Tough Problems, Tough Solutions

Weekly Update – May 14, 2012

Concerns about Europe and the global economy set a negative tone last week and markets closed out at a loss. The S&P lost 1.15%, while the Dow lost 1.67%, and the Nasdaq 0.76%. On apositive note, the U.S. economy continues to slowly improve as evidenced by asurprisingly positive consumer sentiment report, showing that American consumers are still upbeat about the economy. Jobless claims held steady for
the week and some analysts speculate that the unusually high unemploymentclaims seen in the first weeks of April were the result of seasonal adjustment and not actual job losses. Earnings season is winding down, but a few key players such as Disney, Macy’s, and Kohl’s posted better-than-expected earnings.[i](These opinions are not to be construed as investment advice)

Eurozone troubles were at the core of investor concerns last week as realization dawned that in order to keep the European Union (EU) together, the European Central Bank (ECB) will have to pump trillions of euros into the monetary system. Germany is likely to face high inflation rates for the next few years as it struggles to help the economies of its partner countries. Still haunted by the hyperinflation of the
early 1920s, German voters may balk at the spending required to keep the euro afloat, pressuring politicians to balance needs with voter concerns – something that is never easy to do.

The recent European elections may also make it difficult for Europe to make headway against its debt
troubles. Hollande, the new Socialist president in France, has promised voters not to continue with strict austerity measures. While this is appealing to the masses, it could lead to additional downgrades on French debt, thus making problems worse. In Greece, the majority parties won less than 35% of the votes,
giving significant headway to fringe parties. This development, combined with popular sentiment so opposed to necessary austerity measures, has made it increasingly likely that Greece will leave the Eurozone. While the EU can probably survive the exit of Greece, in order to preserve its integrity, it will be critical for the ECB to prevent the default (and exit) of Spain or any of the larger economies. The ECB is the only entity in Europe with the power to save Spain from default – however, the only way to do so is by printing a ton of money, and risking inflation and currency devaluation.[ii]

What all this means for U.S. investors is this: The crisis in Europe is far from over, and we should not be surprised by volatility and uncertainty right now. If European politicians, nervous about losing elections, refuse to make hard budget decisions, Europe’s crisis may deepen and threaten the stability of the euro. It is impossible to know what the future holds for Europe, but with every downside usually comes an
upside somewhere else. We work hard to identify those upsides, and to adjust our clients’ investment strategies where necessary. Thank you for the trust you’ve placed in us.

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