AUGUST 2009 NEWSLETTER

The Eye of the Storm

In a recent cover article, Newsweek magazine assures us that “The Recession is Over”. You can feel it as you go through your day. Everyone is a little bit more relaxed. Economic and business news is continually better.

For those “lucky” enough to have first-hand experience of a hurricane, you may have the same eerie feeling that I do. You walk outside after the storm has passed and you can see the sun and the blue sky. You start to pick up the debris and thank your lucky stars that the damage was not worse. Then you begin to notice it getting a little darker. The wind picks up a bit and before you know it, the stronger ,more dangerous back wall of the storm comes down with all its fury.

The Newsweek cover is a classic reverse indicator. The best example was the 1982 cover that declared the “Death of Equities” just as the greatest bull market in history began and proceeded to last for the next 25 years. It is our belief, and our research continues to support this belief, that we are in for more than a decade of economic and market declines, as well as dramatically increasing taxes.

My friend, Jim Lunney, gives a great summary of our position in his June Seven Signs Commentary. I recommend that you to go to his website (http://www.wealthstratgroup.com/) and read the entire newsletter. The overhang of debt and unfunded entitlements at the federal and state government level are as bad or even worse for individuals and businesses. Jim asks a good question: How does a California state employee spend an IOU issued in place of a paycheck?

Next reality check: Unemployment claims are decelerating but we still have over 10% of the population unemployed and that number is growing. What happens when the unemployment checks run out? Can you see even more credit defaults as even that little bit of cash flow dries up?

In an interview with CNN, Karen Weaver of Deutsche Bank estimates that home prices may fall an additional 14% before bottoming. As it stands, 27% of US homeowners are considered “underwater” with their mortgages. If this negative equity continues to build, they estimate that potentially 48% of all mortgagors could be facing default by 2011. (CNN, Scott Cendrowski – 8/12/2009)

I want you to know that we are preparing for an economic and investment market storm. Yes portfolio values have increased dramatically since March. Leading economic indicators are climbing steadily toward positive territory. However, in the long term there is no underlying support for the tremendous load that is to be carried by our government and businesses. The consumers’ historic 70% support of the US economy has turned to saving and paying down debt as they prepare for retirement. This shift in behavior is natural and we as a country are not prepared for the consequences. In my opinion, it is going to get very ugly for a long time. We must continue our plan to protect ourselves financially by owning stable investments and employing risk management techniques judiciously.

We will continue to keep you informed as we make these changes to protect the investments you use to support your lifestyle.

Regards,

Your Advisors at Dominion Wealth