Don't forget to take your Required Minimum Distributions (RMD) if you are over 70 ½ or have an inherited IRA. The penalty for missed RMD's is 50% of the amount that should have been withdrawn. Certainly one of the stiffest penalties in the IRS' arsenal!

Normally the deadline for RMDs is 12/31 for the given year however the 31^st of December falls on a Saturday this year which means that the practical deadline is 12/30. Often when an IRS deadline falls on a weekend, the effective deadline is pushed to the following business day. For example, the IRA recharacterization deadline is October 15^th of the year following the year of contribution/conversion however this year it was effective for October 17^th because the 15^th was a Saturday. For RMDs, this is a different issue because the following business day will be in 2012! To avoid any complications, be sure to take your RMD on or before 12/30/2011.

This also applies to other distributions such as 72(t) aka Series of Substantially Equal Periodic Payments (SOSEPP). If the distribution is on the last date of the month/year, and defaults to the next business day, your SOSEPP could be in violation of the modification rules resulting in the 10% early distribution penalty being applied retroactively to the beginning of the SOSEPP. Be sure to contact your custodian if this applies to you to take steps to remain in compliance with these rules.

If you have multiple IRAs and/or 401k, 403b, etc., the RMD rules get a bit complicated. Go to http://bit.ly/R_M_D for general guidelines on RMDs. For more information on how to properly calculate your RMD and to understand the RMD account aggregation rules, contact me directly; don't rely on your custodian to do it for you, always verify on your own.

If you do not need your RMD and you are charitably inclined, you may qualify to transfer up to $100,000 from your IRA to a qualified charity to satisfy your RMD under the Qualified Charitable Distribution rules that will expire at the end of this year. This allows you to transfer the funds directly to the charity without realizing the income while satisfying the RMD. While there is no charitable tax deduction, not having to realize the income has a greater impact than realizing the income and then getting a deduction.

On Wednesday 11/16/2011, Jeremy E. Portnoff, CFP^® was awarded the Certified Income Specialist^™ (CIS^™) designation offered by the Institute of Business & Finance (IBF). The CIS^™ program is a nationally recognized retirement designation focusing on fixed-income instruments, retirement and financial planning, taxes, Social Security, withdrawal plans, stretch IRAs, and reverse mortgages.

CIS^™ certification requires mastery of Medicare, income taxes, fixing any income shortfall, home health care, reverse mortgages, surviving a bear market, plus accumulation and distribution concerns. According to IBF, "Members of the financial services community are taught how to help their clients accumulate assets. What has always been missing is comprehensive and unbiased information as to how to turn assets into reliable income. The CIS^™ program addresses these issues and provides the answers.”

The student must pass three comprehensive exams, complete a written case study as well as adhere to the IBF Code of Ethics and IBF Standards of Practice as well as fulfill annual continuing education requirements. The CIS^™ designation is designed for advisors who have clients that are seeking current income.

ABOUT THE INSTITUTE OF BUSINESS & FINANCE – Founded in 1988, IBF is a non-profit provider of financial education and designations to members of the financial services industry. IBF is the fourth oldest provider of financial certification marks in the United States. In 1988, IBF launched its first certification program, CFS^® (Certified Fund Specialist^®). Today IBF offers four additional financial designation programs: CAS^® (Certified Annuity Specialist^®), CES^™ (Certified Estate and Trust Specialist^™), CIS^™ (Certified Income Specialist^™) and CTS^™ (Certified Tax Specialist^™).

For additional information on how to develop retirement income, contact Jeremy E. Portnoff at 877-226-3115.

The recent extreme market volatility has seen the S&P 500 price drop about 18% from its peak in late April to current. This decline was expected given the extreme bearish reading in early April on the "Smart Money” Indicator which measures bullish/bearishness of the largest traders and institutions that tend to drive the markets. As I warned publicly on June 12^th when the "Smart Money” goes to extremes, the market tends to follow a few months later. So when the "Smart Money” rapidly shifted from bullish to extreme bearish in early April, this recent quick and severe decline occurred three months later; right on schedule.

During the third week of July, Toews Corporation, one of the Portfolio Strategists I recommend began to exit 2/3^rd of their Developed International positions and moved to cash with the final 1/3^rd on August 1st. On August 2^nd Toews moved the first 1/3^rd of US Stocks to cash and was 100% cash on August 4^th. As of August 8^th, Toews was 100% cash in Developed International Stocks, US Stocks, High Yield Bonds, and Emerging Market Stocks were 2/3^rds cash. As of August 10^th, all Toews portfolios were 100% cash.

