1. Korean conflict– it has been alleged that the North Koreans torpedoed a South Korean naval vessel and 46 South Korean sailors died. Sabers are rattling on the Korean peninsula and if an armed conflict were to break out, there would be major concerns among global investors.

2. Oil mess in the Gulf of Mexico– the Deepwater Horizon Oil spill becomes worse every day. At its current size, if the Gulf oil spill was placed over New York City, it would extend into upstate New York and Connecticut, over into Pennsylvania and cover northern New Jersey….and sadly that’s just the surface oil. Financially every American has a stake in this. About 35% of the nation’s seafood comes from the Louisiana coast and so does a similar amount of domestic oil production. Predictions are that the spill will eventually get into the Gulf Stream, work its way through the Florida Keys up the east coast and eventually cross the Atlantic to the United Kingdom. There has been no serious success at stemming this disaster. This may wind up as the worst ecological disaster ever for the U.S. Just in the last few days a minor success was achieved with a cap which is trapping some of the oil. However, we still have to worry about a possibly active hurricane season.

3. Debt– The U.S. National Debt has passed $13 trillion. Only 6 months ago it was at $12 trillion. The larger the debt grows, the faster the government’s interest payments mount up.  Take a look at www.usdebtclock.organd see how the debt jumps hundreds of thousands of dollars every minute. One thing we have learned from Europe is that uncontrolled deficit spending is not good for any country. To be sure, there is too much debt in the world.

4. Iceland– other news stories have overshadowed this recently but the volcanic eruption in Iceland is still active and disruptive to air travel and economies in Europe.

5. Europe – what’s wrong?

·        Massive amounts of sovereign and corporate debt. Don’t the people, corporations and governments realize that debt has to be paid back?

·        Rampant unemployment – Spain has 20%+ unemployment.

·        No commonalities in tax system, retirement, etc. This is a key reason why the Euro is in trouble.

·        Will the Euro survive? Probably – but there are still a lot of problems ahead.

·        Hungary: Last week, the financial news media was talking less about Greece. Hungary briefly took the “crisis of the week” spotlight. Hungary’s new government warned that their economy was in a “grave situation” and that talk of a sovereign debt default was “not an exaggeration”. We suspect that Hungary will be able to get out of its mess because they are not part of the Euro and can devalue their own currency. Their budget deficit is actually lower (relative to GDP) than budget deficits in Britain and the U.S.

6. Unemployment – With a near 10% jobless rate, we are obviously in a slow job-market recovery. Most economists estimate that population growth alone requires 150,000 jobs to be created each month just to keep the unemployment rate steady.

Riddle: A zookeeper has a certain number of cages and a certain number of tigers. If she puts one tiger in each cage, she has one tiger too many. If she puts two tigers in each cage she has one cage too many. How many tigers and cages doesshe have? The answer is at the bottom of the newsletter.

The Markets– “The Correction”

This current decline is not unlike other declines after the market has risen so far so fast. Every “bull” market since 1932 has experienced at least one major correction of 10% or more before moving on to new highs. While uncomfortable for investors, corrections are normal and healthy and serve to prevent asset bubble formations.

We are living through a remarkable time of change for the global economy. It is a time of collisions as we journey toward a de-levered and re-regulated world. For investors this translates into a period of changing risks and opportunities. It is a world that calls for a broader investment universe and strategies that can better capture the opportunities available in the world of today.

Several of the market gurus whom we follow have sounded the drumbeat for market caution. Of course, no one can predict the market’s direction, especially in the short term. We believe, however, the evidence points to a range bound and volatile market for the rest of 2010. And without drastic changes in fiscal policy both domestically and abroad, we could be in for serious trouble economically.

We believe “caution” is the watchword for the foreseeable future. We are watching your portfolio but if you would like a further review for the purpose of risk reduction, kindly let us know.

We realize this newsletter has pointed out some of the obstacles we are facing today. However, we have positioned your portfolio with these risks in mind. We do have confidence in the resiliency of the economy and the markets over the long term, but we want to be sure to navigate these stormy waters in the meantime.

Have a great summer!

Riddle answer: She has three cages and four tigers.

Sources: Navellier.com, Wall Street Journal.com, MarketingLibrary.net, Frontlinethoughts.com, Advisorperspectives.com

What does health care reform include … REALLY?

