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What I’m Watching: Debt Ceiling & Trade Deals

What can often be the most frustrating part of my job and ironically the area investors enjoy discussing most, is the spontaneous and ongoing geopolitical events that surround the underlying economic data. It is not to say they are not important, but they often make for better news headlines and can cloud the fundamentals at which a strong or weak economy is graded on.   Situations I am closely watching at this point include:   - U.S. debt ceiling debate - Italian national election - North Korea situation - Pending trade deals with the G-20 nations   The biggest risk, at this point, appears to be the debt ceiling. This will require action by late summer, most likely. Should Democrats and Republicans be unable to agree, it could rattle financial markets.  In the abstract, it’s hard to see what the problem is. All of the borrowing is to pay for spending specifically authorized by Congress itself. Not raising the debt limit is equivalent to whipping out the credit card and then not paying the bill when it comes due. This has not stopped the debt ceiling from becoming a perennial problem, however.   Part of me says this time will be the same as last time. We will see both sides pushing to get maximal concessions on their priorities, trying hard to use the risk of not raising the limit to force agreement on their terms.   Even if we do get a debt ceiling face-off, or any of the other potential issues, known or unknown, the underlying strength of the economy is likely to limit the damage. We have seen many situations in the not-so-distant past that were equally as scary and they didn’t knock the economy or markets off their path.   The biggest risk, given that strength, is that the expansion cycle has been much longer than usual, and the supporting trends are starting to decay. Still, based on history and current conditions, growth is likely to last through the end of the year.   While the risks are real, then, and growth will not last forever, the rest of 2017 looks likely to bring more of the same. More economic growth, slow but steady; more market appreciation, ditto; and more normalization across the board. After the turmoil in recent months and years, this is not a bad place to be.
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The Cryptocurrency World

What is a Cryptocurrency?   In the past, currency has been issued by governments and managed by financial institutions (banks), which are in turn regulated by the financial arm of the government (e.g., in the United States, the Federal Reserve System regulates banks). In other words, money has been inseparable from nation states and banks. We have historically placed our trust in these third parties to manage our money.  Now the rise of cryptocurrency is promising to separate currency from both nation states and banks.   By definition, cryptocurrency is a digital currency that relies on cryptography (the process of writing or reading secret codes) for security rather than established third parties (e.g., governments and banks). Because cryptocurrency takes the form of code rather than currency (e.g., coins and bills), the currency is impossible to counterfeit. Most importantly, because the currency theoretically belongs to no single person, business or government, it is also immune to outside interference.   Blockchain Technology   To understand how cryptocurrency works, it is important to understand blockchain technology. Simply put, if bitcoin is the train, blockchain is the rails on which it runs. While bitcoin is actual currency, blockchain is ledger technology that speeds up network transactions. As already noted, historically we’ve trusted governments and banks to manage our money. Now these trusted third parties are essentially being replaced by blockchain technologies.   Blockchain-based currency exchanges are managed by a distributed database (one with many connected computers based in many different locations). In theory, anyone trading blockchain currencies can see every transaction that has ever taken place in the blockchain, since all data is stored in the cloud. As such, all the accounting is autonomous (run by a network of computers and not by a centralized group of people).   Types of Cryptocurrencies   Bitcoin was the first digital currency to reach the market, and it has the highest market cap at close to $39.4 billion. Bitcoin is a popular currency for consumers and merchants who want to be free of banks and traditional finance. Other cryptocurrencies have made up ground in popularity and application use by speeding up the transaction period.   Ether is the currency of the decentralized network idea known as Ethereum. Smart contracts application has raised a lot of investment dollars from Fortune 500 companies: JP Morgan, Cisco, Thomson Reuters and UBS. Their investments backs the idea that Ethereum is currently the most versatile and sophisticated form of cryptocurrency. However, its pricing and market capitalization has been quite volatile as the price has moved from under $10 to $400 and back to $200, with a current market cap of $25 billion.   A slightly different technology to bitcoin in that it does not rely on mining protocol is a cryptocurrency named Ripple, with a market capitalization of around $7.4 billion. Ripple is both a transport protocol and a currency (XRP). Its main appeal has been its lighting-fast transaction, causing Ripple to gain popularity and establish partnerships with major Chinese Banks.     Government Regulations May Not Disappear   Although demand for cryptocurrencies is rising at a rapid rate, what digital currencies really need is government regulation. The word of the government, and acceptance of a currency for taxes, gives that currency value and, more importantly, instills investor confidence.   Even more desired by cryptocurrency investors is an exchange-traded fund (ETF). This would allow institutional investors to trade in bitcoin. So far, regulators are not accepting bitcoin ETFs; the SEC has rejected two applications for bitcoin-backed exchange-traded funds, the Winklevoss Bitcoin ETF and the SolidX Bitcoin Trust. The futures market may end up being another explorable option for cryptocurrency  investments. The Commodity Futures Trading Commission considers bitcoin a commodity. What’s more, according to Coindesk, an increasing number of governments are issuing guidance on bitcoin, for example, Japan, Jersey, Malta, Sweden, and Switzerland.   With no centralized authority and the ability of buyers and sellers to operate entirely under the radar, there are legitimate fears that in the future, cryptocurrencies will increasingly be used to support criminal activities, such as tax-evasion, money-laundering, and even the financing of terrorist activities. In some jurisdiction, such as New York State, legislators have already started to crack down on cryptocurrencies. The state’s Bitlicense requires virtual currencies to comply with most of the regulations already imposed on banks and other financial operators, including payday lenders. Other government bodies, including the European Union, are also currently working to place restrictions on cryptocurrencies, which they consider a threat to both financial and personal security.
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Where Do We Go From Here? U.S. Economy

