This supplemental update of the annual budget contained a number of projections that are of interest to us. Here are a few:

• A projected federal deficit of $2.9 trillion over the next two fiscal years.
• Gross Domestic Product projected to grow 3.2% this year, 3.6% in 2011, and 4.2% in 2012.
• Unemployment projected to average 9.7% this year, 9.0% in 2011, and 8.1% in 2012. It is projected to stay above 6% until 2015.
• The consumer price index projected to rise 1.6% this year, 1.3% next year, and 1.8% in 2012.
• The 10-year Treasury projected to yield on average 3.5% in 2010, 4.0% in 2011, and 4.6% in 2012.

Projections like this are, of course, notoriously difficult to get right. So much can happen in a short period and throw off the best laid plans. But, looking at the projections at least gives us a place to start. Overall, the projections are a mixed bag. The deficit numbers are problematic. The GDP growth projection is good if we can hit it. The unemployment numbers are painful. The inflation outlook is stable and the Treasury yield is favorable for business growth.

If, by the end of 2012, the above numbers come to fruition, then we would likely avoid a double-dip recession and the economy would probably “muddle along.” So far, corporate America is doing its part by showing really solid earnings for the second quarter. Companies such as Caterpillar, 3M, AT&T, and UPS notched solid quarters and suggest there is underlying strength in the economy, according to MarketWatch. In fact, of the 175 companies in the S&P 500 that have already reported their second quarter earnings, a whopping 78% have beaten analysts’ estimates while only 12% missed, according to data from Thomson Reuters as reported by MarketWatch. Buoyed by good earnings and relief over the European bank stress tests, the S&P 500 rose a solid 3.6% last week.

Given all the volatility we’ve had over the past 2½ years, “muddle along” might not be so bad!

Notes: S&P 500, DJ Global ex US, Gold, DJ/AIG Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

WHETHER AN INVESTOR LEANS BULLISH OR BEARISH, there is ample data to support either view. This situation may explain why Fed Chairman Ben Bernanke told Congress last week that the economic outlook was “unusually uncertain.” For those investors who lean bullish, here are several supporting points courtesy of economist David Rosenberg as reported by Financial Times:

• Congress extended jobless benefits, which is one form of stimulus.
• Some Democrats are now in favor of delaying tax hikes.
• China is having some success slowing its property bubble without bursting it.
• Confidence is growing that the emerging markets may keep world growth positive even if more mature countries slow down.
• Eurozone debt and money markets have settled down after the problems with Greece sparked default fears.
• The European bank stress tests contained no major surprises and added clarity to the soundness of the banking system.
• Consumer credit delinquency rates in the U.S. are improving.
• Mortgage delinquencies in California, one of the hardest hit real estate markets, are at a three-year low.
• The BP oil spill is coming under control and is no longer each day’s top headline.
• The passage of the financial regulation bill removed one more cloud of uncertainty.
• Corporate America is reporting solid earnings for the second quarter and their future outlook has been, on balance, positive.
• Fed Chairman Ben Bernanke indicated he’ll keep using monetary policy to stimulate the economy and he’ll get even more aggressive if need be.

So, yes, there are reasons why the markets and the economy could do okay in the months to come. But, in this “unusually uncertain” time, it still makes sense to be “on guard.”

Weekly Focus – Think About It

“Even if I knew that tomorrow the world would go to pieces, I would still plant my apple tree.”
—Martin Luther King, Jr.

Best regards,
The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

• The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
• The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
• Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
• The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
• The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
• The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
• Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• You cannot invest directly in an index.
• Consult your financial professional before making any investment decision.

The answer is the two-year Treasury note and its current yield is sending us a signal, according to Bloomberg, July 17. Last week, the yield on the two-year note fell for the seventh straight week and touched its lowest level ever. At just under 0.6%, it is now lower than during the peak of the financial crisis in the fall of 2008.

What does this signal?

In short, it suggests the economy is slowing down, inflation is not a threat, deflation is a possibility, and money-market rates will remain historically low, according to BusinessWeek, July 15, Barron’s, July17, and Bloomberg, July 17. Here’s a list of several economic reports released last week that help support this view:

• U.S. consumer sentiment tanked in early July, according to a survey by Reuters and the University of Michigan (MarketWatch, July 16).
• The consumer price index dropped for the third straight month in June, according to data from the Labor Department (MarketWatch, July 16).
• Industrial production rose a modest 0.1% in June after having risen 1.2% in May, according to the Federal Reserve, July 15.
• Another report released by the Federal Reserve, June 22, said, “The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside.”
• The dollar has posted significant declines recently against the euro and yen as traders position themselves for a potential slowdown in the U.S., according to Bloomberg, July 17.