As we continue to receive news on the new health care legislation, we will update you. The following hopefully adds some clarification to some of the public’s questions.

Confusing doesn’t even begin to describe it. Throughout the very long debate over health care reform, a great deal of misinformation (spurred by presumption or misunderstanding) was circulating. Additionally, many changes and alterations to the proposed law were made along the way. At this point, some of the arguments your friends, neighbors or co-workers continue to debate don’t even factor into the legislation signed by President Obama. So what’s the truth behind the Affordable Health Care for America Act?

Q: Will I be forced to change insurance?
A: No. That’s a MYTH.
If you’re satisfied with your current plan, you can keep it.²

Q: Will illegal immigrants now be covered by our money?
A: No. That’s a MYTH.
In fact, undocumented immigrants are expressly excluded from coverage. Only legal immigrants who pay their share will be covered.³

Q: Will I go to jail or be harassed by the IRS if I don’t have health coverage?
A: No. That’s a MYTH.
In 2014 Americans (except Native Americans, Inmates or those with religious objections) will be required to have health insurance or pay an annual penalty. True. However, the law prevents the IRS from using levies, liens or seizing property. Additionally, the IRS cannot impose criminal penalties (such as time in jail).⁴

Q: I heard there was going to be a 10% tax increase across the board. Is that true?
A: No. That is a MYTH.
While there will be tax implications, most of the biggest changes apply to medical manufacturers, insurers and pharmaceutical companies. In fact, some Americans may see no changes at all. Tax changes that could affect average individuals include …

·        A 10% sales tax on indoor tanning (yes, really)

·        A 0.9% increase on the Medicare tax rate

·        A 3.8% tax on investment income for individuals earning more than $200,000 and households earning more than $250,000 ⁵

·        Taxes on high-end or “Cadillac” health care plans (this excise tax would not begin until 2018 and only apply to insurers of plans that exceed $10,200 annually for individual coverage, or $27,500 annually for family coverage) ⁶

Q: Will the government now pay for abortions?
A: No. That’s a MYTH.
The law already in place which prevents using federal money to fund abortions (except in cases of rape, incest, or danger to a woman’s life) is not being altered. ²

Q: Will I have to pay for other people’s abortions?
A: No. That’s a MYTH.
Those opposed to abortion will not be forced to assist in funding them. You can simply select a plan that does not offer them. This applies not only to people who may have objections to abortions on moral grounds, but also to those who simply have no reason to pay an extra premium for that type of coverage (such as women past their child bearing years or single men). ¹

Q: Does the “Public Option” mean the government will run health care?
A: No. That’s a MYTH … and a non-factor at this point.
In fact, the “public option” did not make it into the final legislation that President Obama signed. THERE IS NO PUBLIC OPTION. Even before it was dropped from the bill, it was misunderstood to be government-run health care – wherein the government would make your health care decisions. Rather, it would have been government-provided insurance option to compete with private insurance.⁵

Q: Will my Medicare benefits be cut in order to extend care to others?
A: No. That, too, is a MYTH.
Brooks Jackson, director of FactCheck.org, says that although the reform package includes $500 billion in "cuts", it does NOT include traditional Medicare benefit reductions.⁸

Q: Does this mean that “death panels” are now a reality?
A: No. And they never were.
This myth was based on misunderstanding of a provision in the original bill that required payment, by Medicare, for health care practitioner-led end-of-life counseling. This is not part of the law.⁷

For more answers, you can visit www.whitehouse.gov/healthreform

As always, please call our office with any questions. We wish everyone a very Happy Easter!

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

These are the views of Peter Montoya Inc., not necessarily those of Kohlhepp Investment Advisors, Ltd. nor Cambridge Investment Research, Inc., and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. Past performance is not a guarantee of future results.

.petermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net

Citations

1 - cnn.com/2010/POLITICS/03/23/health.care.timeline/index.html?hpt=T1 [3/23/10]

2 - signonsandiego.com/news/2010/mar/23/health-care-myths-realities [3/23/10]

3 - poder360.com/article_detail.php?id_article=3994 [3/24/10]

4 - insurancenewsnet.com/article.aspx?id=174568 [3/24/10]

5 - americasnewsonline.com/healthcare-bill-does-very-little-to-hinder-health-insurance-companies-903/ [3/24/10]

6 - americasnewsonlineboston.com/business/personalfinance/managingyourmoney/archives/2010/03/tax_implication [3/24/10]

7 - theglobeandmail.com/news/world/no-death-panels-but-obamas-reforms-do-bring-change/article1508653 [3/22/10]

It would be wonderful if the U.S. financial markets could “decouple” themselves from what is going on in Greece, Portugal and Spain. Unfortunately, the debt situation in these countries is like a ripple in a pond. The question is, how strong will the ripple ultimately be and will its full force reach our markets?