Toews Corporation strategy is a purely price reactive model designed to exit asset classes in the preliminary phases of declines. This system has provided a reliable means of getting out of the way of catastrophic market declines. Toews is one of the few firms that have successfully avoided a majority of declines during both the 2000-2002 and 2007-2009 market crashes, while capturing more than 85% of rising markets since it began in 1996. With this recent downturn, they have avoided a good portion of it and should the markets decline further, they will remain in cash until the market begins to move back up again at which time they will begin to re-enter according to their model.

Since 2000 we have clearly been in a secular (long-term) bear market. The previous two secular bear markets occurred in 1929-1942 (http://bit.ly/1929-1942) and 1966-1982 (http://bit.ly/1966-1982). These market cycles usually last around 12-19 years depending upon the cause of the contraction. During times like these, robust risk management strategies such as Toews would tend to avoid the majority of the declines while capturing a majority of the rallies. In other words, Toews is likely to outperform traditional strategies with less risk/volatility during these types of markets.

For more information on the Toews Corporation strategy, click on the following link to watch a brief video: http://bit.ly/ToewsCorp. Contact me directly to discuss how to properly incorporate the Toews Strategy into your overall investment strategy and to review Toews Corporation's GIPS compliant performance results.

Our economy created 117,000 jobs in July however this is within the 129,000 statistical confidence interval which means that the jobs that were "created” are indistinguishable from a decline. Still we have no meaningful and statistically significant increase in jobs creation. Meanwhile the unemployment rate dropped to 9.1% which is simply reflecting additional people not being counted because they have given up looking for work which is indicated by workforce participation rate falling from 64.1% to 63.9%; the lowest level since 1984. Even if the jobs number were accurate, it is not enough jobs to keep up with current labor force growth let along decrease unemployment. Expect jobs numbers to continue to be weak. As the economy weakens further, we will likely see the unemployment rate increase.

The US debt rating was downgraded from AAA, the highest by S&P to AA+ the next level down. This doesn't come as much of a surprise considering the state of our country's finances including massive deficits and debt. There is no doubt that the US will be able to pay back its debt; the issue centers more on our willingness to pay (politicians arguing over the debt ceiling) and the likelihood that US Debt is paid back in less valuable Dollars due to weakening of the Dollar through printing. The credibility of the major ratings agencies is being called into question because they were all part of missing the credit crisis in 2008 and were part of the problem in putting "AAA” status to junk mortgage derivatives.

In the wake of this downgrade, the markets have continued to slide rapidly however interestingly enough, Treasury bond rates did not rise which would typically be expected under a downgrade situation. Since the other two major rating agencies have not downgraded US debt this may be why Treasuries yields have not spiked (prices going down) or it could simply be the markets are work reaffirming their faith in the US Government to pay its bills. Ratings agencies and analysts do not set prices; markets do.

The US Dollar has maintained value relative to the S&P 500 and Gold has shot to new highs. I would caution current holders of Gold as well as would be Gold investors that prices will not go up forever and while Gold is considered a safe haven, it can drop faster than it has risen which is what we saw in the 2008 crisis. Those who have profited from Gold should consider significantly reducing exposure to Gold. Those who are considering purchasing should probably avoid doing so as risk is very high.

The selling that is occurring in the market now is mostly fear based on the recent downgrade of US debt and the continued and intensifying crisis in Europe. Investors are selling their mutual funds indiscriminately which causes the funds themselves to be forces to sell good assets to meet redemptions which is what we saw in the 2008 meltdown. This is a good reason not to buy Gold; as funds/institutions/hedge funds have to sell good assets such as Gold holdings just to meet redemptions causes the prices of those good holdings to drop. This is a negative feedback cycle which continues until some good news comes out. There is no doubt, as I have been stating for some time now, that I believe the markets are have been artificially inflated and should come down, however I would not expect this kind of meltdown so quickly. Usually the beginnings of a decline are more moderate and then begin to accelerate as the slide progresses. The trend will likely be down however I'm sure we'll see plenty of large bounces following declines. It's going to be a bumpy ride, so hold on; we'll get through this.

Recently, Dan Gross, economist for Yahoo Daily ticker made a remark about housing and demographics. He referred to a "impending housing boom simply as a matter of demographics” under the assumption that a number of homes are demolished each year, people have babies, people get older, young people form their own families and as this occurs it will lead to a shortage in housing down the line. I was quite surprised to hear an economist talk about demographics because it is rare. Economists tend to extrapolate current figures into the future as well as being overly optimistic instead of using tools such as demographics to attempt to look around the corner. While it is true that there is a demographic wave of young people who are beginning to form their own households, there is still way too much housing supply and it will take years to use up the excess supply until we see supply pressure that would drive prices up. To watch the video, click on http://tinyurl.com/3hnapqd.

