Spreng Capital Outlook 2010 Q1

8/9/2019 Spreng Capital Outlook 2010 Q1

http://slidepdf.com/reader/full/spreng-capital-outlook-2010-q1 1/4

“Creating wealth is important;Retaining wealth is imperative.”

Sherlock Holmes is quoted as having said,“Inflation is the young’s revenge on their elders for the elders overspending” . How

ironic that a quote so biting, pithy and perceptive isactually credited to a fictional character in Englishliterature. It is probably not fairto begin this newsletter with aquote about inflation. Of all theeconomic headwinds that theeconomies of the world face,inflation is probably one of theleast of our worries, at least rightnow. China continues to exportdeflation through low wages for labor. As long asmanufacturers can hire low cost employees in Asia,

pressure to increase wages will continue to be non-existent. Unfortunately, low cost, available laborin Asia does not bode well for unemployment herein the United States. With a manipulated currency,central government controlled economy, a terriblehistory of pollution and human rights issues anda banking system that is less than transparent; wecan’t help but wonder if the Chinese economy is bestdescribed as a bug in search of a windshield!

Spring 2010

Unemployment and housing concerns stillcontinue to plague the US economy. The currentunemployment rate, as quoted in March, washovering around 9.7%. We tend to put morecredence in the under-employment rate. These areworkers that have become discouraged and havestopped looking for work or are working multiplepart time jobs because they cannot find full timeemployment. This number for the under-employedfor March was 16.8%. The average workweek iscurrently 33.3 hours worked per week. This presena hurdle for future employment gains going forwar

Just to get back to an average of 40 hours a week means that manufacturers and service providershave 20% more hours to glean from their currentworkforce before they even consider adding workeThe level of employed workers is currently around129.5 million people. This is the same number of employed workers that the US economy had in1999. Unfortunately, we have added 29 million

new workers to the labor forceover the last 11 years throughpopulation demographics andimmigration. The reality isthat we have 29 million morepeople looking for the samenumber of jobs that we had 11

years ago. It would be quite anunderstatement to say that the overall job outlook continues to be bleak.

The Federal government spent another $18 billionrecently to try to create jobs. While by itself, this is noble, worthy goal for the use of federal funds, thisvery action also adds to an incredible rising publicdebt that hangs over the economy and the stock markets like the sword of Damocles. We were one the very first to sound the alarm over states’ budgedeficits about five years ago. While it gives us very little enjoyment to have been correct in calling the

Index1st

QuarterYear

DOW 4.11% 4.11%

NASDAQ 5.68% 5.68%

S&P 500 4.87% 4.87%

Great American Crossroad © Eric Grohe,located in Bucyrus—city entrance and event backdrop.



impending fiscal problems of the individual states,it is a little reassuring that we were out in frontof this story long before it became daily headlinesin the media or daily cries of woe from the largebrokerage firms. Simply put, the state budgets arein shambles. Declining income tax revenues causedby high unemployment and lower real estate taxrevenues from foreclosed upon homes does not bodewell for a balanced budget. When coupled withthe tremendous strains on state budgets to fundhigher and longer unemployment benefits, Medicaidpayments and under-funded public employeepension plans, this becomes a volatile mix headedfor disaster. California and Illinois are flirting with anew currency called IOUs. Collectively, the 50 statesneed over $156 billion just to balance their budgets!Where will this money come from, the taxpayers

either on the individual state level or from theFederal government and the federal tax revenue?

The European continent has been embroiled in theirown fiscal emergency for the last three months.Greece has gone broke. There are more polite ways

of saying this such as, Greece is struggling withthe havoc wrought by a global recession or thegovernment is having difficulty assimilating into theEurozone culture and currency. Simply put, Greece isa welfare state that has promised too many benefitswithout requiring the necessary work or tax revenueto support the welfare state. It would appear thatFrance and Germany will be bailing out Greeceunless they can pawn off the responsibility to theInternational Monetary Fund. They would be backingany new bonds that Greece must sell to finance theirdebt. What a surprise that the largest contributorto the IMF is the United States! If we were Franceor Germany, we would want the IMF to handle thesituation too. The downside to the bailout is that 61%of Germans polled do not favor a bailout of Greece.A staggering 40% of Germans polled would like toleave the Eurozone economic umbrella and the Eurocurrency altogether!

