Stone & Youngberg Asset Management Group Comments on Elevated Financial Risks and European Sovereign Debt Problems by EON


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									Stone & Youngberg Asset Management Group
Comments on Elevated Financial Risks and
European Sovereign Debt Problems
Market Commentary by Paul R. Touchstone, CFA Senior Investment Strategist and Portfolio Manager

May 25, 2011 02:41 PM Eastern Daylight Time 

SAN FRANCISCO--(EON: Enhanced Online News)--Stone & Youngberg, a leading financial services firm and
the nation’s top underwriter of California and Arizona municipal bonds over the past five years1, is pleased to share
the following market commentary from their Asset Management Group regarding the Elevated Financial Risk and
European Sovereign Debt Problems.

Equity and commodity markets are giving back some gains in May after strong, high single-digit returns in the first
four months of the year. During the month, Emerging Markets are leading the decline -5.9% while the S&P 500 is
off -2.0%. Gold is off -3.2% while Silver is down over 25% for the month.

The US Dollar is up 3.3% during the month against the basket of G-7 currencies and up 4.0% when compared
directly to the Euro.

The price correction in global markets comes on the heels of recent economic reports out of the US, Europe and
Japan that are detailing softer growth while the emerging market’s main cylinder (China) has been aggressively
raising short-term interest rates and its Reserve Requirement Ratio (RRR). After six straight months of increases, the
RRR now stands at a record high 20%. The RRR forces banks to keep more money in their coffers while rising
short-term interest rates are intended to discourage borrowing.

The market correction, so far, has been orderly as noted in the muted reaction in the broad equity market VIX
(“fear gauge”). Credit spreads seem to be holding together and are not indicating broad signs of market stress.

The Credit Default Swap (CDS) markets in Europe are the exception where renewed fears of debt contagion
continue. The European debt problems are complicated at best due to the political nature of their economic union
and serve as a constant reminder as to how over indebtedness and leverage remain significant global issues.

The markets are protecting against default at the sovereign level (see Portugal, Ireland, Spain, & Greece in the table
below) more so than at the corporate/banking level. Intuitively, this makes sense in the current environment as the
sovereigns would be the first to default. But unless properly “back-stopped” by central banks a domino effect of
defaults within European financial institutions would likely follow resulting in another crisis similar to Lehman’s
bankruptcy in September of 2008. While we do not expect this to happen, the European Central Bank has
been unsuccessful at quelling market fears and tail-risk scenarios remain elevated.

As such, we are closely monitoring the CDS markets on the largest 12 European banks for signs that this crisis could
spread into something more meaningful. As of now, markets remain orderly.

On the positive side:

    l   According to the American Association of Individual Investors, Bullish Sentiment is at its lowest level since
        August 2010 (typically a contrarian indicator)
    l   The Economist/FT survey of global business confidence continues to climb and is in positive territory +20 vs.
        -37 in September 2008 (typically a coincident/leading indicator)
    l   Availability of jobs in the US stands at 3 year highs -- 3.1 million jobs available
    l   US Federal Reserve data shows that bank lending & demand for loans is rising – we’ve been waiting for
        these indicators to turn positive for a couple of years
    l   Monetary policy is ultra loose & accommodative across the developed world

Summary & Investment Implications

Despite near-term risks associated with Europe, we anticipate that the global economic growth story has a good
chance of picking up pace in the second half of the year. Market participants should return their focus toward solid
earnings reports, resilient consumption reports, and positive implications from the rebuilding efforts in Japan &
renewed pace in bank lending.

    l   Broad diversification and balanced portfolio strategies are essential in this market environment
    l   Within Equity Allocations:
            ¡ Overweight US stocks (particularly large cap names)

            ¡ Underweight developed International stocks

    l   Selectively buy commodities & Emerging Markets on pullbacks
    l   Continue to build core positions in liquid, non-correlated assets
            ¡ We are seeking to add to our Managed Futures strategies as they are essentially “long” tail risk. (more

               on this in coming communications)

About Stone & Youngberg Asset Management Group

As a complement to our fixed-income brokerage services, Stone & Youngberg offers fee-based asset management
to individuals and institutions. Our approach relies on reducing volatility and managing exposures to risk. This is
designed to increase the probability of meeting our investors’ financial objectives. Disciplined risk management,
planning, and communication are essential in formulating long-term, successful investment strategy.

To learn more, please give us a call or visit

Important Information: Stone & Youngberg's asset management services are only available in states in which the
firm and or its associated persons are registered or exempt from registration. Information presented on this website is
not intended as a solicitation of products or services or a recommendation of any investment or investment strategy.

This release is for informational purposes only and are solely the views of its author. These views are subject to
change at any time based on market conditions and the author does not undertake to update the reader of any
changes in opinion or information. Readers should evaluate his or her personal situation with a professional before
investing. The information presented should not be construed as investment advice or guidance as to the
appropriateness of any investment decision or as a recommendation as to any specific security, sector or strategy.
Past performance does not guarantee future results. All investing involves risk and the value of your investment will
fluctuate over time and you may gain or lose money.

About Stone & Youngberg: Stone & Youngberg Holdings LLC is a financial services company providing a range
of products and services. Stone & Youngberg LLC, founded in 1931 and member FINRA/SIPC, specializes in the
origination and sale of fixed-income securities. The firm led or co-managed the sale of 927 municipal bond issues
totaling $21 billion over the past five years.1 In addition to bond underwriting and sales, Stone & Youngberg
provides investment services to individuals, institutions, and government agencies and offers a wide variety of tax-
exempt and taxable securities.

Additional information is available at or by calling 800-447-8663.

¹ Based on number of bond issues 2006-2010, Thomson Reuters 2011

Stone & Youngberg LLC
Steve Hall, 415-445-2656
Pierce Communications Group, LLC
Kimberley Pierce, 510-326-0058

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