Many market Pundits and economists alike seem think it is uncertainty that is preventing businesses from growing/hiring. Business is always uncertain. Taxes are always uncertain. A business never knows when the next downturn is lurking around the corner. I think the reason that businesses are not growing and hiring is lack of demand for their products and services. Then I hear some of these same pundits discuss how to create demand. While demand can be created to some small degree at the margins, aggregate demand is more a function of total available income to spend. A new and better product can come out that entices people to buy it, but that only means those consumers will spend less on something else. Incomes have not rise in over the last 10 years and the baby boomers are passing their peak spending years.

We will not be able to all of a sudden get a generation to start spending more money when they are focusing on paying down debt and saving for retirement after their children leave the nest. It is a natural process that will just take time to come back. The good news is that it will come back and come back strong unlike many other demographically plagued countries in the world.

Meanwhile with the recent rash of sour economic news, the discussion of QE3 (Quantitative Easing) has been increasing. While The Fed may be force to do some type of QE3, more stimulus will be less effective than the previous due to law of diminishing returns. It is powerful at first, but each round has less and less effect. We are better off in the long run to deal with the pain of contraction so that we can emerge healthier sooner rather than continually stimulating which has less effect anyways yet will weigh us down with the excess debt in the future.

Fed stimulus has not led to economic recovery, rather it has cause asset inflation which was certainly part of their plan; re-inflate the housing market and stock market in hopes people would spend again. The stimulus did not re-inflate the housing market however it did re-inflate the financial markets to a large degree. What happens if the markets tank again? Then we would have stimulated for nothing. Simply piled on more debt, lowered the value of the Dollar, and received nothing for it. Perhaps the economy would have been worse off without this stimulus, but we will never know.

I also find it laughable when economist and other market pundits say that the chances of recession are unlikely. How can anyone say that a recession is unlikely? The recent GDP numbers are a hairsbreadth away from tipping into contraction. In fact it is very possible we are already in recession and we just don't know it yet because it takes about 6 months or so for the official call that we're in recession to come out.

President Obama recently stated that he thinks it will take a year to 18 months before the housing market picks up; convenient that this time frame is right around his re-election. Also along these lines, The Fed has indicated intent to leave rates at this level until mid 2013. This is also convenient in that it would be after the election.

On a positive note, Jobless claims fell below $400,000 for the first time since April. Although this is a small positive signal in a sea of negative data. It is important to remain cautious and not get caught up in fear and bubbles.

Some analysts/economists opine that government spending cuts will tip the economy back into recession. I couldn't agree more but not for the same reason. Without the massive stimulus, our economy would have tipped back into recession over a year ago and while it would have been due to spending cuts, those spending cuts would not have been government spending cuts rather consumer spending cuts. This is the trend going forward, make no mistake, that consumer will be spending less because the largest generation, the Baby Boomers, have reached their peak in spending and are now finally beginning to focus on saving for retirement and paying down debt.

This is a natural process when children begin to leave the nest. You just don't need to buy as much stuff as you did before and the stuff you do buy tends to be more cash as opposed to leveraged purchases using credit. Think about the products and services we tend to buy and don't buy at different ages and stages of life. It is common sense that what we want and what we buy changes over time. When we're young we spend a lot of money on clothing yet as we get older, keeping up with fashions tends to be less important especially as we enter retirement. When we're young our medical expenses are lower and as we age, medical expenses get more expensive. When we're in our early 30's and beginning to start a family we need a house. As the family grows, we may need a bigger house which is why the people tend to buy their trade up home on average around age 37-42. Just the same when the kids leave the nest, we don't need that big home anymore and opt to downsize in favor of a home that is more management and lower cost to maintain. There are many examples, just look at the people you know, friends and family that are at various stages of their life to see what their financial priorities are.

If you look at various studies on how prepared Americans are for retirement you would be surprised. According to the Retirement Confidence Survey by the Employee Benefits Research Institute, 56% of workers have less than 25,000 saved for retirement. According to the U.S. Federal Reserve's Survey of Consumer Finance from 2007 which is that latest available, the median value of financial assets held by Americans age 45 to 54 was about $42,000. Americans ages 55 to 64 aren't much better off at $85,700. No wonder that when the kids finally leave the nest, we focus on saving for retirement because we are way behind!

It is this very cycle that causes aggregate consumer spending to decline when generations peak on a 46-50 lag. The Baby Boomer generation peaked in their spending around 2007 and we are finally beginning to feel the effects of the slow moving demographic shift. What the Government via The Fed is attempting to do is to get Baby Boomers to spend more and borrow more and guess what? It just doesn't work. These people don't want to spend and borrow more and the generations behind them (Gen-X, Echo Boomers) are not large enough to replace them just yet; that will happen in about 10-13 years. No amount of stimulus is going to get people to spend and we've seen the results so clearly in a slowing economy despite the largest stimulus we've seen.

