October 1, 2010

Let’s start with a few of the things which can affect your investments. For brevity, I will list but not detail them: McDonalds saying they are likely to drop their health insurance on 10,000 employees because of Obama Care, the Flash Crash report which outlines the blow-by-blow of what happened, but few, if any, recommendations on what to do about it, and closing with “it could happen again.” Two more issues potentially affecting your accounts are inflation vs. deflation, and which would be better (hint: neither), or the currency race to the bottom, which is the devaluing of currencies around the globe. As they drop in value, each country wants to keep theirs lower so their exports are cheap. Other notable issues are the passing of the largest financial regulations bill since the Depression, the large number of bank failures (over 100 this year) and the finances of the FDIC, or what the SPIC is doing to pay the Madoff victims. Last is Goldman’s paying $550,000,000.00 to settle with the SEC. I’ve been very busy keeping up and trying to figure out how we should respond from an investor’s point of view.

Given all the above let’s start with some facts. The Dow opened the quarter at 9,774.02 down 12.8% from this year’s high. It ends with the best September since 1939, up 10.4%, with August turning in the worst month in close to a decade. There is so much uncertainty that no one knows what is likely to happen going forward. Here is what I see. We will have some pretty important positive changes in November. Most of you know where I stand on politics but this is not meant to be a slam on the Democrats but to anyone who is in office now. They need to go. The corruption on both sides is breath taking. I think a strong message is going to be sent. We must not get into a trade war with any of our trading partners. Painful as it may be now, we would surely lose and then it would be excruciating. The rest of the world is coming up and we as a country should accept that it can happen (and will). We should not go down as they move up, all boats can rise. A trade war would not stop them and would likely sink us, if I’m wrong on either of these then all bets are off.

That being said, I’m bullish and more so than I’ve been in a long time. The reasons are as follows. First, the companies in the US and around the globe are sitting on an unprecedented amount of cash and when it starts flowing it will be a big event. Interest rates are the lowest I have ever seen and companies have issued bonds at some of the lowest rates on record creating even more cash. Companies like Microsoft just increased their dividends by 23%. The next metric is that for the first time since the 1980’s we are seeing valuations on “growth” companies priced like they are “value” companies. The last, and while it can’t be measured, is the pessimism I see, hear, and read about every day. It is bad, but not as bad as we are being told. When everyone is rushing out of equities into bonds and cash, things get cheap. That is the time to buy, but carefully. Overseas looks better than here and emerging markets look better than developed. The final area which has underperformed is technology. I think we are going to see some inventions that will be quantum leaps forward for all.

In closing, please notice the new report which actually shows your holding’s by account. (I know what a concept). I look to your feedback on the reports as we may be able to improve them even more. I hope you are well and I hope my views end up being at least close to the mark. I thank you for the great trust you place in us.

Yours truly,

Willis

Willis Ashby, CFP®

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