Rory McIlroy’s championship at the 2011 U.S. Open was historic and record setting. He is a needed inspiration to fill the vacuum caused by Tiger Woods’ fade. My own take on Rory is that it’s wonderful especially since he, along with last year’s champ, Graeme McDowell, both hail from Northern Ireland, the Riddle family’s ancestral home. Imagine, a small country the size of Northern Ireland with less than 2 million residents producing 2 consecutive U.S. Open Champions!

This is the second of three articles discussing the urgent need for the US to get its financial house in order or face the consequences. Our objective is to help you understand the implications of this ominous trend and provide the strategy to protect your wealth.

If the U.S. were forced to account for its debts like Apple or Exxon, its debts would equal a whopping $76,000,000,000, 000 ($76 Trillion). That is an enormous number, so large that it is difficult to imagine. To understand how large this number is consider this: it equals $244,000 for every man, woman and child in the U.S. – and, it is growing at $17,000 per year.

The U.S. Government reports its deficits and debts using “cash accounting”. Under cash accounting, the government makes no provision for future Social Security and Medicare benefits in the year in which those benefits accrue. However, this is not Generally Accepted Accounting Principles (“GAAP”) which corporations like Exxon, Microsoft and Apple are required to use. GAAP basis includes year-for-year changes in the net present value of unfunded liabilities in social insurance programs such as Social Security and Medicare.
As the Obama administration prepares to finance a Fiscal Year 2011 budget deficit expected to top $1.6 trillion, the American public is largely unaware that the true negative net worth of the federal government reached $76.3 trillion last year.

That figure was five times the 2010 gross domestic product of the United States and exceeded the estimated gross domestic product for the world by approximately $14.4 trillion.

According to the U.S. Department of Commerce Bureau of Economic Analysis, U.S. GDP for 2010 was $14.861 trillion. World GDP in 2010, according to the International Monetary Fund, was $61.936 trillion

The U.S. government cannot cover such a shortfall by raising taxes, as there are not enough untaxed wages and salaries or corporate profits to do so. Other measures must be taken to reduce future expenditures (Source: The World Press).

“Until you commit your goals to paper, you have intentions that are seeds without soil.”

Author Unknown

Last week NEGATIVE developments were in balance with POSITIVE developments, and the markets remained uncertain as a result.

Positives:

1) Merkel/Sarkozy and hopefully the ECB coalesce around the idea of a voluntary debt rollover which Fitch thinks would not be a technical default but some sell job must be made to convince current holders to buy new bonds
2) After 8 of 9 weeks above estimates, Initial Jobless Claims below forecasts but still above 400k for 10th straight week
3) Multi-family housing starts outlook a positive for construction
4) May Retail Sales a touch better than feared
5) 7 month low in mortgage rates lead to 6 month high in refi’s
6) RBI and PBOC take more steps to slow inflation, soft landing?
7) Chinese retail sales and IP hang in May

Negatives:

1) Even with more help, Greece will never be able to pay back what is owed and the inevitable action to bond holders gets pushed further into the future
2) Philly and NY mfr’g survey’s unexpectedly fall into negative territory
3) NAHB builder survey falls to 13 from 16, bad gets more bad
4) Auto production falls for 2nd month due to Japanese supply issues
5) US CPI now running 3.6% y/o/y, the most since Oct ’08
6) NFIB small business optimism falls to lowest since Sept
7) Chinese bank loans rise 100b Yuan below expectations, M2 growth slowest since Nov ’08, PBOC again hikes RR and RBI lifts rates to sacrifice growth for price stability, soft landing?

The U.S. stock market ended a six-week slide and eked out its first weekly gain since late April, but don’t exhale just yet.

Late Friday, the market held on to narrow gains and remained on alert, as Germany and France huddled with the European Central Bank to devise a rescue plan for Greece, which has been roiled by protests against austerity measures.

Europe’s drama—and how a Greek default will affect banks—isn’t the only source of uncertainty. On one hand, money managers have recently pared back risk, turning defensive health care, consumer staples and utilities into the only sectors clinging to gains this quarter, and many pros are holding cash they’re eager to put to work. But on the other hand, the majority still sees today’s economic soft patch as temporary and expects growth to pick up anew in the second half. That means any evidence to the contrary can still test our tetchy consensus and trigger more selling.

Since late April, skittish investors have already pulled more than $15 billion from U.S. stock mutual funds and shoved nearly $29 billion toward bond funds.

As traders fled risk, U.S. high-yield funds saw their largest weekly outflow in a year. Investors have also yanked $6 billion from commodity exchange-traded funds since late April, and hedge funds’ exposure to commodities is “approaching neutral” for the first time since late 2010, notes JPMorgan strategist Nikolaos Panigirtzoglou; yet “hedge funds appear to be long equities, far from the capitulation levels of last summer.”
It helps that two major drags—the disruptions following Japan’s disaster, and high energy costs—are set to moderate in the coming months. Last week, crude oil absorbed its fourth loss in five weeks, slipping 6.3% to $93 a barrel, down from $114 less than two months ago.

It also helps that expectations have shriveled swiftly, even if Wall Street analysts are still slow to trim their 2011 profit estimates. Retail sales in May fell for the first time in 11 months, but the 0.2% decline from April was smaller than economists feared. Best Buy (ticker: BBY) saw margins squeezed by promotions and indifferent shoppers, but the 12% drop in first-quarter profit wasn’t as bad as analysts forecast, and shares jumped 9% last week.