Debt is like a drug for our economy; it makes you feel good at first but then you need to take more and more just to get the same high and eventually if you take too much it kills you. This is where we are at as an economy; we need to get off the debt drug. In order to do so we will have to go through debt detox. Detox is painful and unpleasant however once clean of the drug; we can re-emerge stronger and able to grow again. So, will cuts in government spending tip us into recession? I think the answer is yes, but we're going there anyways so why not go there with less debt burden, get this thing over with already so we can detox and move on to more prosperous times.

The criticism of austerity is aimed at countries such as the UK which implemented austerity and now their economy is slowing. Of Course it's going to slow when you cut back! But that is what they need long-term to get healthy again.

Many argue that if we hadn't done stimulus, we would have had a depression, unemployment would be worse, etc. My counter to that is that I agree that unemployment would have likely gone higher and we would likely have seen a depression however those effects would also have likely happened faster and put us on a path to recovery sooner. The stimulus has the effect of stretching out the pain longer.

Also from all the commentary I watch and read, there are many arguments why we have slow growth. No one seems to talk about how demographics affect the economy, NO ONE! Demographics is a huge driver, perhaps a primary driver of economic growth because without people, you don't have consumption and without consumption you don't get economic growth. This issue seems simple to me; when you have less people consuming, you will have recessions and varying degrees of economic contraction. The contraction is a function of how the demographics change over long periods.

If we look at the economic growth that began in the early 80's, many argue that it was because Ronald Regan lowered taxes and eliminated regulation creating a pro-business environment among other possibilities. Do I think that these policies had a positive effect on the economy? Well yes I do, however this period of growth continued and accelerated under Clinton who raised taxes.

If we consider demographics, the earliest of the Baby Boomer generation began to reach their peak spending phase right at the beginning of the 80's. Up until now, there have essentially been more people reaching this peak spending stage of like than the previous year which is in other words a strong consumption trend. This did not occur because people just one day decided to spend more money; it is a natural stage of life that occurs after which consumption begins to decline. At this stage of life when the kids leave the house (for those who have children), people begin to focus on paying down debts, spending less and saving for retirement. Also they just don't have the same consumption needs as they did when they were raising a family. There is only so much stuff you can buy for your house.

What we have to consider is that the population and more specifically those who reach their peak spending years, is not flat; it fluctuates with the rise and fall of birthrates. As the birth rate rises and falls, you will have a corresponding rise in fall of those reaching their peak spending years. So going back to my point about the growth that began in the 80's, the demographic trend of peak spenders correlated nearly perfectly. Also it happens to be that this demographic trend is peaking and beginning to decline just as the economy is seeing sluggish growth despite massive Government stimulus. Coincidence? I think not. Demographics is a force you simply cannot fight by dropping money from Helicopters. There are underlying forces at work that the Fed and the Government either don't understand or don't want to admit they have no control over.

We have seen the same or at least similar events occur in Japan over the last twenty years. Their economy peak in 1990 and they have been struggling every since. They have implemented stimulus after stimulus. Each stimulus the economy improves short term and then just goes right back to contraction and deflation. If we look at demographics of Japan, we see a Baby Boom not unlike ours along with a sharp decline in demographics which has really never recovered to the same heights. Japan is an excellent case study to show that government stimulus just does not work and that perhaps we should look at other drivers of the economy such as the people in it and their consumption.

To steal a quote from James Carville, Bill Clinton's campaign strategist, who said, "It's the economy stupid;” I say to all the economists and political pundits who argue about how tax policy, regulation, and everything else they say is causing sluggish growth, "It's demographics Stupid!”

The States are in financial trouble; there is no doubt about this fact. Tax revenues of all types for the most part are down, so States look for ways to increase revenue to make their bills. One issue that has been plaguing states for years are lost tax revenue on online sales. Goods are often cheaper to purchase online because there is often no sales tax to pay.

As the law is now, when you purchase something online, you are supposed to remit the applicable sales tax to your State's tax authority. Almost no one does this. Well the States are beginning to fight back and with their fight may come unintended consequences. If everyone had to pay sales taxes on online sales, then everything becomes more expensive immediately.

While it seems reasonable to require these online retailers to collect tax to help close the State budget gap, what are the potential consequences and what effect can they have? Recently, California passed a law requiring online retailers such as Amazon to collect and remit applicable sales taxes for sales that occur in that State if they have in-state affiliates. Amazon's solution: cut ties with local affiliates in the State's that have these laws.

So on to the unintended consequences.

If an online retailer cuts ties with a local affiliate, the customer purchasing the product will still purchase it however the product is likely to come from another state thereby skirting the tax collection requirement. Whatever the economic benefit the state affiliate had before is now lost. This means the State doesn't collect the revenue they were hoping to and the local affiliate now has less money to pay employees who in turn have less money to spend which has a negative impact on the local economy and makes the problem worse.

If the States want to fix this problem, they will have to be more creative.

