Market Commentary

“What’s happened?”

In May the US bumped up against the $14.3 trillion debt ceiling limit, its maximum borrowing

limit. In early August an agreement was reached to increase the debt ceiling, called “The Budget

Control act of 2011.” The legislation put mechanisms in place to increase the debt at least $2.1

trillion, and potentially up to $2.4 trillion, while also providing spending cuts over the next 10 years.

The new law does not cut spending today but aims to reduce future spending.1

This past quarter was highlighted by daily headlines on the debt situation in Europe,

particularly Greece. The Eurozone has a highly interconnected economic system that has a stable

common currency, the euro. Over the past decade, however, the Eurozone has experienced an

explosion in consumer and government debt, especially in some of the weaker, peripheral

economies.

Greece, in particular, has an extremely large debt-to-GDP ratio, and is struggling to finance its

debt. The Greek economic system is fundamentally uncompetitive, and the government has been

spending much more than it has been taking in. Some may wonder why the Greeks don't just exit the

euro. The reason is that doing so would likely cause the Greek banking system to implode

instantaneously. The negatives of leaving the Eurozone are still far greater than staying and dealing

with a very difficult adjustment process and austerity program. Similar challenges are potentially

facing the Irish, Portuguese, Spanish, and Italian economies.2

3 months YTD 1 year

7/1/2011 1/1/2011 10/1/2010

9/30/2011 9/30/2011 9/30/2011

Return (%) Return (%) Return (%)

United States Stocks: Index Used S&P 500 TR -13.87 -8.68 1.14

International Developed Stocks: Index Used MSCI EAFE USD -19.60 -17.18 -12.02

Emerging Markets Stocks: Index Used MSCI EM USD -23.19 -23.53 -18.14

United States Bonds: Index Used BarCap US Agg Bond TR USD 3.82 6.65 5.26

Gold and Precious Metals: Index Used S&P GSCI Gold TR 7.82 13.67 23.22

Data Provided by Morningstar Inc. an independent research and analytical firm

“What we think”

Boring as it may seem, a diversified basket of poorly correlated investments is still the best

foundation of an efficient, highly predictable investment portfolio. However in the short term this

“Asset Allocation” approach can often do little to alleviate market volatility, and the emotions that go

with it. You can and should however trust this process, as it is time tested, and proven to work in all

periods of recordable time. Often times in the investment world when things seem the darkest, they

are actually closest to breaking out into the light. The “investments light” we see near term are US

stocks and going farther out the Emerging Markets. A quick word of caution, it is best not to judge

the wisdom of an investment decision purely on its short term experience. Rather like everything,

look at the fundamentals, buy cheaply when everyone else is afraid, and then wait and trust the

process that good fundamentals will always payoff over time.

Here are some general reasons for our bullish equity views.

Good cash flows, Good relative values:

Average broad market dividend yields pay over 2%, about the same as the 10 year treasury.

However, those dividend yields are only taxed at a 15% dividend rate and can rise with inflation.

Additionally, the S&P 500 is trading around 11x future earnings, which is way below the historical

average of 16x. The companies that comprise the S&P 500 hold trillions of dollars of cash on their

books, so if you are buying stocks you are buying companies with a lot of cash flow. By the way,

emerging markets are even cheaper. Companies have the ability to navigate away from troubling

economies, and find profits in other lands no matter where they are domiciled. Even though

companies are affected by the US’s anemic growth, 9% unemployment, and massive debt, they have

their own balance sheets, and agendas to create shareholder wealth. Apple and Nike are examples

of companies that benefit from this type of flexibility.

Limited choices for long term investors:

Where else can you really go? There are few alternatives in the bond market and money

market rates are close to 0%? Why does this matter? Because the cost of gas is not going backward,

neither is food, water, medicine, etc. Our money has to eventually be positioned to keep up with

inflation and preferably grow ahead of it, even though we must also consider risk and short term

cash needs.

The trend is your ultimate bullish friend:

It is really the long term global demographics, which we believe will power well run

companies upward in growth, no matter what country they are domiciled within. There are still a lot

more people without food, water, clothing, electricity, and healthcare in the world than there those

that have them. As the world becomes more globally connected those people who live without will

finally have access to these and many other goods and services. The stocks of the well run

companies making and selling all these products will help create great shareholder wealth over time.

The 1 billion new people expected to be added to the Earth over the next 20 years will only help drive

demand...

Sources

1 Authors Multiple. “Budget Control Act Summary.” Fidelity Market Commentary (2011): pages 1-2. Web. 2 August 2011. 2 Eisinger, Nick, Tom Nolan, and Jamie Stuttard. "Eurozone Debt: Policy Scenarios and Investment Strategies." Market Perspectives

(2011): pages 1-10. Web. 23 Aug. 2011