As we wrap up another year - where did 2010 go? - the JSW Financial team would like to wish you all the best for a blessed holiday season. To our many clients, friends and supporters, thank you!

It's been a while since we've talked about the state of the commercial real estate market. Unlike the stock, bond and housing markets, you don't see or hear much about commercial real estate. This is an asset class that large endowments and pension funds have invested in for decades to provide diversification to their stock and bond holdings.

Many of you have some exposure to commercial real estate for the same reason. Unfortunately, during the Great Recession, commercial real estate values dropped significantly. So, what's happened since then and how do we feel about this asset class today?

Fortunately, just like we're seeing some slow improvement in certain areas of the economy, we're also seeing some improvement in certain parts of commercial real estate. Property values in general for high-quality commercial real estate are higher than they were during the worst of the recession, although they have not recovered to 2007 values, according to Moody's. The sectors that have improved the fastest are the highest-quality apartment and office properties that didn't have significant vacancies. These sectors also did not see the same level of overbuilding like in other areas such as retail.

Unfortunately, just below the top-tier properties there are still significant vacancies that have prevented many properties from regaining value. Some experts believe the worst is behind us and that we'll begin to see a decrease in vacancies as the economy continues to grow.

We believe there are still some opportunities in this market. Some real estate managers we work with have programs that made significant investments in high-quality properties during the second half of 2008 through this year. A few of these programs are still open, for a very short time anyway, which allows you to effectively invest in properties that were bought during that time frame. Another strategy we like is buying deeply discounted loans from banks on distressed commercial real estate properties. This strategy has a higher risk/reward than buying stable real estate properties, but the manager we are working with is skilled in this area.

Please let me know if you would like to learn more about these opportunities or discuss the status of your current holdings.  

- Mike Jones

As you prepare your year-end paperwork, please keep in mind:

• Most tax documents (1099s) are sent out mid-February

• Most K-1s are sent out during the second half of March 

If you are planning on gifting any highly appreciated stock please contact our office by end of business Dec. 23. We cannot guarantee any request made after the 23^rd will be made in time for the 2010 tax year. Thank you. 

JSW Financial has some terrific events coming up. Please make plans to join us!

Buying Gold and Numismatic Coins

A presentation by Don Dee, Rare Coins of New Hampshire

When: Thursday, January 13th at noon

Where: Courtyard Marriott, 105 Southpark Drive, Blacksburg

Register: By January 5th to Beth at 540-961-6706

Client Appreciation Event

A celebration of you!

When: Tuesday, March 29th at 6:30 p.m.

Where: Holiday Inn, Blacksburg

Details to come 

Holiday office hours

Closed: 

Friday, December 24th for Christmas

Friday, December 31st for New Year's - monitoring phone messages remotely

Monday, January 17th for Presidents' Day

Mike Jones accepted an invitation to the join the Blacksburg Rotary Club and was inducted on December 2nd.

Quotables

"December has been the second-best performing month for the S&P 500 since 1990, producing an average gain of +1.9% (total return)."     - Source: BTN Research

I have returned to a position of optimism for two reasons as the year comes to an end.

First, the American people can still do something about our country and the economy. This mid-term election proves the people are going to change policy direction of our government. Many are mistakenly interpreting the results of the election as a support for the Republican Party. It is not. 

It was that the people want to be represented by their elected officials and removed many incumbents this election cycle. We talked about this phenomena in past newsletters: that incumbents had to be removed and term limits put in place. Nevertheless, this election is likely to bring the following changes in policy:

• Tax cuts will be extended for everyone

• Estate tax credits will be as high as before 2010

• Capital gains tax will remain at 15%

• Some changes in the healthcare bill will be made

We (the people) will have to have a few more elections of throwing out the incumbents to move toward term limits. The people will have to break the gridlock of partisan politics. Democrat or Republican, Independent or Libertarian - we all have to get out and vote and engage in the issues. I am very optimistic that the free spirit of this country will take back control from Wall Street and the government. From this, in my opinion, will rise a strong economy once again.

My second reason for excitement is that the investment allocation we are currently focusing on at JSW Financial is working. Overall, we are only exposed to less than 60% of the stock market. That is very conservative, yet on average we performed at the level of the stock market for 2010, net of fees. This is important because although progress is being made on an improving stock market and economy, there still remain some very real potholes on the road ahead. You read and listen about most of these taken out of context by the national media. We will navigate through these. Just be aware that throughout the history of this country there have always been economic challenges and differences of opinions from our government leaders. This is not to make light of the times within which we are, but there will be happy days again. The signs are beginning to peak through the clouds.

I leave you with a few of my short-intermediate interpretations of the current tea leaves:

• Short term the market could run up to 13,000 on the Dow Jones.

• Expect a possible significant downturn in the market somewhere in 2011-2012 (25%+ range).

• Jobs will likely not recover for another 4-5 years and may never recover back to a 5% unemployment rate.

• Long-term gold and precious metals are a good hedge investment, but short-term expect some corrections. In my opinion, numismatic coins are a better long-term investment. 

• We may see a drop in commodity prices and foreign stock markets as long as the U.S. has to continue to print ourselves out of this deficit crisis.

• Inflation will eventually become a familiar term to most of us which will change the way we invest today. The good news is that inflation will help the U.S. pay itself out of this debt crisis.

• Interestingly, the younger generations are beginning to save more and reduce their debt because of this crisis. That is good management for the individuals, but does not help our consumption growth.

• The Boomers, on the other hand, are keeping our spending up in most areas except autos and homes. So there is a counter-balancing effect.

• Housing will not recover for 5-10 years. Commercial real estate is improving, but extreme caution needs to be taken when dealing with national and regional banks. The banking sector will remain volatile until we work through this housing inventory.

• Jobs have not returned as expected after normal recessions because the stimulus was not directed into the small-business private sector. A government job does not have the same multiplier effect as does a private sector job.

• Leading indicators are improving ever so small so that we can say the recovery is moving in the right direction. These incremental improvements are smaller than normal, because of the misdirection of the stimulus money mentioned above.

• Technology innovation and entrepreneurship development will be the only way to grow ourselves into more jobs. Meanwhile, we are not out of the woods yet -- 2011-2012 will still be major challenges for the economy and markets.

• Food prices and energy prices will be increasing in the years ahead and this will cause major challenges for our middle-class working families.

• The onerous health care bill of today will gradually be improved on as we move through elections and the people let the politicians know what they want.

So overall, I feel much better because I realize we can manage our way through the many challenges we have going forward for our economy and country. Again, we at JSW are continually seeing what improvements we can make in our strategies. Do call us with your concerns ... and dreams. We can help define the most prudent paths for you.

Have a peaceful holiday season and love on your family lots. We are so fortunate to live in this country.

Until next time,

- Joel Williams