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• An article in Investment News highlighted eight signs that an investment advisor might be a con artist.  Number eight on the list was having a “smoothie firm name”.  We trust you are okay with “ProVise Management Group”.  Number seven was “lots of bling”.  We may need to explain to some of you that this means an “over abundance of jewelry”.  Last time we checked, there was no glitz amongst our advisors.  Number six was “no public information available”.  ProVise is part of a public company (National Financial Partners NYSE:NFP) and as a result we are audited every year.  Number five is an “investment strategy which is considered a great big secret”.  We try very hard to educate our clients to the realities and vagaries of the markets.  It’s important that our clients don’t keep things secret from us, and we certainly don’t keep anything secret from them.  Number four was “different year – same results”.  This is a reference to “Bernie Maddoff types” who consistently produce similar returns regardless of what happened in the markets.  Through the information contained in the quarterly reports our clients know that we have quarters with returns we are very proud of and other quarters where the markets are unfortunately not so kind.  Number three was “a guaranteed return” which we absolutely never promise, and furthermore, we always address risk.  We probably go overboard to explain the risks involved in different investment approaches.  Number two was “suspicious timing”.  That means that you have a good opportunity facing you, or a stressful time, and NOW is the time to do things.  In other words, you get pushed into making a decision quickly.  Our clients know we never push them to make a decision.  It is rare that the decision is overly time critical.  Finally, the number one reason an investment advisor might be a con artist is the “hard sell”.  If it looks like a duck, quacks like a duck, and walks like a duck – it’s probably a duck.  We ain’t no duck!

• The wealth of America is returning slowly, due to both a better stock market and economy.  Well, at least that’s true for the top 10 U.S. metropolitan areas which saw a 17.5% increase in 2009 in the number of individuals with investable assets of $1 million or more.  This was the sharpest increase in four years.  In fact, in New York, Houston, Washington DC, and San Jose, there are now more “millionaires” than there were before the 2007 meltdown.  All this sounds good until you stop to think about what it costs to live in those areas.  As the saying goes, “A million dollars there doesn’t go as far as it does in other places around the country.”  (Source:  Capgemini 2010 U.S. Metro Wealth Index)

• We received a package of information from one of our clients the other day which provided financial information from various publications back in the 1950s.  We will be highlighting a few of those articles in our next few issues of the Bullets, as we believe it will be interesting to put things in perspective 50 to 60 years later.  The first item was a series of 10 articles which dealt with money and its uses in the U.S. economic system.  The articles were based on the book, Money, written by Fred G. Clark and Richard Stanton Rimanoczy, and published by D. Van Nostrand Company.  It appeared in the Studebaker Spotlight in September, 1950 and was titled:  “The Citizen and the Gold Standard”: 

• “A complete explanation of the ‘gold standard’ is not practical within these brief articles but its principle purpose in the United States, as far as the citizen is concerned, is easy to understand; it is a device designed to prevent the government and the banks from arbitrarily increasing the supply of money.  Under the gold standard, the supply of money is limited to the supply of gold and if the people think there is any cheating taking place, they can present their paper money and demand gold.  This keeps the money supply ‘honest’, and, gold being hard to get, prevents rapid increase in the money supply.  The gold standard is the best method ever devised to prevent government from increasing the money supply.

• Without the gold standard, money is worth whatever the government wants it to be worth, thus giving the government powerful control over the lives of the people through being able to control the ‘value’ of their labor and their savings.  Historically, every dictator has had to abolish the gold standard before he could completely control the people.  When the money supply is constitutionally controlled by the people, government must remain the servant of the people.”

• We will allow everyone to draw their own conclusions about this investing article, but remember, we’ve been off the gold standard since the Nixon years in the early ‘70s. 

• Are you a deficit hawk and willing to allow the Bush tax cuts to expire on January 1st, raising taxes for all Americans and perhaps jeopardizing our economic recovery (such as it is)?  In the alternative, do you believe that raising taxes (and arguably this would be the biggest tax increase in history) is bad for the economy and, in the short run at least, it would be better to extend the tax cuts for a year or two, in spite of the increased deficit that will likely ensue in fiscal years 2011 and 2012, but may not have a negative impact on the economy?  Or, do you not care about either the economy or deficit and you simply believe that the “rich” (married couples with $250,000 or more of taxable income and single taxpayers with $200,000 or more of taxable income) should pay more in taxes?

