2nd Quarter 2011 Commentary

Posted on Wednesday, July 27th, 2011

by James W. Heard, CFP®, President, Windham Brannon Financial Group, LLC

Unlike previous client e-letters, there’s no need to divide the discussion into investments, economics, and politics.  For the immediate future, it’s all the same.

As we suggested last quarter in our e-letter to you, the focus of Q2 2011 and beyond has been the debt ceiling negotiations.  So here we are, one week away, and still no deal.  The stakes are high, but no one knows how high, because the U.S. hasn’t been in this situation before.  We have no history to draw upon, and there’s no certainty that a last minute deal will be positive.  A deal which raises the debt ceiling but doesn’t effectively address the annual budget deficits could be worse than a technical default, followed by an agreement that better addresses the annual deficits.  To be clear, we may be some weeks or even months away from real solutions to our debt and deficit problems.  In summary, I’m not hopeful we’ll have a good debt solution in the next few days.  I’m very confident we’ll have one in time. Here’s why -

While a short-term “no deal” is not preferred, we don’t think it’s a formula for disasterIn fact, it could be the required catalyst for a solution.  How? – The markets stand ready to impose the necessary discipline if our politicians don’t.  Sometimes, the market discipline comes first before the voters and then the politicians “get religion.”  And because of that, we’re confident the hard choices will be made and the solutions will come sooner or later.  Here’s hoping it’s sooner (it could be solved by the time you read this), but it doesn’t have to be.

This begs the question – if we’re so sure that we won’t have real solutions in the near-term, then why should clients have market exposure at all? Here’s why selling long term investments doesn’t make sense – 1) we don’t have that level of clairvoyance, and 2) the risk of permanently missing a market move up is worse than the risk of participating in a temporary move down.  We know it’s frustrating to watch the sausage making, but for most of our clients, it’s our best counsel.

As for last quarter, markets held up amazingly well given the debt uncertainty.  Here are the mid-year numbers as of June 30th.

Q2 2011 Last 12 Months
90-Day US Treasury (T-Bills) 0.01% 0.12%
BarCap Interm US Govt/Cr (Bonds) 2.12% 3.77%
S&P 500 (US Large Cap) 0.10% 30.69%
Russell 2000 (US Small Cap) -1.61% 37.41%
MSCI EAFE (International) 1.56% 30.36%
DJ US REITS (Real Estate) 2.69% 33.44%

As we discussed in our recent article, we believe client portfolios are as well positioned as they can be given the short term uncertainty.  Like you, we continue to watch the events closely and will make strategy adjustments as necessary.

What’s New

How about some new digs?  After 20+ years at the same location, the Windham Brannon Companies are heading a few miles north to Buckhead and The 3630 Building near Phipps Plaza.  We’re excited about getting all the Windham Brannon folks in the same location and having you visit our new space soon.

Save the date of Thursday, October 27th for our next Client Summit at the Grand Hyatt Buckhead.  We will give you more information as we get closer to the event.

Best regards -

Jim

© 2011 Windham Brannon Financial Group, LLC. All rights reserved. Any use of information contained in this article, including reproduction, modification, distribution or republication, without the prior written consent of Windham Brannon Financial Group, LLC is strictly prohibited.

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