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Who We Are - President Letters - AFC President’s Letter – July 2011

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July 21, 2011

Dear Clients and Friends,

The following is not going to be an uplifting read. Nevertheless, I tell it the way I see it without any sugar coating.

Headlines from yesterday’s Wall Street Journal: "DEBT WORRIES ROIL MARKETS." Many of you might believe that refers to the PIIGS (Portugal, Ireland, Italy, Greece & Spain). Well, that is a huge problem, but the BIGGER problem in the US is the potential of not raising the debt ceiling. The issue lies in the shaky hands of the elected officials on Capital Hill and the White House; however, it appears that ‘the gang of six’ (3 Democratic Senators and 3 Republicans) may have a viable solution to the debt ceiling issue. I have not heard any details but you will probably hear about them by the time you read this letter. It is not a done deal yet!

Also within the business and finance section of the Wall Street Journal, "Capital markets in the U.S. and Europe were rattled amid worries about government debt on both sides of the Atlantic." We all know that August 2 is a major date on this county's calendar to avoid hitting the debt ceiling. The question is, "Will the irresponsible souls on Capital Hill do the right thing to solve the problem this time, or will they continue 'kicking the can down the road' with ever-increasing levels of national debt?" My expectation is that our politicians WILL PROBABLY NOT do the 'right thing' and simply return to the status quo. While they will probably NOT let our country default on its obligations, they will not put the necessary fiscal constraints in place to get our Federal government on a prudent path.

Taxation rules are complex and lead to situations such as the fact that Warren Buffet has said that he is in a lower tax bracket than his secretary! There are inequities in the tax system and we as a nation cannot be spending more money than we are taking in indefinitely. I saw a statistic yesterday that said for every dollar we spend, 40% is borrowed. I am reminded of the saying: be thankful we do not get all the government we pay for!

John Mauldin, a very well respected economist, said that if we do not change our spending habits that 93 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2020.

The recent credit crisis has resulted in the worst economic disaster since the great recession. This fiasco can be traced back to The Community Reinvestment Act, which continued to increase credit, ultimately allowing folks to buy a house with no or little down payment. This eventually lead to widespread lending by banks, and a new breed of non-bank lenders with little to no oversight. The lending extended to no-money-down loans and fudged finances on applications (known as liar loans).

Below is a chart of housing sales over the past 50 years, compliments of the St. Louis Federal Reserve Bank.



You can plainly see when this all began and where we are now. Oversupply and an insufficient number of qualified buyers has resulted in a very depressed housing market.

The effects of the credit crisis can also be seen in the levels of credit per household, again, compliments of the St. Louis Federal Reserve Bank.



I do not believe we will totally recover from this economic crisis for quite awhile. You do not cure a bubble in a few months…or a couple of years. This will not heal soon.

Now that I have totally depressed you, let us take a look at entitlements such as Medicare and Social Security. I believe most of you know our Social Security and Medicare are paid by those still in the work force.

In 1970 there were 5.3 workers to 'support' those who were retired, and money was flush for Social Security recipients (and for siphoning off for other political needs). Today, there are only 3.5 workers for each retired American – and these numbers will dwindle further over the next 15 years!

Further, it is projected that in 2025 there will be 10 retirees for each new entrant into the workforce. As a friend of mine in North Carolina likes to say, "That dog don't hunt!" We have quite a few 'issues' to address. We need to make sure that our elected folks get with the program.

So, that is what we see for the long haul BUT there is some silver lining. We believe we can navigate this treacherous landscape. As many of you are aware, we did not lose money for our investors when the markets collapsed 57% from October 2007 to March 2009. In fact, AFC made some money during this time, having been in investments that profited while markets tumbled.

Our mantra: When in doubt, take the risk of lost opportunity and not the risk of lost capital.

As active investment managers, we feel that we are well-positioned to execute on opportunities for our clients. However, we remain alert for game-changers as we continue to navigate the markets through 2011 and beyond.

Please share this information with friends, colleagues or family members that are in need of professional assistance given what we believe is in store for the economy. By the way, we do not charge for an initial consultation.

As always, we welcome your calls and emails. We want to hear from you.

Sincerely,
Barry Cliff
President
Barry@AFCAssetManagement.com

Jim Young
Vice President
Jim@AFCAssetManagement.com

Veska Kita
Vice President
Veska@AFCAssetManagement.com

AFC Asset Management Services, Inc.
18310 Montgomery Village Avenue, Suite 440
Gaithersburg, MD 20879
301-588-5000
www.afcassetmanagement.com

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Disclaimer
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Investment strategies mentioned herein may not be suitable for all investors. Any opinions expressed are given in good faith and are subject to change without notice. All investments are subject to risk of loss.
Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have a positive or an adverse effect on the value, price or income of or from that investment to the investor.
The information contained in this report does not constitute tax advice. This material is not intended for any specific investor and does not take into account your particular financial situation and is not intended as a recommendation of any particular security or strategy to any individual. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and seek professional advice.
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