Challenges = Recovery

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I just came back from an investment conference in Scottsdale, AZ. The following is related from the main platform of economic and political speakers. In summary, the economy is expected to continue to improve, slowly. However, our debt problem continues to build. The improving economy, plus the significant fund raising advantages of Obama, give him the current edge on the presidential front. I am not taking a political position here, just reporting what I heard by a political insider. The Republicans incidentally have a significant advantage in taking both Houses of Congress. This stalemate in leadership could moderate impacts on tax increases, economic stimulus programs, and might delay progress in dealing with our debt issues.

Three big risks to our “muddle through” economy remain:

  1. Too much borrowed money—Sovereign Debt/Banking Crisis. Europe is beginning to deal with the real cost of fixing their problems. It is just a beginning and they hope for a controlled set of defaults, however, even this beginning will be painful and reasonably will push their economies into recession for an extended time. Optimistically, a slow, staggered set of defaults could be better news than the market expected, at least in the short run. On the home front, the U.S. continues to grow the national debt at a rate of over one trillion, ($1,000,000,000,000) per year. We don’t see a dramatic immediate impact. The long term implications are not favorable for U.S. economic stability.
  2. The growing risk of Iran and the possible response of Israel. Iran continues in its aspirations to be a nuclear power and growing its influence in the region. Just the threat of closing the Straits of Hormuz, can cause insurer not to allow ship traffic through the area. Israel certainly believes it will be Iran’s first nuclear target. A case can be made for Israel to act preemptively, as early as this summer. The US elections could have some influence in this timing. If Israel waits too long, then they are seen as directly affecting the election. If they wait until after the election, they would likely see a much less supportive president Obama, should he win and Iran might already have a nuclear option.
  3. The U.S. Housing Market is still very challenged. With employment numbers still lethargic and the large number of delinquent mortgages in the pipeline, a healthy housing market is still elusive. We know, as housing goes, so goes sales of large ticket consumer products such as furniture, appliances. In addition, home equity is not available to fuel consumer spending.

As far as our portfolios: We introduced the Dividend portfolio for clients who care less about short term volatility and are looking for more of a constant dividend. This portfolio should do well in a very volatile sideways market, because of the dividend. It’s composed of stocks, mutual funds and ETFs. Our APM (Advance & Protect model) is almost fully invested, current allocation is 50% stock, 10% gold (or other metals), 30% bonds, 10% emerging markets and some cash (individual portfolios vary). It’s been up significantly year-to-date. We see the upside of this market to be maybe another 8%, through some volatility, before the model will move significantly to protect.

If you have any questions, please feel free to contact our office at (877) 8341850.

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