BACK TO THE FUTURE

By Larry Cavalena, Registered Principal

The last year has seen the markets produce some very reasonable and very welcome gains. With the exception of job creation, the U.S. economy is slowly and steadily improving.

The housing market is robust and inflation remains very low. The Federal Reserve has stated that interest rates will remain low for a "considerable period". I think that in "Fed Speak" considerable period means until after the presidential election.

The other side of this market and economic improvement is the markets now carry more risk due to their higher levels. Speculative investing once again is becoming more prevalent. Investor behavior in the Bulletin Board (BB) section of the NASDAQ OTC (Over The Counter) market is exhibiting casino-like characteristics.

The same conditions, which precipitated the market sell off in 2002, still exist today. Corporate corruption and excessive, often undisclosed executive compensation, remain a problem. Very few individuals have been fined or jailed for fraudulent or creative accounting. A major motivator for creative accounting, the lack of disclosure and un-expensed option compensation, remains intact. For corporate criminals, the risk of getting caught has not been much more than negative press coverage on the financial news channels.

The accounting scandals, along with the declining dollar, are keeping foreign investors out of U.S. markets. The addition of foreign capital would help carry our markets to higher levels along with helping to finance our national deficit. The absence of foreign equity will certainly slow market growth.

Please do not interpret this as a gloom and doom forecast. Even with the absence of adequate legislative intervention, investors are wringing corruption out of the boardrooms by shunning the stocks of suspect companies. Dividend payouts are steadily increasing as directors are recognizing that shareholders own the company, not management.

Prudent investors should follow a balanced, cautious approach to the markets, coupled with careful investment selection.

Consider the commentary from legendary investor Bernard Baruch:

"Bears can make money only if the bulls push up stocks to where they are overpriced and unsound.

Bulls always have been more popular than bears in this country because optimism is so strong a part of our heritage. Still, over-optimism is capable of doing more damage than pessimism since caution tends to be thrown aside.

To enjoy the advantages of a free market, one must have both buyers and sellers, both bulls and bears. A market without bears would be like a nation without free press. There would be no one to criticize and restrain the false optimism that always leads to disaster"

Bernard Baruch

If investors allow too much optimism to cloud their memory they could find the past reappearing in their future.

Larry Cavalena
Registered Principal

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Larry Cavalena and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.