The Stock & Bond Markets -
Winston Churchill is often credited with saying that "if you don't like the way the game is going, change the way it's scored." A few years ago (remember the dot com bubble?), the "talking heads" on news broadcasts were talking about a "new paradigm" - turns out there was no new paradigm and that earnings mattered after all. Then there was the "consumer-driven" economy in which reckless spending was financed through ever-increasing home values - oops. More recently, there has been hedge funds and private equity driving the markets through mergers and acquisitions - except there were a few bad bets that forced the closing of several and financing for mergers/buyouts dried up as the housing market woes (see below) worsened. It seems like it never ends. In my 27 years of managing money, there's "always something" which drives markets followed by reality in which gravity exerts its force - remember tax shelters as well as the silver and oil markets in the 1980's? - how about the junk bond market and saving and loan crisis in the 1990's? It never ceases to amaze me how individuals forget the lessons of history while jumping from one "sure thing" to another. We have always advocated diversification and while investing within the risk parameters that are appropriate for each client and proudly list our track record in the "Bottomline" section to the right and we encourage all investors, whether they invest with us or not, to do the same.

Meanwhile, the U.S. Treasury bond market rallied in July as investors (note: bond buyers are really lenders, not investors) made the "flight to quality" while those in the high yield (a.k.a. junk bond) market suffered significant valuation losses as interest rates in those markets rose by almost 2% in 2 weeks (not a typo). Quality in the bond market is every bit as important over the long run as it is in the stock market.

CELEBRATING 27 YEARS
Since 1980, I have been providing financial advice to investors and I'm proud to say that our service and performance (see "Bottom Line" section on the right) continue to be superior to the market and our peers. Thanks for your support.

Real Estate Bubble? -
In a Reuters story last week, as both a joke (pun?) and a reference to Las Vegas, the story began with the classic "What happens in housing stays in housing, right?" Perhaps the reference to Vegas wasn't too much of a pun since many real estate purchasers (like gamblers) shouldn't have been leveraging their bets in a market that, like all markets, goes up and down. Unlike Vegas where the house (no pun intended) always wins, housing does create wealth at times and "redistributes" it at others depending upon the cycle. I've written about the homebuilding industry's woes in recent newsletters so I thought I would focus on the "food chain" theory of housing economics and why it is not likely to be "contained" (as wishful economists hope) to only that industry. Imagine dramatic layoffs in the housing (and related) industries which means those former employees don't have the money to buy new cars, hi-def TVs or even take the family on expensive vacations or out to eat as often. The food chain theory says that the impact is felt among those car, electronics, travel and leisure industries which means workers from those sectors will be laid off and spending less and so on. Additionally, there's the psychology of spending based on a perception of wealth and if people believe their homes are going down in value (true or not), they will spend less. And there's the recently discovered impact of rising mortgage rates which affect bottom lines and force people to spend less elsewhere. These three scenarios tend to feed on one another in a way that is neither good for housing or the economy. While there may be some unique opportunities, diversification (geographically and in investments other than real estate) is almost always the appropriate strategy to maintain.