R.W. Roge

On Friday, June 1, 2012 we had an all day investment strategy meeting. The purpose of this semi-annual meeting is to review our current portfolio strategy and evaluate it against the current state of the global economy...Easier said than done.

While there is plenty to worry about globally, particularly the European financial crisis, Iran, and domestic policy decisions, we can take some comfort that corporate earnings continued to grow and our economy is muddling through with positive GDP numbers. Traditionally, election years are positive for equities. Since 1928 there have been 21 Presidential elections with only three of those years producing negative returns for the S&P 500. Until we have more clarity on the U.S. election, domestic policy decisions and the European financial crisis we will remain cautious and flexible.

It's clear to almost everyone, except the politicians, what needs to be done. Leadership requires the President to call Congress back from vacation and get working on the problem. It requires European politicians to come to the table and take their bitter medicine. A growing U.S. economy is good for everyone in the global economy, because even after the recent rating downgrade by Standard and Poor's, we are still the world's largest economy and our U.S. Dollar is still considered to be the world's reserve currency.

Expect the markets to remain volatile between now and the 2012 election. Over the next few weeks, there will be plenty of talk about the impact of the S&P downgrade. Clearly it's not positive, but I don't buy into the catastrophic talk. Many insurance, trust companies, money market funds and municipalities (Muni Bond Issuers) will have to review their contracts and trust documents to see exactly how they are worded as far as the quality of the bonds they are required to hold. Until this legal review is completed, there is no way of assessing the impact of the downgrade on the markets.

Our elected leaders in Washington, D.C. are playing a dangerous game of chicken. They are making everyone nervous about the deadline (August 2, 2011) for extending the debt ceiling. While every expert on the subject, including Congress, knows that the only solution is to raise the debt ceiling, they are using this to score points for the 2012 election year. Therefore, we should expect another week of this political circus to continue before there is any agreement. My guess is as good as yours and your congressmen's as to what the details will be.

Following the release of the Republican budget proposal, President Obamas subsequent response and the recent downgrading by S&P, I thought I would share some thoughts on the Federal budget. Before expressing my recommendations, you need to know that I really dont like politics which lately has not produced very good policy or politicians, who seem primarily focused on getting reelected. At the end of the day, much of the business in Washington doesnt seem to be about what's good for the country. So, that said, here are a few suggestions I believe could get us moving in the right direction.

Gone are the days when you worked for a company for 35 years and received a gold watch and a monthly pension plan payment for life. Today those old fashioned Defined Benefit Pension Plans have been replaced with 401(k) Defined Contribution Plans and IRAs. These accounts require you, not your company, to determine how much to save, how to invest and manage those savings. It also requires you to assume all of the risk yourself.

Recently we have had conversations with a few clients about making changes to their portfolios due to the current events in Japan and the Middle East. Our advice is not to make changes based on current events. One should only revise their portfolio if their goals or personal circumstances change.

Our outlook for 2011 remains cautious, as we were last year. We will continue with most of our 2010 strategies for 2011, with the exception of bonds and municipal bonds which may present some difficulty going forward. We have already lowered our allocation to bonds in the third quarter, lowered our bond duration, and are currently lowering these variables even further, especially in the municipal bond area.

Our outlook for 2011 remains cautious, as we were last year. We will continue with most of our 2010 strategies for 2011, with the exception of bonds and municipal bonds which may present problems. We have already lowered our allocation to bonds in the third quarter, lowered our bond duration, and may lower it further, especially in the municipal bond area. We are still formulating our strategy as we gather more information.

We are headed into a global economy that can be best described as one of deleveraging, reregulation, de-globalization, and temporary mistakes in government policy responses. U.S. consumers now believe in spending less and saving more for the future. The current saving rate in the U.S. is about 6 percent. That's up from 0 percent a few years ago. All of this evidence points to a slow-growth economic recovery that will eventually improve as government policies fail and more logical policy responses prevail.

Recent signs of economic strength are encouraging, but mostly stem from temporary factors like stimulus spending and inventory rebuilding. Based on current valuations, it is likely that stock returns will trend below average in the next five years. Even under more optimistic scenarios, annualized equity returns barely reach double digits. This goes for stocks of both domestic and foreign developed markets. Roge's investment view therefore remains cautious, balanced and flexible.

The fact that Goldman Sachs did not to disclose to their retail clients that they were betting against the very products they helped create for their institutional clients and then sold those products to their retail clients is disgraceful and unethical, even if the company's actions turn out to be legal. Goldman, the SEC, Congress and the media are missing the point, however, as they argue over what's legal and what's not. The real issue at stake is fiduciary duty and responsibility, and no one in the financial services industry should be exempt.

R.W.Roge is a NY-based advisor and fund manager. They call for a "slow and bumpy" recovery, and expect interest rates to rise. They are investing in the shorter end of the yield curve, TIPS, and high-quality dividend paying stocks.