There is certainly much greater economic risk out there than there was just a month or two ago. My sense is that any recession that the United States may experience would be associated with a slowing of U.S. GDP because of a fall of in Europe, and potentially China. I believe that China would act quickly to reverse their tightening bias to spur growth. Calling recessions is a dangerous game. We all try to make logical sense of markets and try to forecast the future. All I know is that folks that have done well decade over decade, like Buffet, are buying and not selling.

There are myriad clichs that capital market participants and commentators like to call on from time-to-time to help soothe the pain or illustrate the potential for gain. One that we believe applies on almost any given day concerning dividend paying stocks is, paid to wait. However, there are certain times, like now, when we think we can add the addendum, and poised to rally. We have been discussing for quite some time that we thought the U.S. equity markets were attractive based on current valuations and earnings growth (both current and projected), and that is still the case.

I am bullish about the outlook for growth stocks because the trend is our friend. A comparison of the Russell 3000 Growth Total Return Index versus the Russell 3000 Value Total Return Index performances from October 15, 2008 to August 31, 2011 finds the RAG up 61.16% versus the RAV up 33.65%. These are both respectable showings, but the growth index is winning by a considerable margin of 27.51%. While this is not a call to abandon equity value strategies, it is a powerful argument for including growth as part of an overall equity allocation.

Liquidating municipal bond portfolios and hiding out in cash based on a possible change in tax law is not a wise investment program. Clients investment goals dont get to take a rest. Investors must invest wisely to create opportunities for bond objectives to be met. If the very worse case scenario of the municipal bond interest exemption going away completely were to occur at some point, it would happen in conjunction with a large simplification of the tax code and lowering of tax rates. Tax reform talk is real. Be aware of it, stay informed, but dont run for the hills because of it.

There is a rising disconnect in the marketplace between perceptions and forecasts. It is occurring predominantly in the corporate earnings sector; however, we notice it in the commodity markets and the debt markets. For the last couple of months we have noticed a rising discrepancy between the top down earning analysts as compared to the bottom up analysts and CEO forecasts. We would typically side with the bottom up analysts as a general rule. However due to some interesting dynamics, we are leaning even more to the side of the bottom up estimates.

The question I am now most often asked is, Will the United States slip into a second economic recession this year? The risks have definitely risen such that the current soft patch in the U.S. economy may translate from slightly positive GDP to a negative reading. Investors are faced with a huge opportunity to buy risk assets at a great entry point. We believe that the probabilities are that the markets will be significantly higher in the future. Market participants are net short this market and cash on the sidelines is at record highs. That is a recipe for a rare opportunity.

The equity markets look to be suffering from a little sleep apnea. It appears restful until a sudden gyration is induced by a pause in breathing leading to a lack of oxygen. The markets catch their breath only to be shocked again by the combination of lack of comprehension from elected leaders both domestic and abroad and the rising concern the economic soft patch may be quick sand. To illustrate a little more of why we see the soft patch versus the economic quick sand, consider the last 13 years with regard to the equity markets and cash flow.

The 10-year Treasury has hit an important threshold while equity markets across the globe are off 4-5%. The 10year Treasury hit an intra day low yield today of 1.97%, which was last seen on 12/30/08. This is important in that it is a historical low yield and invites the question whether a secular double bottom might just be taking place. It also begs the question whether this flight to quality is another knee jerk reaction to a stumbling of political processes; or is it an environment where historically low interest rates are semi permanent? Could the answer be yes to all of them?

To put it mildly, the equity markets have been extremely weak and extremely volatile over the last three weeks. We expected some weakness into the summer. However, the levels we have seen surprised us somewhat given the vast majority of market moving events came as no surprise and were, we believed, priced into the market. Regardless, we do believe, despite the magnitude of the markets movements, that we are still in a bull market. That isnt to say we go straight up from here but we do think we have put in a summer low.

Current headlines are suggesting that recent market hits have created a buying opportunity. Yesterday, Bloomberg reported that Insiders Buy Stocks at Highest Rate Since 2009. The scare this morning still surrounds the European banking system which is being tested, much like those in the US were tested in 2008. Back then, the U.S. instituted a number of actions to return confidence to our banking system. A combination of TARP and a guarantee by the FDIC of all bank obligations overcame the market attacks. The ECB does not have FDIC, so its looking on how to shore up confidence.

I suspect this decline will not cause a major change in leadership. The best buying opportunities are likely to be in those stocks and sectors that were leading the market higher before the downturn. I continue to believe this will be an earnings growth focused market and, therefore, investors should choose equities that have produced the best earnings relative to Street expectations over multiple quarters. Several sectors that standout include: aerospace, agriculture, industrial, information technology and oil service.

