Securities and advisory services through Independent Financial Group, LLC, a registered broker-dealer

and investment advisor. Member FINRA/SIPC. South Coast Investment Advisors, LLC and Independent Financial Group, LLC are not affiliated. Tax information provided can be sourced at www.irs.gov

September, 2012

Volume 3, Issue 9 South Coast Market Update

The South Coast Corner

South Coast Investment

Advisors, LLC

4041 MacArthur Blvd. Suite 240 Newport Beach, CA 92660 Toll-Free: (877) 922-7242

Direct: (949) 825-7540 Fax: (949) 825-7541:

info@southcoastinvest.com

www.southcoastinvest.com

In This Edition:

QE3 – Impact on

Interest Rates and Real

Estate

Turning Japanese

Mideast Tensions on

the Rise – Oil Prices

Follow

2012 Economic Summit

Announcement

Slow Growth, No Problem – Just Sprinkle a Little QE on it

The South Coast Team is extremely excited to welcome all of our friends, family, clients and prospects to our new office. As detailed in the insert this month, we are hosting an Open House on Wednesday October 3. Chris has been anxiously awaiting the start of college football. His youngest brother, Tim Vizzi, plays for the San Diego State Aztecs. Chris and Candice traveled to Seattle, WA earlier in the month for the season opener and got to witness his brother’s first collegiate Division I touchdown against the Washington State Huskies in front of almost 60,000 people. Chris is looking forward to catching as many home games as possible at Qualcomm stadium in San Diego, CA. Jeff and his family are in full-time school mode, though the hot weather inland has made it seem

The Fed announced a new open-ended program of quantitative easing, along with an extension of “Operation Twist” through year end in order to achieve the Fed’s two mandates of maximum employment and price stability, while containing inflation to the 2 percent range. While the financial markets expected some form of policy easing, market reaction was swift, causing the S&P to surge 1.4 percent on the news. The Fed added that it would undertake further measures if necessary until the economy strengthens and labor market conditions improve without quantifying a specific measure of performance or duration of easing. This action reconfirmed FOMC’s view that, after three years, the economy is expanding moderately, but not enough to comfortably show progress in lowering unemployment. The EU financial crisis, recent deceleration in business-fixed investment, and other key economic measures caused the Fed to downgrade its view of economic conditions and lower its expectations for the near-term outlook. The FOMC will purchase additional agency mortgage-backed securities at a monthly pace of $40 billion for an unspecified period of time. In addition, “Operation Twist,” its program of selling short-term securities and buying long-term

much more like mid-summer than early fall. Isaac’s soccer games have been played in 100 degree heat and Lauren’s softball practices have likewise been very warm affairs. Joey is hesitant to even take his good guitar out in the heat for fear of warping! Tina somehow manages to keep us all healthy, happy and cool while ensuring we are fed and clothed. We appreciate her incredible work for all of us. Jessica and Kelly are preparing for a trip to Lake Tahoe to attend the wedding of Kelly’s good friend from his days at UC Santa Barbara. Kelly is excited to take Jessica to his family’s condo in Kings Beach where he spent countless summers during his childhood. They plan to spend some time hiking and swimming before they put their dancing shoes on for the wedding reception.

QE continued on page 3

securities, will extend through year end, and the Committee will reinvest principal payments from its holdings into agency debt and mortgage-backed securities. These actions will increase the FOMC holdings by about $85 billion per month through year end and create downward pressure on longer-term interest rates. The Committee issued interest rate guidance as well, maintaining a zero to one-fourth point federal funds rate at least until mid-2015, to show monetary tightening would start only after economic and employment recovery is established, and noted the tightening process would occur at a more gradual pace than historical precedent.

