“Creating wealth is important;
Retaining wealth is imperative.”
Spreng Capital Management
New office location at 201 South Sandusky Avenue.
W
e are very excited and pleased to
announce our move into our new
company headquarters. You can see from
the photo at the top of this newsletter that we have
taken the old classic architectural
look of 1920s America and Index
updated the look and the
technology for the 21st century. DOW
We now have the office space for NASDAQ
additional staff that we need, a S&P 500
conference room and the energy
efficiency which we all need
going forward. We invite you to stop in at any time.
At our Client Appreciation Event last September
we asked our clients and friends to list several
financial or life related issues that were important
to them. We anticipate holding small seminars for
our clients and anyone interested, to address these
issues throughout the fall and early winter months.
We would like to feature experts in these respective
fields. Please watch for future announcements or
invitations for these events.
Summer 2010
Which story garnered the most headlines and
induced the most stomach churning during the
second quarter of 2010? Was it the BP oil spill
in the Gulf of Mexico, the “Flash Crash” of the
US equity markets in May that saw the Dow drop
over 700 points in just a few minutes or was it the
expected and then, suddenly averted, potential
default of Greece’s sovereign debt? Any one of
these three by themselves would have been more
than enough to rattle even the most jaded investor
but all three in combination spooked the markets.
The oil spill shows no real signs of containment.
The SEC has no idea what caused the crash of
electronic trading that triggered Proctor and
Gamble stock to drop $20 in just a few seconds. The
European Union bailed out Greece with their own
version of TARP but the futures markets still are
predicting a 45% chance that Greece will default
on its debt within the next five years. This is really
not all that unusual. Greece has defaulted on its
debt at least five times over the
last 200 years. The difference
2nd
Year this time around is that the
Quarter
governments of the world, the
(9.97%) (6.27%) United States included, have
(12.04%) (7.05%) decided that it is far better to
(11.86%) (7.57%) insulate governments, banks
and corporations from default
or bankruptcy by passing this debt on to the
taxpayers. There is no risk of default anymore. If
a corporation, bank or government is deemed too
big to fail or too important for strategic alliances,
then the debt is absorbed, passed on to the tax payer
and everyone moves on as if nothing happened
at all. Then everyone wonders why these same
failed entities take on so much risk and debt. Why
would they not? There is no “moral hazard” or
punishment for doing so, only financial gain and
votes to be had! Time will tell how this bailout of
Greece will play out in Euroland. Angela Merkel’s
coalition government in Germany is under pressure
by unhappy German voters who are not pleased
that they will be paying for Greece’s excesses.
Lest we feel too smug here in the United States,
our state governments are in no better shape than
Greece. The budgets of at least 46 states are short
a total of $112 billion as of July 1st and they are
all looking to Washington for a bailout. The latest
research shows that the state pension plans that are
responsible for the retirements of all public school
teachers, firemen, policemen and public employees
are underfunded by $1 trillion and it could be as
high as $2 trillion! If these numbers are correct, the
total debt of the 50 states is actually double what is
currently carried in Municipal bonds issued by the
various entities. I remember very vividly Cleveland
defaulting on a whopping $14 million of bonds in
1978. New York City was in the same condition
but was the 1970s version of “too big to fail” and
the City was bailed out by New York State and the
federal government.
Nothing in life is certain. In the 1910 census
of the United States, Cleveland Ohio was the
fourth largest city in the country!
Anyone who thinks that we can just cut our way to
balancing a budget needs a sobering reassessment.
Currently, entitlement programs like Social Security,
Medicare and Medicaid and interest on the national
debt, even at the lowest interest rates in recorded
history, take out 65% of all government revenue.
Under the current program this number will rise to
72% of total revenue in the very near future. Add
in defense spending and the number rises to 88% of
total revenue spent in just five areas. Do we really
think we can pay off $13 trillion in debt from just
12% of our total current revenues? Trust us when
we tell you, there will be new taxes in this century.
Our guess is that eventually there will be a National
Sales Tax or VAT, Value Added Tax. Approximately
140 other countries around the world have a VAT.
The average rate approaches 20%. Imagine tacking
20% onto the price of an automobile and you can
see how much tax money this can raise. Politically, it
is an easy out for the politicians since everyone gets
hit by the tax. At least in theory, lobbying, graft and
corruption will be somewhat contained. Here is the
current tax situation as we know it. The 2001 and
2003 Bush tax cuts will expire at the end of 2010.
The current 10% income tax bracket disappears. All
tax rates will rise with the top marginal rate rising
to 39.6% from 35%. Long term capital gains rates
will rise to 20% from 15%. Dividends go from a
15% rate to whatever your marginal tax rate will be.
