Albert Einstein

What do you think Einstein was thinking when he coined this clever quote? We think he was entertaining the idea that great ideas and new discoveries come when creative imagination is used to solve problems. To believe in fairy tales you need to have an active imagination and encouragement to dream big. Unfortunately, children are taught at a young age that fairy tales do not exist. One might argue that the folks in Washington have no imagination which is why they keep trying the same failed policies over and over again.

We believe that there are serious signs of deflation still present in the world’s economies. Why else would Captain Ben have the pedal on the QE metal? No matter what anyone one tries to tell you, it’s not possible to print a trillion dollars and not get inflation unless deflation is sucking it down the drain. For decades inflation was the enemy of the Fed and now they are the best of friends. Doesn’t that seem odd? If the deflation problem had been short lived, QE would have been shorter and more contained, but this has not been the case. So Captain Ben continues to wage his battle but with serious long term ramifications.

We are only fooling ourselves to think that our money is not losing its value. It’s the price we must pay. In its latest attempt to win the battle, the Fed is swapping bank reserves for notes and bonds. The evidence suggests that this is to satisfy the world’s demand for safe assets which is just another example of what happens when the deflation genie is out of the bottle. If you believe the government’s fairytale CPI numbers or the talking heads on TV, you might conclude that printing 80-plus billion dollars a month is acceptable. Money printing always has and always will cause inflation. I can assure you that Big Ben hasn’t changed the universe and his valiant attempts to prevent another depression are proving to be peskier than a staph infection.

So exactly what is it that we are looking for? We would suggest keeping an eye on liquidity leaking into the commodity markets. It will be subtle in the beginning but when it happens the Fed will be hard pressed to stem the tide without draconian actions similar to the Volker era. While the market sputters along, stocks in general will most likely continue to rise because investors have no choice but to play the game. Even if stocks pull back as we expect between now and the end of the 3rd quarter, the choice of earning 2.2% in common stocks or 2% in bonds is not a luxury most retirees and savers can afford.

While this is not going to be your Mother’s 1982 bull market, don’t mistake our frustration as a signal to not invest. You had better own equities and commodities albeit early in the reflation cycle. Do Not Fight the Fed. Like a car sliding on a snow covered road, you have to turn into the slide to stop the accident. We also believe that once the Fed stops its irresponsible stimulus, unemployment will actually drop.

Blaming the rich for not paying enough in taxes is just an excuse for not addressing the crux of the problem. We need to step up to the plate and move towards more growth-friendly policies including a lower, flatter tax rate structure with fewer exemptions and loopholes, lower corporate tax rates and reduced regulatory burdens. We need to reform social security by providing a private option with government guarantees for the less fortunate and extending the retirement age. We need to introduce market-based reforms to healthcare without more government controls (something the socialist in Washington hate). Come on folks it is not that hard. It’s time to let the market take over many of the functions that government has tried and failed to manage.

Until Then Stay Calm

By David Byrne – Talking Heads

Over the past several years, HT Partners has discussed the structural and philosophical concerns we have with both fiscal and monetary policies in the U.S. and around the world.  We have explained the historical context of these problems as well as possible solutions and opportunities.  As you know, democracies are designed to be messy and, by all accounts, ours is the role model for the world.  We often like to reference how every generation thinks the succeeding generation is not doing enough to solve the problems of the day.   Through the wonderful myth of 20/20 hindsight, we all think we have the solutions.   Somehow everything does work out and we believe so will the current dilemmas facing the world.  This is not to say that there will not be bumps or craters along the road, but we still have faith.

As we see it, as long as people are still complaining then the odds are that we still have a fighting chance.  While we are not condoning the dysfunction in DC, we believe that, as long as our elected decision makers are going to the office, the system is working.  In some respects the budget crisis is just another call to action.  It feels like we are waging the War of Attrition.  It’s happening all around us.  Everyone says they want to act but they don’t. We know what the facts are: we have a spending and entitlement problem and serious structural issues with taxation and regulations.  In other words, we have a form of psychological atrophy. 