Turning Japanese – Identifying the Losers in this Low Rate Environment

On June 4th, 2012 Bill Gross, aka the “Bond King,” tweeted: “Global Bond Markets are turning Japanese, I think they’re turning Japanese, I really think so.” Mr. Gross was referring to the similarities between the Japanese bond market and other international bond markets which include high debt levels, extremely low and at times negative real interest rates, and most importantly government intervention in bond markets. The latter will be the primary focus since there is a direct correlation between low interest rates and the amount of government intervention within a country’s bond market. This becomes apparent once you dig into the Japanese bond market and find out how they can finance a deficit that is twice that of any developed country with record low interest rates. Investors, central banks, and governments have all been concerned with debt levels within European countries and even the United States. The International Monetary Fund (IMF) is projecting a debt to Gross Domestic Product (GDP) ratio for the U.S. and the Euro area to reach 111% and 92%, respectively by 2013.

This compares to a projection of 240% by 2013 for Japan (1). Knowing that debt to GDP is one of the main determinants of the ability for a country to repay their debt, one would suspect that Japan is the riskiest country followed by the U.S. However, this is not the case. Interest rates are the primary indicator for the riskiness of a government’s debt and Spain is reaching levels that have forced countries such as Greece into crisis. From the beginning of 2011 through March 2012, foreign investors decreased their Spanish debt holdings from 40% to 26%. (2) As a result, the yield on the Spanish 10-year note rose above 7%, a level that is considered unsustainable for Spain’s solvency. (3) Just like an individual who has poor credit and sees their interest rate on their credit card jump from 12% to 25%, it will only be a matter of time until they cannot make the minimum payment. However, in Japan, the interest rate on Japan’s 10-year government bond has not gone above 1.1% for over a year, yet their debt to GDP ratio is twice that of Spain. (3)

In Japan’s case, over the past two decades the Japanese Central bank has crowded out foreign investors through government intervention by purchasing Japanese Government Bonds (JGBs). By doing so, they are able to avoid the credit crunch caused by foreign investors dumping their bonds when the investor’s feel like the country’s debt level or political uncertainty has reached levels that are not in line with the rate of return. This scenario is outlined in the chart below.

A recent paper from the IMF outlined the following scenario in Spain. “If the outflow of foreign investors continues, like seen at the end of 2011, then you could see non-residential (aka foreign investors) investments drop to zero.” (4) Japan’s non-residential investments hovers around 5% during stable market conditions. Who has been buying the Spanish bonds as foreign investors dump them? The European Central Bank (ECB) has been indirectly buying them. The ECB provided 3-year loans to the Spanish government. First, the ECB lends money to the Spanish government which then channels the funds to its banking sector who in return are “encouraged” to purchase Spanish sovereign debt. In addition to the 3-year term on the ECB’s loan to Spain, additional provisions prohibited the bailout fund from having the lasting dramatic effect that investors have been looking for. The multi-stage illustration on the back page shows that the European Union is still lacking the ability to access its debt markets through direct intervention. A more effective strategy would be for the ECB to do outright purchases (red arrow in diagram) of Spanish government bonds directly with limited provisions with regard to the amount of purchases and holding period. The U.S. and Japan have proven that they can take the necessary steps to preserve calm within their bond markets. Even though our fiscal situation is facing a “cliff” the interest rates on U.S. treasury bonds continue to stay near record lows. You can see from the foreign ownership chart above that the U.S. has a large percentage of foreign investors. Foreign investors know that the U.S. stands ready to “do whatever it takes” and that we can actually do whatever it takes and it’s not just jawboning.

Turning Japanese does not come without its risks. First, since nearly all of Japanese debt is owned domestically and is seeing a zero to negative real return, Japanese investors and savers are the losers. This is apparent in Japan’s GDP per capita which has been stagnant over the past 20 years. Turning Japanese continued on back page…

Calendar of Events

Tuesday, September 25th: Bluerock Real Estate LLC is a

national real estate firm headquartered in Manhattan. Bluerock focuses on acquiring, managing, developing, and syndicating stabilized, value added and opportunistic multifamily properties primarily in the South East and Texas. Bluerock believes that the United States is increasingly becoming a nation of renters and feels strongly that demographic shifts and declining home ownership trends will continue to support Apartment Rental Growth for the foreseeable future. Bluerock and its seasoned institutional investment executives have designed current high cash flowing and value-added opportunities for accredited investors to invest directly with many of the Nation’s top 25 institutional Apartment Management Firms.

