I am writing today to update you on our thoughts and recent actions. When I wrote last, we expressed our concerns about fiscal policy and the risks it presents to the US and Global economy. We are happy to report that, since then, two major policy hurdles have been navigated with outcomes way more constructive than meets the eye.

First, as the clock struck midnight, a deal was negotiated to tax the rich but it included virtually no spending concessions. Despite groans from the fiscal conservatives, the deal wasn’t capitulation – it was a coup! The Bush tax cuts were made permanent for everyone who’s joint adjusted growth income is under $450K and for single tax payers under 400K. In addition the current, more generous, estate tax laws are here to stay as well. This deal amounts to a more than 3.6 trillion dollar reduction in taxes over the next 10 years. And even though the temporary payroll tax holiday expired, that’s also a positive. Don’t they pay for the real budget problems – Social Security and Medicare? And no spending cuts? Now that we’ve taxed the rich and increased Social Security taxes, I guess the conversation has to focus on spending. Right?

The second policy hurdle negotiated was the “sequester.” On March 1st, across the board spending cuts were triggered. Now I’ll agree that across the board cuts are unnecessary and don’t address the real spending problems, but they equal 1.2 trillion dollars in reduced spending and probably kept the US from another cut to its credit rating. More importantly, however, these cuts will affect a lot of people that have no idea what “sequester” means. The majority of people have been insulated from feeling any of the pain and sacrifice we often hear we should anticipate. How is that good? When Meals on Wheels and Head Start programs get cut, when security lines get long at the airport, when people realize we can’t train our troops or protect our interests and citizens around the World, they will scream bloody murder. Hopefully that will light the fire that spurs our politicians to address the real, structural deficit.

A grand deal still needs to be realized, but it really is attainable. Most agree that broadening the tax code and raising more revenue is inevitable. Debt and demographics require it. Many states are already taking the lead. Tax reform proposals abound. Most also agree that entitlement programs must be reformed now, before it’s too late, to care for our aging, sick, and poor. When the noise level from the majority gets loud enough, I think a reelection focused Washington will have no choice but to act.

So what have we been doing? Immediately after the massive tax cut deal, we added to a variety of equity positions. We’ve focused on areas that have been hurt the most in the great recession and that probably will continue to rebound like real estate, global and developing markets, and technology. We’ve even added exposure to small/mid-cap equities while reducing bonds and cash.

Despite all the pessimism and worry, the recent more constructive negotiations have allowed the economy to continue to grow. Consumer confidence was much better than expected in February. New home sales jumped 15.6%, much higher than consensus estimates. 4th Quarter GDP was revised to a positive rather than a negative number. Chicago PMI rose in February pointing to continued manufacturing expansion in the region. ISM manufacturing index was stronger than expected in February. And while the economy certainly hasn’t reached “escape velocity” yet, the evidence would suggest it’s continuing to move in the right direction.

In closing, thank you for your trust and confidence. 2012 was a very profitable year. We believe 2013 can also be rewarding. We’ll keep a close eye on things so you can focus on useful distractions, like watching your favorite investigative crime show. We will continue to “follow the evidence”.

Sincerely,

Donald Miller
CEO / Principal

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. Stock investing involves risk including loss of principal. The prices of small and mid-cap stocks are generally more volatile than large cap stocks. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Recently I wrote to alert you to our defensive positioning and significant sale of equities. Today I want to expand on my thoughts and give you an insight on how others view the landscape.

First the good. Slow growth has continued. Low rates have finally helped the housing market to begin to recover. The weaker dollar has helped our manufacturing sector strengthen. It is even possible that the United States can become energy independent. At the State level, reform of public benefits has begun. Of course they have no choice. The States must balance their budget every year – no deficits allowed.

So what’s bad? How about a potential expiration of massive tax breaks (the fiscal cliff), the largest increase in taxes in the country’s history (Obama Care), mandatory across the board spending cuts (required to raise the debt ceiling last year), the debt ceiling fast approaching again (as early as January depending upon tax receipts), and it being a question of when, not if, Israel attacks Iran’s nuclear facilities (we saw what the Spring Arab Revolt did to oil prices in 2011). Oh, and I didn’t mention Europe. Clearly the bad things seemingly threaten to derail the good things. It could get ugly.

So what are others thinking? The day after the election I attended an advanced wealth management conference in Denver hosted by LPL Financial. Burt White, their Chief Investment Officer, looked at five reasons why the markets are struggling. First, he identified Greece and the European social protests over fiscal austerity. Second, he said it looks like German banks are becoming stressed by the European fiscal crisis. Next, he mentioned the once in a decade change in the Chinese Ruling Party. Fourth, corporate earnings aren’t great (they are actually negative), and finally he said – the election outcome. And by that he meant, as I did when I called it the worst possible outcome, there is no change in the political power structure in Washington. And, of course, the inability to forge compromise is why we have all of the looming issues I just mentioned.

