages in supply. The higher energy prices, which have moderated somewhat, also benefited from speculation in the futures market.
Notwithstanding the negative impact on consumers of higher interest rates and gas prices at the pump, US business continued to report relatively strong increases in corporate earnings for the third quarter 2005 of about 14.0% year over year. However, many businesses have indicated that higher oil prices are being passed along to consumers via higher prices for manufactured goods and services. In September 2005, The Producer Price Index (PPI) increased 1.9% as compared to a 0.6% increase in August. The Consumer Price Index (CPI) rose 1.2% during September while the core index, which excludes food and energy items, rose a relatively modest 0.3%.
The US financial markets continue to be pressured by expectations for increases in interest rates into the next year by the US Federal Reserve Bank in response to the recent CPI and PPI reports. However, there is initial strong market optimism that the newly nominated Federal Reserve Board Chairman, Mr. Ben Bernanke, who is expected to replace out-going Fed Chairman Alan Greenspan on January 31, 2006, favors a more upbeat inflationary outlook for the US economy than the current Board Chairman based on his recent comments and writings on the subject.
US government and industrial spending for reconstruction of the devastated areas in Louisiana, Florida and Alabama could help offset any negative long-term economic impact of the recent storms and reductions in consumer spending. Moreover, as earlier discussed, a new Fed Chairman could signal a moderation or end to increases in interest rates, which would immediately benefit the housing markets and enrich current homeowners as prices rise.
China, India, Australia, Japan and the Pacific Basin are expected to maintain strong economic growths during year 2006, albeit at a more moderate pace in both China and India that are expected to implement fiscal and monetary policies to restrain demand pull inflationary pressures. China and India are projected to slow to an annual growth of approximately 9.0% and 6.8%, respectively for the full year 2006 versus 9.5% and 6.9% projected for 2005.
A recent trip to the United Kingdom strengthened my view that economic growth in Europe will continue stagnant due to outsize social entitlement programs in the form of unemployment and government health care benefits, and pension payments to retirees in Great Britain, France and Germany that continue to be a drag on their economies. Moreover, uncertainty over the fate and future direction of the European Economic Union and the newly formed coalition government in Germany would continue to impede economic growth in the region.
The combination of slower global demand for energy and natural resources combined with increases in production capacity as more crude oil and natural gas come back on stream in the US Gulf region, could continue to moderate energy prices world wide which would benefit consumers and manufacturers. I expect cyclical, drugs and tech stocks in the US and natural resource stocks and consumer goods in Asia to benefit from the current environment.
The catalysts for higher stock prices in the US and international markets in 2006 include: high employment and continued increases in worker productivity, further reductions in the US federal budget deficit due to higher tax receipts, lower energy prices, an end to interest rate hikes in the US, continued strong corporate earnings, and increases in US government spending to help rebuild the storm devastated areas.
Furthermore, US corporations are awash in cash and many are expected to increase dividend payments and initiate stock buyback programs. This is good news for holders of US equities. The Asian markets will continue to benefit from strong consumer demand for goods and services as the expansion and growth of the middle class deepens. This is great news for investors worldwide.
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Ian Quan-Soon
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Outlook for 2005
Despite increases in interest rates, which historically signal bad news for stock and bond prices, the US market showed improvement in 2004. For the year, the S&P 500 rose 9.18%, the NASDAQ Tech Index increased 8.20%, the Small-Cap Russell 2000 gained 15.29%, and the Morningstar Mid-Cap Index advanced 19.66%. However, most of the year’s gains came in the final quarter, following the presidential election. For the quarter, the S&P 500 increased 8.18%, the NASDAQ rose 13.92%, the Russell 2000 advanced 13.79%, and the Morningstar Mid-Cap Index increased 13.68%.
For 2005, I continue to be guardedly optimistic for continuing improvement in the US and international financial markets. The anticipated improvements for the coming year could be tempered by inflationary pressures as a result of the continuing pressure on the US dollar versus the euro and the Japanese yen. Notwithstanding, the continuing up-trend in the economies of Europe, excluding Germany, and improvement in Asia and Japan bode well for US company profits abroad. In addition, US corporations are awash with cash and many have initiated dividend payouts to shareholders. The dividends benefit from favorable tax treatment and, as a result, become more attractive to investors.
The first month of this year has seen a downtrend in the US stock market. This is unusual for the month of January and provides an opportunity to purchase quality equity investments at a discount. I recommend that you consider taking advantage of this January white-sale that could potentially boost portfolio profits for the year.
