Seasons Change

Mark your calendars for our fourth Annual Open House and Wine Tasting Event. It will be held on May 3, 2007 at our Livonia Office. We will start off with healthy appetizers and such then some decadent desserts from my favorite bakery Elite Sweets at 4:30 and then start our wine tasting in earnest at 6:00. Please feel free to invite a friend or two, especially that rich uncle of yours that is looking for a good financial advisor! Many smiles.

Life has been good around here as we have stayed very busy from the start of the year throughout tax season. Yes, we have five seasons in our life. Spring, Summer, Fall, Winter, and Tax Season. We stay busy during tax season gathering information for our clients so they can send off some funds to help our friends in Washington who always seem to need more money. Many of you have told us how you appreciate being able to get all of your information in a timely fashion from our office as it makes doing your taxes much easier. We also have several people working with us that do taxes for that purpose. It makes life easier for all concern. So a special thanks to Sandy Park, Leanna (Williams) Kavanagh, CPA, Mark Wojcik, CPA, and Don Tuttle, J.D., CPA, for doing taxes for our clients.

I spent a week during March in Fort Worth, Texas, visiting family but feel I need another week somewhere where both the air and water are warm. Hmm. Sounds like Florida for me. Mike has been staying busy during the winter months with a few ski trips and then in March he spent St. Patrick’s Day weekend in New Orleans with his brother Carl (Sandy’s son). They told me they behaved and if you knew Mike well enough you would know that to be true. Carl is now back in Iraq as a medic attached to the 89th Cavalry Regiment. We wish him a safe return.

Mike will be doing his part in helping the American Diabetes Association with their annual Tour de Cure for diabetes fundraiser in June. The bike ride leaves from Brighton and will involve 50 miles of riding to raise funds. I am proud to aid him with a donation. As you may know my company Center for Wealth Preservation, has been a proud sponsor of this cause and others such as the Special Olympics for many years. I respect people who give to just causes and support their local communities. So for all of you that are givers, my hat’s off to you.

Changing Cycles
Spring is the time of year for renewal. I am always amazed at the life that springs forth after laying dormant for so long. Just a short while ago I recall looking out my window at the backyard and not seeing any life at all, just a cold, white blanket of snow covering the earth with the bare limbs of trees standing still. Now we are seeing buds on trees and birds returning. Spring has always been my favorite season as it gives one hope and a waiting expectation of greater things to come.

Looking at this cycle of life my thoughts drift to the markets. It is evident that our economy moves in cycles as do the stock and bond markets. Our economy and the global economy are constantly changing. With changing cycles in the economy and the weak housing market I see the possibility of a recession on the horizon. This would favor a portfolio of more bonds and high dividend paying securities like utilities. Of course in contrast to this, we also are seeing higher commodity prices around the world which can be inflationary.

What a contrast. It goes with one of my favorite sayings, “The hardest time to invest is now.” This saying makes the point that it is hard to decide what is best to do with an investment dollar today. We can all look back and say what we should have done a year from now! Add to this the power of human emotions on investing and you can see how we can have markets that move up and down so much. So in summary, we remain diversified using proven strategies, proven managers, and adding an element of protection whenever possible.

At times like this, it does me well to travel a little. It always gives me a perspective on what is going on in this world. So in that light, I want to discuss some global thoughts with you. As many of you may know my wife is from South America. It is there that I truly see the effects of the global economy. I see an explosion in their standard of living in almost all of their countries such as Peru, Brazil, Chile, and Colombia. Natural resources such as oil, tin, copper, and timber are driving their economies as is low cost manufacturing. Imagine, Brazil is now the third largest producer of commercial aircraft in the world. The company called Embraer (stock symbol ERJ) is third behind Airbus and Boeing. Their stock has recently doubled in value. The reason? China’s Hainan Airlines just gave them a contract worth nearly 3 billion dollars. That’s right, an order for a hundred jets gives Embraer nearly three billion dollars in sales. Makes you wonder what Detroit companies could do with that type of money! Perhaps we should start making aircraft again like we did during World War II. In fact, we have been making a lot of money in South America over the last few years by owning an index fund that tracks the larger companies there and in Mexico. This exchange traded fund goes by the symbol ILF and tracks the S&P 40 index, which consists of Latin American stocks, similar to a smaller version of our S&P 500 index. I worry that this index will not continue its fine performance but when I look at the fundamentals such as a normal price to earnings ratio of 16, and a dividend yield of over 2% it does not seem overvalued. However, that insight and $1.00 buys you a cup of coffee. Now, are you ready for a surprise? Bilateral trade between Latin America and China has doubled over the last fi ve years and should hit $80 billion dollars this year. Estimates are by the year 2010, bilateral trade with South America and China should hit over 100 billion dollars. But enough about South America, what about China?

The China Syndrome
Many clients ask me why we are not investing more into China. While I do love international stocks and even some of the emerging market countries, I am nervous about direct investment into the two most populated countries on this planet, China and India.

The recent correction in China may have gotten some people’s attention but I think more volatility is to follow. I prefer indirect investments into China versus direct ownership of their stocks. For instance, you can find many fine large American companies as well as European and Japanese companies that will profit from China’s economy. Your money however is safer in these countries as they have well established stock exchanges, banks, and a longer track record of working with investors.

It’s time to examine the widely held belief that China is destined to surpass the US as an economic power. Their growth is truly impressive however it needs to be pointed out that we and Europe established much of their manufacturing for our benefit. We tapped into their cheap labor markets and the ability of China to produce goods without the extensive pollution controls and labor laws of our countries. I am not proud of this fact but it is the reality.

Remember, China still considers themselves to be a communist nation. That being said, it seems dangerous to over commit your investment dollars to them. Like Japan originally did, China is starting off by doing mostly manufacturing of low cost items yet they will need to transition into the higher technology growth area to create more sustainable profits in the future. I feel their low labor advantage will be lost in this area as machines do much of this type of work. Also, I don’t see other countries giving up this profitable slice of the pie.

In short, they are polluting their country dramatically, and this will cost their society many dollars in the near future. They will find it much more expensive to produce goods once they start implementing pollution controls and once they start dealing with a more middle class society that demands a fair wage for a full day of work. Most Americans don’t know that China’s cities are very polluted and their rivers foul with direct sewage dumping and heavy industrial waste products such as mercury.

One of its strengths is its population of over 1 billion people. But, this is an aging population due to their government policy of one child per family. This country has tremendous growth potential but not without growing pains. Consider that most of their companies are partly owned by the government so they could find themselves facing their own people as these folks struggle to improve their lifestyles. Imagine, these people turning against their own government as they strive for a higher standard of living.

In Summary
China is not a western nation! Their economy suffers from dramatic and deep corruption. They do not have the established rule of law via an organized court system and protection for individual’s property rights as we and many of the industrial nations do. The miracle of their economy could very well turn on them.

People should keep in mind while China controls a lot of dollars via their reserves system holding billions of U.S. debt notes, we hold power over them via our trade policies. As they could hurt us by not buying our debt securities we can hurt them by placing trade restrictions on them. So while pundits are predicting a sharp downturn in the U.S. dollar because China may sell off their U.S. reserves, I feel a downturn in the Chinese economy is just as likely and more certainly more painful for them. Be cautious investing into this region and be ready for some global upsets in the near future. Hopefully both our countries will endeavor to get along instead of fighting each other economically. Otherwise, this would truly be bad for the global economy.