Investing Highlights

1 - The European crisis continues to unfold with Greece at its core. There's no way to know what Greek voters and politicians might decide in coming weeks, much less how world markets might handle a a Greek exit from the euro (the so-called "Grexit" scenario). Below, following This Week's Economic News, is an analysis of what might happen. Most important -- as always -- we need to keep our wits about us.

2 - Our next client event will take place on July 10. It will be a question-and-answer session featuring Steven McNamara, CFA, of Horizons West Capital Partners, who is planning to travel here from his Connecticut office for the occasion. This is not a public event, although clients may to bring up to two guests.

3 - Our office is closed today for Memorial Day. We give reverent thanks to those who have given the last full measure of devotion in our defense.

Have a thankful week!

-Andy

Here are a few highlights from our May 15, 2012 event, New Realities: Investing. Watch our YouTube channel, www.youtube.com/tryonit, for more complete videos of the major parts of the presentation.

What Happens Here if Greece Exits the Euro?

Another downturn? Or something much less severe?

If Greece leaves the eurozone in the coming months, what kind of financial ripples could reach America?

Nobody can predict the endgame yet; Greece may even stay in the euro, although that is looking less and less likely. The big concern isn't what happens in Greece - it is about what could happen in Spain or Italy as a result of what happens in Greece.

The effects from a Greek default (and eurozone exit) would likely be felt on four fronts in America - but first, an economic chain reaction would almost certainly play out in Europe.

A Greek default could imperil Spain & Italy. If Greece leaves the euro, then Greek bondholders lose their money. A crisis of confidence in the euro could prompt institutional investors to either walk away or demand even higher interest rates on Italian and Spanish bonds. The European Central Bank could then step up and provide emergency lending, bond buying and recapitalization efforts. If those efforts were to fall short, the worst-case scenario would be a default in Italy and/or Spain.

It could also hurt U.S. banks that aren't sensibly hedged. If Italy and/or Spain default, a severe downturn could hit EU economies and U.S. lenders would be looking at a huge potential problem. If they are capably hedged against the turmoil in the EU, they could possibly ride through it without a lot of damage. If it turns out they have made foolishly speculative bets (cf. Lehman Brothers, JPMorgan), you could have a big wave of fear, which in the worst scenario would foster a credit freeze reminiscent of 2008. Would the Fed step in again to unfreeze things? Presumably so. Without its intervention, you could have a Darwinian scenario play out in the U.S. banking sector, and few economists and investors would see benefit in that.

The good news (relatively speaking) is that U.S. banks have cut their exposure to Greece by more than 40% as that country's sovereign debt crisis has unfolded. Pension funds and insurers have joined them.1

Stocks could fall sharply & the dollar could soar. The greenback would become a premier "safe haven" if foreign investors lose faith in the euro. At the same time, a crisis of confidence would imply big losses for equities (and by extension, the retirement savings accounts and portfolios of retail investors).

U.S. companies could be hurt by fewer exports to Europe. Right now, 19% of U.S. exports are shipped to EU nations. If a deep EU recession occurs, demand presumably lessens for those exports and that would hurt our factories. If institutional investors run from the euro, it would also make U.S. exports more costly for Europeans. Additionally, the EU is the top trading partner to both the U.S. and China; as Deutsche Bank notes, the EU accounts for 25% of global trade.2

Our recovery could be hindered. Picture higher gas prices, a markedly lower Dow, the jobless rate increasing again. In other words: a double dip.

In mid-May, economists polled by Reuters forecast 2.3% growth for the U.S. economy in 2012 and 2.4% growth in 2013. These economists also believe that were the fate of Greece not on the table, U.S. GDP might prove to be .1-.5% higher.2

If politicians play their cards right, we may see better outcomes. For example, Greece could elect a new government that decides to abide by the requested austerity cuts linked to EU/IMF bailout money. Greece could remain in the EU and banks in Spain, Italy, Germany and France could ride through the storm thanks to sufficient capital injections. Global stocks would be pressured, but maybe on the level of 2011 rather than 2008. (Maybe the impact wouldn't even be that bad.)

In a rockier storyline, Greece becomes the brat of the EU - a newly radical government rejects the bailout terms set by the EU and IMF, Greece leaves the EU and starts printing drachmas again. The EU, IMF and maybe even the Federal Reserve act rapidly to stabilize the EU banking sector. Early firefighting by central banks results in containment of the crisis after several days of shock, with U.S. markets recovering in decent time (yet with investors still nervous about Italy and Spain).

