But First: Josh’s Christian Brothers JV team came away with a decisive victory last week, beating Galt by 30 points. Josh had a good game too, “knocking guys down” as he put it. He had a few good bruises to prove it. It’s good for him, right?

Market Update – Everybody’s bearish, so the rally continues
Even with a monstrous rally off the March lows, bullishness has not caught on. A recent Wall Street Journal/NBC News poll just found that 58% of the public believe the economic recession still has a ways to go, up from 52% in September. This implies that individual investors are not interested in adding risk to the portfolio even after the surge in the equity market. In fact, only 29% of those polled believe the economy has hit bottom and that with 0% interest rates and free government spending. Even better, 64% said the rally in the stock market is still a bear market rally and not the beginning of a new bull market. In sum, the majority feel that it’s obvious that the rally will end and the economy will fall back in its freefall shortly. As we learned in last week’s commentary (http://keithspringer.info/), if it’s obvious, it’s obviously wrong!

I do not argue that the long term economic picture looks dim. The biggest issue continues to be the natural demographic cycle and massive deleveraging. As people age they spend less and save more. It’s just how it is. I discuss this in depth in my Economic Tsunami special report. (ET Link) Now that household debt in the US is an astounding $13.7 trillion as of 6/30/09, 96% of the size of our $14.2 trillion economy vs. 60% in 1990, the aging population is either unwilling or simply unable to maintain the spending patterns of the last 2 decades.

In addition, even though most economic indicators have been distinctly upbeat, we all know that much of this improvement is not sustainable. Much if not all is attributable to government spending and a weak dollar which is prompting a jump in exports. A strengthening real-estate market is critical but pending home sales have moved higher primarily because of the home-buyer tax credit and when this tax-credit program ends, sales will decline. All of this may prompt the Fed to start preparing the markets for a new “post financial crisis” monetary policy change, and a rise in interest rates or even the inkling of a belief in such a rise could have calamitous consequences. On the other hand, inflation is virtually nonexistent, inflationary expectations remain very low and the unemployment rate is expected to remain stubbornly high for some time and a tightening by the Fed would cold exacerbate the situation.

Knowing all of this one would not think that there is no way the market can continue to rise, but that’s what it does…climb a wall of worry. The reality is that with such negative sentiment, the trend remains soundly positive. Yet we are in the throes of the first significant correction of this entire rally. At the moment, there is very sluggish Demand and modest selective strength. This suggests more short term market weakness and the potential for further weakness before a sustainable low is reached. Longer term however, there are still no signs of a major distribution. Selling Pressure has yet to develop into a sustained uptrend that typically precedes a major market top. Such a sustained rally has been evident prior to every major top, even in short-lived bull markets such as 1938.

Many are saying we came so far so fast that a big correction is in order. But did we really come that far and that fast? For some perspective, look at the 2000-2003 bear market, where the Nasdaq and S&P 500 fell -75% and -47%, then followed by a great 10 month rally of +70% and +46%. In this cycle, during the bear market, the NASDAQ and S&P 500 fell -55% and -57%, followed by a 7 month rally of +71% and +61%. Yes the current rally has been quicker at 7 months versus 10, but so what. The two indexes fell an average of -61% in the 2000-03 bear market, and in the 2007-09, they dropped an average of -56%, again not that big of difference. And the most recent rally of the indexes has been an average of +65% versus the 2003-04 rally of +58%, again not a big difference.

Just as before, the big complaint during the start of the economic recovery in 2003 was that ‘it was a jobless recovery. Corporate profits came back first as a result of cost cutting and sales finally picking up. Only after that had occurred did jobs begin to improve. All of this is typical of a normal business cycle. The difference this time is one part money one part emotions. The money is coming from the government, which may be unsustainable in the long term but certainly makes things rosy in the short. (You don’t fight the Fed!) The emotional comes from two severe major bear markets in this decade where the two bear markets in the 1990’s added together don’t even match just one of the bear markets this decade. Well, we all may be driven by emotion but the market is driven by reality. Unless this selloff gets more severe, this is just a normal correction.

This does not mean for you to throw caution to the wind. We are still a bear market rally (echo boom) and when it turns, it will be fast and furious. Yet, investors have to participate and should do so by getting the very best returns with the lowest risk possible. For most of our clients, a reasonable return with tempered risk is the objective. Very few people should use stock market indexes as a benchmark. Moreover, high net worth individuals are getting hammered by taxes and that will only get worse as taxes will assuredly rise.

Investment Strategy: Stick with 3 important things:

1. Invest for “Real Returns”. Dividends, dividends and dividends…(and corporate and tax-free bond interest of course). There’s a lot of great high yielding issues out there with, many yielding well over 8% - 10% with appreciation potential. Call me if you’d like to discuss.

2. Take a “Tactical” approach. Buy and hold kills. Tactical does not mean day trading. In fact to the contrary. It employs an actively managed approach to taking advantage of major trends. Very simply, if the market looks dangerous, you get out. Period. You don’t hold it because your broker says it’s a long term investment. You live to fight another day. Two 50%+ bear markets prove this. Our proprietary Top-Down Tactical™ (TDT™ ) discusses this.

3. Re-read my Economic Tsunami special report that I wrote in December of 2007 (published in February 2008) which discusses the overall economic environment, where we are where we’re heading and the importance of protecting yourself. It is as pertinent today as when it was prepared.

If you would like more information on our unique proprietary process for building successful tax efficient portfolios, give me a call and let’s visit by phone. I’m happy to help you wherever I can. I’ve been doing this a long time and there’s no cost or obligation. I’d just appreciate the opportunity to earn your business.

Let me know if you have any questions or if I can help with something.

Cheers –Keith
916-925-8900

P.S. Be sure I am in your address book so these weekly email newsletters do not get blocked.

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