While the data above points toward economic softness, second quarter corporate profits are coming in strong. Of the 48 companies in the S&P 500 index that have reported their earnings, 75% have topped analysts’ estimates, including a blow-out quarter from Intel, according to Reuters, July 16.

The tug-of-war between soft economic data and strong corporate profits is helping keep the market stuck in a bouncy trading range.

Notes: S&P 500, DJ Global ex US, Gold, DJ/AIG Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

HOW DO YOU SOLVE A PROBLEM LIKE JOBS? This question has a double meaning—jobs as in employment and Jobs as in Steve Jobs of Apple.

Chronically high unemployment in the U.S. is having a debilitating effect on our economy. We can point to many causes for this, but one that receives lots of press is the outsourcing of jobs overseas—and that’s where Steve Jobs comes in.

Without getting into a political debate about the pros and cons of free trade, it turns out that in a little recognized fact, Apple is one of the biggest beneficiaries of outsourcing jobs overseas. We can’t get enough iPods, iPhones, iPads, and Macs, but relatively few of the jobs created by our insatiable demand are sprouting on our shores.

According to Apple and BusinessWeek, as of September 26, 2009, Apple had about 37,000 full-time equivalent employees of which about 25,000 were based in the U.S. By contrast, Apple has subcontracted with a Chinese company called Foxconn that employs roughly 250,000 people who are devoted to building Apple products. Doing the math, for every one Apple employee working in the U.S., there are 10 Foxconn employees building Apple products in China. Knowing that costs are much lower in China (and that Apple products are in high demand), is it any surprise that Apple earned $3 billion in profit with a 42% gross margin in the first three months of this year?

Again, this is not meant to start a political debate about free trade or protectionism as there are many facets to this issue. It simply points out the intractable nature of high unemployment in the U.S., particularly in the manufacturing sector. Some people argue that free trade and capitalism are the best ways to grow jobs and profits. Others, notably former Intel chairman and chief executive officer Andrew Grove (Bloomberg, July 1), argue for protectionist measures to rebuild our domestic manufacturing base.

Ultimately, America needs to get its people back to work. The Apple example shows just how difficult that may be.

Weekly Focus – Think About It

“I want to put a ding in the universe.”
—Steve Jobs

Best regards,
The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

• The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
• The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
• Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
• The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
• The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
• The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
• Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• You cannot invest directly in an index.
• Consult your financial professional before making any investment decision.

After dropping 16% between April 23 and July 2, the S&P 500 recouped one-third of that loss last week and rose 5.4%, according to Bloomberg, July 10. Stocks rose on news that U.S. retail sales grew at the fastest pace in four years in June and a bullish report from the IMF projected an upwardly revised global economic growth rate of 4.6% in 2010, according to CNBC, July 8. Rising optimism that second quarter earnings reports might be better than expected also supported stock prices last week, according to MarketWatch, July 7.

Although the market jumped dramatically, has much changed in the past week? Maybe, maybe not.

Wall Street observers have a tidy tendency to explain every movement in the market with an explanation that seems, on the surface, to be reasonable. Last week’s bullish reports on retail sales, world economic growth, and some earnings pre-announcements all seem like logical explanations for the big rise in the market. However, between April 23 and July 2, when the market dropped 16%, we were reading reports that retail sales were weak, economic growth was slowing, and we might be heading for a double-dip recession. Now, a week later, the economy seems to have turned a corner, right?

In reality, the truth is probably somewhere in between. The economy may not have been as bad as the 16% market swoon suggested and it may not be as good as last week’s 5.4% pop suggests, either.

It’s good to know what market observers are ascribing to the market’s weekly moves, but as financial advisors, we have to filter their tidy explanations with a dose of skepticism.

Notes: S&P 500, DJ Global ex US, Gold, DJ/AIG Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

DOES THE LARGE U.S. BUDGET DEFICIT MATTER? Below is a chart of our annual budget surplus/deficit for the past few years.

Source: Office of Management and Budget.