Tuesday, Oct 2nd: Catalyst Energy Inc., headquartered

near Pittsburgh, Pennsylvania, is engaged in oil and natural gas development in the Appalachian region of the United States. The activities of Catalyst encompass the exploration, development, production, transmission and processing of oil, natural gas and liquid hydrocarbons. Catalyst has offered accredited investors the opportunity to co-invest in the development of oil and natural gas reserves since their formation in 1992. Each investment program provides the investor-partners with tax advantages including the write-off of intangible drilling costs during the 1

st year of operations, the

ongoing yearly depletion allowance and depreciation of tangible equipment.

Wednesday, Oct 3rd: Join the South Coast team for an Open House to celebrate the completion of our recent move into Redstone Plaza in Newport Beach. The office will be open throughout the day for anyone that would like to drop in and we’ll be serving wine and hors d’oeuvres from 5:30 to 7:309.

Saturday, Oct 13th: South Coast Investment Advisors, LLC’s 4

th

Annual Economic Summit will feature a variety a can’t-miss presentations from a group of top investment strategists along with opportunities to have one-on-one discussions with our experts to see how the current economic environment will impact your portfolio. Different events have different suitability requirements – please contact a member of the South Coast Team to reserve a spot.

The Fed delivered a message of support welcomed by investors, and with interest rates already range-bound near zero, business and consumer sentiment may be as important as the size of the economic impact, which many analysts view as modest at best. Spending cuts and higher taxes will weigh on GDP growth in 2013, thereafter ranging between 3.0 and 3.8 percent in 2014 and 2015. The residential sector normally contributes heavily to economic recovery and growth following a recession, but now stands at a fragile juncture. This action bolsters the mortgage market, and although credit requirements are a hurdle, the Fed has removed much of the near-term interest rate risk, creating more certainty for lenders and borrowers. The commercial sector stands to benefit as

well. Increased liquidity will aid in the restructuring of maturing and problematic loans and drive capital into real estate, sound alternative relative to the low-yielding bond and volatile equity markets. While the Fed’s statement and actions help assuage investors, uncertainty surrounding the elections, taxes and spending keeps them cautious. Commercial real estate investors trade higher prices for the greater certainty offered by top-tier markets and properties with stabilized and proven cash flows. Significant price recovery has been limited to coastal and urban core markets, and lags in markets that don’t meet the litmus test for 24-hour gateway cities, employment momentum and population growth. A more liquid credit market for sectors other than multifamily, long buffered by the GSEs, will open broader opportunities for investors.

QE3 continued…

Tens of thousands of supporters of the Lebanese militant group Hezbollah filled the streets of Beirut this month to denounce the U.S. for an anti-Islamic film.

Many waved the group’s yellow flag as they chanted, “America, America, you are the greatest Satan” and “Israel, Israel, you’re the enemy of Muslims,” according to several reports.

The protest followed a call from Hassan Nasrallah, the chief of the pro-Iranian militant group, in which he announced a series of demonstrations. Nasrallah made a rare public appearance at one of the protests and told the crowds to deafening cheers: “We will not remain silent over the insult to our prophet.”

The anti-Islamic film, which the U.S. has described as “very offensive,” triggered a series of bloody demonstrations and attacks on U.S. and European-linked targets across the Muslim world. U.S. ambassador to Libya Chris Stevens and three colleagues were killed in an attack in Benghazi earlier this month, while Muslim protesters in Tunis and elsewhere were killed.

The U.S. Embassy in Lebanon said it had received reports indicating an increased possibility of attacks against its citizens in the country. The Hezbollah protesters marched in southern Beirut, some distance from the U.S. embassy, in a suburb north of the city.

