Aristotle,
commenting on Greek tragic theater, said “the tragic hero need not die at the
end, but must undergo a change in fortune."

As of this writing it appears as though
Greece need not die. A change in fortune? Absolutely. As Greece’s insolvency
has dragged on, it looks like the European Union is making progress, via its
new European Financial Stability Facility, with a restructuring plan.
Bondholders will realize losses and banks will be recapitalized, and the world
may breathe a little easier as the threat of bankruptcy contagion diminishes
for the time-being. The only
problem is that the EFSF, which was just recently created in the summer of
2010, needs to get the bailout money from somewhere. They will be issuing bonds
in the marketplace guaranteed by the European Community member states. That
means that there is the potential for some countries to have their debt rating
lowered and further weaken their own situation, though Germany accounts for
almost 50 percent of the EFSF commitment.

Though our United States exposure to Greek
debt is minimal, our major banks and other corporations have leant several
hundred billion dollars to French, Spanish, and Italian banks. France remains
relatively strong, but their exposure to weaker European sovereign debt is
high. France and Germany hold 55 percent of Europe’s total current exposure to
Greece.

The weakest Europeans countries borrowing
capability have become quite impaired. Remember the investment rule, the more
risk you take the more return you require. Greece has to pay investors 24
percent to lend to them! On the other hand, our ten year treasury bond is
yielding a paltry 2 percent.

The reasons investment returns on our treasury
debt are so low is because our risk of default, despite our down-graded credit
rating, is much lower than the rest of the world (thus far!) and because the
Federal Reserve continues to buy Treasury bonds. The latest maneuver, Operation
Twist, targets the 10-year Treasury bond with the hope that by buying it and
lowering its interest rate, the housing market will recover faster since
mortgage rates are based on the 10-year Treasury bond rate.

Economic growth is the only way out and the
debate around how growth can be stimulated goes on and on. Would lower business
taxes spark confidence in expansion plans and hiring? Or should taxes on the
wealthy be increased to ease government deficits? Each side has its argument.
In fact, there is no evidence that the 2003 tax cuts did anything to stimulate
corporate investment. And, the economy actually grew after the 1982 and 1993
tax increases.

The inability of Congress and the
Administration to take steps for economic improvement is troubling. The vacuum
has been filled by the Federal Reserve and the promise of low interest
rates. Our economy grew at only
1.3 percent in the first half of the year and the direction it takes through
the end of the year could have tremendous impact on stock prices.

There are those who believe that conditions
will not improve and even possibly deteriorate. For those worried bears, cash
and treasury bonds are their preferred alternatives. If you believe, like we
and the majority of economsts do, that our economy will not enter another
recession, then despite near term volatility, select stocks are undervalued and
appealing for those with investment time horizons greater than five years. We think stocks will outperform the
current five year treasury return which is less than 1.0 percent.

We think there are eight good reasons for
stocks to move higher from current prices and finally break out of their
current trading ranges.

1. US Households are making progress getting their finances in
   order.
2. Commodity prices are off their highs and lower gasoline
   prices in particular could be an effective economic stimulus.
3. A majority of investors are bearish on the market, meaning
   there is a lot of money on the sidelines.
4. Low interest rates are here to stay for at least two more
   years.
5. Current trailing Price to Earnings (PE) multiples are at only
   12X earnings, which is less than long-term historical averages.
6. Dividend yields and payout ratios are at the highest level
   over the last ten years.
7. Company stock buybacks are increasing as executives realize
   that their stock is relatively cheap.
8. Corporate cash and corporate profit margins are at record
   high levels.

It is important to remember, that no matter
how fragile and dire world economies seem to be, money needs to go somewhere.
And that “somewhere” is a relative game.
Keep in mind that the U.S. economy has the most sophisticated investment
structure; has one of he most innovative business environments; has the highest
level of trading liquidity; and one of the most stable currencies.

Unfortunately, economic and stock market
turbulence is unlikely to end any time soon, because in the coming months
Congress and the Administration must tackle deficit reduction and job creation.
The final decisions are guaranteed to inflame passions on both sides of the
aisle.

Many factors contribute to the safety of an
investment portfolio. It’s not just the hard and fast numbers of a company that
make it tick. Every day industries change, innovative products disrupt the
status quo, and executive management teams prove their talent or
irrelevance. It is important to
choose companies that are expected to win today and in the foreseeable future.
When the facts change, be nimble and take restorative action.

* Ellen Le is the
founder and president of Ascend Investment Management (www.ascendinvmgt.com).
She has been a financial planner and investment adviser for more than 20 years.
I look forward to receiving your
questions about anything related to investments, retirement planning, or the
economy. Send them to: ellen@ascendinvmgt.com and write “Chadds Ford Live” in
the subject line.