Taking the Temperature of the Markets & the Economy

 
June 10, 2010
 
Now that we’ve endured a market correction (decline of more than 10%), what should we do? Let’s try to assess the situation. The following are some of the issues we are currently dealing with:

1. Korean conflict– it has been alleged that the North Koreans torpedoed a South Korean naval vessel and 46 South Korean sailors died. Sabers are rattling on the Korean peninsula and if an armed conflict were to break out, there would be major concerns among global investors.

2. Oil mess in the Gulf of Mexico– the Deepwater Horizon Oil spill becomes worse every day. At its current size, if the Gulf oil spill was placed over New York City, it would extend into upstate New York and Connecticut, over into Pennsylvania and cover northern New Jersey….and sadly that’s just the surface oil. Financially every American has a stake in this. About 35% of the nation’s seafood comes from the Louisiana coast and so does a similar amount of domestic oil production. Predictions are that the spill will eventually get into the Gulf Stream, work its way through the Florida Keys up the east coast and eventually cross the Atlantic to the United Kingdom. There has been no serious success at stemming this disaster. This may wind up as the worst ecological disaster ever for the U.S. Just in the last few days a minor success was achieved with a cap which is trapping some of the oil. However, we still have to worry about a possibly active hurricane season.

3. Debt– The U.S. National Debt has passed $13 trillion. Only 6 months ago it was at $12 trillion. The larger the debt grows, the faster the government’s interest payments mount up.  Take a look at www.usdebtclock.organd see how the debt jumps hundreds of thousands of dollars every minute. One thing we have learned from Europe is that uncontrolled deficit spending is not good for any country. To be sure, there is too much debt in the world.

4. Iceland– other news stories have overshadowed this recently but the volcanic eruption in Iceland is still active and disruptive to air travel and economies in Europe.

5. Europe – what’s wrong?

·        Massive amounts of sovereign and corporate debt. Don’t the people, corporations and governments realize that debt has to be paid back?

·        Rampant unemployment – Spain has 20%+ unemployment.

·        No commonalities in tax system, retirement, etc. This is a key reason why the Euro is in trouble.

·        Will the Euro survive? Probably – but there are still a lot of problems ahead.

·        Hungary: Last week, the financial news media was talking less about Greece. Hungary briefly took the “crisis of the week” spotlight. Hungary’s new government warned that their economy was in a “grave situation” and that talk of a sovereign debt default was “not an exaggeration”. We suspect that Hungary will be able to get out of its mess because they are not part of the Euro and can devalue their own currency. Their budget deficit is actually lower (relative to GDP) than budget deficits in Britain and the U.S.

6. Unemployment – With a near 10% jobless rate, we are obviously in a slow job-market recovery. Most economists estimate that population growth alone requires 150,000 jobs to be created each month just to keep the unemployment rate steady.

 

Riddle: A zookeeper has a certain number of cages and a certain number of tigers. If she puts one tiger in each cage, she has one tiger too many. If she puts two tigers in each cage she has one cage too many. How many tigers and cages doesshe have? The answer is at the bottom of the newsletter.

 

The Markets– “The Correction”

This current decline is not unlike other declines after the market has risen so far so fast. Every “bull” market since 1932 has experienced at least one major correction of 10% or more before moving on to new highs. While uncomfortable for investors, corrections are normal and healthy and serve to prevent asset bubble formations.

We are living through a remarkable time of change for the global economy. It is a time of collisions as we journey toward a de-levered and re-regulated world. For investors this translates into a period of changing risks and opportunities. It is a world that calls for a broader investment universe and strategies that can better capture the opportunities available in the world of today.

Several of the market gurus whom we follow have sounded the drumbeat for market caution. Of course, no one can predict the market’s direction, especially in the short term. We believe, however, the evidence points to a range bound and volatile market for the rest of 2010. And without drastic changes in fiscal policy both domestically and abroad, we could be in for serious trouble economically.

We believe “caution” is the watchword for the foreseeable future. We are watching your portfolio but if you would like a further review for the purpose of risk reduction, kindly let us know.

We realize this newsletter has pointed out some of the obstacles we are facing today. However, we have positioned your portfolio with these risks in mind. We do have confidence in the resiliency of the economy and the markets over the long term, but we want to be sure to navigate these stormy waters in the meantime.

Have a great summer!

Best regards,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA
Edward J. Kohlhepp, Jr., CFP®, MBA

 

“You can’t live a perfect day without doing something for someone who will never be able to repay you.”
 – John Wooden (who died recently at age 99)

 

Riddle answer: She has three cages and four tigers.

 

Sources: Navellier.com, Wall Street Journal.com, MarketingLibrary.net, Frontlinethoughts.com, Advisorperspectives.com

2010: A Second Quarter Update
''OBAMACARE'' - SEPARATING FACTS FROM MYTHS

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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
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