7.15.20102010 2nd Quarter Newsletter Economic Update: Green shoots are turning brown “Green shoots” is the term used to describe the economic growth coming out of the recession. The economic growth is wilting, perhaps because the government stimulus is wearing off. Historically, housing construction is a major contributor leading the US economy out of recessions. Each new home built creates, on average, the equivalent of three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities, according to the National Association of Home Builders. New home sales generally bottom and begin rising just before or during the recession. May new home sales were down -33%, to an all-time low since the data was first tracked in 1963. The dramatic drop in home sales is in large part due to the expiration of the federal housing tax credit. The powerful downtrend in housing was only temporarily halted by the housing tax credit. This illustrates the temporary nature of government stimulus. The housing industry is no healthier now than it was before the additional deficit spending was incurred. Deficit spending is not conducive to sustained economic growth as substantial scientific research indicates that the government expenditure multiplier is considerably less than one. If deficit spending is added to an economy, such as has been the case in the U.S., GDP will grow, but the economy will then eventually return to essentially where it began. However, the deficit spending leaves the economy in a more dangerous overall condition because the same sized economy must now support a higher level of debt. Market Update: Continued Volatility In just two months, the S&P 500 has given up all of its gains going back to August of 2009. Although long-term the market is expensive, the recent decline is a short-term opportunity to own equities. The investment community is split more than usual between “the economy will continue to grow” on one hand and “the economy is weak and a double dip recession is imminent” on the other hand. These two polarized viewpoints will result in larger than normal market moves (volatility) in both directions. The economy has improved, but it remains extremely fragile as it relies on government deficit spending. There will be both positive economic data for the bulls and weak economic data for the bears to cause heightened market volatility. We intend to take advantage of these conditions. Portfolio Update: Continued Risk Management With our small allocation to equities last quarter, our portfolios significantly outperformed the major stock indexes. As we mentioned in our last newsletter, the highly probable 10% correction did indeed occur. Our risk management approach worked well. After this recent 15% market correction, we bought equities as the markets reached an oversold condition. Since this is not a buy-and-hold environment, we will continue to increase allocations to equities as prices decline and reduce risk or sell when prices rally. We anticipate continued market volatility for the foreseeable future. We continue to hold shorter term, high-quality bonds and high-quality stocks. Thank you for your continued trust and support. Trevor K. Holsinger, CFP