Client Update

Announcements: changes to quarterly reports!
Many of you have asked for less volume in the quarterly report packages and a less complex presentation. In response to that we are making a few changes to your quarterly report format.
1. As of next quarter, we will be simplifying our asset classifications (example: just “Large Cap” instead of Large Cap Value, Large Cap Growth, Large Cap Blend, and Large Cap Neutral).
3. We have been reporting retirement accounts separately from non-retirement accounts for many clients. In most cases all managed assets will be shown in a single set of reports from now on, in order to save paper and minimize complexity.
2. We are testing electronic delivery of our quarterly reports with a few clients right now. The cost is about the same as mailing, but there will be less to recycle on your end. When it works well this method can be very secure from the time we create the report until after you dispose of your copy. So the advantages are that it is more secure, less messy, and reduces recycling and shredding efforts for you.

The Economy
The worsening employment situation in the US appears to have just about hit bottom. US companies will want to see a few more profitable quarters before they attempt to hire more employees though. Although we are technically out of a recession we expect economic growth in the US to be slow over the next couple of years and it may take as long as a decade for the employment levels to return to the pretty much perfect condition they were in a couple of years ago. A complete reversal in the unemployment situation in the US is likely to be a long and slow road. Unfortunately, where employment recovery is slow, consumer spending recovery will be slow as well.

The good part of this is that US companies are being more responsible with their financial condition so we should have stronger companies coming out of this recession. Cutting costs and being cautious with hiring, with acquisitions and with inventories is improving balance sheets. Flat sales plus lower costs equals more cash at many US companies. This ongoing caution means fewer expansion plans and slow hiring.

It seems we have a window where debt, although hard to get, is relatively cheap. Struggling corporations are likely to be up for sale. As we pull slowly out of this downturn mergers and acquisitions are likely to increase. This will be a little bit good for stock prices and a little bit bad for employment numbers.

What looks good?
Job losses are not as bad as they were and Real Estate sales volumes have picked up a bit.

What looks bad?
Economic growth in the US has been revised down (but is still growing instead of shrinking) and Real Estate prices are still losing a bit of ground.

What’s in the middle?
Retail sales are looking slightly better than last year’s terrible numbers which means ‘slightly better than terrible’ instead of terrible. Maybe that means we aren’t spending ourselves into more debt.

The weakening US dollar makes the prices of American products more attractive overseas. And it creates pressure towards deflation, particularly over the next twelve months. High deficit levels (government, business, and personal) puts pressure towards inflation. These two issues may offset each other for the next year or two. Then we are likely to see rising inflation and rising interest rates. Ultimately, we will have to pay the piper for all of our over-spending.

Investment Markets
Stock market prices have run up quite a bit from the bottom in March and we made it through the September October months without any market price disasters. If US companies don’t start coming up with improving profit numbers over the next several months, I expect stock values to dip down a bit before heading into a steadier increase pattern.

Investments
What types of investments look like they can do well in this environment?

Investing
I don’t just look at right now and look forward to develop investment strategies. I always look back at recent history and say; “what could we have done better?” My top investment lessons from this downturn are as follows:
1. Trying to get out of a market downturn most often leads to being involved in the losses while avoiding the gains that follow with a recovery. Only a very few “early escapees” have been lucky enough to do better by “jumping out” rather than “riding it out.”
2. When asset classes drop steeply, just rebalance and buy more of what’s down.
4. It pays to invest in funds that have displayed a strong history of holding up well in downturns.
5. We all need to do a better job trying to understand at what point investment losses will cause us to jump out at the worst time and we need to use that knowledge to get involved in acceptable portfolio risk levels.

Public Policy Issues
Our government has created the “Consumer Financial Protection Agency.” Sometimes our government can be really good at things. We will see!

A number of large financial institutions have begun paying back the TARP bailout money. That’s a good sign for the economy and a good sign (small but good) for our government’s future tax revenue needs.

I hope that any future job stimulus spending does not go toward things we don’t really need. Imagine if they decided to encourage job growth in tobacco production or gambling or the recreational burning of fossil fuels? I hope that doesn’t; offend too many NASCAR fans! I am worried that government programs could drive the next bubble. Remember the PC Bubble, the PC bubble, and the Real Estate Bubble?

Next time:
What the heck are those job numbers?
Should I do a Roth IRA conversion?


Peter J Canniff, CFP® professional
Financial Advisor