Good luck and have a happy new year!
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Ian Quan-Soon
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An Important Election
The outcome of the presidential elections will determine how the government will address issues related to the war in Iraq, healthcare, huge budget deficits, a faltering economy, rising oil prices, the impact of China’s growth on the world economy, and the U.S. social security system. The latter could come under pressure when Baby-Boomers become eligible to draw down benefits starting in 2008.
The proposals being offered by both candidates vary significantly in scope and costs. For example, Senator Kerry’s healthcare proposals include the importation of cheaper drugs and allow the federal government to negotiate drug prices with manufacturers. President Bush opposes this plan. Regarding medical insurance, Bush wants to expand employer-sponsored health plans by giving tax credits to help employees pay for their health insurance or to invest in “Health Savings Accounts” with high deductions. Kerry wants to expand existing health programs for the poor while increasing subsidies for employer-sponsored health insurance.
Overall, Senator Kerry’s proposal would go much further in providing health insurance coverage for more people. On the other hand, the plan would cost substantially more than the President’s proposals. This is just the tip of the iceberg. There are also major differences in both candidates’ plans regarding Iraq, the social security system, and the budget deficit. The implications for the U.S. economy would similarly be dramatically different. This election could well turn out to be the determining factor as to whether or not the United States maintains its global economic supremacy. Stay tuned!
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Ian Quan-Soon
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A New Conversation
Year-to-date and for the second quarter-ended June 30, 2004, all financial market indices continued to show gains despite continuing war in the Middle East and a 0.25 percentage point increase in interest rates by the Federal Reserve Bank in June. Further, the U.S. economy continues to strengthen as corporate profits increase and more people enter the workforce due to a pick-up in hiring.
I continue to be upbeat about the world economy, notwithstanding the dark cloud of potential terrorist strikes against the U.S. and other countries. Evil notions cannot defeat the human spirit and our need to evolve.
During the past 228 years, the U.S. has developed the most powerful capitalist economy driven by a large educated middle-class population. Along the way, we have learned to adapt and to successfully manage the ongoing changes and crises that are characteristic of a complex capitalist economy.
We are a long ways from solving the many problems that beset us as a nation that seeks to be a beacon of hope for many throughout the world. However, there is a new discussion taking place among us regarding our collective discontent with our so-called “riches” versus our weakening social fabric and family and community life. This discussion is a good thing. It is further proof of our ability to openly examine and redefine the meaning of our lives and to change the way we do business, which will be beneficial to all.
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Ian Quan-Soon
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Progress Amidst Uncertainty
For the quarter ended March 31, 2004, the S&P 500 Index rose 1.3%, the teach-heavy Nasdaq declined by 0.5%, the Russell 2000 small-cap stock index jumped 6.0% and the mid-cap Wilshire 500 index increased by 5.4%. Again, the financial markets have reinforced the necessity for portfolio diversification across large, medium and small companies. It is also important to hold the right mix of value and growth stocks, based on your individual tolerance for risk.
For the remainder of the year, the U.S. economic outlook is clouded by the following factors:
-Continuing war in Iraq and Afghanistan.
-Possibility of terrorist action within the U.S.
-Potential for increasing oil and gas prices.
-Probable increases in interest rates.
-A close presidential election that requires court intervention.
On the positive side:
-Economic growth continues apace in Europe and Asia.
-The U.S. economy continues to experience low inflation and high productivity.
-The values of homes continue to rise in the U.S., resulting in a wealth effect that is beneficial to our economy.
Barring a major terrorist strike in the U.S., I believe the above positives outweigh the negatives. Furthermore, the U.S. stock market has historically produced positive returns during a presidential election year. In this regard, we are off to a great start.
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Ian Quan-Soon
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How Uncle Sam Helps With Early Retirement
If planning an early retirement is a major priority and one of your new year’s resolutions, Uncle Sam will help you achieve this goal by rewarding you for saving. Recent tax law changes allow increased deductions for contributions to 401(k), 403(b) and 457 retirement plans. For 2004, employees can contribute pre-tax amounts up to $13,000, or $16,000 if you are age 50 or older. For small-business owners and their employees, annual deductible limits on Simple IRA plans increase to $9,000 and to $10,500 for those 50 or older. Self-employed individuals that set up a 401(k) can sock away $41,000, or 25% of pay up to a maximum of $41,000 if you have a Simplified Employee Pension (SEP) plan.