Here is some perspective from Municipal Separately Managed Accounts (SMA) Land about the S&P downgrade and the municipal bond market: Moodys and Fitch have retained their AAA ratings on U.S. Government debt. This action by S&P was not entirely a surprise and was foreshadowed to a large degree. The rating agencies had negative trends on U.S. Government debt for a few months and S&P, in a mid-July report, laid out in three scenarios the actions they might take depending on how the debt ceiling increase was handled by Congress.

The downgrade potential was not mitigated with the overly dramatic yet not surprising game that Congress and the President partook in. Losing the AAA status has some fundamental and some theoretical impacts. The obvious facet is the increase in interest costs for the U.S. government and every interest based instrument. Estimates for increased interest expense have ranged from 25 billion annually to as high as 100 billion annually. Any measuring is sure to have flaws when one considers past rating cuts and the significance and uniqueness of the Treasury market.

The paralysis that has dominated the markets has only been enhanced by the recent market movements. For those who have a longer-term time frame and are underweight risk assets in general, current levels still appear attractive. The one characteristic that has been missing from the benign sell-off in the second quarter was a market capitulation. Yesterday actually had a feeling of that; however, it may require more of the flushing of the system before that occurs. Calling a bottom would be foolish. Being a successful investor, buying low and selling high, has always been easier said than done.

History is full examples of volatility in the markets and the affects of emotion on the creation and destruction of wealth. People have a false sense of faith in cash. Cash being made up of dollars tend to lose value over time. The loss is sometimes sneaky, but always in the form of lost purchasing power. The U.S. dollar as a fiat currency has for decades, provided a slow debasement of value for holders. At this time we see the largest hoard of cash on the balance sheets of corporations, banks and individuals in history. This seems worrisome at best and just plain stupid at worst.

Even though it feels uncomfortable, earnings growth is very healthy. The actions going on in Washington will likely result in a more balanced spending and debt management approach, in our opinion. Our advicepress on! We see this as a buying opportunity, as it is likely this cloud may soon dissipate. Remember, that buying low and selling high often requires you to make decisions that dont always feel great when you make them.

If a bankruptcy filing were to occur in any of these two cases, it wouldnotbe indicative of the wave of municipal bond defaults predicted by some.It would be simply a story of two particular issuers that made the basic mistakes. Observers who would highlight a bankruptcy filing by either of these issuers as evidence of massive problems to come in the muni market would be misreading the specific events that brought Harrisburg and Jefferson County to their present troubles. We believe it is important to be wary of those who might try to use this as evidence of a broader problem.

In reviewing the weekend headlines and data points released, it appears the gold rush fever is alive and well. It is almost as if a sequel to Shakespeares Merchant of Venice is about to be revived for reality TV... One might expect to read: It appears that what ever side of the Atlantic you lay, gold and gold only appear the play. Gold has crossed over $1600 per ounce, a mere 125% increase over where it stood a little over 2 years ago.

There are some underlying forces that we believe to be a better indicator of the future than the headline risks that pop up every hour. Chairman Bernanke?s announcement that more support is needed affirms our view that they will remain accommodative for some time and analysts? estimates have risen, even though top-down analysts have dropped a bit. The amount of liquidity continues to rise even as markets are up year-to-date. At the end of the day, anxiety and apprehension are key components in the building of the wall of worry.

June did not present a meaningful technical departure from the preceding five months. This does not mean that June was uneventful; it had its fair share of peaks and valleys, the most dramatic of which occurred during the gravest worries that Greece might default on its debt. It was not the first time this year that the stock market was rocked by blazing headlines reporting devastating or monumental events. In March, stocks were driven lower following the Japanese tsunami. Whether a financial woe or a natural disaster event, the effects have been similar thus far in 2011.

We only have a few trading hours left in the 1st half of 2011 and, barring any late day meltdowns, we should end up solidly in the black as the S&P 500 is currently up 5.85% (includes re-invested dividends). On an annualized basis, this equates to 12.14% which is below the 15 ? 20% we predicted at the beginning of the year. However, as we have reiterated many times before, equity returns never come in uniform fashion, and we still are holding to our prediction as we expect, a better 2nd half than 1st half, in our opinion.

The markets are preoccupied with the potential of Greece defaulting on its debt. Just what are we worried about? Greece is unable to access the capital markets, which are necessary for them to continue funding their expenditures and roll their debt forward. The EU outlined an assistance package that is being handed out in pieces to Greece. The next piece is coming due and the EU is pushing Greece to raise taxes and cut expenditures. The Prime Minister is up for a confidence vote tomorrow and the world seems to be waiting to see if Greece has the political will to stand up to their debt.

The one concern we cannot project, and one that every investor should be cognizant of, is the contagion risk of the potential default of Greece or any of the other troubled European issues. It won?t be necessarily the default itself but the reaction to it. This is more than likely the catalyst for the large amount of liquidity being built up in the banking system so as to mitigate another credit crunch that paralyzed the global markets in 2008. It also explains why A-rated Financials have seen their spread to the 10-Year Treasury widen from 121 basis points (bps) in May to a current 147 bps.

