Greetings All:It was June 14th and I sat at my desk, opened up my financial website and here is what I read, “May Retail Sales Post First Drop in 11 Months”, “Wholesale prices rise at slowest pace in 10 months”, “Minnesota government shutdown looming” and “Stocks set to rise after economic data”! The market opened up some 100 points. This follows a small correction of 6.67% that began on May 3 when the Dow hit 12,807 and following the market close on June 13th of 11,953. This type of confusion the media creates within the economy and markets is typical. It clearly demonstrates the absolute inability to predict the future. It highlights the continued focus upon the short-term, a time frame that will always be volatile and full of uncertainty. A time frame we must avoid as long term investors but a time-frame we must continually evaluate and assess. Here is the rest of the story to the headline, “Wholesale prices rise at slowest pace in 10 months” – This from Goldman Sachs – “Retail sales decline, but less than expected. Moderate increase in core retail sales suggests possible stabilization. Headline producer price inflation softens in May as food prices decline; core prices rise as expected.” The media serves no purpose with the exception of providing direction for us to research further. So what is happening out there? We are hearing that the economy is slowing and the recovery is questionable. I challenge this as I am seeing reasons for a slowing that make perfect sense. One situation is that the US economy is deleveraging. This, simply stated is saying that US citizens are paying down their debt. Their extra cash is not being spent buying thing. In the short term, this is going to effect retail spending. This allocation to paying down debt is probably one factor behind the weakness in US economic activity so far in 2011. On the other hand, this deleveraging (paying down of personal debt) suggests that households are repairing their finances and thereby increasing their ability to spend in the future –(read: long-term). Long term we are setting up our finances in such a manner that we can return to the quality of life and spending habits we have enjoyed in the past. Within the US, Consumer confidence remains quite low, housing is still a huge negative and unemployment still high. Consumer confidence? The main reason appears to be high unemployment (circular prose, I know!) but the other major drivers of consumer confidence (employment growth, stock prices, credit conditions and oil) are highly uncertain and likely weighing heavily on the consumer. This is another reason that spending is subdued thus adding to the slowing of the economic recovery. Internationally (and also effecting us domestically) there is tremendous turmoil. Greece seems to be consistently in the news and for the past 2 years a focal point of global economic unrest. But….lets examine what has happened in just the last quarter. Revolutions in Tunisia and Yemen. Violent protests in Bahrain. Unrest in Syria and a stunning regime collapse in Egypt. Japan – Earthquake, Tsunami and Nuclear Melt Down! A civil war in Lybia drawing us (right or wrong) into another armed conflict. Take all these as a whole and no wonder we have simply lost any faith that this world can improve as a society let alone grow as a globalized economic force; the link between geopolitical events and the financial markets is far more significant and relevant today than any time in the past 20 years. There are two huge concerns at present; 1) U.S. Deficit; 2) Economic Recovery. The deficit, an unimaginable number, is certainly the focus of our political regime. Unfortunately they simply do not have a consistent mode of thinking that would create meaningful actions in reducing our deficit. On one hand, political actions being discussed, when evaluated by outside sources, show these actions as cutting into the deficit by $200 billion dollars but when evaluated by another source, that number increases to $1 trillion. Discussion is on structural reform or simply policy changes as the driver of savings; should they cut spending or pay out less? Either way, this situation is not an easy fix and it is going to take several very talented and experienced individuals working closely and productively together to solve this situation. I think it is still safe to believe that the value of the dollar is going to continue to be pressured and we will have to consider investments that will benefit from this devaluation. Another concern is that the economic recovery is stalling and will fall back into recession. From all that I have read, this is not the consensus belief. Yes things have slowed down but the brakes are understandable; higher fuel prices and production slow-down resulting from the disasters in Japan. However, as I type these words, both of these issues have begun to ease. It is important to realize that the causes of the economic collapse between 2007 and March of 2009, in hindsight are now very obvious. Presently there does not seem to be these types of causes lurking but with all the global turmoil could we again be being deceived? Herein lies the big dilemma that I face on a daily basis. I do not think so, but I will not let my guard down. I may not catch it before it happens but my value approach to investing for my clients will certainly provide us the necessary time to adjust accordingly. What is good out there? The household debt service burden has come down sharply (mentioned earlier), household credit quality continues to improve, bank lending standards are easing, and financial conditions remain accommodative. Housing prices according to Corelogic for non-distressed homes (homes not in foreclosure or short sales, etc.) have actually risen slightly year to date 2011. The Fed is still accommodative and keeping interest rates low and the unemployment rate does not seem to be rushing upward; unfortunately, it is not dropping like we would like either. Another positive I think we can hold on to is that inflation, albeit, still below the Federally mandated level, is not out of control; in fact it is being argued that there is not enough price improvement within the economy. Fed President, Bernanke, noted that “the recent increase in inflation is a concern” but suggested that “there is not much evidence that inflation is becoming broad-based or ingrained in our economy”. He stated that “increases in the price of a single product–gasoline–account for the bulk of the recent increase in consumer price inflation. Since gasoline prices are essentially set at the global level, he believes that “developments in the global market for crude oil…rather than factors specific to the US economy” are the main driver of higher inflation in recent months. Bernanke expects considerable labor market slack and stable long-term inflation expectations to keep US inflation restrained going forward. Yes it is a very complex “world” out there. The globalization of “economics” worldwide has created financial inter-relations that can not be dismissed and temporary. This is becoming more involved as each year passes. Trying to navigate the intense amount of information one must wade through in order to create and manage a successful investment plan is not possible without possessing all the facts necessary. It is a team effort and the team I have built, on your behalf, within the industry allows me to be your educated and informed guide. If you re-read my first paragraph, the inconsistencies present can create traps that many investors fall into. My goal is to keep you from becoming trapped and having to make “forced” decisions. I am still long term focused but highly vigilant on a daily, short-term, basis. We are moving into the Third Quarter of 2011. The first half has been frustrating, mundane and for the most part, flat. Lets keep our value approach, utilizing strong diversification and effective asset allocation strategies, constantly communicate and all the while, maintain a skeptical view to all of the positives and alert to the negatives and how they may effect us. Albeit slow, I think our economic world is moving in the right direction. Please take a minute to share this quarterly report with someone that may not be getting this type of guidance. I am sure they will thank you and who knows; maybe I may be given the chance to work with someone that is in need of superior investment services as their investment guide. I appreciate the referral. Best,Martin PS. We just did a complete rebuild of our Legacy Wealth Planning website. When you get a chance, go take a look. Same address as always, lwpreno.com and you access your online account information from LPL in the same exact manner. Let me know what you think. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
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