Archive for the ‘Market Commentary’ Category

Where’s the Growth? – Opportunities in Emerging Economies

The overall sentiment of the market and global economy has continued to swing back and forth between confidence and skepticism. More soft data points, political bickering, stubborn unemployment, etc. continue to plague us, but there are opportunities to be had even though the future is cloudy. Believe it or not, there are areas we view optimistically.

Many companies have reported solid earnings recently with 73% of the Standard & Poor’s (S&P) 500 beating earning expectations for the second quarter, despite the economic soft patch we hit and the Eurozone’s financial issues. Corporations have shored up balance sheets and have reached all-time highs with the amount of cash they have available, putting them in generally strong and healthy financial positions. However, political inaction and the inability of the lawmakers in Washington and in other developed countries to make effective policy decisions has created vast uncertainty. The Europeans struggle to set aside their pasts and cultural differences to form any type of fiscal or banking union although it seems apparent they need a more unified approach. In Washington, we have two diametrically opposed parties who have become so polarized that they can’t find any common ground. These problems are ideological and hinder their abilities to make decisions. Given this polarization and paralysis, companies have opted to compile cash or return it to shareholders in the form of higher dividends or stock repurchases and not re-invest for future growth or spend on additional hiring. On a global level, developing economies currently hold 67% of the world’s total cash reserves compared to 37% in 2000 underlining the relative strengthening of their balance sheets over the past decade. We will likely continue to see slow growth rates and a lack of re-investment in developed economies until this uncertainty dissipates and there is more clarity from lawmakers.

There are areas with strong growth potential however – specifically emerging markets and multinational corporations with revenue streams derived from emerging economies. While the developed world is riddled with the problems of over consumption, astronomical debt, expensive labor forces, and policy inactions, the emerging countries and strong corporations have healthy balance sheets, trade surpluses, serve a growing middle class with an eye to higher living standards, and perhaps most importantly can make and execute policy decisions. While this generates its own risks, these entities will do what’s needed to stimulate their economies or make good investments when appropriate. These factors allow multinationals and developing economies to be much more decisive and direct with the re-deployment of profits and cash that will likely lead towards more growth opportunities in the short and long-term horizons.

Multinationals have already begun to re-deploy their cash through building manufacturing plants, ramping up advertising campaigns, and opening offices abroad. Although the demand from developed nations in emerging markets is expected to slow, there is a lot of room for domestic demand growth and investment, especially relative to domestic demand growth in developed nations, as living standards and incomes rise for the consumers in these emerging economies. They are growing rapidly and have the financial means, demographics and desire to become larger global players. Of course, the million dollar question is when to add exposure to this volatile market segment.

For more discussion on that and other points we have included two articles from portfolio managers at PIMCO and Oppenheimer funds on the outlook for emerging markets, where opportunities exist, how specific countries are shaping up, the effects of the Eurozone outcome on these opportunities and more.

We hope you find this interesting and useful as we continue in our effort to provide you with our thoughts and insights. White swans?! Believe it or not – they do exist. If you have questions or would like to discuss anything in more detail. Please give us a call.

PIMCO Outlook Series June 2012
Oppenheimer Focus Piece 2012

Robert J. Miller
Wealth Advisor/VP Operations
Greater Midwest Financial Group, LLC.
102 N Karlov Ave
Chicago, IL 60624-3047

robert.Miller@lpl.com

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. All indices are unmanaged and may not be invested into directly. Stock investing involves risk including loss of principal. International investing involves special risks such as currently fluctuation and political instability and may not be suitable for all investors.

NAVIGATING WAVES OF UNCERTAINTY

Risk on, risk off. I sometimes feel as if I am watching a “clap on, clap off” commercial. I mentioned when I last wrote that slow growth, uncertainty, volatility and a substantial correction were all likely. We’ve seen all of that.