Notice how our budget deficit has soared over the past three years as the recession took its toll. Surprisingly, it was just nine years ago that we ran a budget surplus of $128 billion. On a cumulative basis, the national debt is $13.2 trillion, according to the Treasury Department. So, should we be concerned that our annual deficit and national debt are rising dramatically?

Without meaning to be glib, deficits don’t matter until they do. Just ask Greece.

Currently, financial markets are relatively unconcerned about our debt level. Investors’ lack of concern shows up in the fact that interest rates on government bonds are near historic lows and the spread between interest rates on inflation-protected Treasury bonds and regular bonds is a mild 2.3%, according to MSN, July 9. If investors were concerned about our debt level, they’d send interest rates skyrocketing (as happened in Greece) and inflation might rear its head if the government cranked up the printing press to monetize our debt.

Investors are not alarmed at our large debt level because they still have confidence that our country will weather the storm. However, investors could lose confidence if, for example, we experience some new shock or a “failed” Treasury auction. If that happens, confidence could dissipate rather quickly and throw our economy into disarray.

Nobody knows if this will happen or not, but we continue to monitor interest rates and inflation expectations as early indicators to help determine if confidence is slipping.

Weekly Focus – Think About It

“Our ordinary mind always tries to persuade us that we are nothing but acorns and that our greatest happiness will be to become bigger, fatter, shinier acorns; but that is of interest only to pigs. Our faith gives us knowledge of something better: that we can become oak trees.”
—E.F. Schumacher

Best regards,
The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

• The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
• The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
• Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
• The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
• The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
• The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
• Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• You cannot invest directly in an index.
• Consult your financial professional before making any investment decision.

It’s no secret that many countries are incurring large—and unsustainable—budget deficits. What’s interesting is the approach each country is taking to try to lower their deficits to a manageable level. Britain, Japan, Germany, and Greece, for example, are focused on cutting government spending, according to Bloomberg, June 22. Conversely, the U.S., while concerned about government spending, seems more focused on keeping the stimulus spending alive and raising taxes until (hopefully) the economy can catch fire and grow on its own.

Who’s right?

According to Harvard University professor Alberto Alesina, “There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it.” In addition, a study by Ben Broadbent and Kevin Daly of Goldman Sachs Group, Inc. as reported by Bloomberg on June 22, “discovered that reducing expenditures by 1 percentage point a year boosted average annual growth by 0.6 percentage point. Raising the ratio of taxes to GDP by the same margin cut growth by an average 0.9 percentage point.” And, from a stock market perspective, the same report said, “The equity markets of the countries that sliced spending beat those of other advanced nations by 64% during a three-year period.”

Like many things related to finance and economics, we won’t know “who’s right” until time passes and the market delivers its verdict. Between now and then, expect the vigorous debate on spending cuts versus stimulus spending to continue among academics, investors, and world leaders.

Notes: S&P 500, DJ Global ex US, Gold, DJ/AIG Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

ARE THE FINANCIAL MARKETS “NORMALLY DISTRIBUTED” and should you even care? Consider this. The average height of an American male is 69.4 inches, according to the National Center for Health Statistics, October 22, 2008. If we randomly chose 1,000 American males and calculated their average height, we would likely come up with a number close to 69.4 inches. Now, in an un-random fashion, let’s assume we found an 8-foot tall man—who is clearly an extreme outlier—and we have him join the previous group of 1,000. By recalculating the data, we now find the average height of this group of 1,001 men jumps by a very underwhelming 0.03 inches. In other words, adding an extremely tall outlier to this group of average height men had very little effect on the overall average height of the group. Without getting too technical and assuming “tall outliers” are just as likely to be found as “short outliers,” we can say the height of men follows a “bell curve” or a normal distribution.

By contrast, let’s consider the average net worth of American households. According to the Federal Reserve, February 2009, the average American family had a net worth of $556,300 in 2007. Like above, if we randomly chose 1,000 families, this group would probably have an average net worth near $556,300. However, for fun, let’s add Warren Buffett—and his $40 billion net worth—to the group. Recalculating the data, we find the average net worth of this group of 1,001 Americans jumps to $40.5 million! Clearly, adding an extreme outlier to this sample dramatically changed the average of the sample.