So what is his take on the fiscal cliff? When all the tax breaks expire and the spending cuts are enacted, we will have “fiscal tightening” of about 3.5% of 2013 estimated GDP. Typically a tightening of 1.5% results in a recession. Interestingly, Burt suggested 3 possible outcomes to the fiscal cliff and handicapped them as to their probability. He put the bear case – going over the cliff – at 30%. The base case – compromise – at 55%, and the bull case – a long-term solution – at 15%.

So what is the bear case expected to look like? Gridlock, recession, credit downgrades, technical default on US debt, at least a 25% drop in stock prices. By the way, he mentioned that in 1969, we had a 3% fiscal tightening and stocks dropped 36%, ouch!

How about the base case? Republicans will compromise. They have more to lose. Going over the cliff means tax increases on the middle class and wealthy and cuts to defense spending with no required cuts in entitlements. Instead of 3.5% tightening, we will end up with 1.5%. The compromise. Payroll tax cuts expire, most of the required spending cuts happen, middle class tax cuts are extended, maybe a new “wealthy” tax bracket, unemployment benefits are extended and another AMT patch is applied. To me it also sounds most probable but it is just another bandaid. Wasn’t a 1.5% tightening recessionary anyway?

The bull case. That requires reforming the tax code and entitlement programs. That requires political courage. So what was the political strategist’s take on the election and these issues? Since Burt was downright depressing, you’d figure that someone who covers politics would sugarcoat it, right? Wrong.

Greg Valliere, Chief Political Strategist of the Potomac Research Group, began by suggesting Republicans got their butt kicked because there is a demographic tsunami going on. The Hispanic vote is growing and the Democrats got 73% of it. He wondered if the Republican party, as we know it, would ever win another Presidency. He predicted the near term to be extremely volatile and projected two scenarios on the fiscal cliff. One, we don’t fall off in January – cuts will probably be extended until the 1st or 2nd quarter of 2013 (sounds like kick the can to me). Or two, we get total acrimony on the 22nd of December when Congress adjourns. He said President Obama is not a good politician – not engaging and pragmatic like President Reagan and President Clinton, but rather aloof. He thought a grand deal on the deficit was probably not on the table because there was not enough political leadership in the current administration. As you can probably guess by now, they were taking away the sharp objects in the room. Greg concluded by saying we overlook geopolitics at our own peril. Israel and Iran. When will Netanyahu move? Three months? After the presentation we all promptly reconvened at the local pub for therapy.

So now you know why I am a little defensive. In fact, more so than at any time in my more than three decades of advising. But we do have a plan – even multiple plans. Policy has implications and there will be winners and losers. It is our job to identify them and with the help of our vast resources develop strategies to make prudent investments. Even while we are waiting for the dust to settle a little, we are updating our own bear, base, and bull case allocations. By the way, our current actions reflect the pre-planning decisions we made last year. We are constantly looking to manage downside risks and identify opportunities. This time will be no different. There will always be good and bad. It doesn’t have to get ugly!

Sincerely,

Donald Miller
CEO/Principal

Greater Midwest Financial Group, LLC.
102 N Karlov Ave
Chicago, IL 60624-3047

Securities Offered Through LPL Financial
Member FINRA/SIPC

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.

I wanted to touch base with you during this very busy and hectic time. Early last month and especially the day after the election we took profits in equity positions based on a number of factors. We felt it was necessary to take a more defensive stance. Because we felt that much of the recent gains were based on the market bidding in a change in the white house and/or congress, which we did not get, we thought it timely to lock up some profits. Instead, in our opinion the worst case scenario has developed. We have more of the same. Additionally, our concerns were magnified on the day after the election with discussions about Germany’s economy slowing and by Greece’s renewed resistance to austerity measures. Also, later in the day it became apparent that the key participants in negotiating an attempt to avoid the fiscal cliff are still deeply divided. Unfortunately, the truth is that even if we get a compromise to avoid the fiscal cliff all solutions will be drags on growth – both decreased spending and higher taxes are significant problems for an economy growing as slowly as ours is.

We know that in some cases we will be triggering gains on a number of positions, but we also felt that any solution to the fiscal cliff will likely mean higher taxes on investment-related income such as capital gains and dividends. And don’t forget that Obama Care will begin to impose a 3.8% tax for high income investors starting January 1, 2013.

I want to keep this brief because I am currently in Denver at an investment and tax conference to discuss the implications of the current environment and the results of our election. I will discuss some of those implications in a correspondence that I plan to write next week. I thought it was important to keep you abreast of what we are doing in an attempt to protect your profits and capital as well as navigate a clearly changing income and estate tax environment.