I previously mentioned that the best way to analyze the U.S. economy was to look specifically at each category that comprises our gross domestic product (GDP.)   Consumer spending: Consumer spending growth requires two things: the ability to spend, which comes from jobs and wages, and the willingness to do so, which depends on confidence.   The number of jobs has continued to grow, albeit at a slowing rate. Although the decay in the job growth rate raises concerns about the future, based on historical trends, growth should continue through 2017. A growing number of employed people will enable spending to grow faster.   Beyond the number of people employed, wage growth also contributes to the ability to spend more. As the labor market tightens, wage growth should remain at current levels of between 2.5 percent and 3 percent, or it could increase. Overall, labor income growth, which includes both job growth and wage growth, has remained around 4 percent on a nominal basis, indicating that the ability to grow spending is there.   The second part of the equation—the willingness to spend—depends on consumer confidence, which is doing even better than income growth. Confidence has risen to levels last seen in 2001, and although it has pulled back a bit from the peak, it remains at levels that historically have led to faster spending growth.   Business Investment: Business investment had been a weak spot, but that started to change in early 2017. After languishing in negative territory in 2016, private investment growth has bounced back, in some cases, to levels not seen since before the financial crisis.   Government spending: What business gives, however, government is likely to take away. After supporting the economy in 2016, all levels of government have actually decreased spending in 2017. Although the decreases are small, the transformation of government from an economic tailwind to a headwind will hurt growth in 2017 as a whole. In fact, this was a major reason for the first-quarter slowdown. The decline is particularly damaging given expectations at the beginning of the year for fiscal stimulus, which has not happened.   Exports and imports: Exports and imports continue to expand. Over the past several years, imports have grown faster than exports, subtracting from economic growth. The most recent data, however, shows changes in trade in rough balance, taking this sector back to net zero from a negative in the second half of 2016. This should also help maintain economic growth.   Interest rate policy driven by stability The Fed is now saying—more clearly than in years past—that the risks of not raising rates are greater than those of raising them. So, expect continued slow increases, to 1.50–1.75 percent by the end of the year. Also, expect the Fed to start rolling off its asset base, not by selling but by lowering the reinvestment rate. Markets now largely expect continued policy tightening, so absent any surprises, the impact should be minimal, as it has been so far.   Financial markets supported by revenue and earnings growth A growing economy and a normalization of monetary policy mean global stock markets are likely to continue to trade on fundamentals, such as revenue and earnings growth. Here in the U.S., both revenue and earnings growth were greater than expected at the start of the year, a trend that should continue through 2017. Revenue growth, in particular, has been strong, at levels last seen in the immediate recovery from the financial crisis.  Strong revenue growth should also support growth in earnings, with the rest of 2017 expected to be quite strong.   All of these areas are still not without their risks. Whether it is data-driven, political or geo-political there are a number of items that I believe should be observed with a watchful eye and will be discussing soon.
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Where do we go from here?

