November 2011

Four Good & Four Bad Presidents, PIIGS, and Printing Presses
Late summer and fall have been very volatile and filled with disturbing economic news. Major global and economic events occurring around the world will have a major impact on the markets and our investments over the coming year. Where are we going from here? Should we be pessimistic or optimistic? Let's examine current events to try and understand what might shape future returns in the investment markets.

Four Reasons to be Optimistic

Although the headlines are bleak, there are reasons for optimism to counter balance some of the negative and pessimistic news. Let's start by reviewing four positive factors for the investment markets: the excellent financial health of American corporations, the accelerating pace of money printing, the lack of competition for investment dollars, and the upcoming presidential elections.

1. Healthy, Cash Rich American Companies

US corporations are extremely healthy right now. As a response to the economic crisis, the typical American corporation has cut expenses, reduced inventory, slashed their work force, and hoarded cash. Corporations have acted responsibly in light of great uncertainty in trying to protect stockholder's interests. As a result, the average US corporation is sitting on an enormous amount of cash. In fact, corporate cash levels are the highest since the 1950s. This might properly be viewed as very optimistic for the future - when times get better, and eventually they will, US corporations are wonderfully situated to take advantage of renewed economic opportunities. The sound balance sheets and the excellent fiscal health of US companies is a reason for optimism for the future. 2. Money Printingand Printing, and Printing Bad for Grandkids Good for

Stocks
As a citizen and as a father, I am disappointed and deeply concerned about the amount of money we're printing both here in the US and in other countries around the world. This out of control and

Four Good & Four Bad Presidents, PIIGS, and Printing Presses November 2011 Gevers Wealth Management, LLC Page 2 irresponsible running of the printing presses I believe will eventually cause a great deal of financial distress, and will burden my children and future generations to come.

Growth of the Money Supply in the USA 1910 to the Present

(Source: Federal Reserve)

However, viewed solely from the perspective of the stock market, I would suggest that money printing is potentially positive for higher stock prices. The reasons are not difficult to understand. When governments print a great deal of money, that money has to go somewhere and that somewhere is often the stock market. There is a very strong historical correlation between money printing and rising stock prices. Professors Christos Ioannidis and Alexandros Kontonikas of the University of Glasgow studied the impact of monetary policies in dozens of countries over four decades and concluded that,

monetary policy shifts significantly affect stock returns, thereby supporting the notion of monetary policy transmission via the stock market.
Ioannidis & Kontnikas, The Impact of Monetary Policy on Stock Prices We have discussed the Feds money printing activities like QE1 and QE2 in recent client letters. One need only skim headlines from just the last few weeks to see more evidence that this profligate monetary policy continues to be followed by governments around the world. For example: in September, the Federal Reserve announced Operation Twist, a new and untested form of quantitative easing involving the purchase of of a Trillion dollars of long dated US treasury bonds. Mr. Bernanke also

Four Good & Four Bad Presidents, PIIGS, and Printing Presses November 2011 Gevers Wealth Management, LLC Page 3 recently testified before Congress that he was ready and willing to provide more liquidity to the markets if situations dictated it. (central banker code words for "we'll print more money if we have to.") The Bank of England, the United Kingdom's central bank, announced a 150 billion Pound bond buy-back program, and the European Central Bank announced a 250 billion Euro bond buy-back program, both of which involve printing massive amounts of money to fund the purchase of those bonds. Unfortunately for our children, but perhaps good for our stocks, money printing continues unabated both here and around the world.

