“Creating wealth is important;
Retaining wealth is imperative.”
Great American Crossroad © Eric Grohe,
located in Bucyrus—city entrance and event backdrop.
S
herlock 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 is
actually credited to a fictional character in English
literature. It is probably not fair
to begin this newsletter with a
Index
quote about inflation. Of all the
economic headwinds that the DOW
economies of the world face, NASDAQ
inflation is probably one of the
S&P 500
least of our worries, at least right
now. China continues to export
deflation through low wages for labor. As long as
manufacturers can hire low cost employees in Asia,
pressure to increase wages will continue to be non-
existent. Unfortunately, low cost, available labor
in Asia does not bode well for unemployment here
in the United States. With a manipulated currency,
central government controlled economy, a terrible
history of pollution and human rights issues and
a banking system that is less than transparent; we
can’t help but wonder if the Chinese economy is best
described as a bug in search of a windshield!
Spring 2010
Unemployment and housing concerns still
continue to plague the US economy. The current
unemployment rate, as quoted in March, was
hovering around 9.7%. We tend to put more
credence in the under-employment rate. These are
workers that have become discouraged and have
stopped looking for work or are working multiple
part time jobs because they cannot find full time
employment. This number for the under-employed
for March was 16.8%. The average workweek is
currently 33.3 hours worked per week. This presents
a hurdle for future employment gains going forward.
Just to get back to an average of 40 hours a week
means that manufacturers and service providers
have 20% more hours to glean from their current
workforce before they even consider adding workers.
The level of employed workers is currently around
129.5 million people. This is the same number of
employed workers that the US economy had in
1999. Unfortunately, we have added 29 million
new workers to the labor force
over the last 11 years through
1st
Year population demographics and
Quarter
immigration. The reality is
4.11% 4.11% that we have 29 million more
5.68% 5.68% people looking for the same
number of jobs that we had 11
4.87% 4.87%
years ago. It would be quite an
understatement to say that the overall job outlook
continues to be bleak.
The Federal government spent another $18 billion
recently to try to create jobs. While by itself, this is a
noble, worthy goal for the use of federal funds, this
very action also adds to an incredible rising public
debt that hangs over the economy and the stock
markets like the sword of Damocles. We were one of
the very first to sound the alarm over states’ budget
deficits about five years ago. While it gives us very
little enjoyment to have been correct in calling the
impending fiscal problems of the individual states,
it is a little reassuring that we were out in front
of this story long before it became daily headlines
in the media or daily cries of woe from the large
brokerage firms. Simply put, the state budgets are
in shambles. Declining income tax revenues caused
by high unemployment and lower real estate tax
revenues from foreclosed upon homes does not bode
well for a balanced budget. When coupled with
the tremendous strains on state budgets to fund
higher and longer unemployment benefits, Medicaid
payments and under-funded public employee
pension plans, this becomes a volatile mix headed
for disaster. California and Illinois are flirting with a
new currency called IOUs. Collectively, the 50 states
need over $156 billion just to balance their budgets!
Where will this money come from, the taxpayers
either on the individual state level or from the
Federal government and the federal tax revenue?
“When everyone thinks alike,
everyone is likely to be wrong”.
~ Humphrey B. Neill ~
The European continent has been embroiled in their
own fiscal emergency for the last three months.
Greece has gone broke. There are more polite ways
of saying this such as, Greece is struggling with
the havoc wrought by a global recession or the
government is having difficulty assimilating into the
Eurozone culture and currency. Simply put, Greece is
a welfare state that has promised too many benefits
without requiring the necessary work or tax revenue
to support the welfare state. It would appear that
France and Germany will be bailing out Greece
unless they can pawn off the responsibility to the
International Monetary Fund. They would be backing
any new bonds that Greece must sell to finance their
debt. What a surprise that the largest contributor
to the IMF is the United States! If we were France
or Germany, we would want the IMF to handle the
situation 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 to
leave the Eurozone economic umbrella and the Euro
currency altogether!
Greece is not alone in their misery. Europe refers to
their problem children as the PIIGS which stands
for Portugal, Ireland, Italy, Greece and Spain. All
five of these countries are on the verge of a fiscal
emergency or bankruptcy. Imagine if California,
Michigan or Illinois eventually descend into the fiscal
depths similar to the PIIGS. What will happen? The
US taxpayer must ride to the rescue and bail out the
states in difficulty. To do otherwise is simply not a
viable option. However, while the talking heads on
TV keep lauding the value in municipal bonds, we
are more cautious and concerned about who the
winners and losers will eventually be in the states
and cities that have over-promised and under-taxed.
The US federal government is now spending 24% of
our total Gross Domestic Product. The percentage
has never been this high except for during World
War II. President Johnson and the Great Society
approached but never hit 20% of GDP. Franklin
Roosevelt, author of The New Deal, only peaked
at 10% of GDP during the Great Depression. Who
ever thought that Roosevelt would be considered a
fiscal conservative? The National Debt now stands
at $185,000 per worker. We prefer the comparison
to worker rather than per person. I doubt that an 80
year old or a 6 year old would be able to have much
of an impact on reducing the National Debt so we
prefer worker comparisons.