So what does this uncertainty mean for 2013?  We do not believe that all is lost.  Predicting market outcomes is rather comical in our business and akin to the search for the Enchanted Forest.   What we can speak to are the hard facts about asset flows and valuations.  Equities are fair valued if not slightly undervalued and company balance sheets are very strong with plenty of cash.  They could go cheaper, but in a historical context you are not overpaying for stocks.  The biggest companies have used low rates to deleverage and restructure their long term liabilities and are awash with cash.  They are lean and looking for a signal to leap ahead.  It would not be surprising to see some of these companies in the future purchase back their debt at deeply discounted values on the open market as bond prices drop and yields rise.  Bonds scare the hell out of us and look just like the tech stocks of the late 90’s.  As long as the “Bernanke Put” is in place you have to keep some meaningful allocation to the asset class.

Alternatives are delivering low single digit returns once again and resting in the middle ground between stocks and bonds. We recognize the value they play in assets allocation versus sitting with only high allocations to cash, but the baggage that comes with holding them essentially outweigh for most clients the benefits of inclusion.   At some point long-term investors have to take the training wheels off and realize that the last crisis is over and what protected you in the past might not fare as well in the future.  Over the next 5 to 10 years the U.S. will follow a predictable track as prescribed by the Fed including lots of QE which in turn results in low GDP growth.  Once the markets or the Federal Reserve is sure the current deflationary trend is over, we will return to dealing with rising inflation.  The question is will the markets allow the Fed to unwind in an orderly fashion or will we be treated to the Volker shuffle.

So before you despair, you should take solace.  The formula for success has not changed.  If you want to entertain financial Armageddon, learn how to farm, enhance other survival skills, pay off your debts, own some real estate and buy a few trinkets of gold and silver.  Otherwise, we will focus on employing the technics that have stood the test of time.

 • Diversify your holdings well and understand what you are invested in.  The sophistication of your strategy should be no greater than your comfort level and understanding of the risk return trade off of your investor IQ.  The impact of technology requires that we maintain a level of nimbleness.

• Evaluate risk often and make sure you understand where the returns of your portfolio are coming from and that they adherently meet your needs.  Those streams of revenue should also be balanced between taxable interest, tax free interest, dividends and capital gains.

• Build a core long term allocation to specific assets classes.  Then, take small amounts of capital and invest in undervalued unloved sectors of the markets. 

• Hedge a portion of your portfolio with an allocation to strategies that smooth out the bumps of unexpected events.  We call it “The Risk Managed Overlay”  and  includes HT Alpha (equity) and coming in 2013 HT Infinity (fixed income).

• Finally, seek the appropriate equilibrium between cost, taxation and returns.  Do not over pay for market returns.

If you are reading this, the Mayans were wrong and I can happily declare – same as it ever was, same as it ever was, same as it ever was, same as it ever was.  Happy New Year and let’s hope that the human spirit brings more peace and less evil to the world in 2013.

IMPORTANT DISCLOSURES This letter may include forward-looking statements.  All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”  Performance is not indicative of any specific investment or future results.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Investment in securities, including mutual funds, involves the risk of loss.  Nothing in this letter is intended to be or should be construed as individualized investment advice.  All content is of a general nature.  Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice. The S&P 500 Index (S&P) has been used as a comparative benchmark because the goal of the above account is to provide equity-like returns.  The S&P is one of the world’s most recognized indexes by investors and the investment industry for the equity market.  The S&P, however, is not a managed portfolio and is not subject to advisory fees or trading costs.  Investors cannot invest directly in the S&P 500 Index.  Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results.  Therefore, an investor’s individual results may vary significantly from the benchmark’s performance. 

In 1993 C. Bradley Thompson published his ground breaking paper  Socialism vs. Capitalism: Which is the Moral System.  We have merged a majority of the key elements of his original work with the hope of resparking the debate he helped to start.  We feel this important for several reasons in that it has been almost 20 years since his original work was published and we seem to be walking down the path he describes so well.  The points he made in 1993 are just as striking today as they were then. 