Since my last correspondence we have navigated this wave of uncertainty by taking profits and raising our cash and ultra short term bond positions. In early April we followed up our technology related stock sales with two additional moves to reduce US and global stocks and convertible and high yield bonds. In early May we quickly cut our global stock exposure after the anti-austerity votes by the Greek and Dutch. Especially problematic was the ouster of France’s leader and his replacement by a “socialist” politician. While I don’t feel austerity alone can solve Europe’s problems, or the US’s for that matter, the jettison of Europe’s current plan without a credible replacement could create a shock – hence the wave of uncertainty. We also have reacted to the softer US data points that have emerged this Spring.

So where are we now? Taking profits and reducing risk have paid off. By early June major stock market averages had given back all or most of the year’s gains. We were able to mute the effect of that negative wave of uncertainty considerably.

What are our biggest concerns? Policy risks!! – not just from European leaders, but from our own. If no actions are taken by year end, we face a fiscal cliff. A 600 billion dollar tax hike will hit Americans. Ouch! And energy, food and other commodity speculation is still rampant and damaging. Economists say in theory that speculation doesn’t change prices over the long haul, but they can cause 20% distortions in current prices. If gas prices are $.75 or $1.00 higher per gallon than real demand dictates, and that happens every time it looks like the economy is starting to gain some momentum, it steals the average persons discretionary income in a big way. It robs them of money they should be spending on automobiles and televisions. And when those prices persist until it looks like we are maybe headed back into recession, consumers change their behavior. They cannot, or will not, commit to major purchases, like buying houses and instead continue to worry about their jobs.

Where are we headed next? Down the same road but the next wave is probably up. Gas prices are currently down almost 25% from recent peaks. Consumer spending will likely strengthen data points in the coming months — at least until they get squeezed again. Europe has no choice but to address their issues now. They need a fiscal union, not just a loose monetary one. At a minimum, they need coordinated and supportive banking policies to prevent runs on banks and to deal with poorly capitalized ones. But solutions are achievable.

And what about our US politicians? The Governor Walker recall election results seem to indicate that spending constraints are supported by US voters. Now if only we can get support for raising additional revenues, in my opinion best done with a national sales tax, we might actually get on a sustainable fiscal path ourselves.

So, prospects for higher growth are really possible. Housing prices appear to have stabilized in most areas of the country. In the absence of any major shocks … you get the idea.

In closing, after May’s pullback we recently added to our consumer discretionary position. Once again, America’s amazing consumers are the engine that’s powering the global economy. We remain cautious but alert at the wheel. Hopefully gas prices will behave so we all can enjoy the summer driving. But don’t forget to wear your seat belt, just in case.

Sincerely,

Donald J. Miller, CFP®
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. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

WHAT A DIFFERENCE A QUARTER MAKES!

Stocks enjoyed very strong gains during the quarter. In fact, it was a quarter of milestones for the broad averages, with the Standard & Poor’s (S&P) 500 breaking through to new post-financial crisis highs, the Dow Jones Industrial Average (The Dow) eclipsing the 13,000 level for the first time since May 2008, and the NASDAQ reaching 3,000 for the first time in over a decade. The quarter’s gains leave the S&P 500 11% short of the all-time highs set in October 2007 and 30% above the 2011 lows set six months ago in October. The solid returns for the broad market were driven primarily by improving U.S. economic news, most notably jobs and consumer data, and investors increasing comfort with Europe’s challenges.

So what do you do after a quarter like that? Stay objective and keep things in balance! That’s why for our income and most conservative investors we recently took profits on our tech heavy positions. Hopefully you remember we made significant investments in that area in March 2009. So, after a large run up, over 20% in the 1st quarter alone, it made sense to trim those positions to more targeted weightings.

Where did we rebalance to? To a more conservative, out of favor, and/or more income oriented investments. We added to clients bond ladders, buying intermediate corporate bonds in the financial sector. We added a position in high quality preferred stocks that are expected to pay solid, tax efficient, qualified dividends. We also established a position with a real estate income focus. Yes, it really looks like prices are stabilizing and probably headed north.

