ECONOMIC CONDITIONS & CONCERNS IMPACTING THE MARKETS

September 2, 2010

As you look at current economic conditions, remember that economic conditions and the markets are two very different things and, because the market is a leading indicator, they are not going to necessarily run in lockstep with each other.  That said, there are multiple economic conditions impacting the markets that can give us some clues as we move forward for how far into working through our economic issues we really are.

• Jobs continue to be the primary concern in our current economic cycle.  It is really the key from which so many other economic factors either get better or worse.  With about 65-70% of our GDP coming from the consumer, it is very important that jobs begin to be created in our economy to get it moving again and this simply does not appear to be happening and I suspect that job growth, like many other areas, will be much slower to come around as we work through this recession than in past recessions because of the de-leveraging cycle we are currently in.

• Housing too is simply anemic with home sales mostly faltering outside of governmental programs.  The main issue with real estate prices is excess inventory.  As long as the market continues to be flooded with additional inventory via foreclosures and short sales, prices simply cannot move up.  This too, will take some time to work itself out and, although not pleasant, is necessary.  We have yet another very large wave of mortgage resets coming in mid 2011 whereby interest rates will be raised on borrowers, many of whom are already struggling to make their payments, pouring even more inventory into an already saturated market.  I am not expecting housing prices to move up in any significant way until well into 2012.

• GDP growth, like jobs, continues to be an issue and, in my opinion, will continue to be sluggish.  Again, it goes back to this de-leveraging cycle we are in and de-leveraging cycles are typically multi-year events.  As long as people are unemployed and/or worried about becoming unemployed, spending will simply not occur.  Add to that the fact that Americans are heavily in debt after years of spending borrowed money and attempting to payoff debt versus spending and you can see the affect of that on GDP growth.  For many years in this country, we have had a savings rate that was at or below zero and are currently running around a 6% savings rate.  If people are now saving and not spending, it obviously will impact growth which will, in turn, impact jobs so around and around we go!

• Government spending has also become a drag on the markets as the concern continues to build that we are reaching unsustainable levels of debt in our country.  In light of these concerns, people tend to "hunker down" even further.

• Tight credit conditions further impact our economy especially given that a majority of jobs are created by small and medium size businesses which are having difficulty gaining access to credit still following the credit crisis.  The pendulum has definitely swung back from the criteria for a long period of time basically being that you could fog a mirror, so to speak, to the need to pledge not only your first born, but your second as well if you are able to secure credit at all.  If you doubt that, refinance your mortgage, but get ready to provide a ream of paperwork plus some even if you have significant equity in your home and an excellent credit score.  I recently read an article that, in addition to the myriad of the typical tax returns, credit reports and bank statements typically required to obtain a mortgage loan, one lender was requiring a written report on why you love the house and what prompted you to buy it!  Certainly there is some middle ground between the two extremes and until we get there, it will be slow going.

• Regulatory uncertainty is another area like tight credit conditions that is slowing down job creation.  So many new "programs" have been added recently with many more still in process which gives rise to the wait and see attitude from businesses toward adding additional employees.  Business owners don't want to go out on a limb right now when they are uncertain as to what the changes will mean to them and how it will impact them financially, so they wait for clarity which is sometimes long in coming.

So where does all this lead us?  I believe that the de-leveraging cycle will play itself out in time, but it will take some time and, in the end, American's personal balance sheets will be the better for it even though the process is, indeed, painful.

From an investment perspective, I think it is wise to "keep some powder dry" in the form of cash in this type of market, have a strong and disciplined downside strategy and the ability to produce income via dividends and interest from investments will be important with an eye toward the fact that there looms in the future the prospect of rising interest rates that can greatly impact fixed income investments.

Lastly, I would say kiss your spouse, hug your children and enjoy life with a mind toward those things in this world that are truly important!

Leigha

The above commentary contains opinions and analysis that are provided by the author for informational purposes only and should not be used as the primary basis for investment decisions.