As we move towards the final days of this election cycle we are reminded that the America electorate is facing a defining choice.   One choice is a continued march towards socialism and the other towards early 20^th century capitalism based on American ingenuity and self-reliance.  Sadly, America is slowly drifting away from its capitalist roots.  Whether we like it or not we presently live under a “mixed economy.”  This is an economic system that is quickly becoming one that permits private property, but only at the discretion of government planners. A little bit of capitalism and a little bit of socialism.

When government redistributes wealth through taxation, when it attempts to control and over regulate business, who are the winners and losers? Under this kind of economy the winners and losers are reversed: the winners are those who scream the loudest for a handout and the losers are those quiet citizens who work hard and pay their taxes. 

If you go back to the beginning of America and what made us a great nation it was capitalism.   It was capitalism that created an extraordinary level of prosperity.  But let’s face it very few people are willing to defend capitalism.  In America today it is fashionable to sneer at the free-enterprise system.  Seldom do we hear the other side of the story, and the dialog seldom focuses on the stark difference between what our current system has morphed in too.  The change may be slow and subtle but it will be defining as to who and what we become.  Essentially socialism can be summed-up in two words: envy and self-sacrifice.  Envy is the desire to not only possess another’s wealth but also the desire to see another’s wealth lowered to the level of one’s own.  In other words, socialism is a form of legalized theft.  Just watch what is occurring in Europe and you will have a purview of the future in America if we continue down this path.

America was built on a social system that rewards merit, ability and achievement, regardless of one’s birth or station in life.   Of the remaining capitalist we meet every day in our work, for the most part they are some of the most generous human beings we have ever met.  They give selfishly of their time, money and spirit to create jobs, serve various social causes and form a social safety net that the government does not want to acknowledge and rationalize as serving society. 

If the middle class is having difficulty getting ahead now it not because of the capitalist system, it’s because the government is preventing them from moving up the socioeconomic ladder to make them turn towards socialism.  Think for a moment if that was not an option?  According to socialist doctrine, there is a limited amount of wealth in the world that must be divided equally between all citizens. One person’s gain under such a system is another’s loss.  To prove the point further President Obama’s statement at the first presidential debate further underscores the problem.  Suggesting that Americans pay higher taxes as a form of Economic Patriotism is straight from the mouth of a speech made by the French Prime Minister Jean-Marc Ayrault in September. 

As a consequence of our sixty-year experiment with a mixed economy and the welfare state, America is creating two new classes of citizens. The first is a debased class of dependents whose means of survival is contingent upon the forced expropriation of wealth from working citizens by a professional class of government social planners and bias media. The forgotten man and woman in all of this is the quiet, hardworking, law-abiding, taxpaying citizen who minds his or her own business but is forced to work for the government and their serfs.

The return of capitalism will not happen until there is a moral revolution in this country.  We must rediscover these American ideals which are based on the virtues associated with being free and independent citizens. Then and only then, will there be social justice in America.  So as we head to the polls in the next month now is the time to think about what it means to be an American.  The individualism and spirit of the privilege granted by our forefathers who sacrificed for our freedom so our future would be brighter. 

Published with the curtsey of C. Bradley Thompson is Assistant Professor of Political Science at Ashland University and Coordinator of Publications and Special Programs at the John M. Ashbrook Center for Public Affairs. All rights reserved

As we enter the final quarter of 2012, we believe that October is the ensuing test of the stock market’s risk appetite.  Investors seem to be overlooking weak 3rd quarter earnings, but it has yet to be determined if sentiment goes dower and the market jerks back.  At this point, the best case for stocks over bonds is the interest rate used to discount the future earnings of companies.  Consider for a moment that the S&P dividend yield is triple the yield of the Treasury.  Of course, equities are free to stay up in this Hyper-Fed stimulated scenario but for just how long can this last?  Can somebody tell us what the Real Treasury Yield is excluding Federal Reserve intervention?   The bottom line is that since 1999 we’ve endured an abject period of two burst economic bubbles, recessions and one of the most unpleasant downturns since the Great Depression. 

