INSIDE FINANCE
Three Down, One To Go

By Robert M. Jaffe, MBA, AAMS
October 14, 2005

The third quarter brought with it good news in the midst of the tragic impact of Hurricanes Katrina and Rita. From a short-term investment viewpoint, the news is good in that the markets ended the quarter on a positive note, all up.

The broad market as measured by the S&P 500 Index closed on September 30 at 1228.81+3.1% for the quarter, +1.39% y-t-d.; the Dow 10,568.7 +2.9% Q3, -1.99% y-t-d; and the NASDAQ 2,151.69 +4.6% Q3, -1.09% y-t-d (The Wall Street Journal).

As I predicted in my last column, on September 20, the Fed raised interest rates for the 11th time signaling their continued strategy to curb inflation and their underlying belief that the economy, despite rising energy prices and the effects of the hurricanes, remains in an expansion phase. According to Dallas Fed President Richard Fisher "runaway government spending was a risk to the economy." (Investor's Business Daily, 10/5/05). My personal feeling is that the current fiscal policy is profligate. You may recall that I cited the surplus of the Clinton administration as being unproductive and needed be put to work. However, the current level of deficit spending is no way to run a business. Either we cut back spending or provide for making up the shortfall (an understatement, to say the least) through appropriate measures and we all know what that means….three little words…Internal Revenue Service. It remains to be seen what the administration will propose and how congress will dispose.

Speaking of spending, the cost of the Iraq war continues to skyrocket with no end in sight. Rising oil demand and refining capacities only exacerbate our dependency on the foreign resources…read Mid East. Further reliance on foreign investing in the U.S is immensely important, both in stocks and government bonds. The dollar's strength - +12.1% relative to the Euro, 8.2% to the Yen, and 6.9% to the Pound Sterling (The Wall Street Journal) should dissuade foreign investors from fleeing dollar-denominated assets. The spread between countries' interest rates is key, and as U.S. rates are high the dollar should continue to strengthen.

So what's ahead for you and me? Expensive oil, inflation, rising unemployment, and the threat of terrorism cannot be ignored. Nevertheless, strong fundamentals and low equity valuations make the near-term future seem brighter. Corporate earnings growth is growing at a healthy pace and this usually correlates to higher equity valuations in the long- term. Investors look to the highest yielding asset which should cause equity prices to rise. Interest rates are near historic lows, and there is plenty of cash to invest both by corporations and individuals.

A long-time friend and client, a very savvy and successful entrepreneur, asked me recently whether it made sense for him to remain in equities in light of a sluggish year and his personal (enviable) circumstances. The answer is unequivocally YES. Despite our specific time frame and level of risk tolerance, equities play a very important role in diversifying a portfolio designed to help attain our objectives, whether dealing in millions or thousands.

This being the beginning of the Jewish new year, I wish you the traditional greeting L'Shana Tovah….literally "A good year."

Please Email bob@cfsias.com with your questions.

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INSIDE FINANCE will appear regularly, addressing financial matters of interest to our readers. Any questions? Email bob@cfsias.com

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member NASD/SIPC. Cambridge and CFS are not affiliated.

The preceding article is for informational purposes only and should not be used as the primary basis for an investment decision. Indices mentioned are unmanaged and cannot be invested into directly. Past performance does not guarantee future results. All examples given are hypothetical and do not reflect actual investments. The views expressed in this article are those of the author and are not necessarily those of Cambridge. Bob Jaffe is Managing Director of CFS Investment Advisory Services, LLC in Totowa and has been a Clifton resident since 1984. Active in community affairs, Bob is Past Board Chairman of the North Jersey Regional Chamber of Commerce and a member of its foundation board. He serves as a commissioner on the Clifton Rent Leveling Board and the Committee for Individuals with Disabilities. He is Vice President of the Clifton Rotary Club. Representatives of Cambridge do not offer tax or legal advice. Consult a professional for your personal situation.