• Those are the issues weighing heavily on the minds of members of Congress regarding what to do with the Bush tax cuts.  Every respectable economist, liberal or conservative, will tell you that raising taxes will slow an economic recovery.  It is estimated that if all of the Bush tax cuts went away, it will take somewhere between 0.5 and 0.75% off GDP.  Given the weakness of the current economic recovery, that would be a substantial “kick in the pants”.  Conversely, if we don’t do something about taxes and/or spending (now there’s a concept), we might wind up in a similar situation to Greece – way too much debt in the next 10 to 15 years. 

• So what will Congress do?  It’s anyone’s guess – so here’s ours:  We believe that the Democrats will advance a proposal to extend the Bush tax cuts for everyone except the “rich” (see above for the definition of rich).  The theory will be that this will simply eat into the savings of the rich rather than into their spending.  While there is some truth to that, we believe that the rich, who will have to pay perhaps 10% to 15% more in taxes as a result, will make changes in their spending, especially if they are business owners.  It could lead to lower or fewer wage increases for their employees.

• By advancing such a proposal, the Democrats will essentially put the Republicans in a position where, if they don’t support the bill, they will be accused of “favoring the rich” which won’t play well going into the elections.  On the other hand, if the Republicans support the bill, the Republicans who are deficit hawks will not be happy.  In fact, there are a fair number of middle of the road Democrats who believe that lowering the deficit is as important as it is to Republicans.  Only time will tell us what will happen and the time is rapidly coming upon us, as Congress will virtually shut down for the month of October so that members who are up for reelection can campaign.

• Can bubbles actually form in investments that are thought to be “conservative”?  The answer is an unqualified “YES!”.  Bubbles can form any time any investment has too much money chasing it.  Right now, there is a strong possibility that a bubble is forming in the bond market at the governmental, corporate, and arguably, at the municipal level.  Let’s look at how bonds fall or rise in value – we refer to it as the “teeter-totter” principle.  Think about interest rates sitting on one side of the teeter totter and bond prices sitting on the other side.  At any given point in time, the see saw is perfectly balanced with your investment obtaining the interest rate currently available.  As interest rates move down, the side holding the bond prices must go up.  That is to say, if you own a bond paying 4%, when interest rates go down, why would you sell a 4% bond at face value when new bonds are being issued at 3%?  Conversely, if interest rates go up, then why would you pay full value for a bond earning 4%, when you could earn 5% or 6%?  In other words, interest rates and bond prices vary inversely.

• The more money chasing bonds, the lower the interest rates people will demand.  Thus lower rates will be paid by corporations or governments issuing bonds.  Today, the Ten Year Treasury is hovering under 3%, which basically says that it is anticipated that inflation will only be 3% over the next ten years – in spite of all the talk about deflation – does anyone really believe that inflation won’t exceed 3% over the next ten years given all the money that has been made available by the government?

• With the stock market’s problems over the past few years and money markets and CDs paying next to nothing, more people have fled to some type of return on their money by buying long-term bonds.  They are reaching for yield and unknowingly making what will likely turn out to be a bad assumption about inflation.  Too many investors and unfortunately more than a few financial advisors don’t understand the potential risk in bonds today. 

• That is why for the most part, we are avoiding long term bonds in our portfolios – remaining on the short to intermediate side of the yield curve.  There will be time to own bonds again for the long-term, but just as real estate prices got too high in 2006 and 2007, we think that long-term bonds today are similarly over-priced.  

• As always, we encourage you to give us a call if you would like to discuss anything further.  We will visit again soon.

RAY, KIM, ERIC, BRUCE, and LOU

©8/16/10 ProVise Management Group, LLC

This material represents an assessment of the market and economic environment at a specific point in time.  Due to various factors, including changing market conditions, the contents may no longer be reflective of current opinions or positions.  It is not intended to be a forecast of future events, or a guarantee of future results.  Forward looking statements are subject to certain risks and uncertainties.  Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in these Bullets, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any discussion or information contained in these Bullets serves as the receipt of, or as a substitute for, personalized investment advice from ProVise.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Information is based on data gathered from what we believe are reliable sources.  The information contained herein is not guaranteed by Provise Management Group, LLC as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.  The indices mentioned are unmanaged and cannot be directly invested into. .  If you do not want to receive the ProVise Bullets, please contact us at:  info@provise.com or call:  (727) 441-9022.  Please visit our Web Site at:  www.provise.com.

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