 The Fed’s latest plan to save the economy looks like yet another step towards financial Armageddon.  A significant piece of the puzzle is missing because, as we watch the news coverage, we continue asking how long can this continue?  QE1 was needed, but it seems we should have saved some ammo as we have been skeptical on the value and efficacy of QE2 & QE3 since the beginning.  Bernanke is only fooling himself as the Fed has become the largest hedge fund in the galaxy.  Conventional wisdom suggests that when the Fed takes duration out of the market bond prices should rise.  That is not happening.  That’s right, the Fed is the Wizard of Oz and Dorothy has not managed to pull open the curtains yet.

If the year ended today, we would declare 2012 as the “Year of the Apple”. Apple has soared 65.42% through September, as the S&P gained a paltry 16.44%.  We guess the sky’s the limit or at least until the Apple Brain Pad comes out with a brainwave interface.  Just remember Joseph Schumpeter and his theory of “Creative Destruction”.  The IPhone is almost ten and yesterday’s technology darlings like DEC Rainbow and the Palm Pilot are sitting at the bottom of American landfills. 

 So have no fear Underdog is here!  We will continue to stand by your side as you climb the wall of worry.  Remember, our mantra is to stay nimble, remain liquid and rebalance often.

 Take care, stay safe and do not forget to vote!!!

IMPORTANT DISCLOSURES This letter may include forward-looking statements.  All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”  Performance is not indicative of any specific investment or future results.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Investment in securities, including mutual funds, involves the risk of loss.  Nothing in this letter is intended to be or should be construed as individualized investment advice.  All content is of a general nature.  Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice. The S&P 500 Index (S&P) has been used as a comparative benchmark because the goal of the above account is to provide equity-like returns.  The S&P is one of the world’s most recognized indexes by investors and the investment industry for the equity market.  The S&P, however, is not a managed portfolio and is not subject to advisory fees or trading costs.  Investors cannot invest directly in the S&P 500 Index.  Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results.  Therefore, an investor’s individual results may vary significantly from the benchmark’s performance. 

At a recent investment conference, I was told that the end of the world was upon us and we were about to sail over the fiscal cliff.  Nonsense, I just don’t believe that Armageddon is on our doorstep.  So stop ruminating!  With unemployment at 8.2%, the audience for this negative stuff is large and diverse.  Why is this time any different?   Look at the previous reasons why the pundits advised us to stay away from the markets:

The world is a complicated place where predicting financial outcomes is an exercise in futility.  Yes, there will be future shocks but I am tired of hearing all the excuses for why we cannot fix our problems. We say, if you predict rain enough times it will eventually rain but that does not mean a great flood is coming.  So instead of telling me about the impending collapse of the free world, tell me how to solve the problem. Oh, that’s right, no one will listen.

So far the best our policymakers have been able to do to combat the problem is quantitative easing and wasted stimulus.  Give me a break!  This is so Japanese.  The time has come to do something new.   Do you remember after September 11 we declared war on terrorism? The time has come to declare war on unemployment!  This does not mean expanding government either – been there done that and it did not work.  Do we need to vote everyone out of office again?  Right now job creation is all that matters and, quite frankly, it is all that has ever mattered. 

In a recent editorial, Arthur Brooks of the American Enterprise Institute responded to a question in which he was asked if the U.S. was becoming a European-style democracy.  His answer was a resounding NO!  “That’s because the U.S. is already a European-style social democracy.” From the progressivity of our tax code, to the percentage of GDP devoted to government, and the extent of our regulatory burden on business, most of Europe’s got nothing on us.  The numbers don’t lie.  In 2010, the U.S. spent 36% of our GDP on government which is very close to Spain’s number.  Our debt-to-GDP ratio is 103%; Spain’s is 68%.

 At first glance this is all shocking stuff.  So how did we get here?  Brooks offers three explanations:

 •The American left is focused on growing government and equalizing income.

•Bi partisan cronyism – It is not just corporate fat cats but also things like new ball parks, pork barrel projects, etc.

•We are not paying attention to the political system.

In 1787 Benjamin Franklin was asked what sort of government our new nation would have.  His famous answer was, “A Republic, if you can keep it.”  When he said this he was envisioning a monarchist alternative, not today’s noxious brew of leftism, cronyism and general inattention to public policy.   Franklin’s comments are still valid today.   So is the end of the world coming?  Not exactly, but what we are becoming is ugly – Welcome to Japan Or Is It Spain?  Ok, I Will Settle For Japain!

