January 2011

Kreitler Financial:

Happy New Year!

While 2010 was not as wild as 2009 or 2008, there was a lot going on and it kept all of us very busy. As we discuss later, it was a good year for our clients.

Our global perspective:

It appears that the aggressive actions by governments around the world prevented "The Great Recession" from turning into a depression, and we even avoided a double dip recession. The government actions were truly and still are experimental. Although we continue to be cautiously optimistic that we have been through the worst, we need to recognize we are still in unchartered waters and it could be several years before things settle down. We could still have unpleasant surprises that upset the global markets as we move to a new balance for the world that will be different from where we came from.

Our thinking continues to be global, even though most of our clients are US based. In this regard it is helpful to view the world as split into the emerging markets, where the economies are expanding at 8% or greater, and the developed world, where the economies are expanding at a slow 2 to 3%. 1 Governments in the emerging markets are trying to cool their economies, while governments in the developed countries are trying to spur theirs. The disparity in growth rates leads to global strains. For example, some countries could put in place trade restrictions as they try to protect their economies from what is happening elsewhere. All of this could lead to unpleasant surprises to investors.

In the US we see gradual improvement. Washington's willingness to work together and extend the tax rates is helping to improve sentiment in many areas. Businesses are flush with cash, have good earnings and hopefully will start making capital expenditures and slowly begin to rehire. It looks like the Federal Reserve will continue to maintain an easy money policy, which historically is good for stock investors. Lastly, the fact that we have stopped going down removes some of the pessimism.

One of the biggest risks we see is in Europe. Several experts have argued for some time the European model of multiple countries using a single currency, yet with each government controlling its own fiscal policies is not sustainable. What is missing is that each European country can not escape from its debt problems (having spent and promised too much) through traditional means of default or currency devaluations. 2011 may be the year we finally see how Europe resolves this dilemma. We don't know what the resolution will be. Many are beginning to expect that something will happen, and therefore, when it does, the outcome may not surprise the markets.

States such as California, Illinois and Connecticut, with huge unfunded liabilities, face problems similar to Europe's. They too are locked into a single currency, in this case the US dollar. We worry that states and municipalities have not factored liabilities for current and future retirees into their budget forecasts. Shortfalls could be so large that it is not possible for the states to grow their economies enough or increase taxes enough to resolve their problems. Like Europe they cannot print money or devalue their currency. Although unusual, states could default on their obligations (bonds or promises to retirees). They have the option of seeking support from the Federal Government which is a tough sell under the new Washington climate. Chairman Bernanke recently said the Federal Reserve does not have the authority to bail out the states. How this plays out may be another factor affecting investors this year.

The Investment World:

Notwithstanding the continued turmoil around the world, most clients should be pleased with last year's performance. Some of their portfolios have started to reach new highs.

Last year there was a wide variation in performance from one asset class to another. Risky assets did well. U.S. small company stocks, emerging markets and gold had large gains. US stocks had a year-end rally that made their final returns very respectable. The real estate investment vehicle we frequently use also had a positive performance. Bonds did well for roughly the first nine months and then weakened with the threat of increased interest rates and inflation. Municipal bonds were particularly hard hit toward the end of the year with worries of potential defaults. They also suffered with the potential of states and municipalities needing to sell more tax free bonds as Congress did not extend the Build America Bonds program. The expired authorization had permitted states and municipalities to raise money by selling federal government subsidized bonds to pension funds.

Throughout the year we continued to recommend adjusting portfolios as we saw events unfold around the world. Much of what we did was defensive. We suggested reducing exposure to traditional bonds (while keeping foreign bonds, TIPs and higher yielding bonds) and returning to real estate.

Going into 2011, for the more aggressive clients that have large positions in gold and emerging markets, we are suggesting taking some profits and cutting back exposure in these areas. On the positive side, we are cautiously optimistic on stocks in the United States because of an easy Fed policy, good corporate cash flow and earnings, and that we seem to be in the beginning of an economic expansion. All these historically have helped stocks.

We expect the 30-year trend of dropping interest rates that gave us a thirty-year bull market in bonds to be over. Higher interest rates temporally depress bond prices as the bond market adjusts to the higher rates. Investors have gotten accustomed to excellent bond returns while we have been in a 30-year bull bond market. With short term interest rates close to zero, the next several years are not likely to be able to repeat this. Bonds still will serve a major role in portfolios as they provide income and stability, but we need to adjust our expectations for them.

Happenings at Kreitler Financial:

One of the big stories for us in 2010 was our rebranding when we changed our name to Kreitler Financial. In May, many friends and clients helped us celebrate our new name, as well as Bob's 25 years of being in the business. My, how time flies when you are having fun.

In 2010 we had two great additions to our staff. Jake Ness joined us an Associate Financial Planner. He formerly was an advisor with Edward Jones. He comes from Minnesota. Amy Alfano joined as Office Manager and "Director of First Impressions." Amy is local and comes from Milford. We are excited about our two great additions with their focus on taking care of clients.

Our monthly luncheons with clients and friends continue to be popular. We alternate between Mory's and The Graduate Club. The January lunch is fully booked. February will be February 24th at The Graduate Club. Please sign up early to reserve space.

We are looking forward to 2011, whatever it may bring. We have wonderful clients and friends, and we are honored to be able to work with you.

1 As reported by GaveKal Research.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Robert Kreitler and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Diversification does not assure a profit or protect against a loss. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. Individuals cannot invest directly in any index. Precious metals including gold, are subject to special risks, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. International investing involves additional risks such as currency fluctuations, differing financial and accounting standards, and possible political and economic instability. Also, investing in emerging markets can be riskier than investing in well-established foreign markets. There is no assurance any of the trends mentioned will continue in the future. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal. Dividends are not guaranteed and must be authorized by the company's board of directors.
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