Moment on Money

Letter to Clients – 3rd Quarter 2010

Dear Clients and Friends,

First for some quick housekeeping. I am pleased to announce that I have changed my broker-dealer affiliation from Ameritas Investment Corp. of Lincoln, NE to Broker Dealer Financial Corp. (BDFS) of Johnston, Iowa. My association with Ameritas was pleasant and rewarding. My decision to make a change was based on several factors:

• BDFS and I share the same core philosophy, the clients' interest always come first.
• My new affiliation will increase the quality and variety of financial services, products, and solutions available; often at a lower cost.
• BDFS is local and accessible.

My move to BDFS will have no impact on your investments, or our relationships with any of the companies we are already doing business with. It is simply a change in the intermediary.

In the financial world, it has taken me nearly two weeks into this quarter to commit my opinion to writing. I feel as if I am walking a tightrope and I cannot, with certainty, predict which way to lean. There are two opposing schools of thought; some analysts see the threat of a double-dip recession and another cyclical bear market for equities, while others see the economy remaining strong and corporate earnings improving in coming months. The available data can be used to bolster both the pessimists and optimists. Before we come to any conclusions, let's examine what has happened so far this year.

At the mid-point, the broader equities markets were down for the year with the S&P 500 lower by 6.7% and the Dow lower by 6.8%. The global markets saw similar performance, with the MSCI EAFE international index returning –12.9% year to date. Despite these declines, the equity markets continued to hold general levels achieved during the sharp run-up in equity prices that followed the extreme lows of March 9, 2009. But all of this happened with increased volatility. The CBOE's Volatility Index (the VIX) reached very high levels several days during the quarter.

Markets rallied in the early weeks of April, with the S&P 500 reaching a new year-to-date high on April 23, but as concerns about the strength of the nascent global economic recovery came to the fore, equities sold off through much of May. Despite a rally in the early part of the month, in late June the S&P 500 reached a new year-to-date low. For the quarter, the S&P 500 was down 11.4%.

 

Regardless of outlook, the market seems focused on three main concerns: the European debt crisis, unemployment and housing.

• European debt crisis: The European debt crisis was clearly the big financial story of the quarter, as investors weighed the threat of default in countries such as Greece, Spain, Italy and Ireland against the overall strength of the European economy and the ability of European nations to tighten government spending. In May, the European Union, along with individual European nations and the International Monetary Fund, created a loan package of over a trillion dollars in an effort to forestall the crisis. While the loan package was generally welcomed by investors, individual countries in Europe may still face major difficulties in working through their debt issues. Greece, in particular, has the least competitive economy in the EU and appears to have more deeply rooted financial difficulties than most European nations.
• Unemployment: Though many sectors of the economy have shown signs of growth, unemployment remains stubbornly high. Recent months have seen modest jobs growth, however the number of jobs added has had only minimal impact on the larger employment outlook. Ned Davis Research believes the job market will likely remain difficult: "We worry that the pace of job creation may not be rapid enough to quickly bring down the unemployment rate. We believe it could take several years for the labor market to get back to full employment." Supporting their view, Ned Davis cites concerns among employers about the long-term strength of the economy, limited job creation among small and new business owners, and the fact that employers now have more alternatives to hiring permanent employees, among other factors.
• Housing: For those cheering on the economic recovery, the housing market has been both friend and foe. Earlier this year, prices seemed to have found a bottom and some regional markets actually showed signs of improvement but more recent news has not been as good. Though a pullback in the number of new single-family home sales was expected following the rush to sign contracts before the April 30th tax credit deadline, the housing numbers for May were worse than many expected, down 32.7% to the lowest annualized rate ever. Sales in the West were even worse, down 53.2%.Meanwhile, according to the Case-Schiller home-price index, home prices have fallen for six straight months. Going forward, it appears the housing market will be highly dependent upon the jobs market, which in turn is likely to be most dependent on the strength and pace of the economic recovery.

Yet despite the discouraging news about unemployment and housing, there are many indications the economic recovery continues. Though recently revised downward, U.S. Gross Domestic Product is still expected to be 3% in 2010, with many analysts predicting more robust growth. Corporate profits have been strong, along with business productivity and exports. And the Federal Reserve continues to signal that interest rates, which are currently near record lows, will remain unchanged for an extended period.

The equities markets are always sensitive to new data regarding key sectors of the economy, and this is likely to be especially true in the coming months. Short term movements in the market are extremely irrational. We have experienced rapid drops in the markets when good news is announced, if the good news did not quite reach the consensus expectations. We have also seen the opposite occur.