You might ask, if we expect this bull market to continue, albeit with a possible significant correction and increased volatility, why was this action important for our investors taking income from their portfolio? There are two answers. The first lies in the difference between portfolios in distribution (ones that are taking regular withdrawals) and ones that are not. If you’re a growth investor and the market goes up 7%, down, and back up, you get the 7%. If you rely on your portfolios for living expenses and take money out regularly, some of that money will be taken out when the market is down and therefore will not be around to rebound. You won’t get the full 7%. So, managing fluctuations and volatility are critical to the success of an investor requiring withdrawals.

The second reason is that clients who rely on regular distributions also need to have a high percentage of their pay out funded by predictable interest and dividend payments – if they want their money to last. Selling something to pay expenses can be a disaster. Sometimes everything is down (think about the last few years). And we all know that if you have to sell when the market is down… it is not so pretty. So, taking profits from non income producing areas and using them to boost the cash flow that supports required payouts is a double benefit. Managing risk and structuring more certain outcomes are critical to successful retirement income planning. And you thought we were just buying low and selling high!

Well, that’s it for today. I hope you appreciate the market update and some insight into the science that guides our decision making. There’s a lot going on so I’m sure I will be in touch soon. In the meantime if you have any questions, do not hesitate to call.

Sincerely,
Donald J. Miller, CFP®
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. All indices are unmanaged and may not be invested into directly. The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield. Stock investing involves risk including loss of principal. Investing in specific industries is subject to higher risks and volatility than investing more broadly.

I’m writing to update you on current market conditions and other noteworthy items.  We promised to give you our thoughts more frequently and to try to avoid lengthy letters.  So here it goes.

 Year-to-date returns in most clients’ accounts are up substantially.  As we suggested, a lack of black swans is creating an environment where the drumbeat of slow steady growth is getting louder; and while many are jumping on the wagon to get “caught up”, we thankfully are not. 

 We added to US equities three times in the last quarter based on methodical portfolio and macroeconomic analysis – not based on market timing.  Because we held the line on protecting assets in last year’s eventful and volatile markets, our returns over the last 13 months have, we feel, been strong – especially on a risk-adjusted basis and especially in light of the Fed’s zero short-term rate policy and historically low long-term rates. 

 And, despite the temptation to sell now and wait for the big correction, we think we need to take this opportunity to take profits and more normally weight portfolios – reduce overweighting in large cap value and bonds and rebalance to add global and mid-cap exposure.

 The issue of what areas will do best in the year ahead seem to be based on credit conditions.  Do they favor “risk on” or “risk off” assets? 

 We see credit improvement on three fronts. 

 One, consumers are expanding revolving credit use – probably because of an improving job picture. 

 Two, fear is subsiding that Europe’s financial crisis will cause a global meltdown.  Ironically, Greece’s fiscal pain may be spurring other nations to fund a solution and avoid the nasty repercussions if it spreads.  There’s even talk of market-based labor reforms in Europe – not just austerity.  I wonder if it will spur spending and tax reform here before it’s too late. 

 Three, serious discussion is underway about reflating the housing market with more quantitative easing and potentially meaningful foreclosure forbearance.  Stabilizing housing prices and lower refinanced monthly payments should help consumers boost the economy. 

 So, if the trends continue, we need to more evenly weight the areas we minimized last year – the “risk on” assets like financials, Europe, and commodities.  To be sure, we have a disaster plan in place should certain events interrupt or reverse these trends.  However, we know our job is to focus on what is, not what ifs.

 Before closing, I want to quickly mention a couple of other items. 