The housing bubble started this whole mess and
unfortunately, it would appear that the price of an
average house still has not reached realistic pre-
bubble levels. The Schiller Home Price Index, the
most widely quoted measurement of home values,
predicts that home prices still may drop between 10
and 20% more. New home construction is still out
of 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 another
3.4 million homes that are vacant but held off the
market due to fear of prices too low. There are
another 3.5 million homes that are occupied but for
“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 available
even if we did not build another single home! 1 in
7 home owners are either in foreclosure or have
missed at least one mortgage payment. It is not just
houses; commercial real estate has been crushed,
too. Vacancy rates on commercial property are at
18% nationwide. From 2010 to 2014, $1.4 trillion of
commercial real estate loans will be coming do for
payment or renewal. Commercial real estate prices
have dropped 40% in the last two years. We think it
is safe to say that there are still a lot of bad loans on
the books of many banks. We can only imagine the
tenor of the impending discussions between banks
and owners trying to refinance all of this commercial
property whose collateral value has dropped so
much in value!
President Obama recently signed sweeping legislation
implementing a national health care system that will
be implemented over the next few years. As we have
indicated, we have remained fairly detached from
this whole debate. While we absolutely supported
the notion that changes are needed, our personal
choice would have been to try to make the necessary
changes in manageable increments. The legislation
is signed and now it is time to assess who the
winners and losers will be for us as investors. Will
Big Pharma win or lose? How will the insurance
companies adapt to the new landscape? For that
matter, we have already seen Deere and Caterpillar
announce huge write downs on their future profits
to reflect tax breaks that they had been receiving
to subsidize their retirees’ drug costs. As we have
indicated, in legislation as controversial as this, the
dire circumstances are never as bad as predicted but
neither are the benefits as wonderful as promised.
As an interesting historical backdrop to the
healthcare debate, the very first health care
legislation was passed in 1798 for sick and disable
seaman. In 1854, President Franklin Pierce vetoed
a national mental health bill on the grounds that
health was a private matter and therefore the bill
was unconstitutional. And finally, in 1912 former
President Theodore Roosevelt campaigned as an
independent on a platform calling for a single
national health service. The more things change, the
more they stay the same.
“Why did God create economists?
To make weathermen feel good
about themselves”!
My wife, Valerie, always has to caution me not to be
too negative when I write these newsletters and as
most always is the case, she is correct. I don’t mean to
be negative but I prefer to make sure that all of our
clients have realistic expectations and understand the
risks that abound. Actually, we are optimistic about
2010 and the potential for adequate returns. For
instance, in the quarter just completed the S&P 500
was up 4.87%. The Dow Jones Industrial Average
was up 4.11% and the NASDAQ was up 5.68%. If
we extrapolated these returns over four quarters we
would have a very good year for equity returns. We
don’t expect that to occur but there are reasons for
some degree of optimism. Gasoline prices are rising,
but slowly. Unemployment has leveled off, albeit at
uncomfortably high levels. What we find the most
encouraging is the use of the stimulus funds that
remain untouched. Of the $787 billion of stimulus
money that was approved for use in 2009, only
35% was spent in 2009. This was planned from the
start to hold back a sizeable portion for use in 2010.
A cynic could say that this was done to guarantee
re-election in Congressional mid-term elections
in November. A true economist could say that this
was done to adequately use limited resources in the
most effective manner. As is usually the case, there is
probably a degree of truth in both statements. Either
way, we are optimistic that the use of these Federal
stimulus funds will bolster the economic output
enough that 2010 will turn out to be a decent year
for economic recovery and the US equity markets.
We are optimistic for multiple reasons. We were
just able to acquire the entire company from our
partner, Jim Pigman. We greatly appreciate all of the
support and assistance that Jim provided through
the years. In the process of acquiring ownership,
we have changed our name to SPRENG CAPITAL
MANAGEMENT, INC. Absolutely nothing else has
changed or will be changing. I always have been the
sole manager of your investments and Leslie has been
in charge of all service related issues so nothing has
changed except the name of the company. Also soon,
we will be moving into our new office space on Main
Street in Bucyrus. We are very excited and optimistic
about the changes that have occurred and will be
occurring. We feel that the move to larger space
and acquiring complete ownership will allow us the
opportunity to continue to grow the company and
expand our service team. With clients in 15 States
we needed to plan for succession and expand our
ability to provide the same high quality investment
management and service that you have come to
expect. We are excited and optimistic about the future
both for you and for our company. Please notice our
updated email addresses and website address. We
also will be once again hosting a Client Appreciation
evening on September 8, 2010. Please mark your
calendars 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 markets
contain risk and they offer reward. Our task is to
balance the two and deliver good returns with an
acceptable amount of risk.
If you have questions about your holdings or
about the general condition of the economy, please
contact us at once. If we do not have a current
email address for you would you please email
us and allow us to add you to our regular list of
clients with whom we correspond. Our email
addresses are jspreng@sprengcapital.com and
lkunzer@sprengcapital.com. Please be assured that
we are monitoring the situation at all times.
If there have been any changes in your financial
circumstances 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 visited
our website, please do so at www.sprengcapital.com.
We appreciate the opportunity to work with
you, your families and your businesses. We are
very grateful for the many referrals that you
have provided to us. We can think of no greater
compliment than to have you recommend us to
your family and friends. We will continue to do our
very best to provide you with healthy, consistent
returns with a minimum of risk. Always remember,
“Investing is a marathon, not a sprint”.
Spreng Capital Management is an investment
advisory firm 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, profit sharing plans,
Foundations, endowments and businesses. We
are fee only investment managers, receiving no
commissions nor do we sell any financial products.
We are paid only by the investment management
fees of our clients. We advise our clients on
financial 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 confidence in us and
their willingness to recommend us to their family
and friends.
229 River Street, P.O. Box 47
Bucyrus, Ohio  44820-0047
P: 419.563.0084 • F: 419.563.0234
www.sprengcapital.com
Jim Spreng: jspreng@sprengcapital.com
Leslie Kunzer: lkunzer@sprengcapital.com