Given the push and pull between the bad news about housing and unemployment and the generally good news about economic growth, I am cautiously optimistic. I believe we will see growth for the remaining months of 2010 but it will neither be rapid nor smooth. Instead of looking at the day to day (and, as the May 6^th "flash crash" taught us, sometimes minute to minute) investors need to focus more on the horizon and ignore the gyrations along the way.

Even though I am optimistic, there are many defensive techniques we can employ to offset the volatility we expect in the months and years to come.

The change from Ameritas to BDFS does require that we transfer each account one by one. We can usually complete the paperwork through email, fax, or US mail but I am also available should you want meet personally. We are in the process of reaching out to every client, but if you would like to transfer your accounts sooner, please get in touch with me or my assistant, MacKenzie, so we can accomplish the transfer in the method most convenient to you.

Be sure to let me know if you have any questions or concerns about the transfer or your financial well being in general. Thank you for the opportunity to continue serving your needs as well as your continued trust. I remain confident in my ability to serve you well in the future.

Letter to Clients – 2nd Quarter 2010

Dear Clients and Friends,

It is difficult to believe 2010 is already 25% (and by the time you receive this probably closer to a third) behind us. It was a record setting winter here in Iowa, and fortunately the markets have thawed along with the snow! The market's low point of the recent recession was March 9, 2009. Now that a full year has passed it is useful to look at the first quarter of 2010 in light of the market's progress in the last twelve months.

For the quarter, the major indices logged solid gains, with the S&P 500 up 5.4% and the Nasdaq Composite up 5.9%. The quarter continued to add to what was already one of the strongest cyclical bull markets in history, with the S&P 500 75% higher and the Nasdaq 84% higher than their lows of a year ago. Despite this run, however, the markets remain well off their secular highs achieved in the last decade, with the Nasdaq still 54% off its 2000 high.

There are many indications that the recovery, which began in the latter part of 2009, continues. According to the Financial Times, "economists are predicting the U.S. economy will see a surge of new jobs [in March], with some 300,000 positions being created after a loss of about 8.4 million jobs during the recession." The Federal Reserve statement that business spending on equipment and software had "risen significantly" and its reiteration that interest rates would be kept low for an "extended period" were also encouraging.

But there are several economic factors that may weigh on the recovery. Even with the modest job growth predicted for March, unemployment remains very high. Household spending continues to be constrained by flat income growth and tight credit, and this will likely affect retail sales as consumers remain cautious. Meanwhile the housing market still sits at record lows. Sales of new single-family homes in the U.S. declined a seasonally adjusted 11.2% in January, which represents the lowest sales pace since these records began in 1963.

There are also two larger trends, one historical and the other demographic, that may affect market returns going forward.

Cyclical Bull Market Trends. According to Ned Davis Research, the median gain of the S&P 500 in the first year of a cyclical bull market is 29% but the second year sees only 9% growth. Small cap and lower quality stocks, which tend to lead the broader market during periods of recovery, tend to give ground as recoveries mature into their second year. With the first year of the current cyclical bull market experiencing torrid gains, which is in line with this historical trend, many analysts are expecting to see this year's returns also follow the trend and come in below last year's while still remaining positive. Ned Davis Research believes there is still a good chance the markets could experience a drawn out correction in the second and third quarter, bringing the overall gain for the two years to be more in line with historical averages.

Inflows to Bond Funds. As mentioned in The Wall Street Journal, The Investment Company Institute reported that long-term mutual funds had net inflows for 52 weeks in a row as of March 18, a shift in assets totaling some $506.6 billion. Certainly some of this inflow represents money returning to the market in the wake of recent gains. But the bulk of investment in 2009 was in bonds, which accounted for $409 billion of the net inflows.

This reveals an interesting demographic trend that may also have implications for market growth in the coming months and years. As baby-boomers enter retirement, they tend to allocate a greater share of their portfolios to fixed-income securities. As the Journal goes on to report, another factor at work in this trend, "is a dip in risk tolerance. Investors, who have seen steep losses in two bear markets, have lost some of their appetite for risky investments. Additionally, the rising use of automatic asset allocation, which moves investments toward bonds as investors age, is driving inflows to bonds."

This suggests that older investors may be less likely to invest in equities even if the broader recovery proves strong. With so much money remaining on the sidelines, the massive inflows to equities that some predict may not materialize. Lower-than-expected inflows would likely have a dampening effect on equity prices. However, the broader inflow trend is definitely positive.

Predicting which of the above factors will most influence the market is difficult. The market may present opportunities, but it also contains risk. Investors may want to proceed with caution and diligence.