As it relates to the financial markets, do you think their distribution of returns looks more like the average height of American men (where an extreme outlier doesn’t really affect the average) or the average net worth of American households (where an extreme outlier could have an extreme impact)? If you think the returns in financial markets look like the average height of American men, but it turns out they behave more like the average net worth of American households, you could lose a lot of money. In fact, much of modern portfolio theory is based on the assumption that financial markets follow a normal distribution, i.e., they look like the average height of American men. Unfortunately, experience suggests otherwise.

Warren Buffett-type outliers such as the October 1987 stock market crash, the 2000-2002 bursting of the internet bubble, the 2007-2009 bear market, the 2008 credit crisis, and last month’s “flash crash,” suggest that the financial markets are subject to large outliers that can significantly affect your financial well-being. Knowing that, we do our best to try to limit the damage to your portfolio if one of these outliers occurs during your investing lifetime.

Weekly Focus – Think About It

“In the business world, the rearview mirror is always clearer than the windshield.”
—Warren Buffett

Best regards,
The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

• The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
• The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
• Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
• The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
• The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
• The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
• Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• You cannot invest directly in an index.
• Consult your financial professional before making any investment decision.

We’ve experienced a series of headlines that have sent the market on a yo-yo ride since we dropped the New Year’s ball in Times Square six months ago. Here are a few of the eye-raising events that have kept investors on an emotional rollercoaster:

• The S&P 500 index rose 15.2% between February 8 and April 23, according to data from Yahoo! Finance. Unfortunately, investor sentiment quickly turned and the index declined 13.7% between April 23 and June 7, according to data from Yahoo! Finance.
• On May 6, the “flash crash” sent the Dow Jones Industrial Average to an intra-day loss of nearly 1,000 points before making a massive recovery to end the day down “only” 348 points, according to Portfolio.com. At one point during the day, the Dow dropped 481 points in 6 minutes and then jumped 502 points just 10 minutes later.
• An April 20 explosion on a drilling rig sent as much as 60,000 barrels of oil a day flowing into the Gulf of Mexico making it the worst oil spill in American history, according to The New York Times on June 18.
• A sovereign debt crisis in Europe sent shivers through world markets and led the European Union to unveil a nearly $1 trillion loan package designed to backstop weak countries from defaulting, according to The Wall Street Journal on May 10.
• Gold prices hit an all-time high of $1,258 per ounce on June 18, “fueled by sovereign risk in the euro zone, historically low interest rates, and concern over the stability of paper currencies,” according to CNBC on June 18.

Pop quiz time. After all these headline-grabbing events, in percentage terms, how much do you think the S&P 500 index has gone up or down since the end of last year? Brace yourself. The index has risen a whopping 0.2% between December 31, 2009 and last Friday.

The up-down EKG between the bulls and the bears has, like the U.S. versus Slovenia in the World Cup, ended in a draw. However, unlike the U.S. versus Slovenia, we still have six months left in this year to see who wins the yearly “Investment Cup.”

Notes: S&P 500, DJ Global ex US, Gold, DJ/AIG Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

HELEN REDDY PROCLAIMED, “I am woman, hear me roar. In numbers too big to ignore,” back in the early 1970s. Today, those words are coming true in education, the workplace, and on Wall Street.

In an article titled, “The End of Men” in the July/August 2010 issue of Atlantic Magazine, author Hanna Rosin reported some little known statistics about how far women have come in today’s society. How many of these were you aware of?

• As of earlier this year, women now outnumber men in the U.S. workforce for the first time ever.
• Even though women outnumber men in the workforce, three-quarters of the jobs lost in this recession were lost by men.
• Thirteen of the 15 job categories projected to grow the fastest over the next decade are staffed primarily by women.
• Women now hold more than 50% of managerial and professional jobs, according to the Bureau of Labor Statistics.
• According to Rosin, women now earn 60% of master’s degrees, about 60% of all bachelor’s degrees, about half of all law and medical degrees, and 42% of all MBAs.
• A 2008 study by researchers at Columbia Business School and the University of Maryland looked at the top 1,500 U.S. companies from 1992 to 2006 and discovered that firms that had women in top positions performed better.

The rising level of women’s educational attainment and workplace prominence will have a profound impact on the business and investment spheres in the years to come. As part of our “find a trend and throw yourself in front of it” philosophy, we will continue to monitor this long-term trend and the ensuing investment implications.

Weekly Focus – Think About It

“I shut my eyes in order to see.”
—Paul Gauguin

Best regards,
The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

• The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
• The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
• Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
• The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
• The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
• The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
• Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• You cannot invest directly in an index.
• Consult your financial professional before making any investment decision.

