SOCIAL SECURITY REFORM
President Bush’s proposed Social Security reforms are probably not going to be implemented at this time. We do not have enough information to be pro or con the issue and our comments are only about its probability of implementation.
Social Security reform proponents want to create an ownership society where the general public would gain more control over, and interest in their retirement investments. Historically, social security has a very low rate of return on contributions. The new proposal would ostensibly have visible and larger returns.
The Pro argument:
1. The plan makes stakeholders more interested in seeing stocks and bonds do well.
2. It creates a universe of more sophisticated, financially aware investors who thus, make more rational, economic and possibly political decisions.
3. It creates donors to politicians from businesses who avoid Social Security tax increases.
The Con argument:
1. The plan creates a big risk of loss, and therefore possible penury in old age for the individuals involved.
2. The plan is partially a copy of the program implemented in Chile over two decades ago, which has a mixed record. Many people are arguing that the Chilean plan was an unqualified mistake.
3. It is a political hot potato. Many Democrats and many Republicans see Social Security as sacrosanct, and too risky to touch.
INDIA’S PRIVATIZATION SCHEDULE
First, the Indian politicians abandon the proposed strengthening of patent protections in India, and thus, cost themselves many jobs from major companies eager to use the highly educated, scientifically trained, English speaking work force.
Subsequently, the governing coalition announced that they are slowing down the privatizations of government interests in public companies. All of this just means that the parties on the left are gaining power in the coalition, which is not good for the Indian stock market. I am less confident about Indian stocks, and would not be surprised to see a pull back in Indian markets while people begin to digest the idea that the left parties, including the communists, do not want privatization. They want control of as much of the economy as possible, so that they can use this leverage for various purposes.
UKRANIAN CIVIL WAR
Wise foreign affairs advisors are increasingly suggesting that a civil war may be brewing in the Ukraine. The pro-Russian south and east are very unhappy with the election results and may ally themselves with Russia in a bid to win their freedom from the strongly pro-Western Europe, west side of the country. Ukraine is a breadbasket that contains warm water ports, and therefore is very important to Russia.
MARKETS THUS FAR IN 2005
Thus far, Australia, Korea, the Netherlands, France and Switzerland are up a bit on the year in their local currencies, but are down in U.S. dollar terms as the dollar has risen 4.5% against the Euro since January 1, 2005.
The U.S., Japanese, German, Chinese and Indian markets are down. When adjusted for the rise in the U.S. dollar, no major market is doing well in U.S. dollar terms except Korea. We believe that this is due to the rising oil price and concerns about the spread of war in the Mid-East. This, combined with slowing economic growth, has frightened investors worldwide.
We are happy with our performance thus far this year. Rising energy stocks, small-cap stocks and short sales have been helpful to us through January 31st, while foreign country funds, with the exception of Korea, have been unprofitable. The accounts that we manage are up by a few percentage points through January 31st, while the U.S. market is down 2.5%, as measured by the S & P 500.
Energy, small company stocks and short sales still appeal to us most. We have cut back our exposure to India, Taiwan and Brazil until events in these areas clarify themselves. We continue to hold U.S. dollars, but we plan to short the dollar after it has rallied for a few more weeks. As we have been saying for years, we see no solution to the U.S. fiscal problems that will not require the dollar to decline longer tem.
Gold has been very solid in its behavior and we expect it to rise substantially over the next few years. The exact timing of the next move up eludes us, but we think buying gold and gold shares on dips is a wise course of action.
Blink: The Power of Thinking Without Thinking, by Malcolm Gladwell.
We always welcome your questions and comments.
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We can be reached by telephone, fax or e-mail.
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Malibu, CA. 90265
Tel: (310) 456-8100, Fax: (310) 456-8093
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