There is an old saying, "Good, fast, or cheap. Pick any two". We could almost rephrase it to the world of investing with, "Safe, liquid, or the potential for high returns. Pick any two." Managing investments in this environment requires balancing multiple objectives which are often in conflict with each other. Fortunately, there are new products and tools in the marketplace which have been developed specifically to address common concerns.

The first step in the process is to identify what your goals and concerns are and I am here to help you. Please contact me anytime you want to discuss your financial plans, dreams, and concerns. We can review what you have done so far and discuss any options you might want to consider.

As always, I thank you for the continued opportunity to work together.

¹ All returns sourced from Morningstar.com and Bloomberg Finance L.P.

² "Outlook for US economy upgraded," Financial Times, March 17, 2010

³ ibid

⁴ ibid

⁵ Chart of the Day, March 9, 2010, Ned Davis Research, Inc.

⁶ "Fund-Inflow Streak Makes It a Full Year," The Wall Street Journal, March 18, 2010

⁷ ibid

And the times, they are a-changing

I knew it would happen sooner or later.

I was at a social function and someone came up to me and asked why I had not been writing very much. I wish I had a good excuse, but I don't.

It is simply a fact that we are in a time of change and transition. The old perspectives can no longer just be assumed. Clients and planners alike must question everything and reassess their portfolios, goals, and risks. It is a time of uncertainty but also a time of great opportunity. As of the beginning of this year I have been in practice for over twenty years, and never before have I experienced such a strong demand for my time.

Last year, in Managing the Road to Retirement from the TransAmerica Center for Retirement Studies, survey respondents were asked how much money they believe they will need to have saved by retirement to feel secure. Here are the survey results:

Ages 20 - 29	$750,000
Ages 30 - 39	$1,000,000
Ages 40 - 49	$800,000
Ages 50 – 59	$500,000
Ages 60 +	$500,000

With the exception of the youngest group, it makes sense that younger respondents felt like they would need to have more money saved to feel secure in retirement. Over time, inflation demands retirees have more available savings to pay for the same retirement.

The real eye-opener for me was the follow up question where the same respondents were asked to admit if they had just guessed at that amount. The percentages who admitted to guessing were:

Ages 20 – 29	63%
Ages 30 – 39	50%
Ages 40 – 49	49%
Ages 50 – 59	45%
Ages 60 +	37%

Again, those closest to retirement seemed more certain of their responses but still… more than 1/3 of pre-retirees have no idea how much money they will need for a successful retirement. Add to that an uncertain stock market, talk of potential tax increases, and fears of inflation. Is it any wonder many people are seeking professional advice?

Letter to Clients – First Quarter 2010

Dear Clients and Friends,

I hope you enjoyed a wonderful holiday season and wish you all the best as we begin 2010.

Perhaps the most popular question I have had about my new office is about the name on the door. I am asked, "who is V?" by people who assume the D stands for Dinkin. It seems obvious now, but that thought never entered my mind when we named our firm DV Financial. Originally it was going to be DaVinci Financial to remind us of Leonardo daVinci, but later we discovered that there were already a few DaVinci Financials scattered across the country. Since we did not want to create any confusion, we simply shortened daVinci to DV. The name is not really important anyway. What is significant is why Leonardo daVinci serves as an inspiration.

Several years ago I was asked why clients chose to work with me as opposed to another qualified financial planner. While I realize trust, knowledge, and experience are important I am certainly not the only Certified Financial Planner ^TM who possesses those attributes. Ultimately I discovered that what clients really like is my ability to make them comfortable by explaining their financial situations in a way they understand. Leonardo daVinci said it this way, "simplicity is the ultimate sophistication."

Inspired by that quote I learned more about daVinci and the trait I grew to admire most about him was his wisdom. He did not reject the conventional beliefs of his era, but he refused to limit his thinking by them either. I believe that more than ever a daVinci-like approach to investing is absolutely essential. We have to consider more than just the traditional investment tools such as stocks, bonds, or mutual funds in order to construct an investment portfolio which has the greatest potential of achieving your goals.

2009 was a volatile year which brought to a close a potentially historic decade. As we entered the new millennium we all sensed change in the world. We focused on the impact of Y2K but failed to predict the tragedy of 9-11 and the series of events which followed. Terrorism, war, economic slowdown, and government influence have led us to the economic crisis which loomed over the end of the decade. In order to provide some necessary context for recent market performance and to set expectations for the months ahead, we need to take a moment to look back at what has already happened.

