July 1, 2011

I hope this finds you well. When I write this report it is amazing to me how much goes on in the world. Bin Laden has been killed, the Middle East is having its “Spring”, Greece is close to bankruptcy and the European Union and IMF (International Monetary Fund) are working on what to do about it, China is preparing for a new leader, and we are already hearing all about our own Presidential elections coming up next year. I could go on but for brevity I will stop.  The issues affecting our investing are many. The biggest two right now are the deficit and the economy. The US deficit is now big enough that even some liberal economists are saying we need to do something about it. I have just returned from the Morningstar Investment conference in Chicago, where more than a few of the speakers left us with our jaws on the floor. The founder of PIMCO, Bill Gross, was just one of the speakers giving dire warnings of our current situation. I would describe his comments being akin to being on an out-of-control train that you know is going to crash but is going too fast to jump off. Here’s the problem; our government has made promises that it will do certain things for us. It has promised health care after a certain age, 65.  It has also promised lifetime income starting as early as age 62 and if you wait till you are a little older you get an even greater payout. Great programs until you let the financing of them get out of control. We have funded many other programs using the funds intended to fund Social Security. “Elect me, I’ll give you (pick your favorite program).” The average retiree receives all the money they have paid into social security in the first 6 years after retirement, the rest is profit. (1) The total dollar amount promised is over $100 trillion. (2) Those numbers are so big that they make the situation in Greece pale by comparison. Gross and others give us, at most, 3 years. S & P has downgraded our government debt. The good news is that people are starting to change their views. One of the biggest is AARP, where in a major policy shift they are finally admitting that the system must be changed. To quote Patrick Moynihan, my favorite democrat, “facts are stubborn things”.

The next area concerning our investments is the economy. QE2 (quantitative easing) ended June 30th. The government sells its bonds to finance its spending. Auctions are held, and banks, countries, and people come to the auctions to buy the bonds. If there is a lot of demand they are sold at very low interest rates. This stimulates the economy. QE2 is our treasury showing up at the auctions not only as the seller but a buyer as well. Our Treasury was buying 70% of the bonds being offered. Lots of demand equals low interest rates. The next auction will not have us buying our bonds. When we quit buying will China or Japan pick up the slack? I think interest rates could be going up. This is problem one.  The Obama administration has said its number one goal is to get the economy going. More jobs are needed and the cash that businesses are sitting on needs to be spent. The published unemployment rate is around 9.1% and the real number is around 15% if you include the people who have quit looking. I think a lot of business’s are concerned about the environment they are operating in. Almost daily I read that one or another government agency is requiring a company to change what it is doing or how it is doing it. In a recent speech in Brazil we (USA) promised billions to help develop their off shore drilling technology, yet we have not yet lifted the moratorium for our own companies drilling off our own coast. More than one of you has given me an earful on that. Boeing is being sued for attempting to open a factory in South Carolina where the labor laws are more conducive to manufacturing. The EPA is still trying to raise the taxes on coal plants this could cause our utility rates to raise. The new healthcare law is another area of concern. What’s allowed or not, which government agency will be in charge and how much will it cost are still being figured out. The law is almost 3000 pages. The law was intended to do several things: Get rid of pre-existing conditions, provide guaranteed issue and provide coverage for everyone. In Colorado we have a guaranteed insurance pool, a carryover pre-existing law, and limits on what can be charged to a sick person vs. a healthy one. All this is without any government bureaucracy and was done with a 20+ page law. If you don’t like your insurance carrier you can change carriers. It’s not perfect and needs to address covering everyone and some other fixes are needed but I feel it solves most of the issues better than a new and even bigger government monster. Over 1,500 companies have been given waivers out of Obama Care and more are hoping to get them. No one knows even today what the rules will be. “We have to pass it so we can see what’s in it”. (3) The list goes on but needless to say the business community has become very wary of Washington. Between the deficit and the business environment the market started to drop, yesterday as the Greece situation seems to be getting a temporary fix it is up again. Given this background and all the various moving parts you can see that sticking with our value approach and methodology is needed and in the long run should pay off. I look forward to seeing you and as always am grateful for the confidence you have in us.


Willis Ashby, CFP®

Reference (1) National Commission on Fiscal Responsibility and Reform 12/01/10

Reference (2) Bill Gross – Morningstar Investment Conference 06/08/11

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