Greece is not alone in their misery. Europe refers totheir problem children as the PIIGS which standsfor Portugal, Ireland, Italy, Greece and Spain. Allfive of these countries are on the verge of a fiscalemergency or bankruptcy. Imagine if California,Michigan or Illinois eventually descend into the fiscdepths similar to the PIIGS. What will happen? TheUS taxpayer must ride to the rescue and bail out thstates in difficulty. To do otherwise is simply not aviable option. However, while the talking heads onTV keep lauding the value in municipal bonds, weare more cautious and concerned about who thewinners and losers will eventually be in the statesand cities that have over-promised and under-taxe

The US federal government is now spending 24% oour total Gross Domestic Product. The percentage

has never been this high except for during WorldWar II. President Johnson and the Great Society approached but never hit 20% of GDP. FranklinRoosevelt, author of The New Deal, only peakedat 10% of GDP during the Great Depression. Whoever thought that Roosevelt would be considered afiscal conservative? The National Debt now standsat $185,000 per worker. We prefer the comparisonto worker rather than per person. I doubt that an 8

year old or a 6 year old would be able to have mucof an impact on reducing the National Debt so we

prefer worker comparisons.

The housing bubble started this whole mess andunfortunately, it would appear that the price of anaverage house still has not reached realistic pre-bubble levels. The Schiller Home Price Index, themost widely quoted measurement of home values,predicts that home prices still may drop between 1and 20% more. New home construction is still outof balance. We are building 156 homes for every 100 homes that we can sell. There are 2 million

homes that are vacant or for sale. There are anothe3.4 million homes that are vacant but held off themarket due to fear of prices too low. There areanother 3.5 million homes that are occupied but fo

“When everyone thinks alike,

everyone is likely to be wrong”.

~ Humphrey B. Neill ~

“Things may come to those who wait,

but only the things left by those who hustle”

~ Abraham Lincoln ~



sale. We have a 21 month supply of homes availableeven if we did not build another single home! 1 in7 home owners are either in foreclosure or havemissed at least one mortgage payment. It is not justhouses; commercial real estate has been crushed,too. Vacancy rates on commercial property are at18% nationwide. From 2010 to 2014, $1.4 trillion of commercial real estate loans will be coming do forpayment or renewal. Commercial real estate priceshave dropped 40% in the last two years. We think itis safe to say that there are still a lot of bad loans onthe books of many banks. We can only imagine thetenor of the impending discussions between banksand owners trying to refinance all of this commercialproperty whose collateral value has dropped somuch in value!

President Obama recently signed sweeping legislationimplementing a national health care system that willbe implemented over the next few years. As we haveindicated, we have remained fairly detached fromthis whole debate. While we absolutely supportedthe notion that changes are needed, our personalchoice would have been to try to make the necessary changes in manageable increments. The legislationis signed and now it is time to assess who thewinners and losers will be for us as investors. WillBig Pharma win or lose? How will the insurance

companies adapt to the new landscape? For thatmatter, we have already seen Deere and Caterpillarannounce huge write downs on their future profitsto reflect tax breaks that they had been receivingto subsidize their retirees’ drug costs. As we haveindicated, in legislation as controversial as this, thedire circumstances are never as bad as predicted butneither are the benefits as wonderful as promised.

As an interesting historical backdrop to thehealthcare debate, the very first health care

legislation was passed in 1798 for sick and disableseaman. In 1854, President Franklin Pierce vetoeda national mental health bill on the grounds thathealth was a private matter and therefore the billwas unconstitutional. And finally, in 1912 formerPresident Theodore Roosevelt campaigned as anindependent on a platform calling for a singlenational health service. The more things change, themore they stay the same.

My wife, Valerie, always has to caution me not to btoo negative when I write these newsletters and as

