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Siegel/Yocum Asset Management, LLC Commentary – 2nd Quarter 2012 Consistent with the spring/summer months of the last couple of years, the U.S. economy has begun to slow. Key measures such as employment, manufacturing, and GDP have weakened to the point where the Fed is contemplating another round of stimulus. Since the 2008 credit crisis, our economy and capital markets have been propped up by artificial means. It appears that real organic growth without the help of an easy monetary policy eludes our economy. Growth (GDP) should be in the 4-5% range at this stage of a typical recovery. The latest reading was 1.9%; far from a recession, but less than ideal. Here are the major issues that stand in the way of economic improvement and a strong equity market: The looming “fiscal cliff” (higher tax rates and automatic spending cuts) European debt issues Weakening economic data in the U.S., China, Europe Political uncertainty On the positive side: Equity valuations Broad pessimism (good for stocks) Policy opportunity (tax reform) Drop in energy prices Stabilizing housing market Historically low interest rates From a strategy standpoint, we are erring on the side of caution in the equity market and have taken a slightly more aggressive position in the bond market. CNBC SPX = U.S. Large Caps, AGG = U.S. Bonds, VEU = International Stocks, GLD = Gold Equity Overview: It was a negative quarter for equity markets worldwide based on weaker economic metrics and headline risks. As we predicted, the U.S. stock market returned a portion of the first quarter’s gains. However, it is important to note that despite the cloud of uncertainty and pessimism, the S&P 500 has logged an impressive return on a year to date basis. Going forward, we expect elevated volatility based on news from Europe and political issues domestically. For the remainder of 2012, the path for stocks will be determined by whether or not the Fed implements another round of stimulus, the outcome of our Presidential election, and corporate earnings. It is our contention that stock prices already reflect much of the current economic and political environment. With the absence of a financial shock, stocks have the opportunity to greatly appreciate based on attractive valuations, low interest rates, and lower energy prices. CNBC SPX = U.S. Large Caps VEU = International Stocks Currently our client portfolios are over-weighted in U.S. large cap stocks and equity investments with lower than average risk exposure. As previously communicated, we plan to add to equities on further price weakness in order to take advantage of what we would consider a very attractive medium-long term buying opportunity. Fixed Income Overview: The U.S. bond market has continued to get more expensive as the benchmark 10-year Treasury yield reached all time low territory this quarter. With stocks out of favor and cash yielding next to nothing, both U.S. and foreign investors have continued to pour money into Treasury bonds as a safe haven. This immense buying pressure has continued to force prices up and yields down. Over the last decade, yields have experienced a precipitous decline from 6.5% to 1.5%. Yahoo Finance The prospective returns for high quality government bonds going forward is dismal. Even if rates stay at these historically low levels, investors will be settling for returns that are less than the inflation rate. If rates begin to rise, which is inevitable over the long run, these inflated bond prices will lose value. We look at this conundrum as a double-edged sword. It is our contention that in order to achieve acceptable returns in the fixed income market over the next several years, investors will need to have exposure to corporate bonds, municipals, and foreign debt of average credit quality. We recently had the opportunity to meet with Dan Fuss, famed fixed income fund manager with Loomis Sayles. He stated that “we are in the foothills of a twenty year period of rising interest rates.” Our role as risk managers is to invest client portfolios in the bond market for diversification and income, while avoiding significant erosion of principal. We will contact you shortly to schedule a review of your portfolio. Thank you.
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