Past MARKETLETTERs
July 26, 2006
How do you keep secure the gains in your investments? Beginning in the first quarter of 2006 and until May 10, 2006, many investors very savoring increases of 10-15% in their portfolios. But on May 10th, Ben Bernanke, the new Chairman of the Federal Reserve said that the world did not understand monetary policy. Investment values declined dramatically. Now the initial shock wave and subsequent aftershocks have subsided. And some investors' portfolios gave back the large portfolio profits that seemed so real just a few weeks ago.
Last month the MARKETLETTER promised to provide more information about our strategy for avoiding some of the stress of market declines like the one we have just been through and some answers to the questions of protecting those gains in your investments. Part of our strategy is an understanding of the economic and financial challenges we face both nationally and internationally.
Current economic and political news is now called "incoming" reports by the Federal Reserve. "Incoming" is a charming expression borrowed from the military, usually used to describe incoming mortar attacks. If the news is positive, for example, if Condi Rice arranges a cease fire in the Middle East, will the "incoming" report lower interest rates that are controlled by the Fed? Will the fact that US corporate profits may increase 12-14% in the second quarter, raise investment values?
The current "incoming" news must be put in perspective. The US international balance of payments is getting worse. In 2005 the USA bought $792 Billion more than it sold. Fortunately, our international friends stood ready to lend us the money to pay for the excess of imported goods. The additional loans were added to the amount the USA already owes to foreign governments, corporations and individuals. In total the foreign loans have reached about $7 Trillion. If $7 Trillion seems like a large loan just compare it to the Marshall Plan for all of Europe and Russia after WW II. The USA provided $130 Billion then, measured in todays dollars, or about 2% of the amount the world has loaned to the USA since 1982. The $7 Trillion occurred by adding the imbalance of international payments, year after year, so that what was a small foreign loan in 1982 is now pretty big. And in case you missed the news, the incoming additional foreign loans were $491.6 Billion in the first quarter of 2006.
For some additional perspective on the financial condition of the USA, we turn now to the budget of the US Government for 2007 prepared by the Executive Office of the President. We are aware that balancing the federal budget is not a high priority, therefore it is not surprising that the projected deficit in 2007 will increase to $354.2 Billion. The current estimate of the deficit for 2006 is $296 Billion. Also, we are aware that several expenditures are not included in the budget. When those are added to the deficit, the total projected borrowing for 2007 are $432 Billion or "negative savings" as the US Government likes to describe the imbalance.
As a citizen you may be concerned about the current challenges facing the USA. But as an investor, you should ask, how does this global economic environment affect the allocation of my investments?
The MARKETLETTER faces this challenge through the Broadview Model for asset allocation. This model performed better than the major market indicators for the first six months of 2006. The actual asset allocations are available at our website, www.GlobalBroadview.com
| Broadview Model | 7.21% |
| Hedge Fund Weighted Composite Index | 3.23% |
| Russell Broad US Market Index | 3.38% |
| Dow 30 Industrials | 4.04% |
| Wilshire 5000 | 3.38% |
| S&P 500 | 1.76% |
Future MarketLetters will describe how the Broadview Model is being adjusted in the search for the optimum investor allocation given the domestic and international risks.