Southwest Ranch Financial, LLC
March 2008 Update
The S&P500 is at 1330 on 29-February-2008

This page can be linked to at   ( www.swranch.net/emails/2008-03.htm ).

The Southwest Ranch Financial Market Alert Timing Model is out of the stock market. 

Year to date, the S&P500 index is down 9.1% and the SWR Balanced Portfolio is down 1.2% (with half the stock market risk.)

Here’s the year to date performance of the SWR Balanced Portfolio by asset class.

As of 2/29/08

Market Alert Model
The SWR core model is out of the stock market.

Year Ahead Timing Model
The YAT model is used to indicate periods of buy opportunities within the Market Alert Model’s timing cycle. The SWR Market Alert Model always trumps the YAT model. The YAT model is neutral.

Interest Rate Model
The SWR Interest Rate model is negative on interest rates and long bonds.  

Gold Model
The SWR Gold Model is positive on gold.

Portfolio Summary
What an incredible first two months of 2008. Look at commodities - up 23% and gold is up 16%. The major stocks indexes are seeing very bad returns. More bad news is coming for housing and inflation. I've warned subscribers for months to lighten up on stocks and I hope you did so. We are in a bear market that's for sure. I suspect that by late 2009 this will be labeled as the beginning of a depression. The SWR Balanced Portfolio is doing much better than the S&P500. That's its job - to smooth out volatility. However, I'm not sure how much longer my portfolios can protect your assets. It's time to switch to a full defensive position with dollar and inflation hedges. This won't end up as a 1930s deflation, but rather as an unprecedented inflationary recession. Like I've said before, clear the decks and head for the lifeboats! The USS Deficit Spending is headed for the rocks. Stocks can go much lower. I wouldn't be surprised to see the S&P500 drop another 25% over the next couple years. Massive inflation is every politicians solution and the purchasing power of your assets will greatly diminished if you don't act defensively. I don't believe holding all cash will be a successful strategy.

I think a deflationary recession/depression where prices on everything drop is a long shot. The US is so deep in debt that it needs to repay foreign and domestic bond holders with diminished dollars. Otherwise, we'll be in hock for a hundred years.

Be cautious with advisors who say to stay the course. That path could lead over a waterfall. By all means, don't base your financial decisions on just one source - get a second opinion. I'm doing personally what I recommend in these letters, but that may not be appropriate for you.

Bonds
For a security considered safe by many, bonds sure have a lot of risk factors.  These can work for or against a bond purchaser. Some major risks are: 

1. Interest rate risk – If rates go up, bonds lose value.  Multiply the bond’s duration times the rise in rates and that provides the potential capital loss.
2. Inflation risk -  If inflation rises, the purchasing power of the currency declines
3. Credit risk – The bond is only as good as the issuer.  Treasury bonds have no credit risk.
4. Currency risk – A currency can weaken and its currency will buy relatively less.  This result is similar to inflation risk, but can be independent of inflation.

Treasury Inflation Protected Securities (TIPS) only protect against inflation risk.  TIPS can lose big if rates rise.  For example, Vanguard's VIPSX has an average duration of 6.15 years. As a rough calculation, if long term rates rise by 1% the fund's value will decline by .01 x 6.15 x 100 or 6.15%. In the US we presently have a negative environment for bonds with rising inflation. Alan Greenspan predicts inflation will be a problem for the next 20 years. The rising consumer price index and gold are sending a clear message to bond holders. Watch out below!! I believe long term bonds are very risky and ill advised at this time (and that includes TIPS). If you want to own bonds then balance them with other assets classes in a portfolio. Currency risk can be greatly reduced by adding foreign bonds to a bond portfolio.

If it's inflation you're worried about then TIPS are better than regular bonds but still a poor long term holding. They only get about 2% over the government's declared rate of inflation which understates the actual by about 1.5%. Basically, TIPS are a sucker investment and you can do much better.