As we move into the second half of 2017, we find ourselves in a familiar place. Once again, as in 2016, we saw a weak first quarter and rising concerns that the economy was rolling over. And once again, we have seen stronger data in the second quarter, which should lead to another solid year for the economy and markets. Employment continues to grow, both consumers and businesses remain confident, and markets have responded by moving up around the world, even hitting new highs here in the U.S. The fundamentals remain sound from both an economic and a market standpoint, and at this point, it seems likely the rest of the year will show continued growth and market appreciation.   There are risks, of course, but they are more political than economic. Even the real political risks, however, have not been as damaging as feared. Both the French and British elections, for example, failed to derail markets, and the political turbulence here in the U.S. has not prevented markets from reaching new highs. Strong economic fundamentals have allowed us to sail through the political storms, and this should continue to be the case.   The big picture, then, is one of continued improvement through the rest of 2017. The economy should continue to grow, perhaps a bit faster than it did in 2016. Corporate revenue and earnings have increased by more than most analysts expected, and that trend is likely to continue as well. Add in high levels of consumer and business confidence, and financial markets are also likely to continue to rise.   The U.S. economy is still growing, but more slowly   The best way to analyze the U.S. economy is to go back to basics. Gross domestic product comprises consumer spending, business investment, government spending, and the net result of trade. We need to consider each separately and I look forward to elaborating on each in the weeks to follow.
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The Macron Victory in France: Great News for US Investors

  “Catastrophe averted” were the words used by the French writer and filmmaker, Romuald Sciora, to describe Emmanuel Macron’s victory against right-wing nationalist, Marine Le Pen, in the recent French presidential election. And he wasn’t just referring to France, he meant for the whole world.   Elected at age 39, Macron is the youngest ever president in French history and the head of a party less than two years old. His presidency is calming the political and financial global seas and, while US investors are coping with recent market turbulence from domestic and foreign relations missteps, Macron is a shining beacon across the Atlantic guiding investors to European markets.   From Rags to Rogue   Somewhat of an anomaly, Macron began his career as a civil servant, quickly became a millionaire investment banker, and then donned the hat of a government minister. He had a privileged education at the Lycée Henry IV before entering the Ecole National d'Administration, where many of France’s political elite are formed.   In 2012, he joined the staff of President Francois Hollande and in two years became the economy minister. Economically, Macron favored liberal reforms that benefited businesses but were unpopular with his own party. Ultimately, the “Macron Law” had to be pushed through the National Assembly, which spurred Macron to change the system itself.   He resigned in August 2016 and launched his party En Marche!   Macron’s Manifesto   Macron's policies appeal to conservative voters. He plans to cut corporate taxes from 33 percent to 25 percent, cut payroll taxes that some economists believe keep companies from hiring, and simplify the tax and pension schemes.   However, he is also proposing ways to boost slow economic growth that appeal to the left. Macron plans to increase pay for teachers who work in poorer areas, for example, and introduce labor reforms to reduce unemployment.   Macron has pledged to reform France's welfare and pensions systems, boost defense spending, and to fight terrorism by hiring thousands more police officers and establishing a round-the-clock task force against ISIS. But his most beneficial policies as far as US investors are concerned are those that apply to trade.   Trade Tantrums   The EU has the second largest global GDP, and France has the 3rd highest GDP in Europe. Trade is paramount in “across-the-pond” relations.   A “Frexit” was a priority for Macron’s opponent, Le Pen, and was making many investors fractious leading up to the French elections. But a huge sigh of relief met Macron’s assumption of the Presidency because he is extremely pro-European. Macron intends to put France front and center of the EU and defend the single market.   The EU is a huge market for US goods and is the biggest single US trading partner. France’s support for the bloc has bolstered US investor confidence that was sorely downtrodden following the Brexit vote.   As far as Britain’s exit from the EU is concerned,  Macron is a deal-maker, and while he is not expected to give the UK a free pass, he is likely to seek a way to avoid a catastrophic outcome for the suffering Brits across the channel.   This all round positive news from Europe has US investors bullish on the French stock market as part of global portfolios. According to pundits, the French money supply and bank lending have already rebounded.   Diplomacy Conducive to Stability   Macron’s tact and diplomacy could also influence western approaches to global conflicts. The French president has reached out to the more politically volatile President Donald Trump and the leaders of Iran, Russia, Saudi Arabia, and Turkey to find a political solution to problems such as Syria and the refugee crisis.   Unlike Le Pen, Macron supports traditional defense structures such as NATO, continuing the efforts to defeat ISIS, and sharing intelligence with the US and European allies further stabilizing US and European relations.   As a newcomer, Macron attracted many first-time voters of all ages, and his party now has over 200,000 members. US investors could, arguably, be added to his list of supporters who appreciate his disdain for international isolationism and division and his stabilizing influence on trade, foreign relations, and the global economy.
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Investing at All-Time Highs