You may have noticed that year-end LPL Financial reports show ex-dividend payments as a decline in market value.  They add back the capital gains and dividends in the dividend column.  So while December was essentially flat from a performance standpoint, it would appear that accounts had a large decrease in market value that month.  This wasn’t so glaring in prior years because either the year-end was up sharply or funds didn’t pay a lot of gains out because they had stored capital loss carryforwards from the financial crash years.  However, in every period a dividend or gain is paid, it negatively impacts the “increase or decrease in market value” entry.  And gains and dividends paid are a hugely positive event.  Please see this LPL Market Value Letter of Explanation that explains this in more detail.

 Finally, I want to remind you of the income and estate tax uncertainty that surrounds our planning this year. 

 Provisions such as making tax-free distributions from IRAs to charities, deducting state taxes on your federal returns and relieving many from the Alternative Minimum Tax (AMT) were not extended last year.  Also looming large are the Bush-era tax cuts and the expansion of the Federal Gift & Estate Tax Credit.  Both are set to expire this year.  Because of the current deficits, and polarization of Congress and the White House, we expect the debate will probably extend into the 11^th hour.  The final resolution may largely depend on the outcome of the elections and the politicized dynamics of the so called “lame duck” Congress.  Just when you thought it couldn’t get any better!  Right.

 Alright, so I did okay on the reporting more often but not the lengthy letter.  Either I like to talk or there’s a whole lot going on, probably both.  Thanks for the trust and confidence.  Talk with you soon.

Sincerely,

Donald J. Miller, CFP®

LPL Registered 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.  All indices are unmanaged and may not be invested into directly.  Stock investing involves risk including loss of principal.  International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.  Mid-capitalization companies are subject to higher volatility than those of large-capitalized companies.  The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Please click on the link below to view the LPL 2012 Oulook.

LPL’s 2012 Outlook – Summary

It has been a tumultuous third quarter with the Standard and Poor’s (S&P) 500 index down 15% since mid-July. Essentially, global markets have largely priced in a recession.  Indeed sentiment data, like consumer confidence, has been decidedly negative, but key economic data has been positive. Last week the Labor Department reported solid gains in jobs and revised the previous month’s estimates higher as well.  Also, the Institute of Supply Management (ISM) data confirmed a slowly expanding economy.  In fact, estimates for third quarter growth are in the 2 to 2 ½% range – hardly a recession.

So what’s creating all the angst and volatility and what are we doing about it?

Clearly, concerns about ineffective policies, here and abroad, to deal with European debt problems and sputtering US growth and job concerns are the chief culprits.  Fortunately, it looks like Europe is getting serious about its sovereign debt issues.  Recently, they authorized a US-style TARP fund to ensure its banks will remain solvent.  But they’re not out of the woods yet.  And, unfortunately, because next year’s elections are looming, US policy decisions remain fractured and politically motivated.  Therefore, we believe volatility will continue over the next year.

Our response?  We want to hedge portfolios against excessive volatility. In fact we believe we can even potentially profit from it.  In order to try and accomplish this, we’ve done two things. First, we sold a position that was diversely invested but typically actively hedged against downturns.  However, through the summer decline, it essentially did no hedging.  So we made the decision to try to better position the money.  Second, with the proceeds of the sale, we’ve worked to identity an opportunity to try and use the volatility of the S&P index to our advantage.  This index volatility typically rises with concerns about recessions, debt crises, oil price shocks, natural disasters, terror attacks, and policy mistakes.  Because it is complicated, however, we intend to speak to every client before implementing it in your portfolio.

The other action we have recently taken is to reestablish our position in an investment similar to the one we took profits in last June.  We feel slow growth and profitability will continue despite policy concerns.  Since we sold our unhedged position last month, we feel we need reasonable exposure to growth and convertible bonds. 

In summary, it has been an interesting last month or two.  However, we not only have a plan for continued slow growth and volatile markets, we are executing it in a way that attempts to manage risk and take advantage of opportunities.  We plan to contact everyone affected by our strategy change.  In the meantime, of course, feel free to contact or call us to initiate discussion or with questions or concerns.  We always appreciate hearing from you.