Why Are Long Bond Rates So Low?
You'd think that with US inflation rates rising and the currency falling that bond buyers would demand more than the paltry 3.8% interest now paid. Well, any person of sound mind certainly wouldn't loan the government money for 10 years at that rate. Foreign governments buy treasuries to recycle their huge holdings of cash from the US trade deficit. They'll continue to do this until they break their currency pegs with the dollar or the dollar is no longer the reserve currency. That day may come sooner than you think. Meanwhile, nations are building huge cash hoards in sovereign wealth funds. They know US asset prices including stocks will someday hit bargain basement prices and will buy at tremendous values.

Hedge Your Dollar Holdings Now
The dollar is in big trouble and holding all your assets in the currency is dangerous. Look at the decline over the last couple years compared to the Euro. It's even worse compared to some other currencies and gold. This is not irrelevant to the average citizen because it directly affects your purchasing power of imported goods including cars and clothing.

Once the world breaks its pegs to the dollar, the dollar could fall a lot more and faster. Most Americans will go down with the ship because they're accustomed to being part of a dominant and expanding economy. After all, it's been that way for generations. They aren't prepared to psychologically adapt to the new circumstances despite the clear fact that the last 8 years have been a disaster for the dollar and the nation's budget. It goes back further than that if you include the decades of money printing since 1960 and then deficit spending since Reagan started the practice in 1980. We've shipped our manufacturing base overseas while expanding military bases all over the world. We've gutted our infrastructure to buy consumer goods and to support a bloated military-industrial complex. This is the path of all empires of times past. Look at England, France, Spain - all of them. They rose to a high level of national wealth, but didn't adapt to a changing world and continued to support unwise military adventures around the globe while losing their dominant economic might. The politicians can't let go of power and drag the nation down. It's a story repeated time and again throughout history.

Inflation is picking up steam. It's caused by printing too much money and is showing up first in rising oil and food prices. Much of the inflation has been exported to China and the Middle East oil producers, but will come back home. These nations receive dollars when they sell us products and must convert the dollars to their local currency which increases their currency in circulation. Unless the dollars can be used to buy other products from us, the governments use the dollars to buy our bonds thus holding down long term interest rates in the US. They buy military hardware from us and some high tech products, but a lot goes into our bonds. This cycle will soon unravel because inflation is in the double digits in oil exporting nations and near 8% in China. It's causing enormous hardships for savers in those countries (they have a very high savings rate) and political turmoil. It's going to end. When it does, long rates will rise in the US and imported goods will cost Americans a lot more money. China will hold out as long as it can because it needs to grow its consumer base before cutting the cord. They could do it now but it would be disruptive to their manufacturing and would plunge the US into a deep recession very quickly. It's risky for everyone to keep playing the game and it will have to end eventually.

Public and private debt in America is at unsupportable levels. Don't listen to Bush when he says everything is fine. His job is to reassure people and maintain confidence in government policies. All most other politicians care about is the next election. They say the budget deficit is only $500b, but don't tell you that all the wars are "off budget" and that the costs don't show up in the official deficit numbers. In 2009 (after the election) the whole dollar game will fall apart. You have to hedge now. For some Americans, it's not patriotic to bet against the buck. Well, if that's your hangup then I'd suggest you buy some gold coins, wrap them in an American flag and tuck them in a safe deposit box. Remember, these are the same people who told you (and convinced most of you) that the Iraq war was about freedom for Iraqis and fighting terrorists. Don't be a sap twice. Did you construct a plastic anthrax tent in your living room after 9-11 like they suggested? Did you drive around with patriotic stickers and flags on your car in support of the war? Do you believe that it's a good idea for the president and CIA to have the ability in their requested spying legislation to suck up every phone call, email, and web site you've ever visited and all in the name of fighting terrorism? Turn off Oprah and tune out talk radio. Wake up!