First, let's consider performance, which was strong for the third straight quarter. The S&P 500 Index returned 6.04% for the fourth quarter and a robust 26.46% for the year as a whole. The Dow Jones Industrial Average returned 8.10% for the quarter and 22.68% for the year. This performance is all the more remarkable considering that the market bottomed in March 2009, with the S&P 500 down over 25% from the beginning of the year through March 9^th.

As encouraging as 2009's performance was, the following chart provides some sobering context. Despite the strong finish, total return for the S&P 500 Index was down approximately 10% for the decade.

This chart shows the potential growth of $100 invested in the S&P 500 index from 1/1/2000 to 12/31/2009. The S&P 500 (a registered trademark of the McGraw Hill Companies) is an unmanaged basket of 500 stocks that are considered to be widely held and thus believed to be a good indicator of overall market performance. This index of common stocks is weighted by market value. The performance of the S&P 500 does not reflect the application of fees. It is not possible to invest directly in an index.

Numerous commentators have debated the current market's similarities to previous secular bear markets, including the early 1970s and the 1930s. The British newspaper the Financial Times even went so far as to argue that the recently completed decade was the worst in the history of the financial markets. The UK, European and Japanese markets saw similar weakness during the decade.

Do not imagine, however, that the gloom is universal. For the emerging markets, the previous decade has been one of enormous success, particularly for Russia, China and India. According to estimates provided by Ned Davis Research, Inc, Russia has enjoyed a secular bull market dating from October 1998 that has seen an 18.0% average annual return in real terms. India, since April 2003, has enjoyed a 25.1% average annual real return, while our nearest neighbors, Canada and Mexico have enjoyed longstanding secular bulls for most of the decade.

China in particular has seen ten years of unprecedented growth. Hamish McRae estimated in the British newspaper The Independent that China has grown from the world's sixth or seventh largest economy to the second largest, behind only the United States. (China, according to McRae, is now the world's largest automobile manufacturer, having recently nudged ahead of the US.)

So what does all this mean for US investors? What is the way forward? Here are a few major lessons the longer-term view provides.

We are in a secular bear market

With two speculative bubbles (technology and housing) sparking major slumps and flattening the decade's returns, it is clear that the last ten years have been a secular bear market. The question is – are we still in one? Recognizing the transition from one secular environment to another is extremely difficult. According to some analysts, including Ned Davis Research, the current secular bear has not completely unwound. If you share their secular outlook, it may make sense to balance exposure to the current rally with defensive strategies and diligent risk management.

Economic power is realigning

The United States is still the world's leading economic power and we believe its financial markets are still the strongest, most liquid and transparent. However, if current trends continue, it will make little sense to call China, India and several other Asian and Latin American economies "emerging". Rather they may soon be taking their place alongside the developed world on a substantially more level playing field than we saw in the 20^th century. At the very least, the secular bull market in many of these economies, coupled with the secular bear in the developed economies, argue strongly for more global exposure.

Government policies and capital market structures will likely evolve

Federal government response to the Great Depression of the 1930s and the capital market regulation that followed dominated our economy for decades. With the economic recovery still in development and policy responses still ongoing, it is impossible to determine the ultimate impact of the financial crisis. It seems likely, however, that your investing future will require careful navigation in potentially uncharted waters for some time to come.

It is clear that we are in a period of extraordinary complexity where professional management, a global perspective and careful risk management are critically important. Prudence requires us to constantly review and examine our decisions of the past to decide if we need to change anything today.

I am here to help when you are looking for opportunities to realign your investments with changes in your goals or your ability to tolerate fluctuations. If you would like to discuss your financial plans in more detail, simply let me know.

Thank you for the continued opportunity to work together.

Letter to Clients – 4th Quarter 2009

Dear Clients and Friends,

The move to our new office went well and we settle in more every day. By the time you receive this we should have pictures on the walls and the signs should be up. Hopefully that means no more lost clients trying to find the office! In case you are not familiar with the area, we are in the office building on the northeast corner of 70^th and University Ave in Windsor Heights. It is the first building east of the HyVee and across the street from the Apple Valley Shopping Center. Our office is on the first floor and there is plenty of parking in the back.

The markets never stopped, despite my move. We have reached the end of the third quarter in what continues to be a most eventful year for both the markets and the economy. It's also one year since the foundations of Wall Street and the global financial system were shook--when Lehman Brothers collapsed, Merrill Lynch vanished as an independent entity, and AIG was taken over by the government.

In light of that, I thought it might be worthwhile to briefly summarize where we've been this year, where we are today, and the prospects for the period ahead--and also to highlight some lessons from last year's financial collapse.