If you have any questions or would like to discuss anything with us in more detail, please feel free to contact me. Also, look for my update soon.

As always, we appreciate your trust and confidence. Have a great weekend!

Sincerely,

Donald J. Miller
CEO/Principal

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this communication may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Premier education. Practical application.

An evening with the brightest minds and information you need.

The third in a series of bring-a-friend educational events sponsored by GMFA.

Thursday, October 21, 2010

5:30 p.m. Cocktails and Heavy Appetizers, Mingle with Speakers

6:30 p.m. The New Normal: Addressing Market Volatility and Uncertainty

 by PIMCO Portfolio Management

7:30 p.m. Accessing Credit in the Current Reality by US Bank

8:30 Event Conclusion, Mingle with Speakers

Edinburgh USA

8700 Edinbrook Crossing • Brooklyn Park, MN 55443 • (763) 315-8550 • www.edinburghusa.org

A special thank you to the GMFA Advisory Board for recommending  

this type of offering to our clients, their friends, attorneys and CPAs.

Featured Speakers

Providing the premier education:

 Sean Dieterle, Senior Vice President, Allianz Global Investors and PIMCO Portfolio Management.

 Mr. Dieterle will present The New Normal: Addressing Market Volatility and Uncertainty. He is a primary liaison between the distribution team for Allianz Global Investors and the portfolio management team for PIMCO—one of the world’s leading investment managers and an affiliate of Allianz Global Investors. Mr. Dieterle focuses primarily on core and credit-related bond strategies. He provides financial professionals and their clients with frequent updates on overall market performance, economic trends and has spoken at numerous investment industry conferences, radio programs and client seminars.

Providing the practical application:

Craig Veurink, Senior Vice President and Regional Business Banking Manager for US Bank.

Mr. Veurink will answer the question, “How can both small business owners and homeowners better access the credit markets?” Mr. Veurink’s team of business bankers, located throughout the Twin Cities Metro area, work  primarily with businesses up to 20 million in revenues. They work closely withbusiness owners as advisors to help them make educated decisions to help their business succeed and work through challenging times.

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A confirmation with map will be emailed the week prior to the celebration

Please take a look at the talking points from our educational event in the Chicago area on September 21.  The paper is written by the founder, John P. Calamos Sr., of the well known and globally respected investment firm Calamos Investments.

Click on the link below!

Low Volatility – John P Calamos Sr

Thank you to all who attended our first annual Educational and Market Update Event at the Fargo Country Club in North Dakota.  We also would like to thank John Tousley, CFA, Vice President with Goldman Sachs who provided a very robust review of our current economic situation and discussed market strategies that will be profitable in the year ahead.  Additionally we want to thank Greg Brousseau, founding partner and co-CEO of Central Park Group who spoke on the basics of alternative investing and discussed some potential opportunities today for unusual market conditions.   We would also like to say thank you to those who couldn’t attend, but expressed interest and wanted follow-up information on the event.

 At the meeting I discussed several points worth noting here.  Recent housing, retail sales, and employment data have us cautious.  But we still remain optimistic about the long-term global recovery.  I feel jobs are still the key to a sustainable US recovery.  Without traction in our labor markets we may end up requiring more support for a somewhat stable but potentially still deflating real-estate industry.  Unfortunately the red ink is piling up from prior spending commitments and a lack of revenue, and it’s causing sane people to question how much more we can afford to support.  In fact, in Europe, belt tightening, austerity measures and tax proposals are being proposed to handle their debt crisis.  I’m concerned that while their actions are necessary for long-term fiscal health, their timing is poor.  You can’t fix problems in a day that have taken years to develop. 

 On the brighter side, the BRIC’s (Brazil, Russia, India, China), are growing fast.  China recently announced that they’ll let their currency float, rather than be pegged to the US dollar.  That’s likely to encourage consumerism and consumption in that highly-populated country—especially of US exports.  Since the emerging countries have huge currency reserves, they can also afford to invest in infrastructure building; such as roads, bridges and factories–and further stimulate global growth. 

 In closing, I want to mention an item I didn’t have time to cover at the event.  Business owners beware:  it looks like a bill to tax all of the profits of personal service S-Corporations as wages will probably pass soon.  Starting next year, paying reasonable salaries and taking profits on your company’s investments, as dividends, will not be allowed.  It is mindboggling, but apparently major abuses are to blame.  C Corporations may warrant another look—especially since personal tax rates are probably going higher soon. 

 By the way, despite our concerns, we wholeheartedly believe in the American Spirit.  We will rise and meet the challenges ahead.  You had to love that US/Algeria soccer game.  Go USA! 

 As always, contact me with your questions or concerns.

Don Miller