The extreme legislation pushed by the Bush administration should be a tip off that they expect more wars in the years ahead or maybe just have totalitarian tendencies. The important thing to understand is that the wars are about natural resources and not about freedom for Arabs or raising the standard of living for Africans. They garner public support by constantly beating the drum of fear and then asking to take away more of your civil liberties. You need to think and read and understand what's really going on. The truth isn't about liberals and conservatives - it's having the common sense to observe what's occuring and acting to preserve your family's welfare. I've talked with survivors who escaped from Germany and Russia in the early 1930's and I never forgot their stories. They didn't die or lose their family and wealth to tyrants and that's because they trusted their observations of reality and not the lies of politicians. They weren't afraid to think for themselves. The CIA teaches its agents to ignore the reports from headquarters if observation of facts on the ground tells a different story. So must you. Don't be intimidated by criticism if common sense leads you away from the crowd.

It's the same with the economy. Any housewife can tell you food prices are rising. Financial market indexes show agricultural product prices for wheat and corn are hitting all time highs by the week. Look at the price of soybeans below. Prices have doubled in the last year to over $15 a bushel. US farmers are pinching themselves and wondering if this can continue. Don't sell the family farm guys - it's finally your turn to cash in.

The government says this is just a blip and no reason for concern. The talking heads on CNBC say commodities are in a bubble. What's really happening is there is huge demand for food coming from developing Asia. Add to that, the money printing and deficit spending is causing producers to demand more for the products to offset the declining dollar. People are selling dollars to buy hedges. It's inflation hitting the wholesale level. Many people dismiss obvious facts if they're not supported by a government authority figure, but politicians lie and put out bad information all the time. Observe what's really going on and trust your senses. I've urged subscribers to buy commodities for years and we've had excellent returns every year.

Now, you must position your portfolio for the rising inflation that will come when the dollar is dumped and the rising commodity costs hit the retail level. Energy is the commodity area most apparent to consumers since they pay for it in home heating bills and gasoline. Oil is rising due to two major drivers: Peak Oil and inflation. Even if nations stopped printing money the price of oil would still go up because world oil production is dropping.

Let's admit the obvious. The Iraq war is a Resource War and it's about oil - 10 trillion dollars worth of the highest quality black goo. It's the age of Peak Oil and resource depletion. Iraq is just the prelude to more wars over energy and water. The major powers are positioning for oil fields, pipelines, and the mined inputs needed by industrialized societies. Unfortunately, the US is making the classic mistake of spreading its lines of defense too thin and wide. Its broad militarization can only continue if its currency remains sound and the economy grows. The facts on the ground (observations in the financial markets) tell me that the dollar standard is falling apart. The US deficits and money printing are getting worse not better. Congress' response to economic problems are temporary fixes that require even more deficit spending and money printing.

This is having an adverse impact on energy production. Commodities are priced in dollars and commodity producing nations don't want to sell their products only to hold depreciating dollars. They figure its better to keep it in the ground. Eventually, the link with the dollar will be broken or maybe they'll ask to be paid in gold. A weakening reserve currency causes gold to be linked to oil depletion and resource development because it's the one true money that can't be debased and it is exchangable for any other commodity.

When the dollar unwinds and the US is forced to deal with its debts and over extended military, the consequences will hit hard. The effects will be borne by consumers who will pay a lot more for the necessities of life plus we'll see higher taxes. Don't make a one-way bet that the current environment of cheap import prices and unchallenged US dominance will continue forever. Economic might is shifting to Asia. China will never become a car culture like America because of rising oil prices. They don't have to. They are building bullet train networks (250mph) around the nation while in America it takes 4 days to travel on Amtrak from Phoenix to Chicago. They're preparing and adapting to economic changes while we're standing still and paying subsidies to oil companies. We send them money to buy high definition tv sets and they're using it to build a modern infrastructure of nuclear plants and vast wind farms to harness energy into their grid.

The US economic decline is appearing first as deflation within the country with falling asset prices and stagnant stock indexes. In fixed dollar terms losses may appear minimal but in terms of purchasing power the dollar is already declining dramatically. Inflation is showing up in products we export like grains because it takes more dollars to compete with stronger foreign currencies. The real political problems will hit when exporting nations in Asia revalue their currencies and our import prices surge. People on a fixed income in America will be crushed by inflation and higher taxes. At some point, after many years, equilibrium will eventually be reached when the trade deficit drops to zero. Our imports will match our exports, but we'll be a lot poorer nation. Until the flow of dollars going offshore ends, we'll have inflation. Meanwhile, foreigners will buy up US assets on the cheap.