Where we've been

Seven months ago, in early March, it truly did feel like the world might be coming to an end. Talk of a return to a Great Depression-like economy dominated radio, television, and print. Understandably, fear was rampant, and stocks responded to these nightmarish scenarios by hitting their lowest levels in years, with financials especially hard hit.

Although no one knew it at the time, that turned out to be the bottom. Since then, we've seen the economy move back from the precipice; there is a growing consensus that we'll return to economic growth in the second half of this year. The Economist recently ran a cover story discussing the extent to which the economic recovery was led by Asia.

As a result, we've had a strong recovery in markets. From their bottom in the beginning of March, stock markets are up 50%, retracing a good portion of the losses since last fall.

In the meantime, here are six lessons from the past 12 months:

1. We were reminded of just how volatile stocks can be...

2. ...and of the importance of true diversification.

3. Many investors discovered that they're less comfortable with risk and volatility in their portfolio than they had believed.

4. Investors were also reminded of the need to focus on what they can control, understanding cash needs, and thinking through how much risk they can live with to fund thosse needs.

5. In some cases, investors began rethinking retirement plans as a result

6. Finally, we were reminded that in today's world, we need to expect the unexpected.

Where we are today

A year ago, the market was characterized by rampant optimism. The market had hit a new high the previous fall, and any concerns were set aside as minor annoyances.

By contrast, six months ago the market was overwhelmed by absolute pessimism--there was no sign of hope anywhere.

Today, the market is somewhere between those two extremes, and many investors can be characterized as extremely nervous.

As a general rule, I think a certain level of healthy anxiety is positive--what gets investors in trouble is an excess of either optimism or pessimism. While today's mood may be erring on the side of being a bit too pessimistic, I think being cautious in the current market makes sense, provided that prudent caution doesn't cross the line into panicked inertia.

I spend a lot of time listening to the best market minds and to managers who have lived through multiple cycles. I am reassured that most say that they are still finding very good value--not to the extent that they did earlier this year, but still well ahead of what they would have seen a year ago.

The good news is that there are still excellent opportunities for investors who are prepared for short-term volatility. What has changed is the old model of asset allocation. The new model of today includes considering alternative investment classes such as commodities, energy partnerships, leasing programs, and real estate. Several clients have taken advantage of FDIC insured CD's whose interest payments are linked to market performance. Some clients have even instituted short term trading strategies which have a high income potential in a sideways markets.

The outlook going forward

In August, Business Week ran a cover story called "The Case for Optimism." The premise was simple: beyond the issues facing the global economy, there are many underlying positives that give cause for optimism if we look out two or three years and beyond.

Looking that far ahead, there are things happening under the surface that will drive economic growth. Economic growth will drive growth in stock prices. Examples include the positive impact of technology, the recovering housing market, the revitalization of the American economy currently taking place, and the incredible energy from the developing world's educated youth and emerging middle class.

But the road to recovery is not expected to be smooth. Let me close by talking about market volatility.

In 1907, financier J. Pierpoint Morgan singlehandedly averted a banking panic. Later in life, someone asked him his best guess on the direction of markets. His answer: "They will go up and they will go down."

One hundred years later, that's still the best answer to someone looking for a short-term market forecast. No one can predict market movements in the immediate period ahead--all we can do is understand clearly how much short-term volatility we can live with, adjust our portfolios accordingly, and stay focused on the horizon as we deal with the rough waters. No one likes volatility, but for most of us, it's the necessary price for arriving at our ultimate destination.

In the meantime, I am constantly looking for opportunities to realign portfolios to give clients the best trade-off between risk and return. If you would like to discuss your investments in more detail, I am always delighted to have that conversation.

Thank you for the continued opportunity to work together.

Letter to Clients – 3rd Quarter 2009

Dear Friends and Clients:

When people who know me see me on the street, they stop and ask how I am doing. They make the assumption that given the terrible returns from the stock market and the high level of uncertainty about the economy, that I must really be professionally frustrated. The truth is actually quite the opposite. As an individual investor, I too feel the pain. But as a Certified Financial Planner ^TM practitioner, never have I been so excited professionally.

My mission statement begins with the phrase "to eliminate your financial stress and worry" and frankly that is exactly what most people need right now. My opportunity to serve my clients and prospective clients has never been greater. Rarely does a day pass that I do not ask myself if there is anything that I could or should be doing to better serve you. I hope that these quarterly letters are part of the value that I can bring to you. But if I ever fail to give you the support and services you desire, please let me know. It is my pleasure to work with you, and guide you through this turbulent time.

