Subject: [NEXTEL-1] Economic Experts Discuss Outlook for 2003

From: Marcel <[email-masked]>
Date: Sun, 29 Dec 2002 12:47:24 -0500

Economic Experts Discuss Outlook for 2003
Source: The Palm Beach Post
Publication date: 2002-12-29

Dec. 29--For beleaguered investors, 2002 was the year reality set in.

Sure, 2000's dot-com bust was painful, and 2001's terror attacks and Enron
implosion were psychologically devastating. But a year ago the stock
market and economy had remained surprisingly resilient, leading many
observers to predict a rebound in 2002.

As it turned out, the market could handle Enron's implosion, but it couldn't
absorb a series of scandals that sent WorldCom, Global Crossing and
Adelphia into bankruptcy and left Tyco's Dennis Kozlowski and ImClone's
Sam Waksal facing criminal charges.

In fact, seven of the 12 largest U.S. bankruptcies on record came in 2002,
including the reorganizations of Kmart, United Airlines and Conseco.

This summer, investors took cash out of stocks in record numbers. Many of
those investors moved from stocks to investment properties or vacation
homes, leading to fears of a real estate bubble.

And the threat of war with Iraq continued to cast a pall over the market and
the economy.

With these volatile times in mind, The Palm Beach Post asked area
economists and money managers for advice on navigating 2003.

Steve Pomeranz, host of the weekly On the Money radio show on
WLRN-FM 90.7 and a certified financial planner in Boca Raton, calls himself
"a reformed bull." Stocks remain a risky proposition, he warns.

Nola Maddox Falcone, head of NMF Asset Management in Stuart, advises
her clients to protect themselves by buying stocks that pay healthy
dividends, a word that was nearly forgotten in the froth of the dot-com era.

Malcolm Berko, senior vice president at Advest Inc. in Boca Raton and a
syndicated columnist whose investment advice appears in 200 newspapers
nationwide, is one of the most bullish of our observers when it comes to
stocks, although he predicts that real estate values are ripe for a fall.

Hedge fund manager Doug Kass of Seabreeze Partners in Palm Beach
sees the market turning around in the second half of 2003, although he frets
about high levels of consumer debt.

And bearish observer Martin Weiss, author of The Ultimate Safe Money
Guide and head of Weiss Ratings of Palm Beach Gardens, predicts a
precipitous drop in the Dow and a popping of the real estate bubble.

QUESTION: Is the bear market over?

WEISS: No, I don't think so. The recession in the economy does not appear
to be over. The decline we saw in 2001 was neither long enough nor deep
enough to clean out or resolve the causes of the recession. It has barely
scratched the surface.

After previous recessions, there was a clean-out process, where a lot of
these imbalances -- high consumer debt, high corporate debt, high stock
market valuations -- were resolved. In this case, that has not yet happened.
The recession was relatively shallow and short. It didn't produce those
benefits that would effectively pave the way for a real recovery.

POMERANZ: No, we have not worked off the excess of the late '90s. While
the economy will probably grow at 2 percent to 3 percent in the upcoming
year, it is not enough to work through the huge amount of excess capacity
that was created during the bubble. In addition, with employment prospects
weak and the consumer living with high levels of debt, there isn't a lot of
pent-up demand waiting to be released into the economy.

FALCONE: We are in a testing situation for the bear market being over.
There might be a good January, because I think President Bush will come
out with a strong economic program of tax cuts that will help the market go
higher. It's not going to be a straight-up bull market. We're in a show-me
market. Once managements of businesses feel a little more confident,
they'll spend a little more. But all bets are off if there's a major world event.

KASS: The bear market is not yet over. Soon, but not quite yet. I see a
rough first half to 2003, and improvement later on in the second half.
Considering the magnitude of the recent market rise, it is time to curb one's
enthusiasm.

BERKO: A qualified yes. The bear earnings are over. The bear revenues are
over. The only bear that's there is the terrible concern about what will
happen in Iraq. Dividends will increase next year. Consumer confidence will
increase. Corporate balance sheets next year will be stronger than they've
been in several years.

Q: Personal bankruptcies are expected to hit a record this year, yet
shoppers seem to keep spending. Is there danger in consumer debt?

POMERANZ: Of course there is. As soon as interest rates start to rise, it
will represent a significant tightening of money. A lot of money to fuel this
recovery is from people who have refinanced their homes. It's not free
money. So consumers haven't been able to save and replenish their
finances.

WEISS: We see symptoms of that danger right now. We have some of the
highest credit card default rates in many years. We have the highest
foreclosure rate in many years.

Throughout the 1960s and 1970s, consumers also took on a lot more debt,
but their income was going up at the same pace. Then, there was 70 cents
in consumer debt for every $1 in income. Now, consumers carry $1.03 in
debt for every $1 in income.

FALCONE: No, I don't think so. But there is a danger if energy prices go
through the roof.

KASS: The consumer is living on borrowed time. At the core of my concern
is that the steadily rising debt burden placed on consumers' shoulders
during the current business downturn -- in marked contrast to every other
business cycle -- will serve to keep the U.S. economy in a period of subpar
growth.

Consumer credit plus mortgage debt now stands at nearly 40 percent of
personal income, compared to only about 30 percent in the early 1990s, and
only 27 percent in the early 1980s. Debt service as a percentage of
disposable income stood at only 12 percent seven years ago. Since then,
the percentage has risen by a quarter, to almost 15 percent.

BERKO: The average consumer debt is $7,600. The danger is that the
consumer might get squeezed because consumers are using the equity in
their homes to pay their consumer debt.

Q: What sectors or investments should investors avoid?