"we don't have a precise read on why this slower pace of growth is persisting”…quote by Ben Bernanke, Chairman of the Federal Reserve, in a news conference on 6/22/11. "Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought.”

I find it curious that the man who arguably wields the most economic influence in the world along with the presidents of the regional Federal Reserve System and their team of highly trained economists don't understand why these economic problems continue. The economy is slowing because people are not spending; how does he not understand why people have chosen to spend less money? According to the Consumer Expendables Index (See chart: http://www.tinyurl.com/3wy87sz) provided by Charles Biderman of Trim Tabs Research; consumer take home pay fell from $7 Trillion in 2008 to $6 Trillion today. That means $1 Trillion of missing income that cannot be spent to fuel economic growth. This data is created from real-time data from readily available payroll tax data. Why doesn't anyone else seem to look at this? I can only surmise that they do not want to see reality!

Consumers have been battered by continued high unemployment, are saturated with debt (and thus do not want to borrow any more), have had their retirement accounts go through two major bear markets in 11 years. Add to the natural process of the largest generation (Baby Boomers) reaching a natural stage in life where they begin to focus on reducing debt and saving for retirement. Think of Demographics as a massive train going down the track at full speed; it's already going down the track and there is no way to get off the train.

I think the more likely scenario is that Bernanke knows exactly what is happening and why however he is unable to tell the truth as it would compound the problem and cause concern in the global markets. He would have to admit that the economy is simply beyond his control. In a recent press conference, Mr. Bernanke appeared nervous as his voice was trembling. Is he just scared of public speaking or is there something else he is frightened about?

The Weekly Leading Index (WLI) (See chart: http://tinyurl.com/3esqd85) published by ECRI (Economic Cycles Research Institute) is showing a softening of growth. This indicator usually predicts economic growth/contraction about 7 months into the future however more recently has been leading by about 1-2 months which makes it look more like a coincident indicator. The WLI went into contraction in May of 2010; not surprisingly we saw a softening of GDP which led to QE3 so ultimately we did not see the contraction as expected. Meanwhile just as QE2 is ending, we are seeing a softening of growth again.

On the other side of the pond, the European debt crisis keeps coming back with recent continued attempts on kicking the proverbial can down the road hoping that their economy will be miraculously better 2 years from now. One possible reason to support the Greek bailouts is that the ECB (European Central Bank) is fighting for more time for other countries such as Spain, Portugal, etc. to get their financial houses in order. I think it is only a matter of time before Greek defaults on its debt and the European crisis worsens and spreads to the US.

Chinese Liquidity Drying up

Overnight lending interest rates between banks has risen indicating that overnight lending between banks is drying up in China. There are two possible scenarios here: the banks do not have enough funds to lend each other because they too many bad loans on the books or they do not trust each other to repay the loans. This was the very issue that sparked the credit/financial crisis of 2008. It appears a similar banking implosion could happen for China for the same reason; years of reckless lending.

China is the biggest bubble. They are the driving force for many other markets such as Brazil for example. When China's bubble bursts, it will ripple through other emerging markets.

Jobless Claims Jump…

The number of people filing for initial jobless claims moved higher to 429,000 which was well above consensus expectations. The four month average of jobless claims is considered a leading indicator of where employment is headed. Anything over 400,000 is considered bad. Unemployment rate rose to 9.1% in May. Monthly unemployment numbers are to be released on 7/1; they should be expected to disappoint.

May non-farm payroll report from the US Census Bureau came in at +54,000 jobs. The confidence interval for jobs is +/- 129,000 which means that any number within 129,000 jobs in indistinguishable from a loss of jobs yet the media presents the number as added jobs. The jobs number includes an upward adjustment of 206,000 jobs created from business that failed which under the birth/death model for business which assumes that when a business fails, a new one pops up somewhere else to hire the employees of the firms that failed. This means that the government unemployment numbers have likely been overstating new jobs by about 25,000 per month. They do correct these overstatements each January but by then no one is paying any attention which is another trick the government uses to make the economy look better than it is.

U.S. Strategic Oil Reserves

President Obama released some 30 million barrels of strategic oil reserves along with expected 30 million from other countries amounts to a relative "drop in the bucket.” This is something like 1 days worth of world consumption? Seems to be more a political move in my opinion.

Velocity of Money

Velocity of money which is the rate at which money gets out into the economy continues to fall (See Chart: http://tinyurl.com/3hquvg6). This is why we have not seen any significant inflation nor hyper-inflation despite the enormous amount of money printing by the Fed. If the money doesn't get into the hands of consumers, and is not spent, the money supply will not grow and we will not see hyperinflation. Recently M3 which is the broadest measure of money supply finally crossed into positive territory for the first time in two years. This means that we could see some minor inflation pressure ahead along with a slowing economy or in other words, Stagflation.

