“There are some people who live in a dream world, and there are some who face reality; and then there are those who turn one into the other.”

...American hockey player Douglas Everett.

Late July greetings from the tourist-inundated Outer Banks! “The Season” seems to be a strong one, although scattered reports are filtering down regarding a softer than normal rental season - maybe due to the increase of available houses to rent and the fact that school in inland North Carolina starts as early as August 5th. (Just wondering -- who REALLY wants to be back in the school routine on August 5th? My guess is no one - teacher, student, parent, or administrator!) US financial markets have been dividing their focus between the progress of second quarter earnings season for US companies and a significant selloff in the bond markets. The world’s major equity markets have been in rally mode the past three months, as investors have built positions in stocks and sold bonds, driving stock prices higher and bond prices lower.

In this issue of Investor’s Corner:

Dear Will, I don’t understand why everyone’s so focused on the bond market. Why does the bond market matter? And why do bond prices fall when interest rates rise? Thanks in advance, Traci

Dear Traci, Thanks for your note. Bonds are IOU’s issued by the Federal Government, governmental agencies, or individual companies. They are usually sold in $1000 increments and pay interest to the holder on a preset basis. Bond prices fall as interest rates rise because existing bonds paying a lower interest rate or “coupon” must be discounted in order to compete with newer bonds sold at the higher interest rate. (assuming a rising interest rate scenario, and we’re not there yet)

The US bond market serves as a primary source of financing and liquidity for much of the world’s business economy — as such its importance cannot be overstated. Additionally, the bond market is known to be highly adept at predicting the future state of the US economy, many times sniffing out good or bad news on the broader market, individual economic sectors, and individual companies long before the stock market gets wind of the impending dynamics.

Much of the attention surrounding bonds recently has focused on the 10-year Treasury note. This bond is considered default risk free because it is backed by the full faith of the US government. It also serves as the benchmark for calculating many mortgage rates, so when it moves in price, mortgages can be expected to follow. And boy has the 10-year note been moving - from a low of 3.1% to a recent high of 4.474%, all in the space of 45 days! (see chart, below)

Three Month chart of the 10 year note-currently yielding 4.474%

Investors are trying to discern if the bond market’s sell-off is a foreshadowing of brighter economic times ahead or simply a short-term aberration. The most feared economic condition of all, deflation, is a word that has been on economist’s lips for the past few years, and the bond sell-off may speak to deflationary fears subsiding.

Hope this helps, Traci!

Send your questions to will@darecapital.com and I will do my best to answer them in upcoming newsletters.

2. ”Investment Management” of a Different Sort - As a professional investment advisor, 19-year resident of the Outer Banks, and homeowner, I read the July 24, 2003 editorial in the Coastland Times with great interest. The topic was the ongoing role of the Outer Banks Visitors Bureau, and any “investor” in the Outer Banks (I would think that would be just about all of us) should consider its message. The Coastland Times has authorized this reprint:

A Change of Mission: With weekend traffic choking arteries to and from the Currituck and Dare County Outer Banks, do we really need to be beckoning ever more visitors?

To ask the question is not to denigrate the Outer Banks Visitors Bureau, or the successful job it has done over the years-ever since the late Aycock Brown took it upon himself, as a one-man bureau, to promote this area.

But how much more promotion do we need? How many more summertime visitors can we handle without choking to death?

Yes, it’s true that much of the current advertising is directed at building the so-called “shoulder seasons,” the spring and fall periods. Still, summer promotions continue.

Are they really needed in view of our traffic, labor, and affordable housing problems? Is it not time to ease up on the advertising?

The secret is out. These Outer Banks have been discovered. The bell won’t be unrung, unless we strangle on our publicity.

Unless they decide bumper to bumper traffic is no longer worth it, visitors will continue to come here in droves, regardless of heavy advertising.

A mid Currituck County bridge would certainly ease congestion at the Wright Memorial Bridge, and along portions of US 158 and NC 12, but it would also generate more traffic.

The Visitors Bureau has certainly helped fund projects that add to the quality of life here, such as all-purpose paths and trails.

But the primary intent of its creation was, and is, to promote tourist traffic. The millions of tax dollars devoted to it have made these Outer Banks a boom area and also created unresolved - if not unforeseen - problems that increase daily.

It’s high time, it seems to us, for some serious rethinking both here and in Raleigh about the current appropriation of sorely needed tax dollars.

Consideration should be given to changing the primary mission of the Visitors Bureau to that of tourist accommodations: the further development of recreational facilities, affordable housing for summertime help and the preservation of our beaches-as opposes to attracting ever more tourists.

No doubt this would require state legislation. But that which was enacted 20 and 30 years ago no longer best serves the needs of today’s Outer Banks.

A thoughtful reader wrote in and replied that he’d had exposure to how Wal-Mart executives handled growth within the mega-chain (after all, even Wal-Mart has to grow!). He noted that they focused on selling more merchandise to the customers WHO WERE ALREADY IN THE STORE, instead of spending on trying to attract new customers. The strategy was beneficial for two reasons: First, it costs lots of money to attract new customers, and second, the stores are already crowded enough. Sound familiar?

In closing let me just add that I think we’re to the point where “more” does not equal “better” on the Outer Banks. Call it good old “Investment Management”!

3. Short takes on the 2003 Tax Cut —

A. Most dividend-paying stocks just became more tax-advantaged. Bond income will continue to be taxed at ordinary income rates and thus became less tax-advantaged.

B. If long term capital gains are taxed at 15%, there will be an incentive to remove high growth-potential equities from tax-advantaged retirement accounts such as traditional IRA’s and 401-K accounts, where withdrawals are still subject to being taxed as ordinary income. Equities in taxable accounts held longer than one year would only be taxed at 15%. Interesting….

C. Small business owners (such as myself) should take a long hard look at the provision where up to $100,000 of capital expenditures for new equipment can be expensed “right off the top”…worth some follow-up!

4. Charts -

Well, that’s enough for this time. Feel free to call or write with questions or comments, or to inquire about my firm’s services as they relate to your individual situation. And please be safe on the road!

Good investing,

Will W. Woodard, III, CFP®
Dare Capital Management and Advisory
PO Box 1138
Kill Devil Hills, NC 27948-1138
252.480.0156
will@darecapital.com
www.darecapital.com

Will Woodard is president of Dare Capital Management & Advisory, a Registered Investment Advisor and fee-only financial planning firm based in Kill Devil Hills. Dare Capital is committed to providing independent, objective, and professional financial advice. Mr. Woodard, his firm, or his clients may own the investments mentioned herein. Contact Will at (252) 480-0156 or e-mail Will@darecapital.com

The fine print: This newsletter can be reprinted or forwarded--however, it is requested that reprints of any material in this newsletter include credit to Dare Capital Management and Advisory (252)480-0156 and an email link to will@darecapital.com. Thanks for spreading the word!

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Will W. Woodard, III and Dare Capital Management and Advisory, and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Mr. Woodard, his firm, or his clients may own the investments discussed in this newsletter. Past performance is no guarantee of future returns.

The information presented herein and the company's web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future results may vary for many reasons.

Copyright 2003 Dare Capital Management and Advisory-all rights reserved.