3. Competition for Investment Dollars

One factor that is particularly promising for stocks has to do with the current lack of competition for investment dollars. To best understand this, let's turn the clock back a few decades and imagine that you were an investor who had $1M to put to work and wanted to review his choices. There are four primary investment areas that US investors have placed their dollars in hopes of earning returns; Investment Real Estate, The Banks, Bonds and Stocks. In the 1970s, 1980s, 1990s and the early 2000s, an astute investor could have purchased investment real estate, perhaps a rental home, earned a positive cash flow from his rent, and also enjoyed some nice appreciation in the value of the home. Investment real estate was a very attractive place to be for many decades. An investor could also have also chosen to deposit his funds at the bank. CDs were paying 5%, 6% or even more in the recent past and an investor might have been perfectly happy earning that rate of return with no principal risk and not a lot of time or effort on his part to collect that interest (and how we all long for the good old days of 5% rates on our CDs). An investor might have also picked a third option and bought bonds. For many years, US government guaranteed bonds were paying rates of 6% or 7% or even higher, and AAA rated corporate bonds might have been paying even a little bit more than that. Again, an investor might have been perfectly happy collecting a relatively high guaranteed interest rate and enjoyed a nice return for many years. An investor's fourth and final choice would have been to buy stocks. The last few decades, over the long haul, were wonderful years for stocks. Dividend paying stocks offered nice income, and stock prices rose over time for many years. A stock investor might have profited handsomely with a well-diversified, properly managed stock portfolio. Now let's look at those same four choices today. Real estate is a toxic mess and not a popular place to invest today. While there are certainly still bargains and opportunities, the cachet of investing in real estate is gone for now and home prices are troubled and still plummeting in many parts of the country. The banks are still an alternative, but savings accounts rates are now measured in tenths of a percent and CDs are just a tiny bit higher. Even though banks are still FDIC guaranteed they are going bankrupt and into receivership literally by the hundreds each year, to make our deposit accounts an even more uncomfortable place to be. And, in a final insult to savers and CD holders, the Federal Reserve has recently promised that interest rates will remain at their very, very low levels through 2013.

Federal Reserve Chairman Ben Bernanke announced this week that the Federal funds rate will stay near zero for now. He reasoned that the low rates of resource utilization

Four Good & Four Bad Presidents, PIIGS, and Printing Presses November 2011 Gevers Wealth Management, LLC Page 4

and a subdued outlook for inflation over the medium run would likely warrant exceptionally low levels for the federal funds rate at least through mid-2013.
Bonds have been doing great for the last several years, and bond investors have had a huge smile on their face. I'm very happy for our clients as our bond fund positions have appreciated nicely over the last three to five years. However, the thing to remember about bonds is that bond values increase as interest rates decrease and one of the primary reasons that our bonds have done so well in recent years is because rates have dropped to almost unthinkably low levels, primarily due to the Feds manipulation of the bond market. Bonds also tend to decrease in value when rates go up. The bond party may be close to being over, and although I'm very happy for the wonderful gains we've enjoyed in our bonds, this may not be a great time to add more money to bonds because of the threat and worry of rising interest rates in the future. So where does that leave an investor today? If real estate is still considered toxic, banks are paying almost no interest and bonds face the spectre of a rising rate environment, then the only investment game in town is stocks. I'm not cheerleading a portfolio dedicated solely to stocks, just making an observation about the state of the investment market in today's environment. I've been investing professionally for about 20 years, and as a private investor since I was a teenager, and I have never seen an investment landscape where there was literally almost no competition to stocks for investor dollars. This is potentially very optimistic for stock prices. As long as interest rates remain low and real estate is unattractive, it creates a climate where investors may only have stocks as the single desirable alternative to choose from.

4. Presidential Election Years are Good for Stocks (usually)

The fourth reason that the stock market might do well is because we are in a presidential election cycle. Those of you who don't like politics may shudder at the next few months constant barrage of ads, debates, and news reports. However, history has told us that the stock markets tend to do very well during the presidential election season. It's not really clear why this is so; it may be a sociological phenomenon rather than for economic or financial factors. But for whatever the reason, stock returns tend to be quite high during election years. There are no guarantees of course, but this outperformance has happened often in the past and it's an important factor to consider as we think about our investments and our stock allocation moving forward.
Stock Market Return by U.S Presidential Term Year 1948-2008 Year Average Annual Return 1 7.41% 2 10.21% 3 22.34% 4 9.79% Source: S&P 500 Total Return Index

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AndFour Reasons to be Cautious

There are a number of very gloomy problems and events that might be harmful to the stock market and our investment returns. Four in particular are quite worrisome; the dismal state of unemployment, the lack of recovery of the real estate market, the U.S.'s continued descent into deeper debt, and the escalating debt crisis in Europe.

