TAKING STOCK: Rosy-eyed Washington projections should be taken with caution

Dear Mr. Berko:

My only stock market investment is $207,000 in several Fidelity mutual funds, which are in my company retirement plan. I'm 56 and single. I earn a decent living and have almost zero debt. Both of my children are living away from home.

A broker who has become a friend is so excited and bullish on the stock market for 2012 that it's become infectious, and I've become a 90 percent believer. His research shows that the real estate market has turned around, that the European crisis is almost over, that our savings rate has tripled, that consumer confidence is exploding, that inflation and interest rates will remain low, that employment is going to be below 7 percent before the end of the year, that rates will remain low until late 2014, that exports are growing, and that all of this plus much more will push the Dow Jones to record highs for 2012, 2013 and 2014.

I have $197,000 in a bank money market account, and my broker friend has advised that I invest all of it into each of the 30 stocks that make up the Dow Jones 500 averages, which he insists will close the year over 15,000 (20,000 by 2014). I'm almost willing to do this, but I want to know what you think.

GR, Troy, Mich.

Dear GR:

Wow! Sounds like your friend has had a cognitive epiphany!

The economic data out of Washington certainly suggests that the stock market will continue to make new highs this year and next. Unemployment has fallen significantly. The inventory of unsold homes is growing smaller. Foreclosures are declining. Short sales and low interest rates are making homes available to more families.

The rise of corporate earnings; record low interest rates; low inflation; and growing exports to China, South America and the Pacific Rim all argue in favor of a higher Dow. Additionally, improving consumer confidence, a higher public savings rate, potential improvement in the European economy, and a turnaround in the European debt crisis paves the way for a continuing upswing in the averages. Higher anticipated tax receipts, higher personal incomes, growing consumer wealth, increased business startups and lower per-capita energy consumption suggest that the stock market will continue to move higher, too. Then, increased foreign investment in the U.S., a GDP that is expected to grow at 3 percent this year, our improving balance of payments, and stronger bank capital positions also warrant record market averages.

These rosy observations from Washington may be right as green grass and sweet rain, and I pray they are. But this soda-straw view of events sounds more like a screeching earnestness that would make dogs and psychopaths cynical. Because this is an election year and because the party in power will do everything within its power to remain in power, it's fair and reasonable to doubt this data; it derives solely from Washington.

In other words, do you trust the administration to be candid, especially when lying is a sacrament to Washington department heads with important management positions? It would be nice to follow the example of Ronald Reagan who, when discussing relations with the Soviets, advised that we "Trust, but verify." But how does one check the checkers, who are the same department heads who control the numbers?

Still, if all of these observations are accurate, then the Dow Jones should leap to record highs this year. And if you are 100 percent convinced of their veracity (I am not), than pour yourself a shot of Hill Billy Tea and go for broke. But if you're only 50 percent certain, go for half-broke.

But you should ask this wunderkind-on-steroids broker buddy of yours why you must spend a couple of thousands of dollars in commissions when you can achieve nearly identical results buying the Dow Jones ETF (DIA-$125), which owns only those 30 issues in the average and spends only $8.95 in commission through Fidelity or Schwab. And no matter how many DIA shares you buy, the commission costs through Fidelity or Schwab will be less than $9. I think you and a few other friends of this brokester ought to take away his car keys ...


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Wed, Feb 15, 2012