“Look out, Charlie. The sky’s falling!”

Although we have had a rather neutral view of the market recently, especially for the next several years, things are happening behind the scenes and under the waters that make us scratch our heads. It seems that newspapers and politicians who are not in power put their heads in the sand and fail to face the fact that things are pretty good in this country. Recently, we read an article in the New York Times stating that although the “economy appears to be booming; indications about the economic vitality are grossly exaggerated”. Glance back in 2005 and see where New York Times columnist Paul Krugman, warned that, “although the economy grew 4.2%, its best performance since 1999, most families actually lost economic ground over the past year”. According to Don Erler, a businessman here who writes a Star Telegram op-ed column comments, “Perhaps America’s least perceptive economics writer, Krugman also admitted that real wages and salaries have increased over the past five years and that makes average families poorer. Oh well, diamonds are really compressed coal, right?”

“There’s always something wrong”

We can remember hearing stories from senior insurance people in the 60’s who told us tales about executives of their companies observing the startup of Social Security and predicting that the insurance industry would die within a decade. This was the furthest thing from the truth since Social Security simply gave people the vision of tomorrow and that they would need additional income at retirement time. From there the insurance and securities industries soared. Today, more than half the households in America own stocks and/or mutual funds and approximately 56% of all U.S. households own life insurance.

Letters to Opinions and Facts

We received a number of e-mails and letters from clients and others that have to do with our last publication. Here are some inserts for your benefit. Because we haven’t asked permission to print, we’ll simply use the initials of the people who wrote us.

Dear Joe, John, and Tom.

Just received the winter 2006 edition of Opinions and Facts. It was enjoyable reading. Thanks to you all for keeping your clients informed on current issues… we have been your client since at least 1987 and have weathered the ups and downs of the stock market. Your suggestion to keep a long term perspective with our investments has proven fruitful as evidenced by the excellent growth of our portfolio.
Best regards, D.T. & M. T., Boerne, Texas

P.S. We get those invitations for a free dinner all the time, even went to one recently. They were promoting the equity index annuities. Sounded pretty good but as you and everybody knows, “If it sounds too good to be true, it probably is too good to be true”. Investors who are uninformed or investors who don’t have advisors like Omega Securities group are easy marks for these promoters.

Dear Joe,

I’ve just received your winter 2006 newsletter and am concerned about its contents. The war quotes from the hawks are bad enough but your contention that the tax cuts have been a boon to the economy is most disturbing. I hate to think that you’ve swallowed the White House and Fox News line that our destiny is endless war and endless deficits… I’d like to think that our investors are educated enough to think for themselves and are not entirely taken in by the daily lies from the administration grown stupid and tyrannical…

Sincerely, T.T. of Fort Worth

To: Omega Group

Hi, just got the Opinions and Facts newsletter. If you can remember, tell Joe I said I thought it was one of his best…
L.S., Hurst, Texas

Dear Omega Financial Group,

Thanks for your excellent insights in the recent 2006 Opinions and Facts. I especially enjoy reading your headlines and trying to figure out what’s going to follow. While I do not agree with you in all issues, it’s still a pleasure to see some original writing coming from an investment advisor other than pitching your readers on the latest hot mutual fund.

Thanks. J.K., Los Angeles, CA.

“Maybe someday they’ll get together and do something for the country”

These are days when you don’t know what to believe. President Bush, hoping to get his domestic agenda back on track has budget proposals calling for making his first term tax cuts permanent. Both the White House and Congressional Republicans believe that recent economic data demonstrate the effectiveness of tax relief, especially the 15% rate on dividends and capital gains. The Democrats on the other hand do not agree and maintain that it is a tremendous drag not only on the economy but on the opportunity to have more benefits at home, not to mention the potential for increasing national debt.

Mr. Bush is calling for slowing the spending on Medicare by $36 billion and proposes a reduction of 141 Federal programs for $14.5 billion in savings. The Bureau of Labor Statistics showed that in the month of January, the unemployment rate dropped to 4.7%. Additionally, they report that 4.7 million jobs have been created since the enactment of Mr. Bush’s Jobs and Growth Tax Relief Reconciliation Act of 2003.

“But, Joe. What about the Farm Bill and the Medicare Drug Bill?”

One of the benefits of the two party system is that the Democrats do not necessarily agree that the country is on the right track and stand on their own statistics. Of course, the Republican dominated Senate refuses to make hard line decisions and simply extended and put off any serious provisions of the tax bill. Only a few non-controversial provisions were extended.

It seems that the day has passed for honest good faith negotiations above and beyond party politics.

Stay tuned for the next battle report out of Washington.

“WE LEARNED IT FROM THE UNIVERSITY OF HARD KNOCKS”

We’ve had a lot of fun recently competing against some of the larger brokerage firms in the country whose portfolios for prospective clients include index and hedge funds.

“OK JOE. TELL ME THE STORY…. AGAIN.”

It’s been some time since we’ve addressed the discussion on the merits of using index funds as an ideal investment. As all of you know, we do not use index funds and there are several reasons.

