Newsletters

First, a belated Happy Fathers Day to all whom it applies. In our often fragmented society, fathers play a vital role in the raising of their children and sometimes other children than their own. I hope you enjoyed your day with your children or dad.

One of the gifts which I received was in that perfect category. It was a shirt with a picture of a bicycle, oar and hiking boots (two of my favorite activities) and below the picture was the caption Diversified Portfolio. Wow, what a segue into what I was going to talk about in this newsletter. Namely, the importance of continued diversification in ones portfolio as it appears the bull run from March, 2009 levels is at least at a pause. Also, ask the many folks in the United Kingdom about their next pension checks as much of their retirement was invested in BP, which has lost more than 40% of its market value and just announced at least a suspension of the dividend for the remainder of 2010.

So, as the oil continues to leak and Gulf Coast residents anger and frustration increases, it occurred to me that much time is spent on negotiating deals to drill, and the drilling itself, but, due to the complexity of the drilling itself, when something like this disaster happens, everyone seems light in the repair/stop department. Perhaps this type of problem was never envisioned, or if it was, decisions were made that the remedy might be too costly. Well, the last number I saw before writing this was about $2B for cleanup and repair. I have even seen reports that oil is still visible in certain Alaska coves from the Valdez spill and we have already eclipsed that volume of spill.

What other affects might this spill have on an average portfolio? Let me list just a few which might or might not be on investors minds:

Economic impact (vs. Katrina) in the Gulf region, then nationwide;

Impact on profits in energy companies if new drilling moratorium continues;

Potential for greater economic impact if large tropical storm or hurricane develops;

Higher gasoline prices domestically if moratorium continues;

Survival or damage to BP as an ongoing company;

Whether political winds will blow, increasing the likelihood of Cap and Trade bill

None of these issues would be positive on portfolios. However, as with every disaster, once the damage is done and we can begin focusing on rebuilding, cleanup and growth again, opportunities will exist. In the meantime, we have some other issues going on in the world which need to be raised, so as we celebrate the first day of summer, and the approaching mid-year point, I would like to remind clients and others of the challenges above and beyond the oil spill that we face as investors this summer.

Interest rates, still hovering at record lows will most likely remain there for the remainder of 2010. I believe its possible for them to drift slightly lower and stay in this range even into 2011. This is great news for borrowers (those who can get approved) and bad news for investors. I continue to warm clients that now is not the time to take extra risk in order to boost yield in their portfolios. We continue to favor short term bonds of decent quality and I pay strict attention to the entity or municipalitys underlying rating. Much has been recently reported about the coming demise of the municipal market. Whereas, I dont see that happening, there will be some municipalities who get in trouble and some will default. Just read your local newspaper (I think some of you still do this!!) or listen to the local news and you will hear how low the revenues are in your area. This is indeed, something to watch.

Our housing market, while showing some signs of a pulse, continues to struggle. Part of the problem is getting rid of these foreclosure and short sale transactions which take so long and drop the prices in the market. I do not see this industry really gaining traction until perhaps 2011. As I noted in the previous paragraph, the interest rates are still very low, but banks are hesitant to lend and when they do, there are numerous regulations on which they can hang their hat when they say no.

Unemployment saw a drop last month, but once you sorted out the temporary census jobs, our economy only produced 30,000 jobs, about 370,000 less than is needed on a monthly basis to move the economy forward in a meaningful way. Look for the unemployment rate to stay right around 10% during the summer. This is not the prescription for a recovery.

Pending legislation in Congress could lead to more spending, higher deficits and higher income tax rates. As it stands, the much maligned Bush tax cuts expire at the end of this year invariably leading to higher income tax rates in 2011. This would also work to derail any recovery which is underway.

With all that pleasantness, I continue to be optimistic about our long term prospects, but somewhat worried over the short term. The November mid-term elections will be very important. Wall Street loves gridlock so that no major legislation can be passed, but rather incremental changes can be affected. That is not a prediction for these elections, but perhaps an introduction to some changes which might come our way if there truly is a shakeup in Washington.

One final thought as I post this. We are just learning of the death of Senator Robert Byrd from West Virginia. We will follow events closely this week to see if his passing affects the passage of a financial reform bill, which was agreed to in principal last week. Its passing might now be in jeopardy.