The First Quarter of 2009 ended on a note of cautious optimism, sparked by a strong March rally that lifted the S&P 500 Index to an 8.76% return for the month. That optimism seems justified as the rally pushed forward during the Second Quarter 2009, with the S&P 500 Index returning 15.9% for the period and posting a 36 % gain since establishing a twelve year low on March 9.

While those robust gains took some of the sting out of the current bear market, the S&P 500 is still well off its September 2008 pre-financial crisis levels – not to mention its October 2007 high. As the rally flattened in June 2009, new concerns were raised: Was this a bear market rally, with the slide likely to resume and deepen? Or is the economy and the markets seeing genuine signs of recovery? And if we are entering a recovery, how robust will be the market response?

Only time will tell. Nonetheless, some of the data and historical perspectives can provide a better grasp of the potential road ahead. Here are a few of the factors I am paying close attention to:

Credit

Credit is enormously important to the U.S. economy, both for business and consumer spending. The U.S. government has committed trillions of dollars to stabilizing banking and the flow of credit and, while challenges remain, liquidity does seem to be returning to the credit markets. Credit spreads have declined during the quarter, potentially signaling a greater willingness among investors to shift from the comparative safety of government instruments to corporate fixed income securities.

Banking

In May, the Federal Reserve released the results of its stress tests of 19 major banks, and announced that 10 needed to raise additional capital – which many did through the sale of non-core assets, issuing new shares, or with the help of the government. The market responded positively to these actions. Financials turned in the strongest performance of any S&P 500 sector with a 35.71 % return.

Recovery Signals

Expect to see mixed signals over the next several months as the economy moves from recession to recovery. Among the positive signs, consumer sentiment and confidence increased over the second quarter (before dipping again in June), although they remain low in historical terms. Pending home sales have also increased over the three consecutive months. Also, surveys of purchasing managers from the Institute for Supply Management, a forward-looking economic indicator, found encouraging trends, although they remain at recession levels at quarter end.

On the other hand, rising consumer confidence has not been matched by spending, at least for big ticket items. Vehicle sales, which had never dipped below the 10 million mark for any month since 1982, in each of the first five months of this year failed to reach 10 million. (June numbers are not yet available.) Unemployment also continues to rise, with higher-than-expected June figures sparking a sharp sell-off just after the quarter end. While unemployment tends to be a lagging indicator that peaks well after economic growth has been re-established, it may inhibit consumer spending, which in turn may slow recovery.

Recession Forecasts

The end of a recession, like the beginning, is only identified in retrospect. Estimates for when the current recession will end have ranged from the Fed Chairman Ben Bernanke's May 5 testimony that the recession might be ending during the Second Quarter 2009, to more cautious estimates that the recession will linger until early 2010.

One optimistic assessment comes from Ned Davis Research, Inc,., which has tracked a group of 12 indicators, including the S&P 500 Index, nonfarm payrolls, sentiment indicators, credit spreads and others, which they believe have been the most reliable at indicating the end of a recession. As of early June, they reported that all 12 indicators were signaling that the recession had finally bottomed and was moving toward expansion. It goes without saying, of course, that historical comparisons, while suggestive, are not guarantees.

Corrections and Bear Market Rallies

Perhaps the biggest debate among investment managers over the quarter has been regarding the nature of the recent rally. Is this the beginning of a new bull cycle, or is it a bear market rally with new lows to come?

Some bearish commentators look to 1930, when the market (as measured by the Dow Jones Industrial Average) recouped more than a third of the original stock market crash, only to sink drastically lower, reaching a bottom in 1932 that erased over 80% of the previous market highs.

More commentators lean towards a more positive outlook and expect that we will experience a correction before the up cycle resumes. Ned Davis Research, to name one example, conducted a historical analysis of similar bull markets and their conclusion is that today's cycle most resembles 1974 which saw a shallow 5.6% correction before the recovery resumed.

Ultimately, what will determine the direction of the market over the remainder of 2009 is the degree of concrete evidence that the economy is indeed recovering. The argument can be made that the market has priced in a third quarter recovery, as well as assumptions about the strength of the recovery. In order for current stock valuations to be sustained, let alone advance, recovery signals will have to become more pronounced. Disappointing economic news may not lead to severely declining prices, but it may leave the market stagnant for months to come.

Looking Ahead

The market rally that began in mid-March was global in scope and brought welcome relief to investors faced with the steepest bear market in decades. The coming months are critical as the market seeks to consolidate gains and the economy finds its bearings.