1. Unemployment: It's Still a Mess

A healthy economy depends on full employment and a robust job market. Unfortunately, we have neither here in the United States. The unofficial unemployment rate (the Bureau of Labor and Statistics U - 6) has been hovering at around 16%, the highest rate of unemployment since the Great Depression. Perhaps even more sobering, there are more Americans on food stamps today, about 45 million, than at any time in the history of our country. Perhaps the best thing you can say about unemployment is that it's getting worse more slowly. The most cynical of the economists note that our country has dumped $1.5 Trillion of stimulus into the economy and yet unemployment has remained virtually unchanged, indicating how weak the economy and the job market really are. Without full employment, and with so many people unemployed or under-employed, it may be difficult for any kind of economic recovery to occur.

2. The Housing Market: Prices Still Dropping

Each of us is painfully aware at how much our houses have declined in value. Stories abound both here and around the country of the devastation in the real estate market. The U.S. economy is closely tied to the real estate market, and weak home values cause pain in many other sectors of the economy. Again, the most cynical of the economists observe that interest rates today are the lowest that they have been in history, and money is dirt cheap (30-year mortgage rates, as I write this letter, are actually below 4%.) yet even with those very inexpensive mortgages, home prices have not shown any sign of recovery. In many parts of the country, home prices are still declining.

3. US Debt $15 Trillion and Counting Interest never sleeps nor sickens nor dies, it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you. J. Reuben Clark

Four Good & Four Bad Presidents, PIIGS, and Printing Presses November 2011 Gevers Wealth Management, LLC Page 6

A third area of concern is our country's continued descent into debt. The total US debt today stands at just under $15 Trillion, and we are scheduled to add another $1.5T this fiscal year and at least $1T or more per year for the next several years according to the CBO. US Government debt levels are rising exponentially causing a great deal of worry and fear about the future state of the US government and the crushing levels of debt that it carries. Warren Buffet made an interesting observation about this subject. When asked by an interviewer if he was worried about the US being able to pay its debt. Buffet replied, Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you're talking about inflation, that's a different question." The US government has their own printing press and they can print as many dollars as necessary to pay all their debts. Therefore the US will always be able to pay any debt they have no matter how large because of their ability to print money. More importantly since the US went off the gold standard in 1971 there has been no accountability as to how much money we can print, thus opening the doors for irresponsible politicians and central bankers to lead us deeper and deeper into debt.

Four Good & Four Bad Presidents, PIIGS, and Printing Presses November 2011 Gevers Wealth Management, LLC Page 7 The US can and is printing money to pay our debts and obligations, but history and common sense tell us that is an unsustainable course and one that has ended very poorly for other countries that have tried the same tactic.

But How Long Can This Go On?!

It's interesting to remember that presidential candidate Ross Perot made the US debt one of the focal points of his campaign in his presidential bid of 20 years ago. Perot correctly pointed out back then the massive size of the US debt and the serious problems that it might cause. Twenty years has passed since Perot's dire warnings and we can look around us and see that nothing calamitous has happened so far, at least as far as our country's debt or our currency is concerned. It may well be this debt spiral can go another 20 years with no concerns or maybe the day of reckoning will come much sooner. Perhaps this problem can be deferred or delayed for much longer than anyone thinks. No one really knows how this ends but deep in our hearts every thinking American knows that this has to end and that it can't end well. This worry and concern about out of control U.S. debt is the primary reason that we have been encouraging our clients to keep a significant portion of their portfolios to things like precious metals, commodities, and oil/energy; assets that historically are good diversifiers against inflation and monetary crises.

4. PIIGS in Debt We all know what to do, but we dont know how to get reelected once weve done it.
Jean-Claude Juncker, Prime Minister of Luxembourg A fourth financial concern is the European debt crisis. The recent focus has been Greece, but the reality is that several other European countries are teetering on the edge of insolvency, most notably, Italy, but also Portugal and Spain and Ireland (hence the acronym PIIGS.) Greece (and the other PIIGS) have borrowed billions and billions of dollars from major European banks. Greece has reached the point of default in the sense that it will not be able to pay its obligations. In other words, not pay the principal and interest on the money they have borrowed. The crisis really has more to do with the banks than it has to do with Greece. If Greece defaults, it is widely believed that many of the major banks on the continent could be hurt badly. The European bailout is really about rescuing the banks not poor little Greece. Does that sound similar to 2008 here in the US? Europe is facing a financial crisis of the magnitude that the United States was in 2008 when Washington Mutual went under and other financial behemoths like Merrill Lynch, Morgan Stanley, Bank of America, all required bailouts and rescue plans from the government just to survive. Large European banks in trouble include Societe Generale, the largest bank in France; UniCredit, the largest bank in Italy; and Deutsche Bank, the largest bank in Germany. You may have noticed there has

Four Good & Four Bad Presidents, PIIGS, and Printing Presses November 2011 Gevers Wealth Management, LLC Page 8 already been one major bank collapse in Europe. Dexia Bank became insolvent a few weeks ago and has been taken over by the countries of France and Belgium.