Nasrallah said the protests will continue until the film is removed from the Internet

and the people responsible for it are held accountable. He said the U.S. should understand that the broadcast of the film in its entirety will have “grave” repercussions worldwide.

Last week, the U.S. imposed financial sanctions against Nasrallah for aiding Syria’s President Bashar al-Assad. Hezbollah is designated a terrorist group by the U.S. and Israel.

The recent protests add fuel to the fire of the already tense relationships between the US, Israel and Iran. Israel accused Iran of orchestrating a bombing attack at a resort in Bulgaria, frequented by Israelis that killed at least six people and injured 30 others. Israeli Prime Minister Benjamin Netanyahu said Israel would "respond with force."

The possibility of a clash between the two Middle Eastern nations has rippled through the oil markets. Any conflict could escalate throughout the oil-producing region. Also, in the past, when Iran has been threatened, Iranian officials said they would close the Strait of Hormuz, a critical waterway for oil shipments.

Crude futures climbed as much as 0.5% as the U.S. Embassy in Lebanon said it received reports indicating a greater possibility of attacks against U.S. citizens. Crude rose 2.7% in September as the Federal Reserve pledged to start a third round of quantitative easing.

Oil prices are prone to rise should tensions continue to escalate. -Written by Chris Vizzi, partner with South Coast Investment Advisors, LLC

Mideast Tensions Give Rise to Oil Prices

Securities and advisory services through Independent Financial Group, LLC, a

registered broker-dealer and investment advisor. Member FINRA/SIPC. South Coast Investment Advisors, LLC and Independent Financial Group, LLC are not

affiliated. Tax information provided can be sourced at www.irs.gov

Citations / Disclaimers *The S&P 500 Index is unmanaged; investors cannot directly invest into the S&P 500. The S&P 500 is comprised of 500 widely held securities considered to be representative of the stock market in general. Past performance does not guarantee future results. Information enclosed is for educational purposes only and should not be considered investment advice. NAREIT – www.reit.com Wall Street Journal – www.wsj.com

1) http://www.imf.org/external/pubs/ft/fm/2012/update/02/pdf/0712.pdf 2) http://www.nytimes.com/2012/05/31/business/global/if-spain-is-rescued-who-foots-the-bill.html?pagewanted=all 3) Bloomberg.com 4) http://www.imf.org/external/pubs/ft/scr/2012/cr12202.pdf 5) http://en.wikipedia.org/wiki/Category:Demographics_by_country 6) http://www.bbc.co.uk/news/world-asia-16787538

Source: Yahoo Finance – 6/29/12

Close: Mo. (+/-):

Dow 13,090.84 +0.63%

Nasdaq 3,066.96 +4.34%

S&P 500 1,406.58 +1.98%

10 Yr Yield 1.56% +6 bps

Oil (WTI) $96.47 +5.05%

Gold $1,648.50 +2.15%

*See Disclaimer

4041 MacArthur Blvd. Suite 240

Newport Beach, CA 92660

Toll-Free: (877) 922-7242 Direct: (949) 825-7540 Fax: (949) 825-7541

info@southcoastinvest.com

SOUTH COAST INVESTMENT ADVISORS 4041 MacArthur Blvd. Suite 240

Newport Beach, CA 92660

Secondly, the demographics will be a significant risk to Japan’s ability to hold down yields over time. In 1980, 23.5% of the Japanese population was between the ages of 0-14 and 9.1% of the population was 65 years old or more. In 2010, this data reversed course with 13.2% of the population between the ages of 0-14 and 23.1% of the population 65 years or older. This compares to a U.S. population with 12.8% over 65 years old.(5) Projections by the Health and Welfare ministry are that 40% of Japan’s population will be 65 years old or greater by the year 2060.(6) That’s a lot of retired Japanese citizens looking to cash in their bonds one day. How “Japanese like” the U.S. and other developed nations become remains to be seen. We do believe that the probability for a