In any market environment, a diversity of asset classes, portfolio strategists and approaches to asset allocation can balance risks and rewards. All of which can help you potentially capture returns with reduced volatility. As always, I am here to serve you. If you would like to discuss the current markets or your portfolio, please call me at (515) 457-1222. I welcome the opportunity to spend time with you answering any questions you may have and addressing your concerns.

Sincerely,

Art Dinkin, CFP^®, CLU, ChFC

Eulogy to Buy & Hold?

If you would have asked me a few years ago if there was risk investing in the stock market, I would have probably explained to you that there are many risks involved in investing but that time tends to diminish them. When "time in" the market can overcome the risks involved, it makes sense to buy an appropriate portfolio of investments and simply hold them for a long time. Even though the market is down over the last 10 years for the first time, I still believe that given enough time market risks are diminished. But how long is long enough to wait? Is the buy and hold strategy all but dead?

Over the next couple posts I want to explore this issue with you. There is no grand conclusion at the end. Without an in depth discussion of your specific goals, risk tolerance, and portfolio it would be very inappropriate for me to provide generalized investment advice. Instead, I hope to provide thought provoking issues for you to consider. Here are the topics I have in mind:

• What is an index?
• The growing importance of fixed income investments

When I have these discussions with my clients, it sometimes provokes controversy and I would be remiss if there was no reaction from my readers. I bring these issues to the forefront because I believe that we must examine the fundamentals of our investment strategies if we are to emerge from this "interesting" financial time stronger and wiser than we were when we entered it. I intend to guide the journey. The destination is up to you.

Celebrating at Eulogy by gottasharepics

Letter to Clients – 2nd Quarter 2009

Dear Clients & Friends:

The Fourth Quarter 2008 ended with a strong equity market rally off the November lows prompting optimism that perhaps the worst of the bear market was over. As we now know, that was not the case. The equity markets resumed their decline and established a new low for the current bear cycle in early March.

We find ourselves in a similar position at the end of the First Quarter 2009. March ended with a strong rally – the best month in six years – posting 8.76% for March as measured by the S&P 500 Index. (For the quarter, the S&P 500 Index returned -11.01%.) Just as at the end of the Fourth Quarter 2008, we find ourselves asking is the worst behind us? Or will we resume the bear market decline?

Only time will tell, but cautious optimism may be more justified this time. While no one is willing to declare the bear finished or promise an end to the current recession, there are several interesting observations to be made as the first quarter concluded:

Market volatility

While market volatility was double its normal level through most of the first quarter, it is roughly half what it was during the market shocks of September and November 2008.

Changing themes

The markets and the real economy still face considerable challenges, but they are significantly different than the questions lingering over the markets three months ago. The major themes at the end of 2008 were the deflating of the housing bubble, the stability of the financial system and the clogged credit market. Concerns remain about all three, of course, but there seems to be greater clarity around these issues:

• With housing prices substantial off their peaks, it is possible to argue, as does JPMorgan's Dr. David Kelly, that the "bubble" no longer exists. Surprising housing data about increased sales and housing starts supports the idea that the worst may be over, even if prices still have room to fall.
• The Obama Administration's plan for getting "toxic" assets off bank balance sheets – and thus stabilizing the system and unclogging the credit markets – was well received by investors, as evidenced by the positive response on March 23.

Signs of economic improvement

In addition to the surprising housing data already mentioned, retail sales were better than expected, especially in January, and consumer sentiment numbers were also improving. Orders for durable goods manufacturing also exceeded analyst expectations for February. Several analysts have begun to suggest that the economy may begin to emerge from recession by the end of this year.

Government stimulus ready

The signs of improvement already mentioned manifested themselves before the government stimulus packages were complete and their impact felt. History suggests that government stimulus programs are more effective in accelerating a recovery than sparking one.

Thank you for your trust

I recognize that the bear market has been long, steep, and severe and I will continue to closely monitor the economic and market environment as well as your portfolio. While the general outlook for the next 12 to 18 months is anything but certain, there is increasing clarity and focus around the issues at hand. 

While I cannot control the markets and claim no special powers of prognostication, I aim to keep you well informed about your money. If you would like more frequent updates, I encourage you to visit my blog. Otherwise, if you have specific questions and would like to discuss the current markets or your portfolio, please call me at 515-457-1222 or send me an email. Allow me the opportunity to spend time with you reviewing your financial objectives and answering any questions you may have.

¹ Market Insight Series, Waiting for a Recovery, March 9, 2009 JP Morgan Asset Management

² Source: Bloomberg

Should you jump in the pool?

