Open house at out office on the river – Mark your calendar to visit with us.
Springtime is here so we thought we’d take advantage of it by hosting a fun and casual open house reception on Thursday May 28th from 4pm – 7pm at our office and at brand new “Pearl On The River” restaurant right next door! I have worked it out with the Pearl to reserve us the whole upstairs and the outside patio over the river. Start at my office, meet my staff if you haven’t already and enjoy our balcony over the river. Then, pop over next door to enjoy great food and libations, all on us. (Yes that means open bar). Please let us know so we know how much food to order. Bring your friends, the more the merrier.

Economic Update: Consumer spending continues decline…Am I the only one?
Yesterday the Commerce Department announced that retail sales (consumer spending) surprisingly declined .4% in April, while expecting them to be flat and revised March lower. They claim, was that unemployment is causing the decline in spending. I am still miffed by the lack of understanding of what is really causing this economic collapse. Sure, unemployment is part of it. However, am I the only one who sees the dramatically changing demographic shift in this country! As I have been saying in previous commentaries and published in my Economic Tsunami report (which is as pertinent today as when it was published 16 months ago so read it again), the aging of our population, which is rapidly passing their peak spending years and turning from net spenders to net savers, will have a profound effect on our economy for years to come. GDP is 70% driven by consumer spending, and even a small decline severely affects the economy.

Well now we have a perfect storm: Our aging population entering a new (and natural) cycle of saving for retirement, the over-indebtedness of the consumer who is scrambling to pay down debt and a depleted savings rate that went as low as .5% in 2006. The normal savings rate is around 7% and was over 10% in the early 1980’s. Given the recent destruction of assets and the fear of an aging population who is under invested for retirement, less spending and more savings is certainly in the cards. This will severely affect everything from lower corporate profits with companies completing for less business (deflation) to declining state and local tax revenue leading to cuts and bankruptcies, much like Vallejo. (Watch out Municipal Bond investors). There is definitely money to be made in this market for those who are prepared.

"Never in the history of the world has there been a situation so bad that the government can't make it worse."
Managing money and portfolio planning has particularly challenging. Traditional asset management techniques just simply may not work. Buy and hope strategies have spectacularly failed. Part of the reason we are so challenged is that we are experiencing a deleveraging on a scale in the world that is absolutely breath-taking in its scope. And to balance that, governments are going to have to issue massive amounts of sovereign debt to deal with their deficits. But who will buy it, and at what price? And in which currency?

It certainly appears as if the credit crisis is over or, at the very least, the light which most of us think we can see at the end of the tunnel is no longer that of an oncoming asteroid hurtling towards earth. No wonder equities are currently enjoying one of their best spells ever. And while equities continue to go up and up, most of us are left scratching our heads. Is this the real thing or will it go down in history as 'just' another bear market rally? Not so long ago, the entire financial system stared Armageddon in the face. Now, only a few months later, equity markets behave as if all the worries of yesterday have been washed away. How is that possible? Of course US banks made good money in Q1. The environment created for them by the government bailouts is the equivalent of the US government reducing the cost of goods to zero for our embattled car manufacturers and then going on to buy - courtesy of the US tax payer - a couple of million cars that nobody really needs. Even Detroit would make money given those conditions!

Is the recession over or even almost? Let’s get real. Recessions that come as a result of or in conjunction with a financial crisis take a lot longer to recover from. A recent study looked at 122 recessions, of which 15 were associated with financial crises. The research, published as Chapter 3 in the April 2009 World Economic Outlook (WEO) of the International Monetary Fund, finds that recessions that are either associated with financial crises or that are highly synchronized worldwide have historically been longer and deeper, and featured weak recoveries. The combination of these two features -- a rare phenomenon in the postwar period -- resulted in even costlier recessions, which lasted almost two years. Think we're through this bear market. Take a look:


"In addition to the current global recessionary cycle, there were three other episodes of highly synchronized recessions: 1975, 1980, and 1992. These recessions were on average longer and deeper. Distinct from other episodes, the recoveries from these recessions feature much weaker export growth, especially if the United States is also in recession. "A perfect storm”? Recessions that are associated with both financial crises and global downturns have been unusually severe and long lasting. Since 1960, there have been only six recessions out of the 122 in the sample that fit this description: Finland (1990), France (1992), Germany (1980), Greece (1992), Italy (1992), and Sweden (1990). On average, these recessions lasted some two years, were unusually severe, and featured weaker-than-average recoveries." (IMF) In addition, as I discuss above, the current recession is unlike any in the study, in that the habits of the American consumer are changing right before our eyes. Instead of spending and borrowing with little or no savings, people are now reducing their borrowing and increasing their savings. Savings are likely to rise to 7-8% or more in the next few years, as consumers see the need to repair their balance sheets and retirement funds.

Market Update: Market rises on wall of worry
The market continues to rise on a very rosy view and a wall of worry, which could easily go higher albeit with a long overdue correction. Keep in mind; this is simply a bear market rally in a secular bear market. Recovery rallies within extended bear markets are often very impressive. If the rallies were not impressive they would not fulfill their function. They frequently last just long enough and carry just high enough to convince large numbers of investors to jump back into a perceived new bull market. Thus far, this recovery rally has been very impressive. The majority of recovery rallies within extended bear markets tend to last around eight weeks. A smaller number have continued into a third month, and there are a few outliers in history that have extended to as much as five months before the primary downtrend resumed.

In the immediate term, a cause for concern is this erosion in the % of NASDAQ Stocks Above their 10-DMA. With the NASDAQ Comp. down only 2.7% from its May 4 closing high, the % of NASDAQ Stocks Above their 10-DMA has declined to just 41.4% as of yesterday’s close, its lowest level since the Mar. 9 low. The deterioration in this indicator warns that fewer stocks are now participating in the rally, suggesting internal erosion is taking place that is not readily apparent in the Index itself. Given that NASDAQ has been a leader throughout the majority of the rally dating from the Mar. 9 low, an erosion in this Index’s performance may not bode well for the market overall.

Portfolio Strategy: It’s time!
Use this period of stability to re-position your portfolio and prepare for resumption of the bear market and the NEXT bull market, which is still a ways off. Those who become complacent are often trapped when the market’s primary downtrend resumes. Don’t take this as glum news, as money can be made in this market provided you are positioned correctly. Do not get complacent, put your head (back) into the sand or (back) under a rock. Take control of your portfolio. If you cannot afford another huge drop, do something about it. If you are managing your own money or someone else helped you lose it, and you lost more than you think you should have, wanted to or thought possible, change your strategy and work with a financial professional that knows what they are doing. The destruction didn’t happen to everyone. As this market rises, everyone is going to feel how brilliant they were for hanging in there and having outsmarted the market, even though they have investments they shouldn’t have. The collective “crying in your beer” will come after traders are out, having sold to the unsuspecting long-term buy and hold investor. You don’t have to live helplessly through the next downturn. Use this period of stability to rationally adjust your portfolio before instability and thus ir-rationalization return. I can't stress this enough. Meet with a Financial Planner that knows what they are doing. Whether it's me or someone like me, don't wait until it's too late. For a free review or 2nd opinion, call me for a review at 916-925-8900. Be the expert, or hire one!

Cheers –Keith
916-925-8900

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