Containment may be the key. If a Greek default can be averted or made orderly by the EU and the IMF, then the impact on Wall Street may not be as major as some analysts fear - and who knows, the U.S. markets might even end up pricing it in. Greece only represents 2% of eurozone GDP; our exports and credit exposure to Greece are minimal at this juncture. Our money market funds have mostly stopped investing in Europe. So with diplomacy and contingency planning afoot, a "Grexit" might do less damage to the world economy than some analysts believe.2


Citations.
1 - www.csmonitor.com/USA/Latest-News-Wires/2012/0514/Greece-s-economic-woes-may-hurt-US [5/14/12]
2 - www.cnbc.com/id/47562567 [5/25/12]

New Realities with Expert Affiliation - Horizons West Capital Partners

1 - Last Tuesday's New Realities seminar went very well indeed. About 40 people attended, and I thin everyone had a good time and learned a lot. My sincere thanks to all who attended, and especially to Michele and Juliet for making everything run smoothly.

 2 - In case you missed it, during Tuesday's event we announced our affiliation with Horizons West Capital Partners and principal Steven McNamara. Steve is a highly trained Chartered Financial Analyst; his full time job is researching investments. A staff of seven supports him as he studies economic and investment trends, visits fund managers, and designs model portfolios. We have essentially hired Steve's firm to serve as our research department, and as such, our clients will be able to benefit from a depth and breadth of research beyond what we have previously enjoyed.

3 - Horizons West is a research firm, not a money management firm. While Steve and company will be providing me with information, I will still make the investment decisions for our clients. Our current stance aligns very well with what Steve is seeing in his research, so don't expect any major change of direction.

4 - Steve spoke to the group on Tuesday evening via video link-up from his office in Connecticut. Our connection turned out to be a bit slow, so we cut the conversation short. We hope to have Steve here in person for our Investment Roundtable on July 10.

Have an excellent week!

 -Andy

You may have wondered: What's the difference between a regular (or traditional) IRA and a Roth IRA? The answer lies in how they are taxed. Here's a quick primer on the differences.

New Realities: Not Solely Domestic

1 - Last call: our New Realities: Investing seminar is tomorrow at 5:30pm. If you haven't registered yet, we would love to see you there. I promise to make it entertaining, and I even have a little surprise announcement in store. Following the one-hour program, we will enjoy passed hors d'oeuvres by Pat Strother along with casual conversation. This event is open to the public; please attend -- and invite a friend. You can register either online or by calling Michele at 859-7001 (ext. 2). 

2 - Don't look now, but the European crisis is back following recent elections in France and Greece. French voters elected Socialist François Hollande as president. He has promised to revisit the Eurozone accord led by German Chancellor Angela Merkel.  Greek national elections resulted in a deeply divided parliament -- and no clear leader. Hold on to your hat; things could get ugly again. See the story below for more info on this unsettling topic.

3 - Many investors put faith in special individuals who can see what the rest of us can't, who know just the right stock to buy at just the right time and price. Those special individuals are known as gurus, and there's always a market for them. There's just one problem: they don't really exist. Check out this week's video for a brief explanation. 

4 - Mother's Day was yesterday, of course. For some of us who no longer have our mothers, the day brings treasured memories of wisdom, discipline, guidance -- and, most of all, unconditional love. A mother is unique among the universe; if you still have yours, treasure her. 

Have a terrific week!

-Andy

Changes in Europe Bring Fresh Anxiety to Wall Street

Will stocks face further headwinds, or sail strongly ahead?

Eurozone debt issues aren't going away -- in fact, it may be several years before the crisis ebbs. Here in May, we have a new development: leaders in Greece and France have been voted out of office, with the risk of jeopardizing the agreed-upon Greek bailout, the close alliance between Eurozone economic powerhouses France and Germany, and in the worst-case scenario, possibly even the European Union itself.

 U.S. stocks retreated from May 7-11, perhaps in part because of the news from the Eurozone. The concern may be whether we are going to have a replay of 2011 -- a new round of EU squabbling that will increase Wall Street volatility.

Some analysts think U.S. stocks can ride through these anxieties without much damage. Others wonder how "decoupled" we are from the crisis.  

What's going on in Greece? On May 6, Greece held a national election from which no majority party emerged. From May 7-11, three attempts were made to form a unity government; they all failed. Hopefully, by the time you read this, current Greek president Karolos Papoulias will have negotiated his way to a coalition. Or, the nation's next president could turn out to be Alexis Tsipras, leader of the radical-left Syriza party that gained ground with voters on its pledge to fight the austerity cuts that the Greek government agreed to as part of the latest EU/IMF bailout. If no coalition emerges in the Greek parliament, there could be another national election in June.^1,2

Greece made a deal with its bondholders months ago: they accepted write-downs on the bonds they held with the promise that those bonds would be swapped for new ones. If Greece backs out of this deal, no one knows what will happen. Some analysts think the hit would be primarily taken by Italy, Portgual and Spain -- investors would probably require higher interest rates on government bonds from these nations, which would push them further into debt. If investors pull their money out of the Spanish and Italian bond markets, Spain and Italy might end up needing bailouts.³