Banks in Trouble: Societe Generale and UniCredit

(GoogleFinance.com)

What might the impact of a default and resulting bank collapse be on the US? No one knows for sure. It might be quite dramatic, or it might just be inconsequential. There is a great deal of fear and uncertainty in the investment markets over this eventuality. There are perhaps two likely outcomes. The first is that Greece actually does default causing a great deal of distress in Europe and perhaps the collapse of one or more gigantic banks, and most likely some major problems here in the United States in both financial institutions and in the investment markets. If you think that a default by a country is unlikely, you might consider the historical record. Country after country has defaulted on their debts, most recently Russia defaulted on all their debts in 1998 leaving their creditors high and dry. Many other countries large and small have defaulted in recent decades, so it would not be a surprise if Greece did choose to default on its debts. The second outcome is that a bail out is successfully implemented. The European Central Bank, the International Monetary Fund, the US, the UK and the Chinese have all been working feverishly to enact a rescue plan. In fact, as of late October it was widely believed that a plan was in place to "rescue" Greece. The optimism associated with that plan is probably the primary reason that the stock markets did so well at the end of October and jumped in value.

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Then, to everyone's great surprise and chagrin, Greece announced that they would not accept the bailout plan but rather, put it to a referendum of the people with a vote scheduled for January. This led to further drama as the government of Prime Minister Papandreou collapsed and he was forced to withdraw the referendum and resign. There is still a great deal of uncertainty and a likelihood that the plan may not work or might not be accepted by the Greek people which would lead us back to the first outcome - a possible default. Some other observations on the European crisis. First; I am enamored with economics, a little geekish in that regard, and often take economics books on vacation or for my bedtime reading. But viewing this European debt debacle in a simple minded way, it's not clear to me how you rescue someone or something that is deeply in debt by lending them more money. Some financial writers have called this the "extend and pretend" rescue and that this is not a permanent end to the problem, rather it just delays the inevitable damage to further down the road for Greece. Second - the other PIIGS are in trouble. Greece is a tiny country, but Italy is significant and is the worlds third largest borrower. And, Italy is having serious financial difficulties. What happens if Italy defaults?

"Italy has much more systemic implications than Greece, its debt is larger than the rest of the periphery put together, it is too big to fail, too big to save,
Thanos Vamvakidis BOA analyst

Four Good & Four Bad Presidents, PIIGS, and Printing Presses November 2011 Gevers Wealth Management, LLC Page 10

Bubble Chart Showing National Debt of European Countries and the US

Third every proposed solution and rescue involves massive amounts of new money printing and creation, a phenomenon that may continue to have a profound impact on our investments and our diversification planning. The Greece/Bank crisis should be resolved relatively quickly and whichever of the two outcomes occurs will most likely have a dramatic impact on our investment portfolio and particularly our stocks. It's disconcerting to think that a group of Europeans making decisions in a smoke filled room in Brussels, might set the course for our investments for the next few months and even years. We'll all be watching this with a great deal of interest.

So What Should We Do?

So we can imagine a scenario where the stock market does well from here due to healthy corporations, massive government money printing, lack of investment competition, and the effects of a presidential election. Yet we can also see major risks arising in the form of dismal housing and unemployment, a deeply indebted US government, and a frightening European debt debacle. What's the appropriate path to take from here? Our advice to investors is to continue to monitor your risk level regularly, especially in light of the current uncertainties, regularly re-balance the portfolio, fund short-term income needs, and consider a lower than normal stock allocation in the current uncertain environment, and stick with a diversification to weak USD/inflation friendly assets as part of your overall plan.

Four Good & Four Bad Presidents, PIIGS, and Printing Presses November 2011 Gevers Wealth Management, LLC Page 11

We can review this on a personal level in more detail at our next client review. And of course, always, please feel free to call if you would like to discuss this before we meet again.

How are Our Gold and Inflation Friendly Investments Doing?