Evidence continues to show that bank reserves are growing to a collective $1.5 Trillion which means that the $2 Trillion plus of QE stimulus is clearly not being let out as intended and anticipated. No matter how low rates go, people just don't want to borrow any more and no amount of stimulus or accommodating lending environment is going to change that at least not for a long time. Consumers want to deleverage which means reduce debt, not incur more.

Other economic data

· Second revision to first-quarter GDP went from 1.8% up to 1.9% which amounts to statistical noise.

· New orders for durable goods rose by 1.9% in May. April's revised number was a 2.7% decline

Real Estate

New and existing home sales in May were both lower reflecting continued bottom bouncing. Current inventory of bank owned homes and those that are in the foreclosure process are at about 2.2 million. According to LPS Applied Analytics, the total inventory for home mortgages that are delinquent more than 90 days (a good indicator of future foreclosures) and actual foreclosures are near 4.2 million. The banks are clearly holding back inventory hoping that values will improve.

I see two potential scenarios with general residential real estate: 1) due to the severe overhang of inventory, low wages, high unemployment, and stricter lending standards, prices will remain low/flat for several years or; 2) prices weaken anew and we see another significant decline with prices bottoming out somewhere around late 2013 early 2014. The good news is that prices in many areas seem to be at 2002 levels so we are getting close to the bottom. This is based on the assumption that asset bubbles tend to return to pre-bubble levels however as is often the case, the correction will go to extremes as the bubble did. The only positive trend in real estate will be multi-family and starter homes as the demographic trend for young people looking for their first home has begun and will be strong for many years.

With softening economic data, the Fed still does not indicate any further stimulus such as QE3. However they have stated that they will use interest earned from existing bonds and proceeds from maturing bonds to re-invest into more Treasury Bonds thereby maintaining the size of the Fed's Balance sheet. This is for all practical purposes QE 2.5. At this point some of the recent slowdown can be attributed to the Japanese supply disruptions as well as severe weather that has increased food prices and high oil prices both of which have left consumers with less money to spend. The main driver of the slowdown is the long term demographic changes which will have to run their natural course before the economy truly gets better.

We could see a final rally in the next 2-6 moths. The aggregate demand for buying stocks has slowed down however this correction may not be all that deep because we are not seeing selling pressure increase yet. When selling pressure increases and buying pressure decreases, that means there is few left to buy and many who wish to sell which is what drives prices down. The question is do we want to take the risk to get that last potential 10% or whatever might be left on the upside? Investors who continue to be conservative and build their cash positions will be the in best position to reinvest when taking risk is more likely to pay off.

As of May 27, 2011, I completed all requirements for the Certified Annuity Specialist^® (CAS^®) designation offered by the Institute of Business & Finance (IBF). The CAS^® is the only nationally recognized annuity designation which focuses on various aspects of traditional fixed-rate, equity indexed and variable annuities. CAS^® certification requires mastery of contract structure, tax ramifications, strategies, income structuring, and principals of asset allocation.

Education in this area is important because there are several trillions of Dollars invested in annuities. These products are often sold because they have appealing guarantees or investment structure however these products are typically quite complicated and many of the financial salespeople who sell them do not have proper education in the products that they sell. For example, it is estimated by the IBF that at least one third of all annuity contracts are not titled correctly.

In addition, the commissions on the sale of deferred annuities are typically much higher upfront than a similar mutual fund or advisory account which makes the recommendation naturally conflicted. Having the proper education helps me to fairly evaluate whether an annuity product is appropriate. While annuities in general have received bad press over the years, I believe this is mostly due to the high pressure sales often associated with annuity salespeople as well as senior being taken advantage of when sold annuities that are not appropriate for their situation. That being said, annuities do have their place.

For example, a traditional fixed-rate deferred annuity can lower the volatility of a portfolio by replacing some of the bond portfolio with a fixed-rate annuity. Fixed-rate annuities can also help taxpayers who are in high brackets avoid the annual tax on their regular savings. Immediate annuities which are for retirement income purposes provide a stream of income in exchange for a lump sum investment. These products have shown to reduce the risk of outliving one's assets.

For additional information on whether any type of annuity is appropriate for you, don't hesitate to contact me.

Is this the beginning of the end of this two year bear market rally? There are several signs that are indicating that this cyclical bull market that began in March of 2009 is on its last legs.

The "Smart Money” Indicator

The "Smart Money” refers to the largest institutional traders which can be said to drive the markets short term. According to Charles Biderman of Trim Tabs Research, the institutional investors own about 75-80% of all stock and therefore it is wise to track what they are doing. The "Smart Money” indicator is a put/call ratio which measures how bullish or bearish these institutions are. Purchasing PUT options is done to hedge downside risk whereas purchasing CALL options is done with the expectation of rising markets. If there are more PUTS versus CALLS then this indicates the overall position is to expect declines and thus they are purchasing protection accordingly.

