October 6, 2009

As usual I hope this finds you well. This quarter I thought I would discuss two things; the Stimulus, and then try to succinctly explain why I feel the Emerging Markets makes a compelling investment. First, did the stimulus work? Well, yes and no. I think that without it we would have likely fallen off a bigger financial and economic cliff. It can be argued that we did. It now appears that the economy is up and rebounding and we have only spent about 40% of the $700 billion of allotted funds. Two of the “job creating” parts of the stimulus were the “Cash for Clunkers” program and the $8,000.00 “First Time Home Buyers” plan. Auto sales shot through the roof and around 700,000 cars & trucks were sold. It removed from the showroom floor a large amount of cars, thus clearing the “pipeline“ or back log of cars and allowed for the manufacturing of new cars.  This should and hopefully will create new jobs. This is paid for by an artificial redistribution of money. Our tax dollars given as incentives to buy new cars for the select few of the population that were driving older high gas consuming vehicles and a select industry (Auto). The bad news is that auto sales for September were down 45% for GM (Government Motors) down 42% for Chrysler with the entire US auto industry down 23%. OUCH!  I might add that Ford is the only US auto maker that has not declared bankruptcy and lost only 5% after the program ended. If the sales remain down it will result in all our taxes going up and only a one time bump to the economy, not producing any lasting benefit or jobs.

Next is the first time home buyers program that will end next month. Just like the auto program, it was designed to clear the backlog of homes so new homes can be built and jobs created. The good news is that home sales are up as well as prices in some areas of the country.  The bad news is that home sales in August dropped. As of this writing, the September numbers are not out. Once again we have an increase in home sales that may be only temporary. If so you once again will be taxed to help what many consider too narrow a group, low to mid income first time buyers. The critics say it should be open to all buyers to move the housing inventory. It is estimated that at least 30% of the past sales were foreclosures on the very group we are now targeting again. We will see if history repeats itself or if the money was well spent. The next several months will tell. Remember these programs were designed to create jobs. If unemployment goes past the new predicted 10.2% rate I would say neither program worked and thanks for the extra taxes and the delaying of the next crunch instead of getting it over with. If we can continue the economic growth we have seen and we don’t slip back, I am willing to pay my share for “the greater good”. Which one it will be is still very much up to debate. Pick your economist. We have no prior history to guide us.

Now, on to the Emerging Markets discussion. First the Vanguard Emerging Market Index has only a few countries that make up 80% of its holdings. They are Brazil, China, India, Russia, Korea, South Africa, Taiwan and Mexico.  This group over the last 10 years has grown their GDP (Gross Domestic Product) by 8% annually vs. the US at around 4.4%. Also the world GDP is about 21% US and 37% Emerging Market the remaining 42% being comprised of the Frontier Markets and the Developed Markets.  It is a stunning development that the Emerging Markets is such a large percentage. Even though the growth rate is almost double ours and there output has passed ours they only represent 10% of the stock market value. This gives them plenty of room to grow. When you add that 80% of the land mass and population is there they become very hard to ignore. I will not bother you with other exploding growth rates or market valuations suffice it to say they are growing faster and are less expensive per $1 of revenue. All that being said the volatility is scary enormous drops and equally big gains. For long term investors and those who worry about our deficit and inflation, I believe if you can handle the ride it is hard to ignore and worth a look. I appreciate your trust and business.*

Yours truly,


Willis Ashby, CFP®

References:  Wall Street Journal, M&I Investment Management, The Economist, IMF World Economic Outlook Data Base. 

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