Best regards,

Donald J. Miller, CFP®

LPL Registered 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.  All indices are unmanaged and may not be invested into directly.  Bonds are subject to market and interest rate risk if sold prior to maturity.  Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.

After the market close on Friday, Standard and Poor’s (S&P)—one of the three major U.S. rating agencies—downgraded the U.S. government debt from AAA to AA+. This is actually a drop of less than one level within the S&P rating system. According to S&P, an obligor rated AAA has “extremely strong capacity to meet its financial commitments” while one of AA has “very strong capacity to meet its financial commitments” and differs from AAA obligors “only to a small degree.” Therefore, U.S. debt is still rated very strong. In addition, the two other major U.S. rating agencies, Moody’s and Fitch, have maintained their highest ratings for U.S. federal debt. S&P kept the short-term rating of the United States at the top rating of A1+. Short-term money market instruments are rated on a different scale, but the status quo with respect to these ratings implies no impact to money market funds.

Since the first U.S. rating agency was established in the early 1900s, the U.S. government has not been downgraded. Frankly, a downgrade just sounds and feels bad. The word “downgrade” has similar negative connotations to words like “demotion” or “decline.” However, while this is the first time that the United States has been downgraded by a U.S. rating agency, it is not the first time that the United States has been downgraded. The United States was downgraded one level by China’s Dagong Global Credit Rating Company to A+ in November 2010 and by Germany’s Feri Rating Agency to AA in June 2011.

There is also much precedent for other AAA-rated sovereign nations seeing their debt downgraded. Japan lost its AAA rating in 1998 and Canada was downgraded in 1994—however, both successfully regained their AAA status at later dates. Japan lost its AAA status again in 2009. Though this downgrade feels unique and unprecedented, it has already happened relatively recently to the United States without much attention and to other sovereign nations in the past.

As investors, we need to take this downgrade as what it is—a change in status that does not meaningfully diminish the term “full faith and credit of the U.S. government.” In fact, the debt of the United States continues to be viewed as preeminently high quality. One measure of this is to examine the credit default swap market, which is similar to insurance that institutional investors can buy to protect their bonds in case of default. Even after the downgrade by S&P, the cost to “insure” against the default of the U.S. government is much lower than nearly every country in the world, including many AAA credits like Germany, France, and the United Kingdom. Therefore, even though U.S. debt does not still carry a full AAA rating, the market still views the U.S. government’s ability to meet its debt obligations as AAA worthy.

So, what does this all mean to the markets? S&P telegraphed their downgrade starting a couple of weeks ago while the debt ceiling debate was still ongoing. As a result, I believe that the markets have largely priced this downgrade news in. In addition, we have likely not seen the last of downgrades. Now that the United States has been downgraded, S&P will separately be reviewing government agencies and companies that rely heavily on U.S. government support—such as Fannie Mae, Ginnie Mae, and Freddie Mac—for potential changes in credit rating. That said, further downward price moves in the stock market are likely not attributable to the downgrade of U.S. debt, but rather escalating concerns around the European crisis and decelerating global economic growth. In a sense, the downgrade of U.S. debt is not nearly as important to the market as is the potential downshift in the strength of the global economic recovery.

While we have to acknowledge that the risks for a double-dip recession have been creeping up as of late, I continue to believe that it is extremely unlikely. The market appears to be pricing in a far greater likelihood for a return to recession than the data actually indicates. As a result, stock valuations are cheap versus historical averages. The S&P 500 Index trailing price-to-earnings (P/E) ratio, a measure of how much the market values a dollar’s worth of corporate earnings, is at 13 (the lowest since 1990) and the forward P/E ratio is 11 (same as March 2009 low).Essentially, the market is as cheap, or even cheaper, now than it was during the depths of the 2008-2009 recession.