Perhaps Brazil? Russia? India? China? Collectively, those four are known as the “BRIC” countries and for a number of years, many investors have pointed to them as economic stars. However, in a global quarterly poll of investors and analysts who are Bloomberg subscribers released on June 8, “Almost four of 10 respondents picked the U.S. as the market presenting the best opportunities in the year ahead.” That placed the U.S. #1 on the list followed by Brazil, China, and India.

Of course, this is simply the opinion of a group of investors and analysts and it does not mean that the U.S. will turn out to be the best market. But, it does raise an interesting observation, which is… there are countries with good economics and countries with good investment opportunities—and they are not always the same.

Here’s what we mean. In the first quarter of 2010, Brazil, India, and China’s economies expanded at an annual rate of 9.0%, 8.6%, and 11.9%, respectively, as measured by gross domestic product, according to Bloomberg. That’s huge. By contrast, the U.S. economy expanded at a relatively modest 3.0% in the first quarter, according to the Bureau of Economic Analysis. On the surface, you might think that the three countries with the highest economic growth rates would also present the most attractive investment opportunities. Possibly yes, but the latest survey from Bloomberg put the good ol’ USA in the #1 spot.

Why would these investors and analysts put a slower-growing U.S. ahead of fast-growing Brazil, India, and China? There could be numerous reasons, but a simple takeaway is this—in the short-term, good economics does not always translate into good investment opportunities. For example, if the fast economic growth in Brazil, India, and China was already “priced into” their financial markets, then the near-term outlook for stock prices might be muted. Conversely, if the modest growth in the U.S. helped drive our stock prices down to a relatively low level, then we might be in the best position to experience a bounce from this “oversold” condition.

This is a long-winded way of saying short-term market movements might not reflect current economic realities.

Notes: S&P 500, DJ Global ex US, Gold, DJ/AIG Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

DID YOU FEEL WEALTHIER in the first 3 months of this year? Well, believe it or not, the net worth of U.S. households rose by $1.1 trillion in the first quarter, according to the Federal Reserve. Most of this increase came from rising stock prices. And, if you believe economists, each extra dollar of wealth should generate about 5 cents of spending over time, according to MarketWatch. Dubbed “The Wealth Effect,” it suggests that rising stock prices could lead to a virtuous cycle of higher spending, higher corporate earnings, and higher stock prices. That’s the good news.

Here’s the bad news. The theory also works in reverse.

Yes, household net worth was up in the first quarter, but it is still down about $11.4 trillion from its early 2007 peak, according to MarketWatch. And, with the roughly 7% slide we’ve seen in S&P 500 so far in the second quarter, we may see the net worth number drop when the second quarter data is released in a few months.

This net worth data and the stretched balance sheets of many Americans leaves us with a conundrum. On one hand, consumer spending accounts for about 70% of U.S. economic activity, according to Associated Press. So, if we want robust economic growth, we need consumers to open their wallets and start buying stuff. On the other hand, the pragmatic observer says consumers are already too much in debt and need to curb their spending and build up their savings. This could lead to slower growth.

Essentially, we can keep spending by going deeper in debt and hope we can “leverage” our way to prosperity. Or, we can cut our spending, increase our savings, and gradually build our way back to a sustainable growth rate. Both scenarios would likely cause some pain. The former scenario would likely delay the pain. The latter scenario would likely speed it up.

Sooner or later, don’t be surprised if we enter an “Age of Austerity” that enables (forces?) consumers to reduce their debts, and, after a painful adjustment, puts our country back on a path to prosperity.

Weekly Focus – Think About It

“I have learned, as a rule of thumb, never to ask whether you can do something. Say, instead, that you are doing it. Then fasten your seat belt. The most remarkable things follow.”
—Julia Cameron

Best regards,
The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

• The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
• The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
• Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
• The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
• The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
• The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
• Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• You cannot invest directly in an index.
• Consult your financial professional before making any investment decision.

It’s easy to get caught up in the daily gyrations of the stock market’s ups and downs, but when viewed through a longer-term lens, the S&P 500 index has been pinballing between a range of about 1,040 and 1,217. The low end of the range was established in mid-September of last year and the high end of the range was reached in late April of this year, according to data from Yahoo! Finance. Last Friday, the index closed at 1,065, which is near the low end of the range.