If you make less than $55,000 a year ($75,000 for a married couple filing jointly), you still get a deduction for contributions to a Traditional IRA.
College-tuition deductions have also increased to $4,000 and the new Medicare Prescription Drug and Modernization Act allows families to contribute up to $5,150 tax-free in a Health Savings Account for healthcare costs.
If you are age 50 or older, consider purchasing Long Term Care insurance (LTC). The cost of nursing home care now tops $100,000 a year in New York, an amount few can afford. The key to protecting yourself from potentially devastating nursing home costs is to plan ahead. Purchasing tax-deductible LTC while you are young and healthy enough to qualify is a relatively low-cost alternative for ensuring a high-quality lifestyle in your future years.
P.S. Call us for help with getting started.
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Ian Quan-Soon
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September 30, 2003
Since March 2003, financial markets have rebounded strongly from three-year declines that saw the S&P 500 and the tech-laden Nasdaq end year 2002 at 879.82 and 1335.51, respectively. Year-to-date, the S&P 500 has risen 11.2% to 995.97 and the Nasdaq has jumped 33.8%, to 1786.94. During the same period, small capitalization stocks, as measured by the Russell 2000 index, have increased by 27.3% to 487.68 from 383.09.
I believe that the recent strength in market performances will continue apace as economies in Asia, particularly Japan and China, and in Europe, as reflected in the nascent rebound in Germany, contribute to worldwide economic growth in 2004. The Bush administration has requested $87 billion of increased spending for the reconstruction of Iraq. While I do not expect the full amount to be approved, any additional spending would help fuel economic growth in the U.S. as companies and consumers would benefit from the increased spending. U.S. growth in conjunction with a turnaround in Asia and Europe should provide the impetus for stronger stock markets.
Traditionally, stock dividends were taxed at a higher rate than capital gains for stocks. With recent tax law changes, this may no longer be the case for high-income taxpayers. Consequently, companies that pay relatively high dividends will become comparatively more attractive to investors. As such, the financial markets would reward such companies with higher stock prices. All things considered, this is the best time in years to invest in the U.S. stock market.
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Ian Quan-Soon
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The American Worker
June 30, 2003
We can all now exhale (at least ever so slightly). We have just experienced some major events in the history of the world, including a stock market crash equivalent to what we saw in 1929 and the outbreak of war, which wreaked havoc in financial markets. Notwithstanding continuing concerns about the economic, social, and political costs of our involvement in Iraq, the stock market finally turned positive during this year’s second quarter, after three and one quarter years of declines. The S&P 500 gained 12.9 percentage points, the tech-laden Nasdaq increased 18.5 percentage points and the Russell 2000, index of small-cap stocks, rose by 21.6%.
Over the remainder of the year and into next year, the financial markets will be influenced heavily by talk news regarding projected huge budget deficits, continuing attacks on US troops in Iraq, the upcoming presidential elections, continuing high unemployment and the recessionary economy. As I have indicated before, the stock market acts not as a thermometer that measures current temperature, but rather as a barometer that guides predictions for the future. As such, current stock market prices tend to reflect expectations for future events. That is the good news.
It is interesting to add that most of my clients remained fully invested during the past three and one-quarter years. By any measure, you survived the worst anyone could have predicted for the market four years ago. Your resilience in the face of daunting news is a tribute to your loyalty to the American economic system and the belief in the ability of the American worker to continue being productive during the worst of times. You were proven right. It is the American worker after all, that drives our economy. That is the better news.
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Ian Quan-Soon
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What's Next?
March 31, 2003
The United States stock market rose ten percentage points in the first week of the war in Iraq as success on the battle field gave rise to feelings of optimism. Since then, markets have given up all gains and returned to levels seen just prior to the start of hostilities. Investors continue to be apprehensive about the effects a protracted war would have on oil prices and more importantly, the U.S. economy.
My own view is that the intense fighting will be short-lived, although continued sporadic attacks on U.S. personnel by Iraqis could create uncertainty during the early phase of the occupation of Iraq. However, our experiences in Haiti, Panama and more recently, Afghanistan, should serve to inform us about the degree to which we could expect U.S. presence and involvement in the government of post-war Iraq. If history is any guide, after ousting hostile regimes, the U.S. has quickly facilitated the establishment of representative government, maintaining a low profile, and allowing the citizens to govern their countries. As such, Iraq could achieve some semblance of order within a relatively short period of time.