The visceral, emotional reactions to this downgrade are normal, but I believe that the S&P rating downgrade is more disappointing than it is material for capital markets. While the market may react emotionally to the news over the short run, rational analysis will soon reveal that continued favorable economic fundamentals and attractive valuations point to potentially promising investment opportunities just around the corner. I believe that maintaining a cautious stance remains prudent, but systematic additions to risk at these levels will prove a wise investment as the year unfolds. As always, if you have questions, I encourage you to contact me.

Best regards,

Donald J. Miller, CEO, CFP®

LPL Registered 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 me 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.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

An obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

The P/E ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio.

Credit rating is an assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.

Stock investing may involve risk including loss of principal.

This research material has been prepared by LPL Financial.

Tracking #786254 | (Exp.08/12)

The first few days of August for the stock market have represented a rapid flight from risk. The third-quarter bounce for the economy, driven by the tight consensus of investors three weeks ago, has now been completely rejected by the capital markets which have turned lower, despite the fact that earnings remain robust for Corporate America. The market has also ignored several recent, solid assessments of the economy, especially the recently released employment report, which showed a welcomed gain of 154,000 jobs being created in the private sector for July. The uncertainty of the European debt crisis and intense debate on the U.S. debt ceiling precludes any material hope of fiscal or monetary stimulus before the next election. This lack of policy actions has increased the perceived risk in the markets that is causing investors to flee. In a sense, “all news has been bad news” as of late.

European issues are challenging, but not a crisis. The news flow makes it sound like Europe is flailing about trying to throw more money at a growing problem. European Central Bank President Jean-Claude Trichet’s statement this week—that the downside risks to growth have intensified and that they will let banks borrow as much as they need—had an air of desperation to them. But, I do not believe the situation is nearly as bad as the headlines make it seem. The likelihood of a Greece-like situation developing is remote for the market’s next perceived “problem child”: Italy. Unlike in Greece, substantial spending cuts are already well underway in Italy. Italy has already cut government workers, raised revenue by eliminating some tax breaks, and sold government assets, which is moving the country on a credible path to fiscal sustainability. In fact, in 2010, Italy reduced its deficit-to-GDP ratio by nearly a percentage point and has a lesser debt burden than does the United States, Japan, and the United Kingdom.

To be sure, some recent economic data has been disappointing, notably the downward revision of second quarter gross domestic product (GDP) and the July ISM Purchasing Managers’ Survey which showed elements of manufacturing activity down near contraction levels of 50. However, it has not been all bad of late as retail sales continue to post strong advances, weekly unemployment claims dropped back to the all-important 400,000 level, housing starts showed modest signs of improvement, and employment accelerated dramatically in July relative to the previous two months. The bottom line is that the economic data is mixed, but not terrible. We still see below-average growth on tap, as we forecasted for this year, but we do not see a double-dip recession on the horizon.

With bond yields falling as investors flock to the safe-haven of Treasuries and major stock market averages now down about 10% from the recent highs, this may seem all too familiar. It is natural to wonder about how recent economic conditions compare to those of 2008 and if the market is foreshadowing that another crisis is on tap. The message from the markets is important, but in last summer’s soft spot, bond yields dropped to similar levels seen today and the stock market fell 15%, but there was no recession. Instead, we got a second-half market rally as clarity improved and investor sentiment returned. In our opinion, the summer of 2010 is the more relevant comparison for what lies ahead for this market as opposed to the recessionary period of 2008-2009.

While there is much to be worried about, I believe that the market’s concern is overdone and it is pricing in a far greater likelihood for a return to recession than the data actually indicates. Stock valuations are cheap on both a trailing and forward basis versus their historical averages. The S&P 500 Index trailing price-to-earnings (P/E) ratio, a measure for how much the market values a dollar’s worth of corporate earnings, is at 13 (the lowest since 1990) and the forward P/E ratio is 11 (same as the March 2009 low). Essentially, the market is as cheap or even cheaper now than it was during the depths of the 2008-2009 recession. While valuations could compress further, the spring is already tightly coiled. A solid earnings season suggests the market is too bearish with the price it is putting on earnings.