Our "inflation-friendly/weak USD" investments have fared poorly over the last several months. Commodity prices are flat to down, oil prices retreated, and gold stocks have done very poorly, and only our gold bullion investments have appreciated. We have had wonderful results with these types of assets over the last 5+ years, but is it time to make a change? The answer to that question lies in observing how governments are responding to the ongoing financial crisis. Almost every major government has printed massive amounts of money and taken on staggering amounts of new debt. This continued debasement of the world's major currencies is the primary reason for staying the course with our weak dollar investments. These types of assets do tend to be volatile and sometimes disappoint us like they have this last quarter. Nevertheless, in a world where there is an increasing amount of currency risk - it is important to keep a significant allocation to investments like gold, oil and energy, and commodities. Another question clients have asked recently is what is going on with our gold miner stocks? As I write this letter the price of our gold and our gold bullion investments has appreciated nicely, up over 20% for the year. Yet our gold mining equities have actually dropped in value to everyone's surprise. Why are the prices of gold-mining stocks dropping? Is it because they are not making money? The answer is a resounding no. Gold-mining companies are recording record profits and record earnings, and are absolutely flush with cash. In fact, gold-mining companies have rarely seen a more profitable time than now. The cost incurred by a gold-mining company to extract ore and refine it to gold bullion has not changed much, if at all, over the last several years. However, the price that they're able to sell their product for has skyrocketed. If you own a business with a fixed cost of production and a rising sales price, that's a recipe for tremendous profits. That is why major gold-mining companies are enjoying incredible performance. Yet their stock prices are not appreciating. That dilemma is puzzling the analysts and experts that follow this sector. As you can see from the chart below, the price of gold as of the date of this letter, as represented by the blue line, is up sharply for the year, yet the price of gold-mining company stocks, the red line, have dropped significantly.

Four Good & Four Bad Presidents, PIIGS, and Printing Presses November 2011 Gevers Wealth Management, LLC Page 12

(GoogleFinance.com)

A more typical rule of thumb between the stock price of gold-mining companies and the price of gold is 1.5 to 1 In other words, if the price of gold goes up 10%, you might expect the price of gold-mining stocks to be up 15%. That rule of thumb has not held true this year. There are two prevailing arguments as to why this might be the case. The first school of thought is that the price of gold is higher than it should be and so the stock market, through lower gold stock prices, is anticipating a drop in the price of gold. If the price of gold does drop, then the prices of these goldmining companies might be about where they should be. If that school of thought is correct, we may see the price of gold drop. The second school of thought (and the one that I learn towards) is that the price of gold is about where it should be today due to the excessive money printing by the US and other countries, and that if the financial crisis becomes worse and governments print more money, it might even be possible to see the price of gold continue to rise. If this argument is correct, then we might eventually see gold mining stocks rise and catch up to the higher price of gold. Gold mining stocks are an important part of our diversification plan against possible higher inflation and a weaker dollar, and this may be a good time to exercise patience with our holdings in this sector, and remember the wonderful gains we have enjoyed in this particular asset class over the last few years. We appreciate our relationship with you, and remain diligent to serve you and help you meet your financial goals.

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Finishing with a Smile and a buzzer beater from downtown!

Now for a complete break from gloomy economic news hope you enjoy this uplifting video.

http://www.youtube.com/watch?v=S4-AhcKKEEc
Happy Thanksgiving and blessings to you and your family. With Warm Regards,

William R. Gevers Financial Advisor PS: We have been repeatedly asked by clients if they could share these e-mail notes with their friends or neighbors. Please feel free to forward this with the stipulation that it may only be forwarded if done so in its entirety with no portions omitted. We would be delighted to share our comments and opinions with your friends, and welcome your comments and feedback. If you received this and would like to be included on our newsletter list, please email us at wgevers@geverswealth.com Copyright 2011 William R. Gevers. All rights reserved.

Gevers Wealth Management, LLC I-90 LakePlace Center 1605 NW Sammamish Road, Suite 250 Issaquah, WA 98027 Office: 425.657.2238 Fax: 425.657.2138 E-mail: wgevers@geverswealth.com
The views are those of William Gevers, Gevers Wealth Management, LLC, and should not be construed as individual investment advice. All information is believed to be from reliable sources; however, no representation is made as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors can not invest directly in an index. Please consult your financial advisor for more information.

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