 All our best and enjoy the summer.

For a Print Version Of THis Post Please Click The Link Below.

 http://www.htptrs.com/sites/default/files/documents/pdfs/2012-0630-2nd-quarter-commentary.pdf

IMPORTANT DISCLOSURES This letter may include forward-looking statements.  All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”  Performance is not indicative of any specific investment or future results.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Investment in securities, including mutual funds, involves the risk of loss.  Nothing in this letter is intended to be or should be construed as individualized investment advice.  All content is of a general nature.  Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice. The S&P 500 Index (S&P) has been used as a comparative benchmark because the goal of the above account is to provide equity-like returns.  The S&P is one of the world’s most recognized indexes by investors and the investment industry for the equity market.  The S&P, however, is not a managed portfolio and is not subject to advisory fees or trading costs.  Investors cannot invest directly in the S&P 500 Index.  Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results.  Therefore, an investor’s individual results may vary significantly from the benchmark’s performance. 

Also of great concern to us is the failure of the Belgium bank Dexia which believe it or not is the world’s largest lender to municipal governments in the U.S. and overseas. A natural assumption will be more belt tightening and job cuts at local governments everywhere. Also Dexia was one of many large banks that actually PASSED Europe’s official “stress tests” just three months ago. And yet it’s the first to go down!? So what happened to Dexia? It was a bank run — the sudden and mass withdrawal of its funding. Moreover, the run on Dexia funds was not by consumers lining up on the street to pull out their deposits. Rather, it was by so-called “wholesale funding” sources — other big banks and institutional investors. What makes this truly shocking is that nearly all large European banks depend very heavily on these same funding sources.  The promises made last night by France and Germany — to “recapitalize the banks” — do NOT fix this problem! Finally some of our largest banks, including Bank of America and JPMorgan Chase, are equally vulnerable.

In the past several years, we worried that the U.S. risked repeating the mistakes of Japan. Fortunately, the U.S. is not Japan. The U.S. was quick to act with several rounds of quantitative easing to respond to our banking system crisis. The Federal Reserve did a good job. The European Union, on the other hand, is looking more like Japan and seems to be repeating their broad policy mistakes. While we are still weak from our body blow, our markets are attempting to repair themselves. A different kind of November surprise may be on the horizon.

So what’s the problem in the U.S.? Well for one thing it is Big Government! Under the cover of the 2008 financial crisis, Congress and the President ushered in a sneak attack of market-stifling regulations, spending and big government policies. Without this sneak attack, we suspect that the economy would have been back and humming along.

Regardless of government proclamations, we are in what Dr. Judith Bardwick describes as a “Psychological Recession.” To a large extent many Americans feel that they are no longer stakeholders in the direction of the country and feel as though they just can’t get ahead. The great concern is that the longer this takes hold in people’s psyche, the more likely it will result in long term structural changes to the way people think and behave. Think of this as a negative economic self fulfilling prophecy. In the past you could bet that Washington would pull out all the stops in an attempt to reverse course just in time to claim victory during a typical presidential election cycle. It may not be that simple this time. Many small business owners seem to be adopting the same posture “you go first, not me” making persistent unemployment an extremely challenging problem. So in come the advocates of the “Stimulus Calvary.” What many fail to realize is that government stimulus does not solve systemic unemployment. Instead, its productivity gains that shock the economy back to action. During the 1930s, the growth that followed the low point of the Great Depression was primarily due to productivity. Productivity is considered a supply-side factor by many economists. It is determined by the technology and regulatory structure of the economy and is largely independent of spending policies. The policy changes in the late 1930s benefited the economy by increasing competition, by bringing wages more in line with productivity, and by improving the incentives for investing. Many assume that World War II spending singlehandedly brought the economy out of the Depression, but nearly half of the increase in nonmilitary hours worked between 1939 and the peak of the war already had occurred by 1941, well before major wartime spending took place. In addition there are no data points to suggest that government stimulus will cure the psychological recession.