Range-bound markets are not unusual and with the big rise we’ve had since March 2009, some consolidation of those gains is par for the course. Going forward, the market can do one of three things. It can continue to bounce around the range, it can breakout of the range to the upside, or it can breakdown. Of course, nobody knows until after the fact which scenario will occur, but regardless of the next direction, we continue to do all we can to help you reach your goals and objectives.

Notes: S&P 500, DJ Global ex US, Gold, DJ/AIG Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

HOW OFTEN SHOULD WE EXPECT THE STOCK MARKET to experience declines of at least 5%? When training for athletic events coaches are fond of saying, “No pain, no gain.” Likewise, investors should expect to endure the “pain” of market declines in order to benefit from the “gain” of bull markets. But, in order to withstand these market declines, it’s helpful to know how much pain is “normal.”

The chart below shows more than 100 years of the frequency of various declines in the Dow Jones Industrial Average. Although past performance is no guarantee of future results, the chart should give you some historical perspective:

A History of Declines (1900 – December 2009)

Source: Capital Research and Management Company – (1) Assumes 50% recovery rate – (2) Measures market high to market low.

As of last week, the Dow was in the “-10% or more” category, according to CNNMoney.com. This was the first decline of 10% or more since March 2009, according to Barron’s. Looking at the chart above, the current decline puts us right in line with the historical frequency of such declines.

We realize that market declines are not enjoyable even if they are in line with historical frequency. However, knowing where we stand within the context of history can help us make clearer and less emotional decisions as it relates to investment strategy.

Weekly Focus – Think About It

“The trend is your friend except at the end where it bends.”
—Ed Seykota

Best regards,
The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

• The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
• The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
• Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
• The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
• The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
• The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
• Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• You cannot invest directly in an index.
• Consult your financial professional before making any investment decision.

According to a May 1, 2008 CNNMoney.com article, “The old ‘sell in May’ strategy says that if you invest in the S&P 500 or the Dow industrials during the ‘best six months’ (November through April) and then switch into bonds during the ‘worst six months’ (May through October), you’ll end up with better returns than if you did the reverse.” In fact, a study by Plexus Asset Management as reported by InvestmentPostcards.com, showed that between January 1950 and March 2009, the S&P 500 index returned 7.9% per annum during the “best six months” and only 2.5% per annum during the “worst six months.”

The S&P 500 performed better during the “best six months” due to seasonal factors such as end-of-the-year bonuses, the “Santa Claus” rally, and the timing of tax refunds and quarterly earnings results, according to the CNNMoney.com article. Of course, past performance is no guarantee of future results and this “Sell in May and go away” strategy does not work every year.

But, back to the May just passed. It wasn’t pretty. The S&P 500 index dropped 8.2% for the month making it the worst May performance since May 1962, according to CNBC. Rising tensions in the Korean peninsula, European debt worries, China’s property bubble bursting, and the winding down of America’s “stimulated” economy conspired to send investors to the sidelines, according to The Economist.

Not too surprisingly, as equity prices declined in May, government bond prices rose, according to Associated Press. This “flight to safety” suggested that diversification between equity and government bonds worked in May.

While you may “go away” this summer for some rest and relaxation, be assured that we will remain hard at work on your behalf.

Notes: S&P 500, DJ Global ex US, Gold, DJ/AIG Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

OVER THE PAST FEW MONTHS, we’ve endured an uncontrollable oil spill in the Gulf, a volcano in Iceland that disrupted air travel in Europe, and an earthquake in Haiti that caused immeasurable suffering. These human disasters have parallels in the financial world that are worth noting.

The ongoing gusher in the Gulf is a manmade disaster that, in the financial world, looks like our country’s ongoing manmade gusher of deficit spending. With the fragile Gulf ecosystem drowning in oil, our country is drowning in bills that will eventually come due. Efforts to stop the oil spill have so far failed as have our efforts at reducing our deficits. BP says drilling a relief well is the “end game” to stop the leak. What is our country’s endgame to stop the ballooning fiscal mess?

The volcano in Iceland disrupted air travel for millions of travelers causing birthdays and weddings to be missed, business meetings to be cancelled, and a few extra days of unexpected expenses. But, eventually, the ash cleared and travelers went on their way. Likewise, the financial markets experience disruptions from time to time that are disappointing to investors. We call these “corrections” and they are usually temporary and not “retirement threatening.” They’re no fun, but we get through them.