It is hard to imagine a healthy economic recovery
with tax increases of this magnitude. There is no
choice. Taxes have to go up or else the next time
we encounter “The Great Recession” the federal
government will have no options or levers left to
pull! However, when you combine new taxes, rising
rates on existing taxes and an underemployment
rate of 17% it takes a real leap of faith to think
that our recovery from the Great Recession will be
robust.
Here are some interesting facts for us to ponder:
• 1 in every 10 homeowners missed a mortgage
payment in the 1st quarter of 2010, a record
number.
• 1 in 6 Americans are either unemployed or
underemployed
• 4 out of 10 unemployed have been out of work
at least six months
• 1 in 4 homeowners have negative equity in
their homes
• 1 out of 8 believes that current government
policies are actually helping the economy.
• 1 out of 10 small businesses have a job opening
• 1 out of 10 credit cards are being written off,
another record.
• There are 5 unemployed workers competing for
every available job continuing the downward
pressure on any wage growth.
• 91 banks missed their quarterly TARP payment
to the federal government in May. This number
has grown higher each quarter over the last
three quarters.
• FDIC bank failures as of the end of June stood
at 86 closed banks which is 5 times larger than
the number of closed banks in the same time
period in 2009.
 • The Financial Reform Act which was just
approved by committee in Congress does
absolutely nothing about Fannie Mae and
Freddie Mac. Conjecture varies from a need for
an additional $160 billion of tax payer money
to prop up these sick federal mortgage backers
all the way to a possible $1 trillion to support
their toxic mortgages on their books. Oh how
we long for the good old days of Senator Everett
Dirksen of Illinois when he said “A billion
here, a billion there. Pretty soon you are talking
about some serious money”! Now we talk in
trillions of dollars instead of billions.
“If all the economists in the world
were laid end to end, they still
wouldn’t reach a conclusion”.
~ George Bernard Shaw ~
The really fascinating questions now reverberating
around the governmental think tanks are twofold.
Can governments, federal, state, municipal and
foreign, really afford to cut their deficit spending
habits as their respective economies continue
to struggle to climb out of the Great Recession
hole? Must they continue to pour taxpayer funds
into propping up the existing infrastructure that
currently exists or will the debt loads incurred by
such actions eventually doom these governmental
bodies to eternal slow economic growth or even
eventual default or bankruptcy? Europe, led by
Great Britain, has decided to take the course of
action to greatly slash their government spending
and thus their borrowing to try to, if not to
completely pay off, at least control the growth
of their sovereign debt to other countries and
individuals. Greece was forced into this role when
they were basically declared bankrupt in May.
France is struggling to raise the retirement age to
the ripe old age of 62 and of course there have
been widespread strikes and work slowdowns by
the French workers and voters in response. At the
recently completed economic meetings in Toronto,
United States Secretary of the Treasury, Timothy
Geithner, urged the other developed nations of the
world to continue with deficit spending, like we
are doing in the US, to prevent the world economy
from sliding back into a deeper Recession. Both sides
have very valid points but the skeptic in us have to
wonder how Mr. Geithner would respond if China
suddenly refused to buy any more US Treasury
bonds.
The second question concerns inflation versus
deflation. Pure economic theory would indicate that
the US monetary policies that have been instituted
should have started a long, painful transition to high
inflation. This has not occurred and if anything,
deflation rules the current marketplace. Home
prices continue to fall. No one is eager to buy a
home that may well be worth less in six months that
it is now. Oil prices remain steady even in light of
the BP oil spill disaster. Wages are not increasing
due to the previously quoted problems with chronic
high unemployment and the fact that China still
continues to export cheap wages. This is one of the
reasons why bonds have defied the experts and
continued to do well in 2010. Bond values are
crushed during periods of high inflation. Deflation
tends to make bonds more valuable because the
payout or interest paid on the bonds stays consistent
when everything else is dropping. This conundrum
also bears watching as it is not consistent with
normal economic theory.
A new term has been coined by PIMCO, a large
bond manager located in southern California. They
refer to this era as “The New Normal”. We agree
with this concept and even the description. For the
past 12 years, the S&P 500 has generated exactly 0%
return. We have said it before, “You cannot clean
up 20 years of excessive borrowing by corporations,
individuals and governments in 2 years”. However,
and we need to make this very clear, all is not lost.
We are in what has to be termed a “stock pickers
market” which simply means that there is money
to be made in any environment. You have to be
very careful with debt instruments. Which state or
municipal bond runs the risk of default? Which
company can best withstand the possibility of
higher taxes, inflation or deflation? That is our
“Technology has no respect for tradition”.
~ Peter C. Lee ~
task, to identify the best debt instruments and stock
ownership that will deliver the best return with the
least amount of risk in “The New Normal”. This
may very well be an environment where you “rent”
these stock rallies, not own them. We continue
to strive to achieve this each and every day. We
appreciate the opportunity to work with you.
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 a viable financial future is
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 market situations 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
1999 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.
201 South Sandusky Avenue, 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