Client Letter, Spring 2012

Sean Gross, CFP®, AIF® | President & CEO

Steve’s “Restylement”

For the last 4 years, my colleague Steve Bogen and I have been making preparations for his eventual retirement—that is, “restylement” (see below)—in order to ensure there was a plan in place for his clients to continue being served by TWM after his departure. That time has now come: Steve will be retiring from wealth management on 3/30/12 and restyling his life around a new vocation.

If you know Steve’s work ethic, you’ll rightly assume that he will not be retiring to an easy chair. Rather, as we encourage our clients to do, he will be restyling his life around the pursuit of his passion for helping the elderly and disabled. Having already started Care-Finders Inc., a business which is specifically devoted to helping families find appropriate care for their elderly family members (www.care-finders.org ), Steve will be adding insurance recovery services to help families, who have had their health, disability, and long term care insurance claims denied, obtain insurance benefits without litigation.

Steve and I have enjoyed a personal and professional relationship, which spans over a decade. In addition to being a great friend, Steve is one of the most competent financial planners I have ever known. It has been a tremendous blessing for us to have Steve on our team—his strong faith, integrity, wisdom, wit, and great love for others will be sorely missed by our team and his clients. Steve is one of the most durable men I have ever known: In addition to surviving a tour in Vietnam fit for a movie script, Steve has survived cancer, and other health challenges, while remaining one of the most grateful, unflappable people you will ever meet. We are deeply grateful for the opportunity to have worked with Steve, and we bid him “Godspeed” in his restylement!

Unchartered Waters

“We are in the early stages of a monumental debt deleveraging cycle that has gone global...there is likely at least five more years to endure before we climb onto the other side of the mountain...” – David Rosenberg, Chief Economist & Strategist, Gluskin Sheff

All investors desperately want to know where the U.S. economy and markets will go from here, and particularly when they will return to the halcyon days of the 1980’s and 1990’s. Though attempts to predict such matters have always been an imprecise science, the fact that the U.S. has not experienced anything like this for over 65 years, makes forecasting a particularly difficult endeavor in the current environment.

As we have written on previous occasions, we believe the underlying reason for the continued difficult economic environment we are in—and are likely to remain in for several more years—is due to the unprecedented decline in private debt which began as a result of the 2007-2008 financial collapse, and continues unabated to this this day. According to Comstock Partners, to understand the significance of this private debt decline, one would have to go back to WWII: “...since 1945, there has never been a quarterly decline in [household debt]...and this time period includes the terrible recessions of 1973-74 and 1980-82. However, since the 3rd quarter of 2008 household debt has declined for 13 consecutive quarters!”(1)

Believing the only way to avoid a depression is for government spending to increase (in order to replace declining consumer spending), world governments have attempted to overcome this deleveraging cycle through massive debt expansion. While this may have helped avoid a depression, it has resulted in unsustainable government debt burdens which threaten to collapse the very economies these fiscal policies were intended to save. U.S. government debt, alone, has increased over 45% since 2008(2), and is now over 80 percent of GDP, which is the highest level since the end of World War II(3).

Market Environment Indicator Remains Bullish

Regardless of the negative situation described above, our Market Environment Indicator (MEI) remains “bullish” on a cyclical basis and, as result, we currently have greater stock exposure and less bond/cash exposure in our MEI-based Market Leaders Model Portfolios (MLMPs). However, since turning bullish in November, 2011, underlying economic data now appears to be weakening again, suggesting that the MEI is likely to reverse to “bearish” within the next few weeks/months, resulting in reduced stock exposure and greater bond/cash exposure in our MLMPs. In order to be successful in this type of market, we believe investors need to replace their “buy-and-hold” mentality, which worked so well during the secular bull market of the 80’s and 90’s, with a “risk on/risk off” strategy based cyclical directional changes in market momentum.

Obamacare Goes to the Supreme Court

On Monday, March 26, 2012, the U.S. Supreme Court began three days of hearings regarding the Patient Protection and Affordable Care Act, otherwise known as Obamacare. As we understand it, there are at least 3 choices the court can make with this massive law: 1) Completely strike the law down, 2) Strike only the portions of the law it rules as an unconstitutional, or 3) Leave the law intact.

We can't begin to describe the importance of this case and its economic implications—it is likely to become one of the most important Supreme Court decisions in generations. Opponents of the law suggest the law’s individual mandates are an intrusion on individual rights, expressly prohibited in the Constitution. Proponents argue that the individual mandates are constitutional under the Commerce Clause and, in particular, under the “Necessary and Proper Clause.” Simply put, they argue that if Congress wants to reform health care, it can do so because health care is a huge part of the nation’s commerce. Regardless of the Supreme Court’s decision—which is not expected to be released until June of this year—we believe employers and employees should expect their healthcare costs to continue increasing well above the rate of core inflation.

Celebrating Five Years

TWM will celebrate our 5th anniversary on April 1. When I started TWM in 2007, I had no idea the great financial crisis of 2008 lay just around the corner. The fact that we survived the second worst stock market decline in U.S. history is entirely due to God’s grace and the unwavering loyalty of our clients—we are deeply humbled and extremely grateful that you chose to stick with us! We will be closing our office from April 2nd through April 6th, partly due to school Spring Break schedules, partly due to Christian “Holy Week” holidays, but also because it’s been an extraordinary 5 years, which we’d like to celebrate by taking a short break!

Thank you for giving us the privilege of serving you—it is a stewardship we take most seriously,

Sean Gross, CFP®, AIF® | Co-Founder & CEO Sean Gross, CFP®, AIF® is the Co-Founder and CEO of Telos Wealth Management, LLC, a Registered Investment Adviser located at 656 North Miller St., Wenatchee, WA. Sean can be reached at 509-664-8844 or at Info@TelosWealth.com.

Sources:

1. Comstock Partners, Inc., Why the Great Debt-Induced Bear Market Will Continue, January 12, 2012.
2. FactCheck.org, Dueling Debt Deceptions, http://www.factcheck.org/2012/02/dueling-debt-deceptions/
3. McKinsey & Company, Debt and deleveraging: Uneven progress on the path to growth, January, 2012.