But, do not forget what turned last summer’s market malaise into a double-digit second half rally for stocks: improving economic data, strong corporate earnings, emerging clarity from Europe, and above all, a market that was just too cheap to pass up the attention of investors. The bottom line is that the market has a blind eye to good news given the bearish-colored glasses it has been wearing as of late. It is my opinion that volatility will remain elevated, but the market’s emotional sell off will soon transition to a rational assessment of improving economic fundamentals and attractive valuations.

The economic and market recovery is now well into its second year from the March 2009 lows and as any parent can vividly recall, this market “toddler” is just going through an old-fashioned “terrible twos” temper tantrum. But, market slides are where great buying opportunities are born and this will be no different. I believe that maintaining a cautious stance is prudent, but systematic additions to risk at these levels will prove a wise investment as the year unfolds. As always, if you have questions, I encourage you to contact me.

Sincerely,

Donald J. Miller, CFP / Registered 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 me 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.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The P/E ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio.

Credit rating is an assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Stock investing may involve risk including loss of principal.

This research material has been prepared by LPL Financial.

Tracking #751660 | (Exp.08/12)

Below is LPL’s commentary on the market and economy currently and their view on where we are headed for the second half of 2011.

LPL 2011 Mid-Year Outlook

I’m writing today to update you about some defensive portfolio changes we’ve made recently and to give you our thoughts about the state of global and domestic economies and the impact higher oil prices are having on them.

About two months ago we sold our commodity position because prices had spiked to an alarming level and we knew speculation was the primary culprit.  Since then our suspicions have been confirmed.  Seventy percent of oil purchased in the futures market is coming from non-users. 

While prices have retreated 10 to 15% they remain stubbornly high.  This, while economic data in May points to a significantly slowing U.S. economy.   While we know oil prices need to come down to prevent consumer spending and confidence from tanking even further, they remain stubborn.  In fact, while the stock market declined in the face of poor jobs and housing data, oil prices firmed and even rebounded slightly.  Fundamentally it makes no sense – unless you assume jobs, housing and consumer spending are not important to this relatively weak recovery and that a continuing U.S. recovery doesn’t matter to global growth. 

Now I’ll concede that China has recently surpassed the U.S. in oil consumption per year – while producing only half the goods and services that we do.  But, remember Alan Greenspan suggested that energy inefficiency is a prime characteristic of an emerging economy.  I don’t believe that emerging economies can stand on their own yet.  That time may be getting closer, but, it’s not here now. 

So if higher oil and food prices persist . . . in the face of weak housing and job markets . . . and if consumers have no equity to borrow against or can’t afford to (or are afraid to) take on more debt . . . and if politicians shut down the State and Federal Governments . . . and if that causes a default on U.S. debt obligations . . . or if spending cuts are too large and lead to job losses . . .  

Well, I think you can see why we are taking a little more defensive position.

Specifically we exchanged U.S. Domestic Equity positions specializing in mid-cap stocks and technology stocks for high-quality intermediate bond positions.  Essentially we are taking profits from outperforming areas and are investing into positions that will likely go up if the economy struggles.  We know this may create some capital gains, but many have capital loss carry forwards and most advisors believe that capital gains will likely be taxed at higher rates after 2012.  Most of you know I feel that managing risk and seeking to protect capital trumps most other considerations. 

What’s next?  We’re monitoring things closely.  We have a specific plan to deal with our portfolios – depending on whether fundamentals improve, stay the same, or get worse.  We’ll keep you posted. 

By the way, I believe oil prices will “give” before it’s too late and the global expansion will continue.  I’m just not willing to bet the house on it.  Thanks, once again, for your trust and confidence.  As always, call with questions.

Donald J. Miller, CEO, CFP®

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  All performance referenced is historical and is no guarantee of future results.  Bonds are subject to market and interest rate risk if sold prior to maturity.  Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price