With all of the confusing, often contradictory, reams of economic information flooding the market, the supply of conundrums seem to be rising. With the combination of hitting six consecutive weeks of declines in the S&P 500 (not seen since 2002) and on track to make it a seventh and the large number of rolling over of economic data, one might be surprised to see the success of technology IPO (Initial Public Offering) market recently. LinkedIn brought back a euphoria and cautionary tales of the go-go 1990s with their stellar IPO nearly a month ago.

Right now it?s easy to latch onto the argument that the soft patch we are entering economically will transfer into quick sand. The predisposition of retail and institutional investors is greatly formed by events over the last decade as well as the sixth straight weekly loss for equity markets. With deposits and household liquidity standing at all time highs, is there truly exuberance and overly-hyped expectations for the economy and equity markets? It appears not, which should caution those who are longer-term bearish.

As we find ourselves in the throws of an economic soft patch, the anxiety to investors seems only to be a sniffle versus an outright sneeze or full-fledged cold. Many are wondering as to why the accumulation of the slowing economic news is having such a muted impact and cause many to extrapolate that a ?coming to Jesus? meeting is around the corner. As we stated last week, the conundrum of negative outlook on Treasuries by three credit rating agencies is being trumped by slowing economic metrics. It is also influenced heavily by the majority of investors believing rates will rise.

Meredith Whitney appeared on CNBC to defend her highly controversial forecast that the municipal bond market would experience severe defaults as a result of local government finances. Here are my thoughts on Whitney?s comments: First, it is important to remember the broader context of her interest in the municipal bond market. Last Fall she created a new subscription service offering her analysis of the municipal bond market. What better way to launch her subscription than to appear on 60 Minutes and state that there will be hundreds of billions in muni defaults within the next 12 months?

Municipal (muni) bonds remain a very workable asset class ? one worthy of investment in spite of the recent uncertainty and volatility of the past six months. Properly done, munis can provide dependable, attractive levels of after-tax income with modest expected volatility for conservative investors. Here are 10 reasons to think about munis and professional bond management right now: 1. Munis make sense for top tax bracket investors. 2. Muni bond credit quality challenges are real, but muni bond issuers have the resiliency and tools to help remedy their difficult budget situations. Continued.

The market has been predisposed to a positive bias over the last quarter. This is in light of what we see as a bit of rolling over in the economic metrics and various global forces. The market has somewhat disregarded the impacts of natural disasters, the European Central Bank (ECB) turning generally hawkish and placing the rating of U.S. Treasuries on negative outlook. A few years ago, any of these events would have proven to be a detour to the markets road to higher levels, currently they are merely speed bumps.

May is popularly regarded as the month of the year to ?sell and go away?. Statisticians have found merit in this Wall Street adage, but it is not flawless. For investors who choose to focus on stocks and sectors rather than the popular market averages, it is not a saying that should be seriously incorporated into one?s decision making in our opinion. Surely, there can be instances where technical indications of an overbought or vulnerable market condition coincide with a seasonal call to sell. However, this May is not one that would make me believe this adage should be heeded in 2011.

This week we have seen a huge sell-off in commodity prices. Silver is leading the way down posting another steep loss today. Some think the smart money is getting out even as the commodity exchanges are raising margin requirements. Is this the end of the ?hard asset? commodity trade? I hardly think so. We believe that we are in a commodity ?super-cycle? that has its foundation not in speculation or weakening currencies, but in a sharp rise in global demand. The weak dollar has merely exacerbated the move over the past couple of years as the Fed has embarked on very loose monetary policy.

Everyone is concerned about what happens when QE2 ends. On one side believes that when QE2 ends, long term interest rates on Treasuries will spike as the largest buyer exits the market. They believe that the Fed may be tempted to generate QE3 in order to continue try to keep interest rates down and keep the fragile economic recovery going. On the other side of the aisle, there are folks arguing that the yields on the Treasury bonds will drop even as the Fed exits and despite the fact that they are the largest holder of U.S. debt following a slowing U.S. economy during the first quarter.

The U.S. appears to be at the crossroads of fiscal and monetary policy. Many are painting a very bleak picture of the future of the dollar, U.S. credit and the validity of the U.S. economy as the model for the world. Could the U.S. return to 1970s style of inflation? The answer is that, although the possibility is there, the probability that such a high level of inflation returning any time soon is actually very low. Is the Fed conducting monetary policy that is inflationary in nature? Yes they are, but let?s not forget why they are doing this. The Fed is engaged in the avoidance of deflation

These are tough times for bond investors. It?s not surprising that higher inflation and rising rates are becoming more of a focus. Economic growth continues to accumulate and oil and commodity prices are rising. Labor markets are showing some improvement and anticipation is growing concerning the eventual end of easy monetary policy. In times such as these, we typically see investors wring their hands about the comparatively meager total returns they expect from bonds going forward. This concern may cause them to inappropriately reduce their exposure to bonds or even abandon them altogether.