Productivity growth continues to be overlooked today. But, as in the case of the Great Depression, economic growth since the low of the Great Recession in June 2009 has been largely accounted for by productivity growth rather than the restoration of jobs. Congress has an outstanding opportunity to initiate broad-based tax reform that adopts the recommendations of most bipartisan tax reform commissions of the last 20 years: a simpler tax code that improves the incentives to hire and invest, broadens the tax base, lowers the corporate income tax, and also eliminates loopholes to equalize tax treatment of capital income. In addition, sensibly addressing our long-run challenges will do more for the psyche of the economy than continuing the stop-gap measures that have dominated policy-making for the last three years. People want to see a real plan. The government should consider establishing enterprise zones in those areas where the unemployment and poverty rates are the highest. Then consider such radical ideas as suspending the minimum wage along with restrictive regulations and taxes to allow those who invest the incentive to risk capital. In addition, policymakers should actually go even farther by completely eliminating taxes on the profits that are reinvested within the enterprise zones.

As for the investment markets, everyone has an opinion but, quite frankly, the market does not care. Many professional money managers are scrambling to explain why gold and U.S. Treasuries are leading the way when so many have avoided them out of fear of a market bubble (whoops they got it wrong, at least in the short term that is!). Meanwhile, all the technical signals are telling us to protect capital and avoid risk which is classic “Bear Market” thinking. One market watcher recently stated “take the income and run.”

We suspect that in the short term that most active manager will continue to underperform. We believe that Greece has technically defaulted and that the end is near. It is hard to anticipate the cross over contagion, if any, and just which emperor has no clothes. Strangely enough, we feel that these events could actually benefit the U.S. as a safe harbor destination to ride out the storm although we might feel more pain as well. Our risk management strategy is working to limit losses while the market decides which direction it will go next. To say we are waiting for the storm to pass is an understatement. The hatches are battered down and no cowboys need apply, especially those riding missiles.

All our best,

IMPORTANT DISCLOSURES This letter may include forward-looking statements.  All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”  Performance is not indicative of any specific investment or future results.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Investment in securities, including mutual funds, involves the risk of loss.  Nothing in this letter is intended to be or should be construed as individualized investment advice.  All content is of a general nature.  Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice. The S&P 500 Index (S&P) has been used as a comparative benchmark because the goal of the above account is to provide equity-like returns.  The S&P is one of the world’s most recognized indexes by investors and the investment industry for the equity market.  The S&P, however, is not a managed portfolio and is not subject to advisory fees or trading costs.  Investors cannot invest directly in the S&P 500 Index.  Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results.  Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.   

We were actually starting to believe that the economy was beginning to stabilize and that we could begin to apply more traditional allocations to asset classes.  As often is the case, just wait a moment and, like the New England weather, everything will change.  While we have seen a tremendous amount of market instability (the S&P 500 is off nearly 6.5% year to date), we continue to strive to mitigate losses and make tactical adjustments.  Even though we appear to have been granted a relief from the recent volatility, we now believe that the odds of further declines are very real. 

While philosophically we will always favor holding equities, we are aware that many of our clients are dependent on their portfolios to sustain their cash flows and thus owning the broad stock market at this time is akin to standing in an open field during a tornado.  You do not need to suffer a direct hit to be affected.  Whether you agree with the downgrade of the United States credit rating or see the major problems associated with the sovereign debt crisis in the Euro Zone as a serious risk, each of these factors have structurally and psychologically damaged investors’ perceptions. The Wall Street Journal even suggested in a recent article that many of the professionals who are charged with guiding investors have placed a significant amount of their own capital on the sidelines as they cheer on the virtues of the market to others.

We are suffering from a “Crisis of Confidence” in the very institutions that create confidence.  There are typically no good endings once you start down this road.  We are entering a deleveraging path and, as we have been writing for several years, much of the entire developed world is now faced with choosing from among several bad choices, some being worse than others. 