In the United States, the S&P 500 and the Dow Jones Industrial Average, the two most quoted equity indices, seemingly post new records daily. Driven by rallies in the financial services, industrial and technology sectors, U.S. equities are priced richly, both in comparison to historical averages and in terms of valuation multiples. Given these trends, where then do investors allocate capital? While conventional wisdom may lead investors to avoid equities, we believe there is still significant room for appreciation. Historically low retail investor participation means that a massive inflow of assets into equities may be coming. Slow rate increases mean that fixed income market returns will remain subdued in the intermediate term, making many bonds untenable for a large group of savers. Finally, macroeconomic and policy tailwinds should serve as a strong bedrock for future earnings growth.   As equity markets digest these factors, sectors that have not fully participated in the rally to date should benefit disproportionately. Health and biotech, negatively affected by rumors about drug price controls, should be able to manage any risks that arise from policy changes. The economically sensitive materials business will likely see share price increases as a result of economic growth and the prospect of higher infrastructure spending. Consumer staples, some of the highest dividend payers in the equity market, should remain attractive relative to still-low yields in sovereign and corporate bond markets.   Economic Outlook   Despite a weak economic outlook internationally, the United States economy continues to outperform. This is especially acute when weighed against weak growth expectations across other advanced economies in Europe and Asia that are mired in a sub-two percent growth range. With stronger consumer spending expectations, the comeback of some energy-related industrial production and a better demographic outlook, the U.S. economy should expand well above the two percent range in both 2017 and 2018. Additionally, while the Federal Reserve is expected to raise interest rates in congruence with the direction of the economy, these increases will likely be moderate in the short-term, reducing the risk of stunting growth.   Corporate Earnings Outlook   These macro trends are trickling down to U.S. corporations, which are projected to post the first consecutive quarterly revenue growth for the first time since the last quarter of 2014 and the first of 2015. This shows that companies are successfully monetizing higher incomes and capitalizing on new opportunities. Corporations are not just increasing sales without benefit to shareholders. Earnings per share (EPS) growth is expected to be above five percent, the highest since 2012, as businesses turn better sales into better profits. In past years, many companies have been unable to translate top line growth into earnings. Companies’ ability to transform revenue into profits is a reflection of improving productivity and cost restraint. Overall, the picture seems rosy for the U.S. economy and corporations alike.   Policy Outlook   In Washington, there is a significant expectation that the agenda of the White House and Congress will yield policies favorable to the equity market. First is the complex issue of tax reform, where Republicans want to reduce tax rates and incentivize companies to repatriate an estimated $2 trillion of overseas capital. This should provide tax relief to individuals, increasing their spending power and acting as a further benefit to an already growing economy. On the corporate side, the large pool of capital held overseas would presumably be used to finance more aggressive shareholder returns and/or capital investments. Both are beneficial to the broader equity market. While there is, of course, the chance that neither of these legislative proposals are enacted, the general environment in Washington seems more conducive to business growth and investor returns.   Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Talk to your financial advisor before making any investing decisions. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses.
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Market Commentry: Snapchat Goes Public

