Not to be Confused with the Summer of 2011. Oh... And What about Facebook?

In the past few weeks there have been renewed and increasing concerns regarding Europe's debt crisis, causing Greek, Italian and Spanish interest rates to soar higher and global equity markets to take a tumble. This is all reminiscent of the summer of 2011 and has heightened – understandably – investor anxiety. However, our research suggests that these renewed concerns are unlikely to result in a significant or sustained decline in stock prices which we experienced this past summer.

The fact that Europe's debt crisis is percolating once again should be no surprise to anyone. Debt crises of that magnitude – including ours here at home – take years to repair and are punctuated with periods of instability, similar to what we are experiencing now. In the case of Europe, investors should prepare for the worst – the very likely event that Greece and possibly one other country is forced out of the European Union. It is this fear, and the resulting aftermath, that is causing market volatility. However, as opposed to the summer of 2011, most of this concern is already reflected in the price of securities. Many European stocks are down 50% and Euro banks much more. Fortunately, we sold most of your European exposure last August prior to the big decline. In addition, as opposed to the summer of 2011, the extent of the crisis is now known and the elements of surprise marginal. Lastly and most importantly, the European Central Bank has infused billions of dollars into the European banking system and is ready to continue to do so. This provides the Euro banks the ability to weather the storm and reduces the risk of a 2008 financial meltdown. Our overriding message for investors in regard to Europe is to allocate your funds elsewhere – which is what we have been doing.

The rest of the world's equity markets appear attractive to us given this recent, normal correction in stock prices. Goldman Sachs recently published a very interesting and compelling report suggesting that we are at the beginning of a long term cycle of rising stock prices. Our own research suggests a similar trajectory over the next few years given a number of data points and economic factors. Stock prices relative to corporate earnings are lower than they were last summer and at just about any period since 2008. At the same time, global economies – outside the Euro Zone – have been recovering. Corporate profits in the US, Brazil, and China have been stellar. This recovery is punctuated with soft patches, but is recovering regardless. A look at the improving unemployment rate in the US over the past two quarters is just one sign of recovery. Historically low interest rates are allowing residential real estate markets around the globe to "bounce along the bottom" and banks have begun to lend again – albeit at a slow pace. Lastly, central banks around the world, including the Federal Reserve, are prepared to leave rates very low until the economy improves. This accommodation can go a long way to support higher stock prices.

Though we continue to be cautiously optimistic, we are prepared for bumps along the way and for the possibility of something worse that we cannot see or do not expect. Therefore, we continue to manage these risks through your portfolio's asset allocation, sector management and the use of carefully placed stop loss orders.

The media has given a great deal of attention to the upcoming initial public offering of Facebook. This pioneering and premier social media company will likely go public in a week or so. The offering has been significantly oversubscribed since its very hint of going public, leaving most investment advisors and the general public unable to particiapate in the offering. In fact, the company is offering such few shares that most of the company's publicly traded stock will end up in the hands of its employees. (This is not a recommendation to buy or sell a security.)

We hope this update finds you well. If you have any questions, please feel free to contact us at your earliest convenience.

Sincerely,

James E. Demmert
Managing Partner