March 31, 2001 Now Are the Times That Try Men’s Souls The NASDAQ has plummeted 60% from its unreal March, 2000 levels while the S & P 500 Index and the Dow Industrials have just entered bear country with 20% declines. You probably thought those March, 2000 amounts were real and you had already mentally spent the money it represented. Now, you are wondering why you didn’t sell then and waited until now, to reinvest. Hindsight is 20/20. But for those of you who invested in the market prior to mid 1999 you may still be in positive territory. But you are still waiting for the market to come back. When, you ask? Now that the Federal Reserve has cut interest rates three times in rapid succession, history shows that one year after such an event the Dow and S & P 500 Index will be up approximately 20% and NASDAQ 40%. If you have a portfolio designed by me, your personal answer is closer to 30%, midway between the three averages. Hold on! The best seven years are yet to come. The Tidal Wave is Coming Just before a tidal wave hits, the water level on the beach drops precipitously. That is what I think is happening now. The Federal Reserve increased the money supply in 1999 in order to prevent an expected cash shortage due to Y2K. The shortage never materialized, so the Fed by raising interest rates too much, caused the 2000 meltdown by contracting the money supply too much. Now, money supply growth is surging and some economists think that’s exciting news for the economy (in 6-9 months from the last raise). Investors Business Daily 4/3/01. Money supply measurement is the best yardstick for prognosticating stock market performance. In addition to the money supply, which is a near term measurement, I believe the longer term shows a once in a lifetime coming together of two events which will create the “Perfect Storm”. The first event is that the baby boomers are starting to finish up with paying for their two children in college. The dollars that they will no longer have to spend for educating their young will either be put to use in being invested for their retirement, or it will be spent on things for them. Considering that no matter what the boomers do is important because of their sheer numbers, this change in direction is very important. The other event is the children of the boomers, Generation Y, the echo boom, is starting to graduate from college and will be pairing off and starting to form households. Household formation is the largest source of domestic consumption that we know of. For approximately the next seven years, I believe the workforce will continue to be dominated by the boomers who are in their extremely productive years, with each year more and more inefficient Generation Yers entering the workforce. This means that the greater consumption and, hence, greater production should occur at low or no inflation levels since the increased productivity of the boomers will predominate the market. After seven years, the stated trends having continued, will cause higher inflation levels to reoccur because of the expected departure of the boomers from the workforce. This departure will tilt the equation toward the increasing amount of inefficient echo boomers. In short, increased production will no longer be outweighed by increasing productivity. That will signify the beginning of the end of the tidal wave. But before that, I believe there will be the best seven years of investing, ever. Everybody into the surf! Luxury Auto Depreciation Dollar Limits Unchanged for 2001 The IRS has issued the inflation adjusted depreciation limits for business automobiles placed into service in 2001 and the annual income inclusion amounts for business autos first leased in 2001. The Code section 280F depreciation and expensing limits for so-called luxury automobiles are adjusted each year for changes to the automobile component of the Consumer Price Index. Thus, the luxury auto depreciation limits for regular cars placed in service during 2001 are $3,060 for the first tax year, $4,900 for the second tax year, $2,950 for the third tax year and $1,775 for each succeeding year. Federal Taxes Weekly Alert 3/1/01. If you want to know how much of a car you can afford, visit the calculations section of our website at www.lisch.com. The IRS also announced the inflation adjusted dollar limit for employer provided autos, the personal use of which can be valued for fringe benefit purposes at the mileage allowance rate of 34.5 cents per mile for 2001. Federal Tax Weekly Alert 3/1/01. If you have any questions about the foregoing or any other business or financial matters, please call us.