The economy is once again getting weaker. What can we do? The short answer is, sadly, not much.  We think there is little political will for another major stimulus program. The impact of the last stimulus program was trivial and we quickly fell back into a major debt bill with a higher level of government spending. We fully understand that lowering government spending will have negative short-term effects, but we are at the point in the endgame where we must all bite the bullet.

What about QE3? We ended up with more money on the Fed’s balance sheet and higher commodity prices.  The trade data last week showed exports fell by over $2.3 billion last month suggesting a slowing world economy.

In short, there are no easy solutions. We have just about used all our “bullets” as far as fiscal and monetary policy is concerned. We now must focus on allowing the private sector to create new businesses and jobs. In addition, some commentators feel that we need a major policy initiative that will change the focus away from a financial services led economy and the political squabbling in Washington.  This may help but the U.S. still needs to get a plan that includes developing an energy policy initiative that would free us from our addiction to foreign oil.  Finally, our infrastructure is crumbling and, instead of wasting our human capital, we need to re-train workers to meet our current growth challenges especially for those receiving unemployment benefits.

Unless something magically changes in the next few weeks, HT Partners will begin to make tactical changes as to how we approach our investment strategy.  As a tactic, we will carefully move our equity exposure toward the lower end of our asset allocation guidelines. This shift will also change our focus towards more defensive higher yielding equities as we wait for the markets to stabilize.  This may not protect us completely, but will help us to earn stable single digit returns that will allow you to meet your cash flow requirements.  Fixed income allocations will remain the same as we remain committed to underweighting U.S. Government Bonds and our alternative allocations will increase as we continue to focus on our “Bear Squad” investments for when those tornados blow through town.

In closing thank you again for traveling with us as we do our best to smooth out those bumps along the unfriendly skies known as the financial markets.  As the famous writer Ursula K. LeGuin often said “The only thing that makes life possible is permanent, intolerable uncertainty and not knowing what comes next.”

All our best,

IMPORTANT DISCLOSURES This letter may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.” Performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Investment in securities, including mutual funds, involves the risk of loss. Nothing in this letter is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice. The S&P 500 Index (S&P) has been used as a comparative benchmark because the goal of the above account is to provide equity-like returns. The S&P is one of the world’s most recognized indexes by investors and the investment industry for the equity market. The S&P, however, is not a managed portfolio and is not subject to advisory fees or trading costs. Investors cannot invest directly in the S&P 500 Index. Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.

The recent developments in Washington are forcing many to wonder if our political system is broken. Many are wondering whether or not we are about to enter a new phase of the debt ceiling debate that could very possibly lead us into a constitutional crisis. At this time no perfect solution exists.

As unconceivable as it may seem, we have come to the probable conclusion that the United States government will default most likely on a portion of its obligations resulting in a downgrade of our country’s credit rating. Unfortunately, if this comes to pass, no one can predict exactly what will happen. To help shed some light on how we plan to help our clients proceed, we want to provide you with some points to consider as to how we will help you weather this crisis.

• As urgent as the situation may seem, sometimes the emotion of the moment can fog your vision. Please do not panic.

• Each portfolio invested according to our asset allocation guidelines is well diversified and, even as the markets drop, our client portfolios have been carefully designed to be less volatile. This provides us with the luxury of staying the course and allowing assets allocation to do its work

• Each of our portfolios invested according to our asset allocation guidelines feature daily liquidity and, thanks to our technology platform, we have good tools to assist us in viewing the markets. We believe that our process is nimble and flexible enough to respond to meet the challenges that we may face if the situation gets worse.

• The actions taken after the crisis will define your future success. Remember, all asset classes do not necessarily have to drop and, just like the Lehman crisis, some investors earned handsome returns for being rational. We are ever mindful of these opportunities.

Please call us if you have any concerns. As always, we are here to guide you through whatever happens.

All our best,

IMPORTANT DISCLOSURES This letter may include forward-looking statements.  All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”  Performance is not indicative of any specific investment or future results.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Investment in securities, including mutual funds, involves the risk of loss.  Nothing in this letter is intended to be or should be construed as individualized investment advice.  All content is of a general nature.  Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice. The S&P 500 Index (S&P) has been used as a comparative benchmark because the goal of the above account is to provide equity-like returns.  The S&P is one of the world’s most recognized indexes by investors and the investment industry for the equity market.  The S&P, however, is not a managed portfolio and is not subject to advisory fees or trading costs.  Investors cannot invest directly in the S&P 500 Index.  Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results.  Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.  