The earthquake in Haiti came without warning and was devastating. More than 200,000 people likely died and many more will feel its effects for years to come. Poor infrastructure and lack of planning exacerbated the devastation of the quake. Likewise, the economic crisis of 2008-2009 is the financial market equivalent of the Haiti earthquake. Our country’s inability to live within its means (poor infrastructure) and prepare for contingencies (poor planning) led us to a market debacle. Like Haiti surviving its calamitous quake, we can survive a market meltdown, and, ideally, learn from it so we are better prepared to withstand the next financial earthquake.

This comparison of nature’s disasters to a financial counterpart is not meant to trivialize the pain from the Gulf, the volcano, and the earthquake. Rather, it suggests that we can become better investors by learning the lessons that nature teaches us. The question is, will we take nature’s lessons to heart?

Weekly Focus – Think About It

As we took time this past Monday to remember those who gave their lives for our freedom, these words from singer Lee Greenwood express a sentiment that we all feel:

And I’m proud to be an American,
Where at least I know I’m free.
And I won’t forget the men who died,
Who gave that right to me.

And I gladly stand up,
Next to you and defend her still today.
‘Cause there ain’t no doubt I love this land,
God bless the USA.

Best regards,
The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

• The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
• The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
• Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
• The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
• The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
• The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
• Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• You cannot invest directly in an index.
• Consult your financial professional before making any investment decision.

Catalysts for this recent correction are varied. China is clamping down on its easy money policy. Several European countries are in the midst of a liquidity/solvency problem. In the U.S., jobless claims unexpectedly rose last week and the Conference Board reported a surprising drop in its index of leading economic indicators. Both reports raised concerns that the economic rebound in the U.S. may be losing some strength, according to Bloomberg.

The case for optimism is also in plain sight. U.S. News and World Report says two new surveys out last week suggest, “We might be on the verge of experiencing the Great Shopping Comeback of 2010.” Higher consumer spending could propel the economy and create jobs. In corporate America, first quarter earnings for the S&P 500 companies grew 55% from a year earlier and 77% of them beat their Wall Street estimate, according to Bloomberg. And, according to Federal Reserve Bank of New York President William Dudley as reported by Bloomberg, “The U.S. economy is recovering and we are now seeing the first signs of significant employment growth.”

Economist Darda answered his own question and said we’re simply having an aftershock, not a relapse. Even if he turns out to be correct, aftershocks could still generate some “scary headlines” in the near future. As always, we do our best to stay on top of these types of evolving situations.

Notes: S&P 500, DJ Global ex US, Gold, DJ/AIG Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

“History provides a crucial insight regarding market crises: They are inevitable, painful, and ultimately surmountable.” —Shelby M.C. Davis, legendary investor

It’s been said that we can count on death and taxes. We should also add “market crises” to the list. It seems like the market is always either in a crisis, recovering from a crisis, or anticipating the next crisis. According to a January 2010 Morningstar article, we’ve experienced numerous “crises” over the past four decades including the following:

• In the 1970s, we had stagflation, oil shocks, high inflation, and a stock market that dropped 44% in 2 years.
• In the 1980s, we had the collapse of Drexel Burnham Lambert and the stock market crash of October 1987, which sent the Dow Jones Industrial Average down more than 20% in one day.
• In the 1990s, we had the savings and loan crisis, the bailout of hedge fund Long Term Capital Management, and the Asian financial crisis.
• In the 2000s, we had two bear markets, the subprime mortgage meltdown, and the financial crisis of 2008-2009.

But, guess what? Despite these market crises, the Dow Jones Industrial Average rose from 800 at the beginning of 1970 to 10,193 at the end of last week, according to data from Yahoo! Finance. That’s nearly a 13-fold increase.

It’s easy for investors to let the events of the day or the “crisis du jour” cloud their thinking. However, successful investors take a wider view and realize that crises happen, crises get resolved, and while they can sometime be scary, they should not lead you to panic mode.

Weekly Focus – Think About It

“Close scrutiny will show that most ‘crisis situations’ are opportunities to either advance or stay where you are.”
—Maxwell Maltz

Best regards,

The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

• The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
• The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
• Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
• The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
• The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
• The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
• Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• You cannot invest directly in an index.
• Consult your financial professional before making any investment decision.