The stock market has pulled back 7% over six weeks since late April. That’s on par with the 6.4% retreat over four weeks, from mid-February to mid-March. Yet on some level, this second correction of 2011 felt more ominous—unfolding, as it did, continuously amid European uncertainty, with commodities flailing and as our market-supporting Federal Reserve prepares to end Act II of its benevolent quantitative-easing opus. Our Fed chairman is scheduled to make an appearance this week, and he’s sure to say something soothing. But rising shelter costs and the widening of year-over-year core inflation, to 1.5% in May from 1.3% in April, limits the kind of promises he can coo.

Meanwhile, a Greek bailout should placate the market, but expect a real rally only if the European Central Bank cuts interest rates. While the ECB has nudged rates higher just once recently, the Euribor rate, a gauge of banks’ appetite for euro lending, has risen 0.87 percentage points since early 2010—effectively raising the cost of credit for all Europe.

Weaker European nations can’t handle a period of rising funding costs, “and the debt markets appear to be echoing this sentiment,” says Michael Darda, MKM Partners’ chief market strategist. “We do not believe the austerity/bailout policy will work unless the ECB reverses course and begins to ease aggressively.”

Last week, US stocks increased slightly, bonds were unchanged, and foreign stocks decreased.  During the last 12 months, U.S. STOCKS outperformed BONDS.

Returns through 6-17-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	0.0	3.3	5.4	7.0	6.7	5.8
US Stocks-Standard & Poor’s 500	.1	1.0	12.2	-3.9	-2.3	.7
Foreign Stocks- MS EAFE Developed Countries	-1.0	-.7	16.4	– 7.0	-1.0	2.6

Source: Morningstar Workstation. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three, five and ten year returns are annualized excluding dividends

“A stumbling block to the pessimist is a stepping stone to the optimist.”

– Eleanor Roosevelt

I DID find THE solution to beating this atrocious weather by vacationing in sunny south Florida. The weather was perfect with highs in the upper 80’s each day even in Key West. Unfortunately, the wind kicked up on the day we were to take a Dry Tortugas fishing trip to eat what we catch. The winds forced us to cancel the trip due to rough seas. We ended up eating what someone else caught.

My most vivid memory of the trip was the close-up view of my younger daughter Jennifer’s diamond engagement ring. Life’s little pleasures. She is engaged to marry Nicholas Patton Ward. They intend to marry sometime in 2012 and reside in the Arlington, VA area.

My second most vivid memory is the Atlantis space shuttle sitting on Launch Pad #39A at NASA’s Kennedy Space Center preparing for launch in July for the last space shuttle blastoff ever. The space shuttle program is being shut down after July. Then, the USA will depend upon the RUSSIANS to launch its payloads to the International Space Station. Can you believe that – the RUSSIANS! It leaves me with a kind of empty feeling because I grew up with the space program (and the USA vs. the USSR) and to think we are handing this responsibility to the RUSSIANS because we don’t have the money to do it ourselves is simply @%^&!

This is the first of three articles discussing the urgent need for the US to get its financial house in order or face the consequences. The last two articles will appear in future issues of The Weekly Commentary. Our task is to help you understand the implications of this ominous trend and provide the strategy to protect your wealth.

The size of the projected federal deficits is so ENORMOUS that the U.S. will be forced to borrow HUGE sums from foreigners. When you owe as much as we will owe in 4 years to foreign creditors, sooner or later they will call the tune and we will be obliged to dance.

If you think this is far-fetched, then it is important for you to understand when the United States, the big money center at the time, forced Great Britain to give up its demands upon the Suez Canal during the crisis in 1956 by using Great Britain’s huge debt burden against them.

The United States put financial pressure on Great Britain to end its Suez Canal invasion. President Eisenhower warned the British that unless they withdrew, he would order the sale of the United States’ currency reserves of British Pounds and Sterling Bonds; thereby precipitating a collapse of the British currencies’ exchange rate. Eisenhower in fact ordered his Secretary of the Treasury, George M. Humphrey to prepare to sell part of the US Government’s Sterling Bond holdings. The Government held these bonds in part to aid post war Britain’s economy (during the Cold War), and as partial payment of Britain’s enormous Second World War debt to the US Government, American corporations, and individuals. It was also part of the overall effort of Marshall Plan aid, in the rebuilding of the Western European economies (Source: Wikipedia).

Last week there were more NEGATIVE than POSITIVE developments, and short term investors sold stocks as a result.

Below is a succinct list of last week’s events:

Positives:
1) US exports hit record high in April (somewhat old news) and lower than expected deficit will help Q2 GDP
2) AAA said gasoline prices fell another $.05 to the lowest in two months
3) ECB says they will raise rates again to further adjust relative to inflation
4) Canadian unemployment rate falls to 7.4%, the lowest since Jan ’09

Negatives:
1) Initial Jobless Claims disappoint again, staying above 400k for the 9th straight week
2) May Import Prices rise at the fastest pace since Sept ’08 with the help of the growing cost of doing business in China
3) Germans vs. the ECB, Schaeuble vs. Trichet in a “smackdown” showdown has European credit markets fast losing patience, CDS in Greece, Ireland and Portugal reach fresh record highs
4) ECB says they will raise rates again when some in the region certainly can’t handle it, euro reverses lower due to this concern and #3 above
5) The Hang Seng index in Hong Kong closes at 12 week low as property worries spread.