U.S tax receipts are near historic lows, although the cause is not low tax rates.  Today’s revenue difficulty is the result of no growth.  Even if tax receipts were to increase radically, this would still be the weakest revenue rebound from any recession in 50 years and far below the average tax take since 1970.  The 70’s followed another period of history in which the role of government expanded ushering in a period of unprecedented stagflation.   All of this makes the White House debt- ceiling strategy a policy paradox.  On the one hand, Mr. Obama is saying Republicans and Democrats must agree to raise taxes on business and high incomes. On the other hand, Mr. Obama says he wants a further payroll tax cut because he is worried about sluggish growth. Even orthodox Keynesian policy doesn’t suggest a tax increase with a growth rate lower than 2% and a jobless rate at 9.1%.

As a nation, we continue to neglect the benefits of using resources more effectively showing that we have failed to learn one of the most essential lessons of the past half century: transfers, grants and redistribution did little to elevate living standards in Asia, Latin American and Africa.  People must work!  Capitalistic expansion and open economies lifted vastly more nations out of poverty in a decade than welfare state policies achieved in 50 years.  The governments who force businesses to use capital more productively have created far more growth.  Despite trillions of dollars and stimulus, unemployment is truly closer to 18% as John Williams of Shadow Government Statistics reports.  The Organization for Economic Cooperation and Development in Europe exposed the chilling point that a one percentage point change in the growth rate of country becomes a 25% difference in per capita income.  Low growth considerably lowers real wages and living standards for everyone, which in turn lessens tax receipts. It is not rational to tax future generations just because they cannot vote.   

In today’s low-interest-rate setting, it’s hard to make a persuasive case for cash except as a portfolio diversifier and a fund of liquidity. The risk in bonds is rising as economies improve and interest rates start to increase.  This leaves stocks. Whether or not you accept the “lesser of two evils” view of stocks as opposed to bonds, there are unmistakable values in high-quality stocks that pay solid

dividends. Today quality companies do exist with durable cash flows that provide a comfortable funding for their dividends and also have the prospective for dividend growth.

For the past few years, we have listened carefully to our clients by building highly diversified portfolios.  These “higher-quality” companies haven’t continuously outperformed funds or firms with weaker balance sheets and low or no dividends. In 2008, all stocks dropped considerably in spite of quality. Since the spring of 2009, we have seen a “junk rally” in stocks in which low interest rates favored more levered firms.  This cannot persist forever because at some point genuine businesses with real earnings will triumph.  Meanwhile, dividends afford a floor for stock prices provided that the time horizon is long enough as we continue to see unpredictable markets.

Finally, even though they are wrought with danger, many emerging economies are more materialistic and capitalistic than some wish to acknowledge.  The rational belief is that emerging markets are where the long term action will be.  How we choose to capitalize on this growth will be the real challenge.  An all in approach to direct investment will probably not be warranted.  Instead, we hope to understand what these changes mean to global demand and position ourselves to benefit from these opportunities.  We suspect that companies with strong cash flows will have the funds to finance their own expansion and become the ultimate beneficiaries of the ever changing global marketplace.

As always, thank you for the opportunity to work together.

All our best,

IMPORTANT DISCLOSURES This letter may include forward-looking statements.  All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”  Performance is not indicative of any specific investment or future results.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Investment in securities, including mutual funds, involves the risk of loss.  Nothing in this letter is intended to be or should be construed as individualized investment advice.  All content is of a general nature.  Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice. The S&P 500 Index (S&P) has been used as a comparative benchmark because the goal of the above account is to provide equity-like returns.  The S&P is one of the world’s most recognized indexes by investors and the investment industry for the equity market.  The S&P, however, is not a managed portfolio and is not subject to advisory fees or trading costs.  Investors cannot invest directly in the S&P 500 Index.  Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results.  Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.