  Snapchat made its highly anticipated publicly traded debut on March 2nd, under its parent company Snap Inc. (SNAP.) The initial public offering (IPO) of 200 million shares made noise from the investing world to teenagers all over the world. The listing on the New York Stock Exchange (NYSE) valued the social media company at more than $30 billion, making it the largest U.S-based technology offering since Facebook’s launch in 2012. This valuation was a very big contingency point for investors as it equates to a price-to-sales ratio of 80x, nearly 6x the valuation Facebook carries. It also became instantly more valuable than a handful of household companies such as: Snapchat   The valuation will be highly scrutinized and will only be able to play itself out over time, but some of the most interesting details have become public in their prospectus.   The Financials Snap currently has no earnings; in fact, it recorded a net loss of $514.6 million in 2016.   The revenue has increased from $58.7 million in 2015 to $404.6 million in 2016, but not enough to outpace its net revenue loss.   98% of Snap’s revenue is derived from advertising.   All shares listed on public exchange have zero voting rights; co-founders Evan Spiegel and Robert Murphy have an iron clad control of the company.   User Base The majority of its users fall into the 18-34 age category, a highly coveted advertising demographic.   These users visit the app more than 20x per day and spend more than 30 minutes’ total on the app.   With 158 million daily active users (DAU’s), an average of 2.5 billion snaps are sent every day.   The teen demographic is one of the least “brand loyal” bases and could shift attention to another platform.   Snap uses Alphabet Inc’s (GOOGL) Google Cloud for much of its computing storage, bandwidth and other needs. Snap said in its filing that if business would be “seriously harmed” if that relationship was disrupted.   About Midwest Wealth Management, Inc.   Midwest Wealth Management, Inc. was formed by Greg Shields, a 30-year financial services veteran committed to offering sophisticated investors an alternative when looking for a more strategic path for long-term investing. As a private investment group, Midwest Wealth Management, Inc. offers a proprietary trading platform, alternative investment offerings and dedicated advisory support for a select audience. For more information, please visit www.midwest-wealth.com.   Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.   All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks.   VIX: trademarked symbol for the Chicago Board Options Exchange Market Volatility Index. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period.   https://techcrunch.com/2017/03/02/snapchat-is-already-more-valuable-than-these-9-companies/   http://www.marketwatch.com/story/snap-ipo-six-things-we-now-know-about-snapchat-parent-company-2017-02-02
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Our Market Commentary-Global Developments

U.S. Interest Rates: Bond & Currency Moves The Federal Reserve has started to surprise many observers by the number of potential interest rate hikes in 2017. The initial thought of two rate hikes may turn out to be three or four. The decision to raise rates pushed short-term bonds lower. The yield of the two-year U.S. Treasury rose to the highest level in 7 years. Rising U.S. rates can cause disturbances for markets and other countries’ currencies moves all over the globe.

     

  • China’s Yuan tumbled to lowest level against the dollar in more than 8 years
  • U.S. dollar is moving closer to 1:1 parity with the Euro, its highest level in nearly 15 years.

 

Bitcoin on the Move The most popular crypto currency, Bitcoin, has risen to record highs above $1,250. The currency has increased an impressive 76% since the U.S. Presidential election and is now worth more than an ounce of gold.

