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SAN DIMAS, Calif. – If the economic environment shortly after the Persian Gulf War in 1991 is any indication of how the rest of 2003 looks post-Operation Iraqi Freedom, a market rally – at least in the short term – is expected, as an increase in consumer confidence remains one of the strongest factors in forecasting any recovery. This from WesCorp Investment Services, LLC’s second quarter `Market Review and Outlook’ held April 15 as analysts looked to past indicators to determine where the economy is headed, if more layoffs are anticipated, and what credit unions can expect for the rest of 2003. More than 100 participants logged on to WesCorp’s Webinar, which was broadcast in conjunction with its Economic Forum held during the broker/dealer’s annual meeting. Through an online poll taken during WesCorp’s Webinar in January, 52% predicted Operation Iraqi Freedom would be a short war at 21 days, compared to the Persian Gulf War in 1991 that lasted 42 days. The comparison is significant because that war saw several short-term rebounds, said Dwight Johnston, WesCorp’s managing principal. “In 1991, the Dow hit a high of 2900 just before the war ended and did nothing the rest of the year, Johnston said. “The GDP for all of 1991 was a meager .8% and unemployment rose from 6.6 to 7.3% by the end of 1991.” At the same time, Johnston warned “it’s very popular on Wall Street to dismiss all the bad news as war related, but only a very small percentage of the blame can logically be blamed on the war. The economy was struggling before the war.” What factors need to align before the economy starts to significantly shift? Johnston said non-farm payrolls need to average more than $100,000 for six months or longer, consumer confidence readings need to rebound by 30 points, the unemployment rate needs to drop by 1% and the S&P needs to rally on a sustained basis by 42%. Because non-farm payrolls declined again in March and more than 457,000 jobs have been lost since February, Johnston said the declines are “reminiscent of recession periods” and “a healthy economy creates (more than) 200,000 jobs per month, not loses them.” Some of the other areas discussed included President Bush’s proposed $725 billion tax cut which has virtually no chance of being passed by the Senate, said Ron Araujo, WesCorp’s portfolio manager and head of investment advisor services. “The Senate has assured that the tax cut won’t be more than $350 billion,” Araujo said. “This is relevant for credit unions because in times of economic stagnation, local governments had to look to state governments for relief and then state to federal government.” Araujo also said the promising news is that other tax cuts such as child tax credits are more likely to occur given the realistic likelihood that the Senate may be willing to bend to a $550 billion tax cut despite the nation having a record $530 billion budget deficit that is expected to balloon to $5.2 trillion by 2013 because of Social Security and Medicare expenses. In March, Johnston said as optimism about the war rose, it was likely that stocks would rally sharply and bond yields would rise and bond investors were encouraged to take advantage these temporary moves. “That first move proved to be a false start, and yields dropped back sharply,” Johnston said. “Currently, we are apparently seeing the actual successful conclusion of the war and again, stocks are rallying and yields rising. We think this will again provide only temporary relief from the long-term trends, and we encourage portfolio managers to lock in the higher yields.” Johnston also noted that because the Federal Reserve said it would not make a move until after the Iraqi war ended and Alan Greenspan did not provide commentary on the economy’s outlook in March, “statistics have deteriorated further.” “This was a pretty bad move because people wanted to know where things stood,” Johnston noted, adding a few governors have since come out to say that the war has “brought some stimulus to their states.” Still, the indices don’t paint a rosy picture: retail sales fell by 1% – the biggest drop since September 2001; capacity utilization continues at 20-year lows and the ISM index of manufacturing dropped sharply below 50 to the worst level since October 2001. Most impactful was consumer confidence hitting a 10-year low, Araujo noted. For the first time ever, household net worth has fallen three years in a row. While mortgage debt has escalated, it has limited opportunities to take on more debt, he pointed out, as the percentage of equity as home ownership remains down. Meanwhile, second and third-time home refinancers contributed to a record high of 36% compared to October 2002. Indeed, mortgage investment rates declined and notably, callable products declined more than the general Treasury compression, Araujo pointed out. The trading range for Treasury rates during the first quarter was 3.175%. Credit unions can expect to see declines in the cost of funds index if interest rates fall. While it is likely that yields are near lows on a short-term basis, the prospects are “not good” that yields will rise significantly and remain there, Johnston said. “Waiting on that supposedly eventual rise in rates means sitting in cash at 1.25% and probably watching that rate fall to 1% and then maybe even .75%,” Johnston said. As many predict, oil prices will collapse post-Operation Iraqi Freedom. More significantly, there’s been some “damage to international relations” as the “world has taken a less favorable view of the United States,” Johnston noted. To ease global economic woes, with international barometers at “20-year lows,” Araujo said, “it’s going to be vital to have the support of other countries going forward.” -

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