Sandy is on vacation, enjoying the beauty of France and the lower Euro.  She left me with the task of writing this quarter’s commentary. 

 

1st Half of 2010

After 2008's sharp decline and last year's recovery in stock markets, many had hoped that 2010 would see a return to relative normalcy and stability. And certainly, the year started on a positive note, but volatility returned in May and June. Here is a partial rundown of what occurred this past quarter:

v      The intensification of the budget crisis in Greece in February and the fear it would spread to other European countries.

v      Concerns that European budget cuts would slow down economies, with spill-over effects globally; this is especially problematic in light of the need to compete with a devalued Euro

v      The sinking of a BP oil drilling rig that had exploded in the Gulf of Mexico

v      The May 6th "flash crash" in which U.S. markets plummeted in a matter of minutes without explanation

Looking at these events, it's tempting to be negative, but there were positive events that also occurred:

v      While businesses are hesitant to expand their workforce, they continue to make capital investments in equipment and software.  Business spending is leading the slow recovery.

v      Personal incomes rose for 6 out of the last 7 months, and so did personal savings

v      China announced that it will let its currency – the yuan appreciate against the dollar.  Because the yuan is currently undervalued, it unfairly affects our trade deficit.  Currently, the deficit with China is $231 billion.  If this were to be cut in ½, it could create roughly 800,000 jobs (assuming $1 billion in exports creates 7,000 jobs).

 

Technical Indicators

Sandy and I both subscribe to financial newsletters that concentrate on technical and fundamental indicators.  Also, this past quarter, we both attended different conferences to get an overall perspective of the economy and factors affecting the market. While we did expect a pullback – a bull market cyclical correction, we are still undecided if this will lead to a double dip recession.  This is why we are limiting new purchases in the portfolios to income producing holdings with good dividends and yields.

 

Let us learn to appreciate there will be times when the trees will be bare, and look forward to the time when we may pick the fruit." Peter Seller
 

Long-term goals demand long-term thinking
Warren Buffett has said that it only takes two things to make money—having a sound plan and sticking to it—and of those two, it's the sticking to it part that most investors struggle with.

Markets like we've seen of late create understandable stress and can lead to short-term decisions. Hard as it can be at times we've found the only approach to investing that works over time is to keep that long-term view, modifying portfolios as circumstances warrant but never losing sight of the fact that long-term goals demand long-term thinking.

New LA Times Money Makeover (a copy of the article is enclosed)

Sandy and Asset Planning were featured in a Los Angeles Times Money Makeover article on 5/16/2010. This makeover involved helping a young couple, who were quickly spending through a large inheritance, develop a budget and preserve what was left of their windfall.

 

Financial Reform Bill

There is nothing new to report on the health care reform, but Congress has made progress on the financial-reform overhaul.  It has not been officially voted in as of this writing, but passage seems likely.  It gives regulators a mandate to monitor the biggest financial institutions and clear authority to shut down failing institutions. It promises that the multi-trillion-dollar market in over-the-counter derivatives, will be better regulated through open exchanges. And it gives regulators the authority to impose high capital requirements, forcing banks to hold more equity and thus assume less risk.

 

One area where I wish Congress had stood firmer was the issue of “fiduciary duty.” The idea here was that a financial adviser or broker would have to act in your best interests—that’s what fiduciary is all about—when making investment recommendations. Right now the standard is simply one of suitability, which stops far short of requiring the broker/adviser to act in your best interests. Unfortunately, the fiduciary rule got kicked down the road in the new bill. All that is going to happen is that the SEC will study the issue. That’s a lost opportunity for Washington to really do something that protects investors.  Asset Planning Inc. is a SEC regulated investment advisor and therefore we already operate under the fiduciary duty.

It’s also frustrating that the SEC lost its ability to oversee the world of Equity Indexed Annuities. The SEC had already issued a rule—not yet enacted—that would have tagged these investments as securities, thus making them regulated by the SEC. But the new legislation undoes all of that, and like all insurance, it falls onto each state to regulate.

 

Client Education

We are planning to have a client education seminar in the fall.  We welcome any suggestions and input you may have on topics that you would like us to cover.

 

I will be going on vacation to Yellowstone National Park a few days after Sandy returns.  Last time I was there was about 17 years ago, just after the big fire.  I am excited to see how things have grown back since then.  Have a great summer!

 

Carol Somoano, CFP, MBA

 

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