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We are summarizing investment performance for the first quarter of 2010 and outlining our view of financial markets going forward. Overview The numbers for the first quarter of 2010 were as follows: The overall market, as measured by the S&P 500 was up 4.87%, the bond market, as measured by the Lehman Aggregate Bond Index was up 1.91%, and a balanced portfolio, based on an equal weighting of these indexes, was up 3.47%. As we write this quarter’s newsletter we find ourselves muttering the words “stay positive”. However, it requires a substantial amount of optimism to think that the current stock and bond markets are reflective of our national landscape. Why are we so down? This current period of deleveraging from debt is sure to be with us for a while. This deleveraging will be followed by the required ‘after the fact’ congressional investigations into what went wrong which will then be followed by massive governmental regulation to make sure the financial system is safe. The current nationalization of public companies like Fannie Mae, AIG, and Citigroup appear to us as necessary tool in minimizing the meltdown. The trend of increasing government spending to the tune of 1 trillion dollar plus deficits (10% of GDP!) can not bode will for the markets or the marketplace. As we said before, we are experiencing a never seen before deleveraging of the American consumer while at the same time reaching epic levels of government debt. In effect, the consumer has handed Uncle Sam the debt. The problem is high fiscal deficits and higher outstanding debt leads to higher real interest rates and ultimately higher inflation. These are troubling trends for both the stock and bond markets. Throw in a little runaway entitlement spending and the costly new health care program of new insurance for 30 million people and you have a staggering 11.25 trillion dollar debt on its way to 20 trillion. This is not sustainable. So, what’s an investor to do? For starters, we will continue to stay away from long term bonds since inflation is highly likely. Real estate is always a good hedge for inflation so that is worth considering. We do not recommend large allocation changes in portfolios although, with the Dow hovering around 11,000, it is hard not to look at a little rebalancing. We may choose to take some profits off of the table in the upcoming quarter. We strongly believe that all investors should be investing in alternative investments. Alternative investments fall outside the range of stocks and bonds. Specifically, many banks and financial institutions are selling their “toxic assets’ at fire sale prices. These toxic assets take the form of REO’s (real estate owned) or even performing or non-performing loans on real estate. Many of you have already been contacted by us or may have already invested in this. In closing, we feel very fortunate to have avoided the malaise that has occurred over the past 36 months. Out strategy, while simplistic in nature, has always been to stay diversified and conservative. We will continue to search for investment vehicles that are easy to understand and protected with solid balance sheets or collateral. As always, we appreciate your feedback and would love to hear from you regarding your quarterly report.
We will continue to make your financial security our first priority. We appreciate your continued confidence and look forward to another prosperous year! Sincerely, Chris Reedy, CFP
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