-New Special Report: My latest Special Report is finally finished– Economic Tsunami – Revisited. I try to put in so much critical information, they always take longer to write than I think. This new report updates my original report: An Economic Tsunami Lies Ahead – How to prepare for this perfect storm, (ET) that was published last February 08. As I’m sure you remember, this report warned of the collapse of our economy and markets and has been very accurate in explaining the current economic environment. The new report will be mailed to clients in the next week. If you are receiving this email (subscriber) but not currently client and would like a complimentary copy, reply back to this email and we’ll send one to you.

Are we at the end of the recession or just the end of the beginning? Much of the optimism for investors is stemming from hope: Hope that the economic downturn has been so severe, it must be over soon over…. Hope that stocks have fallen so much, they must be at a bottom…. Hope that the sheer enormity of the government stimulus has to have an effect. Well, “Hope” is not an investment strategy! This recession is very different than those since the Great Depression, and could even turn into another. Since WWII, the consumer has always pulled us out of recessions. Not this time. I discuss this in depth in my ET report so I won’t go into great detail here, but the consumer is dead for the foreseeable future. Consumers are going to save more and spend less, likely pushing the savings rate over 6% from only about 1%. What is shocking is that without home equity loans, the US economy would have grown barely or less than 1% a year from 2001 to 2006 and that is with consumers saving less than 1-2%! Now, let's imagine a world with savings going to 6% because aging baby Boomers now realize they may actually have to save to be able to retire. More declines in housing will only make matters worse, and that is not even counting the likely collapse of commercial real estate, which has yet to fall? With 70% of GDP coming from consumer spending, it’s easy to see how the Storm continues. The massive deleveraging and the banking crisis, which are merely Symptoms of the downturn, will continue to plague us. An economy simply cannot get itself out of a recession by saving. Therefore, you need to be planning for a lengthy recession and a slow recovery.

On the Stimulus Bill: As I mentioned in a recent Associated Press AP interview, I definitely believe we need action, but it must be bipartisan. Unfortunately, what we got is simply a pork-laden package that will increase debt that will have to be paid later by our kids. (and Josh is pissed) Many of the issues addressed are very noble causes, but are not likely to immediately “stimulate” and create jobs as it has been billed. There is way too much spending on items that have very little current effect on the economy. Interestingly, the increase in federal spending is going to be accompanied by a substantial decrease in state and local spending, as almost all nonfederal entities must balance their budgets, and tax receipts are way down. If consumers are spending 5% less, it stands to reason sales taxes are down by 5%. Property taxes will be down, as will the state portion of income taxes. Increasing taxes will bring about local voter rebellion, so spending cuts will be the order of the day. As we have seen right here, California state employees now have every other Friday off, which cuts their pay by 10%. Expect more such cuts everywhere and on everything. What’s worse is that I firmly believe that this is just the first installment, and soon the government will be asking for more.

It’s hard for us to know what will work but one of the best ideas I have heard comes from Allen Sinai of Decision Economics. US companies have so much money squirreled away outside the U.S. that if we lowered tax rates temporarily on repatriated earnings, companies would repatriate US$545 billion. There is a precedent for this: we saw US companies bring home $360 billion in 2004 as a result of the temporary 5% tax rate contained in the American Jobs Creation Act.

Hope Rally hopes: The earnings season for the 4th quarter is just about complete, and the facts are dismal. It is worse than the current data shows, and could get uglier. Unemployment is increasing, and consumers are both saving more and spending less with incomes not keeping pace with what little inflation there is. The main hope will be if inventors believe that the earnings trough has passed and things will improve. If earnings don't come in dramatically better for the first quarter as opposed to last quarter, we could be setting up for another nasty summer bear market. We likely have until the next earnings pre-announcement season begins for a meaningful rally, around mid March, which will probably have companies lowering estimates again. Once that starts, we could easily see another wave of selling that rivals the one we just had. Another summer Bear Market would be devastating.

How to survive the current financial mess: Not opening your statements and or hoping for a rally will only make it worse. Be proactive and tactically manage your portfolio. Your goal is to make reasonable returns that beat inflation taxes and CD rates during this time, and to still be standing when we get through this. There is another bull market in our future, as hard as that may be to imagine now. Sure, there could easily be a rally soon, and I even expect one. After all, in the 5 previous years the Steelers won the Super Bowl, the S&P 500 was up an average of +25.6% on a total return basis. However, the problem is that you could get killed waiting for it.

Now is a time for absolute returns and active tactical management. Many quality corporate and municipal bonds are currently VERY attractive, some in the 7-8+% range, as well as high yielding stocks and preferred stocks, many yielding even higher. However, it is critical to have someone who knows what they are doing in this arena. Just buying based on yield or ratings could be disastrous. There may also come a time to be all cash. These are tough times and they will likely get tougher. In the ensuing bear market, millions will lose their life savings. Don’t be one of them. There are many investments doing well. If you are not, get a free 2nd opinion. Quite simply, be the expert or hire one.

Keith Springer is President of Capital Financial Advisory Services, a registered investment advisor, providing Wealth Management and Mortgage Consulting Services.  For more information on how to build and maintain a solid retirement plan, please contact Keith at
916-925-8900 or Keith@KeithSpringer.com