 

Volatility (VIX) Touches Multi-Year Low Dropping 20% over 2016, the VIX, a measure of market volatility, hit levels only previously seen in early 2007 and in summer of 2014.  
  • Indicates a lot of complacency in the market and that investors perceive minimal risk in equities.
  • This can lead to a lot more upside pressure, as retail investors are owning historically low percentage of stocks.
  • Could leave stocks susceptible to large and quick corrections on any news of a negative event.
  About Midwest Wealth Management, Inc. Midwest Wealth Management, Inc. was formed by Greg Shields, a 30-year financial services veteran committed to offering sophisticated investors an alternative when looking for a more strategic path for long-term investing. As a private investment group, Midwest Wealth Management, Inc. offers a proprietary trading platform, alternative investment offerings and dedicated advisory support for a select audience. For more information, please visit www.midwest-wealth.com. Securities and Advisory Services offered through Commonwealth Financial Network®. Member FINRA/SIPC a Registered Investment Adviser.
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U.S. at a Glance: Our Market Commentary

JOBS December: 156,000 jobs gained, slightly below expectations. January: 227,000 jobs added was largest increase since September 2016. February: 235,000 jobs gained were also paired with upward January revision and a drop in the unemployment rate to 4.7%.   U.S. MARKETS Aging Bull Market: The bull market turned 8 years old this past month, marking the longest run since 1987-2000. This bull has survived four corrections, or declines of 10% or more. Record Expansion: The U.S. economy has entered its 93rd consecutive month of growth, the third largest expansion in history. Consumer Optimism: University of Michigan’s consumer sentiment index reported that U.S. consumer are the most optimistic they have been in 13 years, highest level since January 2004. Amazing Amazon (AMZN): On the back of strong holiday sales numbers, Amazon (AMZN) captured 38% of all holiday online shopping sales. Its next closest competitor, Best Buy (BBY) had only 3.9% market share. About Midwest Wealth Management, Inc. Midwest Wealth Management, Inc. was formed by Greg Shields, a 30-year financial services veteran committed to offering sophisticated investors an alternative when looking for a more strategic path for long-term investing. As a private investment group, Midwest Wealth Management, Inc. offers a proprietary trading platform, alternative investment offerings and dedicated advisory support for a select audience. For more information, please visit www.midwest-wealth.com. Securities and Advisory Services offered through Commonwealth Financial Network®. Member FINRA/SIPC a Registered Investment Adviser.
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The SEC, Markets & Tweets

Baby boomers, their parents and the early Generation X's are not the only groups of people still trying to find their footing in the world of social media. From liking and sharing to understanding who it is "ok" to follow or friend, the rules are ever evolving. If you want to take solace in feeling like you are always playing catch up in this world, one of country's most important regulatory agencies, the SEC (Securities and Exchange Commission) is right there with grandmothers who are friending their grandchild's social circle and wondering "why don't they accept my invite?"

 

Social media was a previous non-issue in the investing world until Reed Hastings, co-founder and CEO of Netflix (NFLX), posted exciting news about his company in the middle of 2012. Thrilled that his company had exceeded monthly viewing of 1 billion hours (a whole lot of "Netflix and Chill") he turned to Facebook to share the exciting news with his 200,000+ friends. with many of the people in his social network having an interest in the shares of his publicly traded company news quickly spread the viewership numbers resulted in a share price increase of over 20%.

 

After review by the SEC, they fully approved the use of social media for publicly traded companies in 2013. The rules require simultaneous access to material information, so now companies are required to notify shareholders which platforms and which accounts (company or executives) may be used. Not only are corporate executive posts being examined for "market moving" information, the search has spread to anyone with enough following to be viewed as credible. Firms and trading strategies are now being built around posts from news outlets, politicians, regulators and the biggest names in investing.

 

Big Market Moving Posts of the Past: SEC, Markets & Tweets   About Midwest Wealth Management, Inc. Midwest Wealth Management, Inc. was formed by Greg Shields, a 30-year financial services veteran committed to offering sophisticated investors an alternative when looking for a more strategic path for long-term investing. As a private investment group, Midwest Wealth Management, Inc. offers a proprietary trading platform, alternative investment offerings and dedicated advisory support for a select audience. For more information, please visit www.midwest-wealth.com.

 

Securities and Advisory Services offered through Commonwealth Financial Network®. Member FINRA/SIPC a Registered Investment Adviser.
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