To maintain purchasing power its imperative to own stronger currencies and own things like gold and commodities that are real and can't be faked. If you properly hedge your investments then you'll gain purchasing power and will later have the investment opportunities of a lifetime right in your own neighborhood. For those who have cash, multi-family apartment buildings will offer good value and with positive cash flow. Stocks will be cheap and dividend yields will be high. The good news is you can hedge your dollars easily right now and within the parameters of a balanced portfolio.

I'm amazed by the bad advice from most financial advisors. They say "stay the course" or "invest in the stocks of US exporters". On the Vanguard web site I read an article suggesting retirees consider going back to work or cutting back on expenses. Cutting back is fine for a year or two but what if it goes on for twenty. As much as I like Vanguard, this is not the best advice. They should be telling people how to balance financial risk by holding inflation and dollar hedges. This can be done within a balanced portfolio. By all means see a financial advisor who can assess your situation. You need professional assistance and not advice from some shyster out to make commissions. The worst financial advisors are biased by self interest and in maintaining control of your investment accounts and earning commissions. They'll steer people right off a cliff. Find an independent advisor who charges a fixed fee and express your concerns about the dollar and inflation.

The situation is already unraveling and people are feeling the pain. Fidelity Investments reports that people are drawing down their retirement accounts and are paying big penalties because they need cash.

"At industry leader Fidelity Investments, withdrawals from 401(k)s surged 17 percent surge in December - the biggest jump on record, and a surge the company calls "dramatic."

I personally have older people telling me they can't earn anything on their certificates of deposit and are worried about paying their bills. I'm not a financial advisor and tell them to find a good one. Family members tell me their concerns too and when I suggest buying a commodity index fund they say it's too risky. They won't know the disastrous consequences of ignoring financial risk management until it's too late. Nothing I say can cause them to budge and act to preserve their assets. In the Midwest they call this dumbfounded stare of confusion "a deer caught in the headlights". Those deer become road kill.

Dollar and Inflation Hedge Suggestions
I've been asked if I am advising against the balanced portfolio strategies in my book, "How to invest if you can't afford to lose". In a word, yes. The book offers broad information on managing money and the suggested portfolios are much less risky and costly than those proffered by the financial services industry. Simply look at the year to date returns of my Balanced Portfolio versus the S&P500. However, I don't believe even a 40% position in index stock funds is the best approach at this time. Bond funds are also too dangerous. It's still important to hold a variety of asset classes but I suggest more of a hard money approach with lots of dollar hedging.

For most investors, a balanced approach is best. I really like the Harry Browne Permanent Portfolio Strategy of the 1970s. It offers balance with a strong emphasis on beating inflation but it doesn't ignore equities. Stocks will have a tough time until the asset markdown process is completed. I'd be patient and wait for excellent values.

Keep It Simple Method
1. Put money into the Permanent Portfolio mutual fund PRPFX. It's 1/4 each in gold, stocks, bonds and cash with foreign currencies. Year to date it's up 5%. Your investment decision is done and your money is safe. I've back tested this strategy and it works. It under-performs during strong periods for stocks, but still provides acceptable positive results over average 3 year time frames.

2. SWR Balanced Hedge Portfolio
Cash: 1/3 in money market accounts or CDs. Divide the rest up among the currency ETFs in equal amounts FXE, FXC, FXF, FXY. I think the Swiss Franc and Japanese Yen will perform the best.
Bonds: 1/2 Loomis Sayles Bond (LSBRX) and 1/2 in BWX (tracks the Lehman foreign bond index and is dollar unhedged)
Stocks: Hold only dividend paying stocks of the bluest blue chips (perhaps gradually buy those on my web site). Place the balance in an index of foreign stocks - there is no need to rush to buy. Place a total of about 1/3 of your stock allocation into energy stocks (VDE, VGENX) and gold stocks (USAGX and others). Gold is now priced about $500 over the cost of mining it. Gold stocks could perform better than bullion in the period ahead).
Gold and Commodities: Buy coins or own GLD and a commodity fund like PCRIX, GSG, RJI or a bit of all. I believe commodity prices are going higher for many years. Gold is headed higher because US inflation is just ramping up.