The reason that this is important is that it appears that the "Smart Money” has already begun to question this rally by shifting from very bullish in early 2011 to extremely bearish in the 2^nd quarter of this year and beginning to sell into this rally. Given it is largely the purchasing power of institutions that have been the driving the rally, as they begin to sell, there will be less buyers which would indicate price declines. The Smart Money indicator is not perfect however in the past we have seen significant crashes/corrections come a few months after an extreme bearish reading. This recent shift from bullish to bearish in a very short time should be considered a warning sign of potential decline ahead.

Government Stimulus

The US Government has been financing its activity and stimulus through borrowing. This borrowing is similar to a credit card; you can continue to borrow but eventually you have to pay it back. The more you borrow, the worse your credit rating gets which causes interest rates on borrowing to increase further limiting the amount you can borrow. At some point when you get into too much debt and your payments become too high, you are no longer able to borrow anymore and it can lead to not being able to make payments on the debt leading to default and often bankruptcy.

When the economy started to slow down in spring of 2010, the Federal Reserve (The Fed) embarked on its QE2 (Quantitative Easing) stimulus program. The program was designed to ease the money supply thereby providing systemic liquidity and stability to the financial markets. The largest banks and financial institutions were essentially credited with excess reserves which would allow them to lend out more money which was the goal of the program; lend more, people spend it, the economy grows. Unfortunately this did not have the desired effect because the banks don't want to lend (despite what they state publicly) and people don't want to borrow anymore as the average person is saturated with debt.

The result is that the banks and financial institutions awash with cash and nothing to do with it began investing the excess reserves in risky assets such as stock, bonds, commodities, etc which is why we've seen these asset classes move in tandem which is very rare. This was a desired effect of The Fed which is to re-inflate the financial markets in hopes that consumer confidence would go back up, people would begin spending, and re-grow the economy. The stimulus money has essentially been driving speculation in every except for real estate because the money has had nowhere else to go. This has largely worked for the last two years however we are beginning to see cracks in the dam again.

More Stimulus anyone?

Stimulus is like a cup of coffee; the first cup will wake you up and keep you going for a while until you begin to get tired again. The next cup always has less of a stimulus effect until eventually it doesn't work as sleep must come at some point. Monetary stimulus is the same; each round of stimulus has less and less impact.

Since QE2 began, we have seen only one quarter of increased positive GPD (Economic Growth). The most recent reading of GDP growth is slowing already. Is the economy already fizzling out? With continued high oil and food prices, we will likely see further weakening of our economy ahead due to decreased consumer spending.

It appears that The Fed is recognizing the lack of effectiveness of Quantitative Easing (QE) as expected. Recently Fed Chief Ben Bernanke indicated there would be no QE3 and directed the problem to congress to be fiscally disciplined (Austerity). As we are seeing in the Euro zone, Austerity doesn't work either. As we've seen, QE2 has had minimal impact. If the economy weakens anew and there is no additional government stimulus, I expect that we will see the economy go right back to recession, credit deleveraging, and deflation.

If the economy weakens again, The Fed will be pressured to do a QE3. Given the state of our national debt, and that S&P and Moody's (credit rating agencies) have essentially threatened to downgrade our credit rating from the coveted AAA rating, making the case for QE3 will be tougher. If the government increases the debt limit and if The Fed does QE3, it will likely have even less impact than QE and QE2, and the bond markets are likely to demand higher rates on US Treasuries which in turn would increase the cost of mortgages thus killing the already weakening housing market. If home prices don't go up, how can the banking crisis recover? The banks are still holding on to enormous amounts of bad assets from housing. As we are starting to see recently, the housing market has resumed its decline and is likely to get worse which will further weaken bank balance sheets and the banking crisis could come roaring back.

The Government/Fed is checkmated either way.

We've Seen This Movie Before

Japan has been an excellent case study for what we are going through now as they saw their economy begin to slow long-term going back to 1990 to current. Each time the Japanese economy would start to slow, the Japanese government would stimulate; they have been doing this for over 20 year. They have been able to repeatedly stimulate because they went into their economic contraction as net creditors to the world.

Japanese Treasuries are currently yielding around 1-1.5% largely because they have high internal demand for their debt; the Japanese have been net savers. The problem is that as their population ages, retirees go from being net savers to net spenders. In order to fund their lifestyles they will begin selling assets such as government bonds. If internal demand for these bonds decreases, Japan would have to go out to world markets to finance their borrowing and rates for Japanese bonds would likely go much higher resulting in a diminished ability to continue borrowing and they would effectively become bankrupt.