Naturally, investors are concerned about the negative impact the high cost of conducting the war and rebuilding Iraq could have on the U.S. economy. A short war could cost less than the $75 billion the U.S. government has already budgeted for one month of fighting. Further, funding for the rebuilding phase would be provided by sales of Iraqi oil, which could drive oil prices substantially lower, thereby mitigating the detrimental effects on the U.S. economy.
A short war and lower oil prices would be good news for investors.
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Ian Quan-Soon
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Happy New Year?
December 31, 2002 The past three years were unhappy ones for investors in the U.S. For the third year in a row the S&P 500, Nasdaq, and the Dow Jones Industrials registered declines. During 2002, the respective indexes dropped by 23.8%, 32.5%, and 17.2%. On a positive note, during the last three months, September through December 2002, the three aforementioned indexes rose significantly. For the quarter, the S&P 500 increased 7.9%, the Nasdaq rose 13.9%, and the Dow gained 9.9%.
It would be unprecedented for U.S. markets to decline for four consecutive years. Beginning with the Great Depression, which lasted from 1929 until the beginning of World War II, the Dow Jones Average has declined three years in a row on only two occasions: 1930-1932, the period known as the Great Crash, and 1939-1941. During the latter period, World War II broke out overseas in 1939 and the U.S. declared war on Japan in 1941 due to the attack on Pearl Harbor.
We already experienced our own "Great Crash" in the market due to overvaluation and over exuberance. Furthermore, history teaches us that war is beneficial to the economy. During the two-year period 1942-1943, the Dow Jones posted gains of 7% and 13% annually.
I expect the year 2003 to reverse the downward trend. Placing our current economic/political situation in a historical context, the potential conflicts with Iraq and North Korea are not as onerous as a major world conflagration such as the one experienced in 1941. Nevertheless, the potential war with Iraq and unresolved political problems in Venezuela and North Korea continue to cloud the investment horizon. I do believe, however, that the aforementioned issues will be resolved this year. The probability of an up market for year 2003 is significantly higher than it was in the comparable period preceding U.S. involvement in World War II. This should be good news for market participants.
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Ian Quan-Soon
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Keeping Things In Perspective
September 30, 2002 During the past three months, the large capitalization value stocks, as measured by the S&P 500 Index, have declined further by 17.6%. Year-to-date, the S&P 500 has slid by 29.4 percentage points, the Dow Jones Industrial Index has fallen by 24.6 percentage points and tech stocks, as measured by the Nasdaq, have dropped by 40.8 percentage points. The continued decline in the markets reflects the threat of war with Iraq and the potential negative effects on the U.S. economy.
Operation Desert Storm began on January 16, 1991. Oil prices declined from about $29 per barrel to $18 per barrel the following day, which saw a 3.7% rise in the S&P 500. By the end of the first week of the war, the S&P 500 was up by 4.4%, and by 16% at the end of the one hundred day war.
Although the situation today is different from that of the early 1990's, either a diplomatic or a war resolution of the conflict would be good news for the market, which is now significantly undervalued due to the aforementioned difficulties facing the U.S. economy.
During the past seventy-three years, the large-cap stocks returned an average of about 11% compounded annually, despite six major wars plus other major catastrophes, including 9/11.
If you are investing for the long term, it would serve us well to remember this fact.
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Ian Quan-Soon
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The Business of America
June 28, 2002 I would like to introduce my new assistant, Danny Abajian, a recent graduate of Stuyvesant High School. Val Shlivko, my assistant during the past four years, has graduated New York University and, is moving on to a new career in the computer/financial services industry. One of the great pleasures of my life's work is assisting the young people that I hire from the neighboring Stuyvesant High School to grow into maturity and to pursue their own goals and dreams. Val has been invaluable to our ongoing success and we will miss his dedication and loyalty. We wish him well and know that he will be successful in his endeavors.
I too have learnt much from the young employees: their computer literacy, fresh insights and natural curiousness, provided many benefits. An example was Val's angst-ridden questions about the financial impact of the Enron, WorldCom, and Martha Stewart scandals. Thinking about past corporate misdeeds, it occurred to me that we have been down this road before: the 1960's "Salad Oil" scandal and the 1970's Hunts brothers misguided attempt to corner the market in silver were major market earthquakes.