WEISS: I would avoid almost all equities or mutual funds that invest in the
stock market. The stock market is still the biggest area of danger.

POMERANZ: Longer-term bonds have serious inflation and market risk.
Housing and retail stocks. Stocks in general are not yet cheap enough to
warrant an attractive risk-reward relationship.

FALCONE: Technology is struggling. Telecommunications is really
struggling.

BERKO: I'd avoid the housing sector. I'd avoid the municipal bond sector
because we're going to have higher interest rates. Temporarily, I would avoid
the banks. I would avoid the automakers. I would avoid the airlines.

KASS: The retail sector.

Q: Which sectors offer opportunity?

WEISS: The only sector we are recommending is certain selected gold
mining shares.

POMERANZ: There was a buying opportunity for stocks at certain times of
the last year. I'm not sure right now is the exact moment. The best thing an
investor can do is continue to adequately diversify. Add some gold or gold
shares to the portfolio and keep a significant amount in cash in anticipation
of attractive opportunities to develop.

FALCONE: Utilities have been clobbered. It looks like they're coming off the
bottom, but I still think there's some room to grow in these issues. Now, you
have to be very careful. There's a batch of them you don't want to touch.
There also are some interesting financial issues.

BERKO: The quickest recovery is going to be in the tech sector. Qwest,
Lucent, Nextel, Sun Microsystems, JDS Uniphase will experience the
greatest percentage returns in the shortest time.

But investors now are looking at companies like Kimberly-Clark and J.J.
Heinz. The other sector I think we should look at is high-yield bonds.
Companies that were rated C by Standard & Poor's are going to be BB or
BBB.

KASS: Technology appears sold out and represents opportunity on the long
side.

Q: Where do investors look for a safe haven?

WEISS: The safe haven money market mutual funds that invest exclusively
in short-term U.S. treasuries. They currently are offering very low yields, but
that's true of any safe investment today.

POMERANZ: There is no real safe haven. For example, short-term bonds
may protect principle. However, earning 2 percent before taxes and inflation
means you are losing future buying power.

FALCONE: I'm using a value approach with some yield combined in it,
because I think that can protect you on the downside. It's kind of like a
buffer. People want birds in the hand right now. They're tired of losing sleep,
and they're tired of losing money on their growth stocks. There's also a very
strong chance that dividend tax relief may come in.

KASS: Short-term municipal and government notes, real estate investment
trusts and utilities.

Q: How would a war with Iraq affect the economy?

WEISS: It's a wild card. The Pentagon scenario is a quick victory. No one
can be sure that's what the outcome will be. Many military strategists are
concerned that it could trigger other events. The obvious things would be
higher oil prices, higher gold prices, negative effect on the stock market. But
sometimes the most obvious things are obviously wrong.

POMERANZ: Notwithstanding other political stresses, like a prolonged
strike in Venezuela, which would change the balance in the supply of oil to
the industrialized world, I think the U.S. market is priced for a war with Iraq.
The market has known all the details of a possible war for months and it is
reflected in current share prices. If war was declared, I would expect a brief
downturn and then a swift reversal punctuated with a lot of volatility. The
economy would not be affected unless the situation in Venezuela continues
to deteriorate.

FALCONE: If we go to war and things go well, we're making progress and
we're not losing a lot of lives, the market will breathe a sigh of relief. If things
don't go well, it will be a depression on the market.

KASS: A brief war will be positive for equities. A long, drawn-out
confrontation will raise interest rates and oil prices and lower PE multiples.

BERKO: A war with Iraq would be very positive for the economy -- and it
pains me to admit this. The deficit would increase, but the money would be
spent putting people to work.

Q: In the past five years, housing prices appreciated 49 percent in Palm
Beach County and 42 percent in the Treasure Coast, far outpacing inflation.
Are we in a housing bubble?

WEISS: Anything that has gone up more than 25 percent in that time would
have to be classified as high-growth or a bubble. There are several things
that could trigger the bubble bursting. One would be a decline in personal
income. Another could be a decline in demand from migrants to the area.
The third area would be mortgage rates.

POMERANZ: Housing prices in general are not reflecting bubble-like
conditions, with the exception of specific overheated locations. In general,
however, home prices are a direct reflection of affordability. Unlike stocks,
whose investment merits and inner workings can be esoteric -- PEs,
earnings yields, dividend discount models, etc. -- people can either afford
the purchase of a new home or not. Low interest rates have made housing
more affordable. Prices therefore rose reflecting a basic intrinsic cost of
housing.

FALCONE: The bubble is not ready to burst. Prices in some areas are very
fully priced. In Palm Beach County, I'm staggered by the housing prices on
the high end. On the high end, a lot of people have stopped buying.

But nationally, there's still good demand. There has been a huge increase in
the immigrant population of people who have been here 10 years and are
ready to buy a house.

KASS: The all-important housing market is already turning from a seller's
market to a buyer's market. High-end weakness is starting to trickle down to
other price points.

Incentives are being introduced in many markets. And falling rents and rising
apartment vacancies typically presage lower home prices. Moreover, the
recent 50 basis-point rise in the 10-year bond yield will likely serve to
pressure the housing markets even further. So, for Palm Beach County and
the nation as a whole, I expect 2003 to be the first year in many that home
prices decline.

BERKO: Absolutely. The housing bubble is going to be pricked. It doesn't
make sense that you'd have a 50 percent increase in housing costs in Palm
Beach County. As interest rates increase, it's going to make it more difficult
for you and me to make a payment on a $300,000 home.

In Boca Raton, the overbuilding of condo units has reached epic proportions.
Across the street from me, they were asking $800,000 for condos earlier
this year. Now, they're begging you to take the bloody things for $600,000.

-----

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