I realize that people may look at the gold price at $960 and figure it's too late to buy. I believe gold will rise another 50% at least, but can't provide a timeline. Expect a wild ride in gold and commodities. Dividing your assets into the four classes like I suggest covers the major asset groups and diversifies away from the dollar. The SWR Balanced Hedge Portolio isn't about getting rich; it's about preserving your wealth and not losing to inflation. If you invest in the standard 60/40 stock bond mix recommended by 90% of financial advisors and the mutual fund web sites, you are going to be killed.

Don't go crazy and put all your money into gold or listen to wild eyed forecasts from promoters predicting the end of the world or offering extreme investments. Keep your head screwed on straight and let your balanced and diversified portfolio do the work for you. Don't panic, but by all means act. It's easy to get caught in the trap of avoiding portfolio balance because it appears "obvious" that bonds will do poorly or "commodities are in a bubble". Assets are priced right now exactly where they should be based on the decisions of millions of world investors acting for many different reasons. Never forget that.

Opportunities Ahead
Whoever is the next president will have daunting task of trying to fix the economy. Short term this will probably result in massive spending programs and higher taxes long term. Inflation will rise. To keep taxes low they'll probably pillage from the future. There is $4 trillion in future tax dollars locked up in IRA accounts and it may prove irresistible to the politicians. They may offer people with IRA plans the opportunity to convert IRA assets to a Roth IRA and at an attractive low tax rate. If taxes are higher in the future as I certainly expect, then converting to a Roth early and paying the taxes may be a good idea.

At some point in the future, US bond yields will be quite high and inflation will be peaking out. Switching to treasury bonds near the peak of yields will offer a lifetime buying opportunity of locking in high inflation adjusted rates. Be patient because we could have a long wait.

Don't Delay
Year to date the DOW is down 7%, the S&P500 is down 9%, and the Nasdaq is down almost 15%. Commodity prices for basic materials and agriculture are up over 10% and the dollar continues in its downard channel. Inflation is here and rising and risks are increasing.

In summation, I'd suggest you hedge the dollar and shift your equity exposure to dividend stocks when they offer excellent value. Don't rush to buy dividend stocks because the prices appear low, but patiently wait until they're lower in price and the yield plus the expected growth rate of the yield exceeds 10% - a high rate of inflation. Own some gold and commodities. Avoid bonds except for an aggressive and opportunistic fund like LSBRX. Hold cash in a basket of foreign currencies. My dollar hedging portfolio is not extreme, but it is much different than what you're used to hearing about from financial advisors. When you consider the consequences of doing nothing, I thing it's quite reasonable.

Suggested reading for a quick understanding of the broad issues: Some of the titles sound extreme because that's the nature of book publishing. The content is excellent. Take a few sick days off from work and get up to speed fast.

Crash Proof by Peter Schiff; Discusses general economic conditions and suggests an investment strategy. Good book, but you don't need his investment service.
The Coming Economic Collapse by Stephen Leeb; Oustanding explanation of the oil issue
A Bull in China by Jim Rogers; Describes what's going on in China with our trade deficit dollars
Resource Wars by Michael Klare; You'll understand the Iraq war and the others to come

Best Regards,
Southwest Ranch Financial, LLC    (www.swranch.net)
Tom Gleason, Manager & Researcher

Author of: How To Invest If You Can't Afford To Lose

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Investing involves risk and the future performance of the models cannot be guaranteed. SWR is not a registered investment advisor and nothing published by SWR should be considered personalized investment advice. Any investment recommendations made by SWR should be made only after consulting with your investment advisor and only after reviewing the prospectus or relevant financial statements.  SWR does not receive any compensation for mentioning stocks, funds, or financial products.

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