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US Economy-

After a mid-year slow down, the economy is continuing to improve in an asymmetrical fashion. Manufacturing and housing are still very weak while technology, service and energy/commodities are gaining ground. The US dollar is in a global race for the weakest currency among western nations as the result of Z.I.R.P. (zero interest rate policies), continued massive Federal Reserve bond purchases and improving exports. This has caused a whiff of inflation, sending gold and base commodities higher, along with a potential peak in the price of Treasury Bonds.

Summary-

The US Economy is in the midst of a shaky hand off between the end of government stimulus spending and private sector’s slow growth. We expect this hand off will ultimately be successful, but anticipate a few more scares over the next 6-9 months that will provide additional market dips to be taken advantage of. Continued above average corporate spending should finally provide some much needed solid labor market gains by year-end. We expect low growth and low inflation in developed countries, and higher growth and higher inflation in the important and cannot gain much ground until construction picks up in 2011/12.

Summary-

A growing sense that our economic recovery could be stronger than anticipated has lead the US Stock Market up, close to our year-end target of 1225 on the S&P 500. Inflation continues to be mild and US businesses report better than expected profits due to near record productivity gains from a lean work force. Commercial real estate is finally following residential in a bounce from deeply depressed levels. However, the real growth continues to be in the BRIC countries (Brazil, Russia, India, and China) and Asia in general, as their internal consumption for Western goods and services grows. While we will have our short-term setbacks, we are experiencing a better than expected recovery which will lead to a healthy economy in a few years.

Summary-

After the crash of ’08 and the vigorous rebound of ’09, we expect the economy and financial markets to spend most of 2010 moving sideways as they adjust to a slow “grind out” recovery. Jobs will be the key, as there can be little CPI inflation, rent growth, gain in consumer spending or main street improvements until unemployment is below 8% and falling. That is unlikely until well into 2011. Like the USC football team, it will be a building year, necessary before a healthy future economy can emerge.

U.S. Economy-

It has been a little over a year since the Wall Street/banking meltdown took what should have been a garden variety recession into a “second great depression” free fall. In retrospect, what happened? In addition to the
underlying toxic real estate loan problems, I believe two key factors put the “panic” into this recession: 1) banking problem transparency – high level, public discussions of potential nationalization, closures and fire sale mergers of large financial institutions became a self fulfilling prophecy. If you announce that a big bank could be under-capitalized if depositors withdraw their money, people will pull their money out and it will become undercapitalized…

The “New Normal”

Like the aftermath of 9/11, I believe that the United States will have some lasting implications from the near collapse of our financial systems and our current worldwide asset devaluation. I have been an interested observer, as you may have, in the rapid unwinding of asset-backed leverage and the subsequent damage it has caused across all investments and previous assumptions of what is safe and truly secure.

Investment Summary-

The second quarter of 2009 continued to see the global economic “Great Recession” slow its decline and saw confidence grow that the GDP will turn back up in the second half of the year. Prices of stocks, bonds and commodities all rebounded sharply in April and May before
stalling in June. A tension exists between balancing the early signs of recovery with prospects of a “jobless recovery” and economically unhelpful government policies presently being proposed. Our near-term outlook is neutral with little expectation of further price appreciation. Our overall strategy continues to be focusing on low/medium risk income producing investments along with a smaller allocation to inflation/weak dollar hedges.

Investment Summary-

The first quarter of 2009 started with the continuation of the scary economic declines from the fourth quarter and ended with the hope that the worst was behind us. We now believe that the combination of worldwide economic/financial stability crises and the US stimulus/economic spending budgets/deficits are finally fully discounted in today’s current financial asset values. However, reaching the bottom still means that we have a long way to go until the damage is repaired and markets go back up to historic valuation norms.

The current financial crisis reminds me of a movie from the 50’s, “The Day the Earth Stood Still”.  With a frozen and fearful credit market, lending for virtually everything has stopped.  A true panic has caused runs on money market funds and banks (WAMU saw $16.5 billion withdrawn from its bank in the week before it was seized by the FDIC).  These are supposed to be the “safe” places to put your money.  Goldman Sachs, the most revered of all investment banks, recently had to borrow money from Warren Buffet at 10% interest.  If Goldman Sachs has to pay 10%, everyone else down the food chain has to pay more. This also means that the yield on corporate and muni bonds have sky rocketed, driving their prices down. The value of our well diversified Optivest portfolios, including Commercial Property, Trust Deeds and Hedge Funds really shines in times like these.

Investment Summary-

Thank goodness for broad diversification in our investment portfolios. While the portion of our accounts that are in unhedged stocks and bonds have been subject to the worst bear market since the Great Depression, our diversification into real estate, trust deeds and hedged stock and bond funds have held most accounts to losses in the low single digits. Stable, cash flowing assets never looked so good…