In the most severe scenario, Greece rejects the agreed-upon bailout deal and the euro along with it. That could lead to huge problems. A single rejection of the euro from an EU member might reveal a deeply flawed currency. A perception of a failing euro would hurt the currency and the value of European equities and bank debt; euro-denominated bonds would find fewer investors. So the global currency swap market could be damaged, with a multi-continent recession a possible consequence. Hopefully, things won't go this far.³

What's going on in France? President Nicolas Sarkozy lost a national election to Francois Hollande, a socialist who is widely considered a moderate. Hollande wants to see an economic stimulus for France even with the austerity measures coming, and he has indicated that he will propose the same thing for Germany when he meets with German chancellor Angela Merkel.³

You may recall that Merkel and Sarkozy formed a united front these last couple of years -- affirming their faith in the euro and helping to broker the Greek bailouts. Hollande and Merkel would seem to have immediate philosophical differences about fixing the EU economy, and any difference of philosophy between the leaders of the EU's two most powerful economies doesn't bode well for unity.

Defending the euro may be their most important task. It would be unimaginable to have one of the globe's reserve currencies fall apart. If currency traders see a departing euro, then conditions would be right for another global credit crunch.

What does this mean for Wall Street? If the data stream from our recovering economy can drag Wall Street's attention away from Europe -- and if the EU and IMF leaders successfully hurdle this latest obstacle -- then the impact on U.S. equities might be short-term.

Economists have warned of a fragmented Eurozone before, yet it has held together despite remarkable stress. Common ground was painful to reach, yet a feasible Greek bailout plan emerged from it. Now that common ground must be regained.

Our New World

With the combination of Labor Day and the impending tenth anniversary of 9/11, one's thoughts inevitably turn to the changes that have taken place in our world in the last ten years. Both the concept of labor as it applies to the American worker and the idea of national security are a world away from our notions of a decade ago.

Some would argue that the changes to our world are all bad. I prefer to leave that judgment for tomorrow's historians, who will have the benefit of hindsight which we do not currently enjoy. Instead, we would do well just to recognize the new realities as they exist, and deal with them as best we can. That is the goal of all our recent work and events here at Millard & Company, and we hope you are deriving some benefit from them.

Items for your attention this week:

1 - Just a few days remain until this Friday's Client Appreciation Movie Night. We already have a good number of clients planning to attend, but we would love to have more, so please plan to spend some of your Friday evening with us. You may bring up to three guests. Each person will enjoy a personal made-to-order pizza from a wood-fired oven (which will be set up next to the Depot deck), fresh local salad, and Italian wine from our friends at La Bouteille. Juliet is even making Tiramisu for dessert. We will view the timeless Casablanca on the big screen in digitally-restored Blu-Ray high definition, complete with surround sound. It promises to be a fun night, so please make plans to join us here by sending your RSVP to Libbie Johnson at ljohnson@low-stress-investing.com, to let us know to expect you!

2 - Last Tuesday's portfolio resetting work sessions were very well attended and received. We had 67 total clients in attendance between the three sessions. We will begin to implement the new portfolio models over the coming weeks and months. For those clients who were unable to attend, we are preparing a DVD of the presentation for you to view at home; the video should be ready by the end of next week.

3 - By way of introducing the client work sessions, we showed the 10-minute video slide show below. Feel free to view it and share it with others if you'd like. Unlike this introduction, the main presentation that will be included on the forthcoming DVD is intended for clients only.

Fall has unofficially begun; have a great week!

-Andy

Let's Make a Deal

1 - Well, that wasn't so hard. (Do you note just a touch of sarcasm here?) Late last night, leaders of both parties in Congress finally reached a compromise agreement to raise the federal debt ceiling and cut spending over the next ten years. However, the proverbial fat lady has yet to sing: the legislation still must pass both houses by midnight tomorrow night in order to meet the deadline, and it promises to be a heavy lift in the House of Representatives. So, we continue to wait....

3 - Please make your plans now to attend our August 9 event (that's next Tuesday) entitled "New Realities: Real Estate." Interest is very high in this timely topic. We have three distinguished panelists, each of whom can be considered a real estate expert. One one (Cathy Toomey, president of the Polk County Board of Realtors) is focused on Polk County, one (Madelon Wallace, partner with Walker Wallace and Emerson) the greater foothills region, and the third (Scott Hamilton, CEO of Advantage West) all of Western North Carolina. If you have any interest in discussing the new facts of life as they apply to real estate, I urge you to attend. Libbie will be contacting clients soon to take reservations.

3- Today is the one-year anniversary of Millard & Company as a separate corporate entity. My sincere thanks to Juliet, Libbie, Tabatha, Sharon, Bonnie, and Mike -- as well as many, many others. I am especially grateful to our wonderful clients, who have made this anniversary possible. Success is not achieved in a vacuum, nor is there any such thing as a "self-made man." It is with a sense of joy and thankfulness that I come in to our beautiful office every day, and we look forward to many more anniversaries to come.

Have a cool week!

~Andy