Come on in! The water is perfect… or maybe it's cold… at least it's colder than it used to be… I believe that it will get better… hopefully soon… actually my teeth are beginning to chatter… I don't know… maybe you shouldn't get back in the pool just yet… aren't you supposed to wait an hour after you eat?

Actually I doubt investment returns can be based on what you ate and when you ate it, but lately I have heard so many different economists draw so many obscure parallels in an attempt to explain the markets and predict market behavior that it may only be a matter of time until someone connects digestion to investments. All the economic gurus are trying to answer the questions on everyone's mind. Have we reached the bottom? Should I get back in now?

Hopefully you never got out. Unless you needed the liquidity or you realized that your portfolio was truly out of line with your risk tolerance, there has never been a reason to flee. The week of March 9^th we saw a +10% mini-rally in the stock markets. You missed out on it if you were on the sidelines. One economist I follow (Brian S. Westbury, Chief Economist, First Trust Advisors) recently said that there was enough money in money markets now to cover 60% of the market capitalization of the S&P.

So if you have cash, is this the bottom? Is this the time to get back in?

I can't give you a definitive answer as to if we have reached the bottom. I just don't know. No one does. Unfortunately bottoms are a lot easier to see in the rearview mirror than out the front windshield.

But my opinion is strong that if you have cash on the sidelines, now is the time to be in! You may not have come in at the absolute bottom, but there are many opportunities out there.

If there has been any lesson to be learned from this volatile market, we need to make absolutely certain that the investment portfolio matches the risk tolerance of the investor. Today there are many investors who used to think they were willing to take risk. Now they know the truth. Be honest and realistic during portfolio construction. If you are, you will have no regrets later about when you got back in the pool.

Gray's Jump by Michael Keen

The Paradox of Thrift

Everyone knows we are in the midst of a financial crisis. Our investment portfolios are down, unemployment is over 7%, and the headlines are filled with doom and gloom. I have spoken to many clients who are living in absolute fear and panic. Some have lost their jobs, some have taken pay cuts, and others are cinching their belts and pinching their pennies just in case. It is a very rational response, but is it the best response?

John Maynard Keynes was one of the most influential macro-economists of the 20^th century. An advocate for government intervention as a means of managing the economy, many of the principals he pioneered are guiding the US government's attempts to lessen the severity our situation.

Of fascination to me is a principal he called "the paradox of thrift". Here is how it works. Let's say you have a white collar job with a large financial institution. You decide that with the declining markets and the financial uncertainty we now face, that you should avoid unnecessary spending and increase your savings. You eat more meals and home instead of dining out. You stop buying new clothes to replace your still good, but not the latest fashion, wardrobe. You decide your spring break will be a good opportunity to spend family time renting DVD's and playing board games rather than going to the beach. As a result, since everyone is thinking like you do, the local restaurant sees a drop in income and eventually closes. The textile factory and the airlines lay off workers. All three businesses were clients of your firm. Now their business is down. Soon your boss calls a meeting and tells you the "good news". She was required to cut 20% from the budget. Instead of eliminating positions she has decided that everyone needs to take a 20% pay cut. You thought you were being wise and frugal, but ultimately your income dropped by more than you saved by cutting your spending. Now things are tighter than they were at the beginning of the cycle. You need to cut spending even more. The economy has entered a downward spiral.

So what should you do? I am not advocating ridiculous spending, but instead look at this as an opportunity for the right kind of spending. Is there a home improvement project you would like to do? If you find a contractor who is slower than normal, maybe they would be willing to do the job at a slight discount. Simply put, the economy depends on us to spend some of our money. If we don't, in the long run we may only be hurting ourselves.

I fear that many of the lost jobs and wage reductions have not occurred out of need, but rather out of fear. I suspect that in some cases businesses are using the economic environment as a justification to cut budgets. Just in case. Unfortunately when everyone responds with the same prudence, it becomes a self fulfilling prophecy.

That is why Keynesian economists call for increased government spending in times like this. In theory, the government's spending can replace the diminished spending of both business and consumers to break the chain caused by the paradox of thrift and provide a base from which the economy can grow again. Once the fear has subsided and normal spending increases, the economy should grow on its own.

I wish I studied more economics as an undergraduate, but I never thought I would ever witness this kind of macroeconomic theory in play out in real life. Soon we will discover how smart Keynes really was.

What others are saying:

• Are you making the recession worse?
• Obama's shout-out to John Maynard Keynes
• John Maynard Keynes: The Abridged Version
• What J.M. Keynes Should Have Said
• Bad news, and the paradox of thrift
• Is Saving Bad? The Paradox of Thrift Says Yes

John Maynard Keynes image from Wikipedia under free license