Brilliant manipulators will continue to pull daring capers and successfully out-maneuver financial markets. The numbers will stagger the imagination, the press will investigate, citizens will be outraged, politicians will rail and, invariably, Congress will implement the necessary market reforms and safeguards. The US remains the only country that prosecutes and punishes its well-connected and powerful citizens for financial chicanery. Apprehended wrongdoers will pay their debts to society, as determined by law, and become infamous via books and movies. The rest of us will continue with the real business of America: earning our keep and making money.
Reaction by investors to the scandals could create buying opportunities. Have a great summer!
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Ian Quan-Soon
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A Room With a View
March 31, 2002
During my 25 plus years in the financial services business on Wall Street, I have had a front row view to the vicissitudes in financial markets. The end of the Vietnam War in 1975 resulted in high inflation and interest rates. Interest rates rose to a high of about 18%, further exacerbated by high gas prices due to the Arab oil embargo in 1979.
In the 1980’s, New York City veered toward bankruptcy and, co-operative and condominium owners were unable to sell their apartments for any amount near the original purchase prices. Furthermore, the US stock market crashed in October 1987, and fully recovered by year-end 1988. The 1990’s started | with the Gulf War and dire predictions that the Japanese were replacing the US economic juggernaut.
However, the American worker rose to the challenge and increased productivity. Consequently, the period 1992-1999 saw the US economy enjoying unprecedented growth. By the year 2000, speculation in Internet stocks triggered a meltdown in tech stocks worldwide. As a result, the US markets and world economies declined significantly. The attack on the World Trade Center last year further threatened the stability of the US economy, which by then had officially entered into recession.
What lessons can we learn from the volatile past and | what should we expect for the future? At the end of the Vietnam War in 1975, the US stock market as measured by the S&P 500 stood at 90.19. On March 31, 2002, the S&P 500 stood at 1147.39. This represents an average annual growth of approximately 10% percentage points. Moreover, recent economic data indicate that the US recession has ended and, the world and US economies are now experiencing higher growth rates.
If we believe that our economy will continue to weather all storms and remain strong and productive, we would do well to continue to invest.
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Ian Quan-Soon
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Year End 2001
December 31, 2001 Individuals predictably experience major life-altering events every ten years or so: college graduation, marriage, divorce, retirement, etc. However, unanticipated and unpredictable epoch-making events animate the histories of nations. In the US, we have embarked on a new epoch that requires a new dispensation.
A confluence of factors; the ageing of the baby boomers, the maturing of “Generation X”, the widespread acceptance of the idea of the stock market as a viable long-term alternative to savings accounts, and the vulnerability of the US to terrorists attacks have forever altered our world, and how we will conduct business and order our lives.
Long-term, we will invest more as our families, financial security and quality | -of-life issues become more important to us. In addition, we will be less ideological: big government will be back, as we demand greater security from terrorist attacks and for retirement and health reasons. War has changed us. Less cynicism has so far characterized our new reality. For us, the world has come more sharply into focus.
Shelby M. C. Davis of the Davis Funds avers, “The stock market predicts like a barometer, not a thermometer. Its moves are based on forecasts of future business and economic conditions, rather than a reflection of current conditions”. If Mr. Davis were correct, the strong stock market rebound after September 11, heralded good news | for the US economy, which officially entered a recession in March 2001. I expect a modest rebound in stock prices for 2002 from the steep declines of the past two years.
I do not know how the overall stock market would perform in the near-term, as there could be different winners (security, computers, cell phones, defense contractors, drugs) and losers (airlines, hotels, etc.).
Many people throughout the world view America as their best hope for the future. Our optimism, flexibility, resourcefulness and resilience continue to reassure that our future and theirs will be bright. We shall not disappoint. That is my firm belief.
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Ian Quan-Soon
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September 11, 2001
October 12, 2001
I would like to extend my family’s and assistant’s, Val Shlivko, heartfelt thanks to you for your concern about our safety following the September 11th tragedy. At the time of the attack, I was in the midst of presenting a financial planning seminar in Trinidad. Most people left work early and the entire country froze for about 24 hours. One would have thought that the country itself was under attack. Such is the power of the media.
To my great surprise, by September 30, not one of my clients had called to liquidate or move the account to safer ground. | Due to the unprecedented nature of the event, we have decided to provide you with an up-to-date report card that reflects values as October 11, at which point the S&P and NASDAQ recovered to September 11 levels.
We greatly appreciate your trust and support. It is people like you that made my job so rewarding and a pleasure. I continue to remain optimistic about the market’s future.
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