most always is the case, she is correct. I don’t meanbe negative but I prefer to make sure that all of ourclients have realistic expectations and understand trisks that abound. Actually, we are optimistic abou2010 and the potential for adequate returns. Forinstance, in the quarter just completed the S&P 500was up 4.87%. The Dow Jones Industrial Averagewas up 4.11% and the NASDAQ was up 5.68%. If we extrapolated these returns over four quarters wwould have a very good year for equity returns. Wedon’t expect that to occur but there are reasons forsome degree of optimism. Gasoline prices are risingbut slowly. Unemployment has leveled off, albeit atuncomfortably high levels. What we find the mostencouraging is the use of the stimulus funds thatremain untouched. Of the $787 billion of stimulusmoney that was approved for use in 2009, only 35% was spent in 2009. This was planned from thestart to hold back a sizeable portion for use in 2010A cynic could say that this was done to guaranteere-election in Congressional mid-term electionsin November. A true economist could say that thiswas done to adequately use limited resources in themost effective manner. As is usually the case, there probably a degree of truth in both statements. Eitheway, we are optimistic that the use of these Federalstimulus funds will bolster the economic outputenough that 2010 will turn out to be a decent yearfor economic recovery and the US equity markets.

We are optimistic for multiple reasons. We were just able to acquire the entire company from ourpartner, Jim Pigman. We greatly appreciate all of th

support and assistance that Jim provided throughthe years. In the process of acquiring ownership,we have changed our name to SPRENG CAPITAL MANAGEMENT, INC. Absolutely nothing else haschanged or will be changing. I always have been thsole manager of your investments and Leslie has bein charge of all service related issues so nothing hachanged except the name of the company. Also soowe will be moving into our new office space on Ma

“Why did God create economists?

To make weathermen feel good

about themselves”!



229 River Street, P.O. Box 47

Bucyrus, Ohio 44820-0047

P: 419.563.0084 • F: 419.563.0234

www.sprengcapital.com

Jim Spreng: [email protected]

Leslie Kunzer: [email protected]

Spreng Capital Management is an investment

advisory rm registered with the SEC. Founded in

2010 by James Spreng, Spreng Capital has grown

to encompass the very best in service and support

for our clients.

Our client base is quite diverse. With clients in 15

states, we offer structured, customized investment

management for individuals, prot sharing plans,

Foundations, endowments and businesses. We

are fee only investment managers, receiving no

commissions nor do we sell any nancial products.

We are paid only by the investment management

fees of our clients. We advise our clients on

nancial planning and manage their assets, making

recommendations based entirely upon our clients’

needs and goals. Everyone on the Spreng Capital

team has a vested interest in the success of our

clients’ portfolios. Our team has a unique blend of

experience, youth and business credentials.

Our use of high quality stocks and mutual funds

along with investment grade bonds, allows us

the opportunity to deliver consistent long term

returns. We focus on minimizing risk and volatility,

striving ultimately to deliver the very best after-tax

returns possible, within the constraints you have

established.

There is nothing that signals success more than

referrals from existing clients. Our success is a

result of our clients’ continued condence in us and

their willingness to recommend us to their family

and friends.

Street in Bucyrus. We are very excited and optimisticabout the changes that have occurred and will beoccurring. We feel that the move to larger spaceand acquiring complete ownership will allow us theopportunity to continue to grow the company andexpand our service team. With clients in 15 Stateswe needed to plan for succession and expand ourability to provide the same high quality investmentmanagement and service that you have come toexpect. We are excited and optimistic about the futureboth for you and for our company. Please notice ourupdated email addresses and website address. Wealso will be once again hosting a Client Appreciationevening on September 8, 2010. Please mark yourcalendars and we hope that you can join us.

No one said securing your financial future was easy;nor should it be. There are many challenges and

headwinds that we will face every day. The marketscontain risk and they offer reward. Our task is tobalance the two and deliver good returns with anacceptable amount of risk.

If you have questions about your holdings orabout the general condition of the economy, pleasecontact us at once. If we do not have a currentemail address for you would you please emailus and allow us to add you to our regular list of clients with whom we correspond. Our email

addresses are [email protected] [email protected]. Please be assured thatwe are monitoring the situation at all times.

If there have been any changes in your financialcircumstances of which we should be made aware,please notify us at once. If you would like a copy of our most recent Form ADV, part II, or our Privacy Policy, please call the office. If you have not visitedour website, please do so at www.sprengcapital.com.

We appreciate the opportunity to work with

you, your families and your businesses. We arevery grateful for the many referrals that youhave provided to us. We can think of no greatercompliment than to have you recommend us toyour family and friends. We will continue to do ourvery best to provide you with healthy, consistentreturns with a minimum of risk. Always remember,“Investing is a marathon, not a sprint” .

Spreng Capital Outlook 2010 Q1

Documents

Transcript of Spreng Capital Outlook 2010 Q1