Here are some points that might be worth considering when someone suggests index funds.

• Index funds have no managers; they simply have supervisors since there’s no research done on the companies whose stocks they own. There are no analysts studying these particular companies. Why pay for research when you can’t use it?

• What most people don’t know is that the portfolio for equity index funds must be made up of 100% of the stocks that are in the index. The index, whether it be Standard & Poor, Lipper, or whatever, is determined by the executives at the various companies who decide on the stocks that would be in the particular index. For example, all S&P 500 index funds are made up 100% of stocks of the S&P 500 fully invested at all times. These are the largest capitalized companies in the United States. Again, there’s nobody managing this portfolio; the “caretakers” simply supervise the purchase and sale of the stocks that make up the index. When new money comes in, they invest 100% in the particular stocks that the index holds. It’s all based on the largest 500 stocks in this country. And the lowest of the 500 capitalized companies gets the smallest percentage while the largest, the bigger percentage.

• Interestingly enough, the S&P 500 at one time carried Enron when that company’s market cap was in the top 500. I might mention that the funds most of our clients own did not own Enron stock. Enron was one of the index’s top 10 holdings.

• As the liquidation of shares of index funds occur, the shares can be replaced by dividend reinvestment but only incidentally with capital gains and when new money is utilized. In other words, there are only incidental capital gains distributions made since nobody’s managing the money in the portfolio. The only time stock is sold is when liquidity is needed to pay off shareholders and when a particular company is taken out of the portfolio by the executives at the company that chooses the stocks for the portfolio or in the case of a purchase of a company by an outside corporation.

• Index funds can never beat the index because of the expense ratio of the fund.

• When a bear market occurs, the index fund in many cases leads the way since most of the index funds are distributed by direct purchase to the investor who utilizes a 1-800 number. These funds are not marketed by financial advisors

Other Observations…

Misquoting the Bible is a common habit we all have. A familiar misquote goes this way: “The love of money is evil” – it should be, “The love of money is the root of all evil”. And another word of wisdom: “Money can’t buy happiness”. There is a puritanical streak in some of us who love the thought of unhappy rich people…. The New York Times reported a few months ago that the type on paperback books has become larger. We always thought that the legs went first with the Boomers – now we suppose it’s the eyes!.... A 2005 survey of Financial Planners showed the following attitude about Social Security solvency: 93% said the system must be fixed now; 96% were somewhat or very concerned over the future of Social Security; and 33% believe we should implement partially or fully private accounts…. And finally….After reviewing a discount broker/dealer’s ad on television, I must ask the question: “Do you want your money manager buying the stock of a denim jean maker, because his daughter has asked for $80 to buy a pair, because “everybody is wearing them”?

Our Opinion

Declaring the war on foreign oil is not something that President Bush pulled out of a hat. For the last 35 years, presidential energy initiatives have basically fallen on their backsides. In 1973, Richard Nixon launched Project Independence saying that by 1980, we will not be dependent on any other country for energy in the U.S. Additionally he promised federal dollars to produce a pollution free automobile within five years. (Yeah, right!)

President Ford continued the battle when he signed the Energy Policy and Conservation Act setting federal standards for energy efficiency in new cars. Jimmy Carter kept up the good work when he said that the vital national interest in energy was the “moral equivalent to war”. He then signed a law creating the Department of Energy (my goodness, another department) which allegedly tends to the management of America’s ongoing energy crisis.
Not to be outdone, George H. W. Bush announced a national energy strategy and funded it with tax dollars, a $260 million research project to develop lightweight battery systems for electric vehicles. Bill Clinton proposed a tax of 59.9 cents per BTU on crude oil in 1992 and in ‘93 launched the billion dollar partnership for new generation vehicles with Ford, Chrysler, and General Motors, aiming to produce a prototype car that was more fuel efficient than conventional vehicles. Finally, George W. comes again with a $1.2 billion FreedomCAR proposal to develop hydrogen fuel vehicles. And now, voices from Congress tell us of a possible “excess profit” tax on oil companies.

Will they never learn? The only way this country has ever cut back on imported oil is in response to higher prices. According to the Wall Street Journal, world oil price peaked in real terms in 1980 at about $90 a barrel. In 1977, U.S. imports were 6.6 billion barrels per day. By 1985, imports had been cut in half to 3.2 million barrels. Why? You guessed it: simple economics. Higher prices boosted domestic production and reduced consumption. That, of course, is what is happening today.

We’re now experiencing that in this country. Higher prices have caused oil companies and others to improve retraction methods that lower costs. The higher price of oil and gas provides the incentive for large oil companies and entrepreneurs to meet the energy challenge of the 21st century. Today’s higher prices will do far more than free us from independence on foreign oil imports. Higher prices spur energy, technology, and innovation more than any federal program ever will. This makes much sense, but we must be patient. American ingenuity always responds, but it never has happened overnight.

That’s our take, yours is welcome.

The Omega Financial Group
309 W. 7 th Street, Suite 900
Fort Worth , TX 76102

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