The problem. Greece, Spain, Portugal, Italy and Ireland (affectionately referred to as the PIIGS) are all carrying enormous debts. On May 1, the New York Times put up a chart breaking this down: Greece owes $236 billion, which believe it or not is the smallest debt among these five countries. Portugal’s debt stands at $286 billion – and it owes roughly a third of that to Spain. Spain carries around $1.1 trillion in debt, and its economy is in horrible shape (20% unemployment). According to the Bank for International Settlements, it owes $220 billion to France and $238 billion to Germany. Ireland has $867 billion in debt, with about 40% of that owed to the U.K. and Germany. Italy owes $1.4 trillion, including $511 billion to France (almost 20% of France’s GDP).¹

After the euro was launched, Greece had access to a whole bunch of cheap debt - and the country used it nonchalantly. In the years since the establishment of the euro, Greece’s debt-to-GDP ratio has remained repeatedly above 100%.²

Europe’s biggest banks are heavily exposed to these debts, and so are some of ours: names like Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley. In fact, these five banks have $2.5 trillion of cross-border exposure in the crisis, with Citigroup the most exposed. So U.S. taxpayers have potential risk to these banks, the euro, and the European and world economy.³

The offer on the table. Finance ministers from the 27-nation European Union hammered out a deal in Brussels early Monday, May 10, under which the EU Commission and the International Monetary Fund will make available some 750 billion euros ($955 billion) in lending support to some of the 16 eurozone countries like Spain and Portugal to keep those nations from suffering the same fiscal fate as Greece. Greece has the chance to accept a $146.5 billion bailout from the International Monetary Fund and the European Union in exchange for austerity measures (less government spending and a lower standard of living). This would help Greece avoid default – that is, having to renegotiate its debt and possibly assume more. (As a sovereign nation, Greece cannot go bankrupt.) Many economists think Greece will go into a deep recession (or depression) which could last most of the decade.^2,4

Note: 20% to 40% of the International Monetary Fund is funded by the U.S. and consequently U.S. taxpayers.

The whole Greek economic tragedy had made for lurid headlines, one of those rare global business stories that gets the attention of average investors. You know that a country is bordering on dysfunction when its AIR FORCE goes on strike.


The potential ripple. It looks like the bailout will be accepted by Greece and its EU partners. This means some confidence will return and other Eurozone nations with big debts will be slightly less threatened. However, Greece still has a risk of default.

Should Greece default even with the bailout, some major lenders in France and Germany would be hit very hard. They would have to raise capital ratios and reduce the frequency of loans. That would hamper economic growth in France, Germany and in turn across Europe. In coming months, the U.S. and other nations could feel the pinch from such a slowdown.⁴

Keep in mind, Greece only represents about 2% of the Eurozone economy.² Greece’s economy (approximately $350 billion) is about the size of the U.S. state of Georgia. In the roughest scenario, Spain or Italy could default and the shock wave to European banks (and U.S. banks exposed to the debt) would be significantly greater. What would happen then? A credit freeze across Europe? Diving stocks? A trashed euro? A flight to gold?

These are merely scenarios, not present realities – but in a nutshell, this is what had Wall Street biting its nails this spring.

So is the bailout truly a solution? It was unpopular throughout the EU, but probably the right step to take. The move certainly helped defend the stability of the euro; in fact, German Chancellor Angela Merkel and French President Nicholas Sarkozy have jointly pledged to preserve the euro’s value.⁵

The worry is that other bailouts will be needed to preserve the fiscal health of other Eurozone nations. We all hope these countries can effectively manage their debt levels, for the sake of the stock market and the economy in our country.

As always call us with any questions you may have.

Best regards,

These are the partial views of Peter Montoya Inc., not necessarily those of Kohlhepp Investment Advisors, Ltd. nor Cambridge Investment Research, Inc., and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. Past performance is not a guarantee of future results.

 Citations