This strategy has not worked in Japan for the last twenty years yet the US Government is trying to go down the same path as Japan. The main difference is that Japan went into their crisis as net creditor to the world and had the luxury of long-term stimulus; we do not.

What's to Come?

Only time will tell what will come of this mess. We may see a short term correction similar to last year and get another year or so out of this rally. We may see a decline similar to what started in October 2007 and accelerated in October 2008. We may see nothing either way for many years. No one knows. What I do believe however is that this is not the environment where taking risk is likely to payoff and therefore investors should go to and maintain a conservative allocation until a more favorable opportunity comes.

Being conservative means that if the markets go up, your portfolio still goes up, just not as much as it otherwise would have if you remained growth oriented. Meanwhile if a significant decline does occur, a conservative portfolio should see declines that are much smaller compared to more aggressive portfolios thus allowing you to "live to fight another day.” It is all in the mathematics of a decline. For example, a portfolio that sustains a 50% loss needs a 100% rate of return to recover. A 40% decline would need to earn a rate of 66.7% to break even. A decline of 10% would only require a return of 11.1% to recover. And a decline of 5% would require only a 5.25% return to break even.

Many people are concerned about the value of the dollar and the Fed's efforts at debasing the currency. A quick look at the Dollar index going back to 1980 shows that the Dollar has already been devalued in the mid 80's and again more recently. In fact, the only asset that went up in 2008 was the US Dollar. So while the Fed has been printing plenty of money, credit deleveraging is happening much faster and thus the money supply continues to contract rather than increase. It is difficult to have inflation when the money supply is contracting as it is a matter of supply and demand. If there are too many Dollars chasing the same goods, then prices go up (inflation); conversely if there are less Dollars chasing the same goods, then prices tend to go down (deflation). The US Dollar is the Value play in this environment.

In the article "The Big Bang" in Financial Planning Magazine talks about Harry Markowitz, the father of modern portfolio theory. As the father of MPT/asset allocation, he usually has a 60/40 split of stocks/bonds. The interesting part is that the article states that he is a "tactical investor when he wants to be. "

"In June 2007, just before two of Bear Stearns' subprime mortgage hedge funds blew up, Markowitz sold all his equity holdings outside of the TIAA-CREF account-iShares MSCI Emerging Markets (EEM), iShares MSCI EAFE (EFA), plus small- and mid-cap Select Sector SPDRs-and put the money into cash. He made the move after conferring with a hedge fund client who was shorting Bear Stearns.”

The guy who came up with the idea for passive asset allocation does not follow it!!! When he sees risk he will and has made tactical moves away from those asset classes. What does that say for the theory when the founder doesn't even follow it?

Click here to read the full article

Dagong International Credit Rating Co., a Chinese credit rating agency, is attempting to break up the "monopoly" on credit rating agencies largely dominated by Moody's, Standard & Poors, and Fitch. Dagong claims that the three US rating agencies have failed to provide accuracy among emerging market debt and reflect changing conditions. Dagong's chairman, Guan Jianzhong, stated that the US credit agencies "provides the wrong credit-rating information” and that the US credit rating agencies are to blame for the global financial crisis and the debt crisis that Europe has been dealing with.

Is this criticism warranted? The answer is a resounding YES!

The US rating agencies clearly missed the call on the banking crisis fueled by sub-prime mortgage lending which led to the global crisis. The problem is when you are paid by the very firms you are supposed to provide credit rating for creates an enormous conflict of interest thus the lack of accuracy in the ratings. This certainly has affected their credibility as rating agencies which allows competition to criticize.

Dagong has basically downgraded US debt to AA which is below their top rating of AAA along with a negative outlook. The three US credit rating agencies rate US Debt as the safest however China is challenging these rating by claiming that US Debt is rated below China and 11 other countries citing high debt and slow growth. In addition they suggest that the US may face rising borrowing costs and risks of default.

Bingo! I say they hit the nail right on the head!

China certainly has cause for concern because they hold nearly a trillion dollars in US Debt! And we have already seen China putting the pressure on Washington about expanding the US Balance sheet by adding more debt. As of 2008, total US Debt was approximately $56 Trillion and this does not included unfunded liabilities such as Social Security and Medicare.


While risk of default on US debt is unlikely simply because Washington has a printing press, however continuing to add more debt and increasing the money supply would not be good for these foreign holders of debt and US Dollar denominated assets, hence the pressure.

Are we now beholden to China?

Currently we are already seeing a slowdown in growth and possibility of a return to recession (did we ever really leave recession?) later this early into early 2011. This is after the largest government stimulus we have ever seen.

I think that this makes a case for more stimulus a tough one as China is already putting on the pressure. What happens if they decide to dump US debt for something they believe to be a stronger credit risk?

Adding debt to a debt crisis just doesn't work. Maybe it is time we take our lumps and fix this debt crisis instead.