As you know from our prior correspondence, we recently altered our portfolios and exchanged certain managers for others.  Today I wanted to provide you with some insight into exactly what we are doing and why.

First, because of softening economic data, falling consumer confidence, and significant market volatility, we made our portfolios more “defensive.”  We raised our target for cash and bonds.  In the near term, we feel that deflation is more worrisome than inflation and protecting capital is more prudent than exposing ourselves to high-levels of uncertainty (risk) in pursuit of higher growth. 

Next, we exchanged a mediocre performance manager for one that historically has had more consistent returns in today’s choppy environment.  We also replaced relative return managers for ones focusing on absolute returns.  The difference between the two is that relative return managers compare themselves to a benchmark.  Their job is to outperform it — even if it’s negative.  If it’s growth stocks, they typically will need to be invested in growth stocks most of the time.  In less volatile markets that generally are rising, these managers should be considered.  Over the past 12 to 15 months, they’ve done well.  An absolute return manager, on the other hand, usually has much more latitude on where to invest and when.  They selectively risk capital if they believe sufficient opportunity exists.  They might invest in growth stocks if the market has momentum, but they might “short the market” if it’s falling.  They are not tied to a benchmark; instead they are trying to generate positive returns — even if that means staying in cash and collecting interest.

So in English, we’ve replaced managers that go up and down with the market for ones that are better positioned even if the market falls or stays flat.  We feel the new managers can take a more defensive approach. 

That said, remember, we’re fine-tuning parts of a portfolio that already reflects our cautious outlook — not making wholesale changes.  We still feel that it’s folly to try and time the markets, but it is prudent to protect capital first.

That means we’re not on the sidelines.  We still feel that while growth has slowed significantly, we are not going to “double-dip” into recession again.   The odds are higher today, but it is still mostly avoidable. 

So, we hope this is helpful and not too much information.  It’s been suggested that corresponding more often, when things seem uncertain, is appreciated.  We hope you agree.

In closing, I wanted to mention that there is some tax relief available for college bound students.  The expanded and renamed HOPE Credit is available this year.  Called the American Opportunity Credit, it covers the first four years of post-secondary education, can net you as much as $2,500, and can be claimed by joint filers with adjusted gross incomes as high as $160,000 to $180,000.  If you fit the bill, make sure you give us a call if we’ve not already discussed it.  Also look for more information in the coming weeks from us on the financial reform bill.  As always, please feel free to contact us directly to discuss your thoughts.  Sally Noel is our new Client Service Manager and she’d be glad to help schedule a conference call if that helps.  We look forward to hearing from you. 

 Don 

The following disclosures are courtesy of our LPL Compliance Department. 

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. 

Stock investing involves risk including loss of principal.  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. 

Greater Midwest Financial Group does not offer tax advice.  Please consult your qualified tax advisor.

Greetings, I hope all of you are enjoying what is shaping up to be a beautiful summer.

I wanted to update you on some recent actions we have taken and give you some insight into where we think this global recovery is at.  As I mentioned in our last blog/correspondence, we are cautious but optimistic.  U.S. jobs, retail sales and housing numbers indicate a “soft spot” in the recovery.  However, additional data has been released that we feel warrants us being more defensive.  Falling consumer confidence, the potential for a double dip in housing and policy risk are our major concerns.  This time it seems like the republicans, under the cover of no more deficit spending, appear to be thwarting attempts at additional stimulus.  While I’m a strong advocate of living within your means, timing could be poor to make a stand unless your timeframe was more focused on the November elections.

Remember I’m not taking sides, just reporting that things could get bumpy if the tracks need a little more grease and they get none because of political squabbling and posturing.  Eventually both parties will have to compromise and do what’s best for the economy.  They’ll have no choice, but timing is everything.

So what did we do?  We reduced client equity exposure.  We took profits in the consumer discretionary area.  Consumers are definitely holding back and who can blame them with so few jobs being produced.  We also reduced positions and managers that we thought were underperforming.  So what are we going to do next?  We’ll look for profitable ideas that are more defensive – remaining flexible enough to participate in growth when risks to the global economy have diminished.  Some clients need more guarantees.  Some need less volatility.  Everyone wants solid total returns.  Even though we feel we know each of you well, we’re always interested in your thoughts.  Please don’t hesitate to contact us with your questions or concerns.

Yes, I’m sad to report that the U.S. Soccer Team lost, but I’m proud of the way that they played.  The American Spirit is still alive!

Don

I am writing to provide you with yet another market update. Last week we continued our portfolio repositioning and saw some dramatic market volatility. Today I hope to provide you with some insight into both topics.

Friday we took profits in a balanced fund that is concentrated in growth stocks and convertible bonds. As always, we did this where we had discretion and/or were able to contact you where necessary. Our investment team decided that after the significant run-up in the NASDAQ that we wanted to reduce our large overweight in growth stocks and cash in on profitable convertible bond performance. We also achieved our objective of slightly reducing overall bond positions. As we and others have reported, we ultimately think that interest rates have nowhere to go but up.

We immediately repositioned cash into a well-known commodity strategy fund that is weighted towards the energy and food sectors. We believe last week’s positive job and retail sales reports support our’s and LPL’s view that a global recovery is continuing to gain traction. With the possibility that financial reform may curtail speculative derivative use, it appears that fundamental supply and demand are now more in sync and may potentially drive prices, in line with growth, over the next 3 to 5 years.

Which takes us to last week’s other events — major stock market volatility and the Greek debt crisis. First, let me say those events did not precipitate our decisions. We are not trying to time the markets. We decided two weeks ago what to sell and then calculated the correct way to execute it within client portfolios. The fact that prices for all assets came down quickly did nudge us to immediately reinvest into the commodity strategy fund. We think we have achieved a relatively good entry point.

Next, the Greek debt crisis is just a symptom of a larger problem; excessive spending and entitlement promises by many governments – ours included. As I said before, you can’t borrow indefinitely. And if you “can’t” default to creditors, then you can only default on promises to your citizens. The Greek riots and protests may well play out in other countries over the next decade as fiscal reality sets in. But, in the long run, these are good things that continue to support a slow and steady recovery. The fact that credit is being offered under more stringent terms and that demand for credit is slow to rebound means we probably won’t get too far ahead of ourselves for awhile. Things will continue to loosen up and jobs will be added slowly.  By the way, we’ve just added a recent St. Thomas business graduate to our professional team. You will probably be talking to Rachel soon if you’re scheduled for a review.