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July 21st 2011 Commentary

Do You See What I See?

The market is rallying today on a possible European Union bailout plan for Greece. As it stands, the markets are on pace for their best weekly gains in three weeks and their first monthly gains since April. With so many headwinds still prevalent, I am not sure I understand such short-term optimism.

I still see several issues that need to be resolved or improve before I feel more confident that the economy and the markets can return to a period of steady growth.

The most pressing issue is a resolution on the debt ceiling. The U.S. Treasury bond is the benchmark used as a risk-free rate of return due to its backing by the “full faith and credit” of the U.S. Government. Even a partial default by the U.S. would render credit ratings and financial instrument pricing obsolete since there would no longer be a risk-free rate of return pricing point.

If there is a positive resolution to the debt ceiling issue, I still worry the U.S. growth prospects may be limited until the housing and unemployment issues improve. Corporate earnings have been strong so far this earnings season, but a number of companies have reduced their future earnings estimates. With unemployment not improving, I fear consumer spending may decline and companies may have difficulty maintaining current earnings projections. Another factor that could hamper corporate earnings is increased inflation in emerging market countries. Emerging market growth and spending has been one of the catalysts that have contributed to solid corporate earnings over the past few years. Hyperinflation will lead to a decrease in purchasing power and a decrease in consumer spending.

Although I am optimistic that the world will work through some of my concerns in the second half of 2011, I will maintain my caution until I start to see some positive resolution to those issues.

As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.

Jason M. Vavra, CPA, PFS


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