OCTOBER 2009 NEWSLETTER

No News is Good News?

Here it is, late October, and there seems to have been no real developments in the economy or investment markets over the past month. Many have pointed to do the Dow breaking 10,000 as a significant development. While this is a nice “mental hurdle” to have overcome, would we go so far as to call it significant? Maybe we are just becoming accustomed to these strange times, and we look for signs of recovery wherever we can. Consider this, 100 US banks will go broke this year. It is only after witnessing the dramatic volatility of the past two years that we now take such news in stride.

Please review the two graphics attached. The first is a depiction of the emotional roller coaster human beings go through as market cycles evolve over time. Presently, I believe, the country is somewhere between Relief and Optimism. The next two phases in the cycle, Enthusiasm and Exhilaration, may come sooner than we think and are not necessarily good states of mind for long-term investors. There are structural reasons to be positive about the economy in the short-term. The long-term outlook, I believe, is still bleak. This leads to the second slide that shows the last 60 years of consumer and government spending. Notice that consumer spending trended at around 60% of US Gross Domestic Product (GDP) from the 1940’s to the early 1980’s. It then rose to around 72% over the next 25 years. Government spending has been around 20% for the entire 60 years shown. If we trend back towards 60% consumer spending as the Baby Boomers save money and pay down debt, will the government be able to make up the difference for the next 10-15 years? That would require an enormous amount of stimulus funded by either increased taxes or printed money!

You are by now quite familiar with how Dominion Wealth has developed our cautious outlook for the next ten years or so. There are always opportunities to make money and grow portfolios while taking steps to protect your investments. We must take into account that “Buy and Hope” is not the only investment strategy available to us. Our goal is, and will remain, growing and protecting your money.

For now, we are continuing to monitor the leading economic indicators and things appear to be looking up for the economy into 2010. The invest markets obviously feel the same way. The indexes are up 10-20% for the year-to-date, and 40-60% since the lows on March 9th. Some indexes in the emerging markets are up over 100% since that time, and we are taking that as a sign of a speculative bubble and will be reducing exposure to this sector gradually. This is an example of how we intend to protect your investments and not take the full ride on the emotional rollercoaster.

I commend you to review the Schwab Market Snapshot from December 2008. Liz Ann Sonders’ presentation “Good Tidings or a Lump of Coal” continues to be a great piece of research. I can still find the video via Google by typing in the above description and following the link to the Schwab website.

We look forward to discussing this piece, along with all of your planning endeavors, in the near future.

Your Advisors at Dominion Wealth