June 2010

Kreitler Financial:

We have a new name, "Kreitler Financial". The name should make it easier for people to know what we do. Charlie, Financial Advisor, and the rest of the staff spear headed the re-branding. Please check out our new website with its up-to-date look and more useful information. What has not changed is our culture or philosophy that clients come first; we treat clients like family; our emphasis on protecting assets in these turbulent times; and our elite level of service. Here's to the next 25 years of working with you.

The World:

You must be getting numb from the constant global events. Not in the headlines, there really are positive things happening. The economy really looks like it is improving. Major corporations have weathered the "Great Recession" very well. They have large cash reserves, are looking at expanding and many will likely increase dividend. The Federal Reserve is holding interest extraordinarily low and this tends to be positive for stocks and the economy. Lastly, most of our clients have weathered the "Great Recession" and their long term plans remain in tact.

Now to the headlines. While it was the US's turn in 2008 to upset the world financial markets, it is Europe's time now. In both cases, problems in the debt markets triggered the crisis. In the US it was a bubble in housing. In Europe the small country of Greece was living beyond its means and accumulated debt too large to service. (It is one thing to pay the interest at 2%, but if lenders demand 5, 10 or even 25%, servicing a large debt load can bring any country to its knees.) In the US the government stepped in during the 2008 crisis to prevent AIG, and then a multitude of companies, from going bankrupt. In Europe, multiple governments stepped in to not only prevent a Greek default, but to head off defaults in other countries, nicknamed the PIIGS (Portugal, Italy, Ireland, Greece, and Spain).

Traditionally when a country gets into trouble, it defaults on its debt or devalues its currency as a way to clean the slate so it can move forward. Being a member of the European Union prevented Greece from doing either and thus a small country problem became a problem for all of Europe.

We are in the camp that believes guaranteeing the Greek debt does not resolve the problem because the country is spending too much. The debt guarantees just push the problem into the future. Additionally, the austerity requirements for getting their financial houses in order could leave some of the European countries in a recession for years to come. Stay tuned; this story is not over.

In the US when you look at states and municipalities, what we find troubling is there seems to be a parallel to the Greek problem. Like Greece, states and towns can not devalue their currency (the US dollar) and at least at the state level they have limited ability to default on debt. We are concerned this "California problem" may be more wide spread than commonly recognized. The unfunded liabilities for government retirees and current employees are troubling to us and probably many of you. We doubt state revenues can grow enough to offset this liability and question voters and taxpayers' willingness to work to age 70 so state employees can retire at age 55 with 80% of income. The federal assumption of these debts, a possible fix, would have huge national implications, but at least the federal government has the (unpleasant) options of devaluing the dollar and monetize the debt (printing money which leads to inflation). The adjustment this would cause would be painful. The federal government also must deal with unfunded Social Security and Medicare costs, as well as new health care obligations.

The Markets:

Global events keep being thrown at us at warp speed and the investors like us around the world remain very unsettled. Because of the European crisis, the US stock markets are off sharply and have given up all of this year's gains. The Euro has been weak causing US investors larger losses on declining European stocks when measured in US dollars. Gold has been very volatile, initially being very strong but just in the last week losing much of this year's gains. Emerging markets have dropped, responding to China tightening to slow down its very rapid growth rate.

This sounds worse than it is. In the US stocks have lost about 10 percent, which some are now calling a "correction." Of course from the March 2009 low to March 31, 2010 US stocks had extraordinary gains and were up over 75% as measured by the S&P 500. Most bonds, after large gains last year, have provided steady gains since January 1 and have significantly reduced the volatility of many portfolios.

Our Investment Approach:

How do we invest in this crazy world? Over a year ago we introduced what we are calling "Multi Scenario Investing". It is based on the premise that the world is more uncertain than we have seen before. We believe the unusual rate of global change will continue and that we really don't know what the future will bring. Multi Scenario Investing is diversification, but with a different focus. We try to identify various economic outcomes that could occur and then design a portfolio around them. We look at good outcomes as well as bad. We recognize that for many investors losing money is much more painful than the benefits from gains. Therefore, many investors have a conservative bias. The range of possible scenarios we are looking at is particularly broad and include global political power shifts, economic expansion, recession, deflation, and loss of faith in governments. Our small investment in gold is one of the best examples of how multi-scenario investing works. With gold and gold companies we are trying to hedge the possible loss in faith in currencies. This is not an outcome we want or an area where we want to make money, but gold investments have done very well over the last year. Gold can be very volatile, but with today's uncertainties we see potential risks in every investment. There is, of course, no guarantee that Multi-Scenario Investing will work.

One way to look at how we are structuring portfolios is to think of them as a barbell. We have risky investments and conservative investments. They are concentrated on either end of the barbell. Generally, our client's portfolios have fewer risky investments, primarily stocks, than we had several years ago. However, the stocks tend to have larger concentrations in higher risk areas such as emerging markets as we seek potentially higher returns. We have maintained larger allocations to bonds, which over the last year have done very well. Because of the events in Europe and questions about unwinding US government debt commitments in the US, we are actively looking at ways to reduce bond allocations without increasing stocks. We don't want too much of even a conservative investment, such as bonds.

More at Kreitler Financial:

We have created a lending library. Books are categorized by basic investing, working with kids, and advanced investment books. We also have a shelf for books, in a variety of genres, authored by our very talented clients. Autographed contributions are welcomed... Charlie and his family were featured in the New Haven Magazine in an article on his recent renovation... It looks like an exceptional honey production year for the bees. However, past performance does not indicate future performance.

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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