Turning Japanese continued…

prolonged low interest rate environment has increased over the past year. In addition, the probability of an inflationary environment, as seen in the 1970’s has decreased. Such is the case in Japan, the savers have been the losers during this low interest rate environment and will continue to be as long as rates remain at suppressed levels. Just as Japan led the way for governments to intervene in government bond markets, they will lead the way if and when the bond bubble bursts. As the demographics in Japan continue their shift towards an aging nation, the JGBs will see increased volatility. At some point, Japanese citizens will be ready to retire and will need to cash in their JGB’s to retire comfortably. When this happens, the Japanese government will have to come up with the funds or you could see some very upset Japanese bond holders.

Announcing the South Coast Investment Advisors’

2012 Economic Summit Keynote Speakers:

David Rupert Co-Chair of the Cornell Endowment Investment

Committee. Mr. Rupert is also the President of Galleon Global, a

digital media firm based in Greenwich, CT and a member of the strategic advisory board of

Griffin Capital, a privately owned investment company involved in the acquisition, financing, and management of institutional-

quality real estate in the United States.

Greg Autry Noted economist, lecturer, and co-author of “Death by China; Confronting the Dragon – A

Global Call to Action”

Saturday, October 13, 2012

10:00am – 2:30pm Lunch will be served

Radisson Newport Beach Hotel

4545 MacArthur Blvd.

Newport Beach, CA

The South Coast Team is pleased to announce the keynote speakers for our annual investor preparedness event where we

set out each year to take stock of the domestic and global economic environment, examine current as well as potential

future investing headwinds, while highlighting a variety of tools and strategies designed to improve our clients’ overall investing

experience.

The 2012 Economic Summit will provide investors with an opportunity to view a variety of unique breakout presentations

from representatives of top investment strategists whose discussions will range from tactical management of equities and

fixed income to in-depth reviews of opportunities in various sectors of real estate, energy (oil and natural gas), and private

equity and debt investments.

Securities and advisory services through Independent Financial Group, LLC, a registered broker-dealer and investment advisor. Member FINRA/SIPC. South Coast Investment Advisors, LLC and Independent Financial Group, LLC are not affiliated. Tax information provided can be sourced at www.irs.gov

South Coast Investment Advisors, LLC

HAS RELOCATED!! The South Coast Team is extremely pleased to report that we’ve relocated our home office to

Redstone Plaza on the corner of MacArthur Boulevard and Newport Place, down the street from John Wayne Airport in Newport Beach.

The South Coast practice has grown dramatically over the past three years due primarily to an unbelievable outpouring of client referrals brought on by our unique financial planning approach

that relies on diversifying both liquidity and duration of portfolio components while remaining steadfast in delivering stable, sustainable, tax-efficient returns.

The relocation was effective September 1st. Please note that as a result of the move, our local

telephone and fax numbers have changed.

Phone: (949)825-7540 Fax: (949)825-7541

The South Coast Team is grateful for the trust that our many clients have placed in us and we look forward to starting a new chapter in the South Coast story with all of our valued clients this

fall as we end the year strong in our new home.

We will be hosting an Open House, Wednesday, October 3rd. Stop by anytime throughout the day for a tour. We will also be having a cocktail party later on that evening with local wines and

hors d'oeuvres from 5:30 pm to 7:30 pm. Please let us know if you will be able to make it by registering for the event online or just give us a call. Please feel free to bring along friends

and family as everyone is invited.

Securities and advisory services through Independent Financial Group, LLC, a registered broker-dealer and investment advisor. Member FINRA/SIPC. South Coast Investment Advisors, LLC and Independent Financial Group, LLC are not affiliated. Tax information provided can be sourced at www.irs.gov

Redstone Plaza

4041 MacArthur Blvd. Suite 240 Newport Beach, CA 92660

877-922-7242 (SCIA)