A&I Financial Services Periscope

A & I Financial Services LLC Newsletter

For the Week of
February 1, 2012
 
Greetings!  

Last week's Periscope was contributed by our own, Cameron Morgan. Wasn't that interesting about Chinese New Year? If you didn't read it, you can always find the archive on our web site: assetsandincome.com

 

This week, let's look at Europe in Part 2 of our 3 Part Economic Perspective.  We'll continue with the big picture of things we see shaping the direction of our investments in 2012. Again, we'll lean heavily on our economic research teams. For a more complete analysis, contact your advisor!

The grind we are dealing with - and the same message we've been delivering since 2008 - is that the developed world took on massive and unsustainable levels of debt that in all likelihood will take a decade or more to fully unwind. This will reduce economic growth below the levels we had come to think of as normal; levels which themselves became distorted upward based on the spending of all this borrowed money. As that debt is reduced going forward, less money will be available to spend.

Another way that debt is reduced is through defaults, and this leads us to the reiteration of another very important point, which is that the risk of defaults, such as in Europe, poses a significant threat to the financial system, and in turn to the global economy.

Very briefly, investors are afraid that Europe lacks the political unity and possibly even the financial capacity required to provide a sufficient financial backstop for the eurozone. That increases the risk of weaker governments defaulting on their debt, which makes investors demand higher yields for taking on that risk. Those higher yields contribute to a feedback loop that makes a default even more likely, because governments can't sustain interest payments above a certain level, so only some type of unified policy action and intervention can allow governments to roll over all the debt that is coming due.

It is possible that EU policymakers will fail to address the crisis before major economic damage occurs. The biggest concern is that the eurozone itself unravels, with impending government defaults triggering a financial crisis as banks that hold huge amounts of now-devalued debt no longer have sufficient capital to remain solvent. This would lead to a significant reduction in lending and economic activity and impact the rest of the globe as well - making a global recession likely and in a very bad outcome a depression in Europe or even globally can't be ruled out.

A bright spot in recent years is the strength of emerging-market economies, but this is also a source of risk. Of particular concern is China, which depends on demand from developed economies like Europe and the U.S. to drive its export machine. To offset the initial decline in demand that followed the financial crisis in 2008, China took steps to fuel infrastructure spending at home, but in so doing ignited a bubble of its own. Our concern about a "hard landing" in China is that it may be unable to deflate this bubble without a harsher than expected impact on its economic health, with damaging effects on the rest of the globe.

These are the reasons our message remains a sober one as we ring in the New Year. With stocks not priced cheaply enough to provide us with sufficient return potential to fully justify the risks we see, we remain wary. We are also confident that with current yields on bonds very low, returns on traditional investment-grade bonds will be unattractive over the next five years. For that reason, we prefer flexible and/or alternative strategies that we believe offer better longer-term returns, and we are willing to accept that they provide us with somewhat less protection in the short term against a very negative scenario. The effect of the bond positioning offsets some but not all of the conservative bias from our equity investments. 

 
Weekly Economic Update 

ECONOMY GROWS 2.8% IN Q4 While this is the best GDP reading since Q2 2010, the initial estimate from the Bureau of Economic Analysis still disappointed the markets. Many economists and investors were looking for growth of 3.0% or better. The majority of the growth actually came from increased inventories. Consumer spending rose 2.0% last quarter, with auto sales being the biggest factor. Durable goods orders did see 3.0% growth in December, putting them 45% above the recession low hit in April 2009.(1,2,3)
  
DIPS IN NEW & PENDING HOME SALES 
The number of signed home sale contracts fell 3.5% in December, according to the National Association of Realtors. Separately, a Census Bureau report showed that new home sales declined 2.2% in December.(4,5)

 

MARQUEE SENTIMENT INDEX AT 11-MONTH PEAK
The Thomson Reuters/University of Michigan consumer sentiment index ended January at 75.0. This was way up from December's 69.9 mark, and it beat the 74.1 reading forecast by economists surveyed by Reuters.(6,7)

 

PRECIOUS METALS GAIN ALLURE
At Friday's COMEX close, gold was +10.56% YTD, copper +13.18% YTD and silver +21.05% YTD. Crude futures finished last week at $99.56 per barrel on the NYMEX, putting oil merely at +0.74% YTD. (Retail gas prices were +3.67% for the month as of Friday.)(2)

 

A STRONG MONTH COMES TO A CLOSE
With just a couple of trading days left, January is shaping up to be the best month for U.S. equities since October (see the YTD numbers below). Across last week, the S&P 500 rose 0.07% to 1,316.33 and the NASDAQ gained 1.07% to 2,816.55; the Dow slipped 0.47% to fall to 12,660.46.(1) 

Market Summary

% Change

Y-T-D

1Yr Chg

5-Year Avg

DJIA

+3.63

+5.59

+0.28

NASDAQ

+8.11

+2.22

+3.13

S&P 500

+4.67

+1.29

-1.49

(Source: cnbc.com, bigcharts.com, treasury.gov, treasurydirect.gov - 1/27/12).  Past performance is no guarantee of future results.  Indices are unmanaged, and investors cannot invest in them directly.
Create a beautiful week!

Karl Frank, MBA, MSF
Certified Financial Planner (R)
A & I Financial Services LLC
303.690.5070
 
Citations:   

 

(1) -  www.cnbc.com/id/46162429 [1/27/12]
(2) - money.msn.com/market-news/post.aspx?post=6e802a2f-f50a-4ae4-948b-7bc9555ff5f6&_nwpt=1 [1/27/12]
(3) - www.npr.org/2012/01/26/145895744/durable-goods-orders-signal-business-investment [1/26/12]
(4) - www.reuters.com/article/2012/01/25/us-usa-economy-idUSTRE7BM0AB20120125 [1/25/12]
(5) - www.startribune.com/business/138174364.html [1/26/12]
(6) - montoyaregistry.com/Financial-Market.aspx?financial-market=common-financial-mistakes-and-how-to-avoid-them&category=29 [1/27/12]
(7) - www.cnbc.com/id/46162624/ [1/27/12]

This material has been prepared and is distributed solely for information purposes only. It is not a solicitation or an offer buy any securities or instrument or to participate in any trading strategy. There is no assurance that a particular trading strategy will achieve investment success.
 
Securities offered through Geneos Wealth Management, Inc., member FINRA/SIPC.  Investment advisory services offered through A & I Financial Services LLC, registered investment advisor.
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"Judge each day not by the harvest you reap but by the seeds you plant."

Robert Louis Stevenson

Karl Frank In  Investor Advisor Magazine

Holiday header
Investor Advisor - November 2011
 
Investor Advisor Magazine's November 2011 edition features Karl Frank.  In the article "Never Satisfied," John Sullivan writes:  Passion born of tragedy drives Karl Frank to do all he can to help business owners ensure a legacy for loved ones and heirs.  Industrial age publisher and philanthropist Frederick Bonfils said there is no hope for the satisfied man. If that's the case, Karl Frank is full of hope. 

 

"I'm never satisfied," Frank says matter-of-factly when asked about his advisory firm

.....Read More.

Karl Frank was interviewed by 9News on January 9, 2012 regarding "Key Questions to ask when picking a financial advisor". 

Click Here to View Video 

 

 

 

 

 

  Riddle of the Week

It has no crown, yet when the chips are down it is more powerful than a king or queen. What is it?   

 Last week's riddle:

 

  

I'm usually standing on a city sidewalk, and I'll always stand by your car. But if you don't feed me, I you may get into trouble. What am I?

 

        

Last week's answer:  

 

A parking meter