Quarterly Comparison and Discussion

In contrast to last quarter, the broad U.S. fixed income market, as measured by the Barclays Capital U.S. Aggregate Index, was in the black for the period, gaining about 0.4%. Longer-term fixed income bonds fared the worst, and the high-yield (higher risk) segment of the market continued to gain. However, despite this rise, the fixed income market is clearly showing signs of concern about global debt and long term fiscal management; primarily in the US and some other nations in Europe (Greece, Portugal, and Spain). During the quarter in both February and March, significant comments and actions were made by major bond market participants, most notably, Bill Gross of PIMCO, who is the world's largest manger of bonds.

In a February outlook entitled Devil's Bargain, Mr. Gross had many choice words for the Federal Reserve, other Central Banks, and Wall Street. Amongst his quotes were: "To rebalance debt loads and re-equitize financial institutions (Wall Street) that should have known better, central banks (The Federal Reserve) and policymakers (Politicians) are taking money from one class of asset holders and giving it to another." A low or negative real interest rate for an "extended period of time" is the most devilish of all policy tools and the asset class holder that it affects, or better yet, "infects," is the small saver, and institutions such as insurance companies and pension funds that hold long-term fixed income assets. To put it bluntly, they are robbing savers and taking money surreptitiously from longer-term asset holders who are incorrectly measuring future inflation.

On March 9th, Mr. Gross announced to his shareholder's and other market watchers that his PIMCO Total Return Fund had complete selling all of its US Treasury holdings which amounted to a staggering sale of over $43 Billion…and he place it all in cash. He is not alone has it is widely reported and confirmed that both the Chinese and Japanese governments have been systematically reducing their ownership of US treasuries and purchasing Euros.

All U.S. economic sectors, as measured by the Russell 3000 Index, posted gains in the quarter; however, the gains were more subdued relative to last quarter. The Energy sector led the pack, rising 16.9%, followed by the Industrials and Health Care sectors, which rose 8.8% and 6.7%, respectively. As we each can attest energy prices at the pump and their correlating impact on the shelf for goods are clearly being experienced at the consumer level. The poorest-performing sectors were Consumer Staples, Financials and Utilities, gaining 3.1%, 3.5% and 4.1%, respectively.

Markets were volatile during the quarter as a response to numerous global obstacles. Political unrest in North Africa and Asia fueled an increase in the price of crude oil once again forcing the world to re-examine the global supply demand imbalance for crude oil which remains both precarious and unresolved. A devastating earthquake and tsunami rocked Japan, the world's third-largest economy, causing a potential nuclear disaster in its wake certain to leave lasting untold human, environmental, and economic consequences. Ultimately, coordinated efforts and actions by central banks around the globe and the Group of Seven (G7) nations helped to stabilize currency and financial markets for now. Domestically, the housing market remained weak as exemplified by the first quarter report from KB Homes the country's largest homebuilder that targets first-time buyers reported a larger first-quarter loss than expected and a 32% decline in net orders, a clear signal the housing crash is not over yet. KB Home lost $114.5 million or $1.49 a share during the quarter. The consensus estimated had been for a loss of 27 cents a share. Revenue and new orders plunged amid slumping demand for new houses.

Further, wages in the U.S. have not kept pace with inflation (though there have been some encouraging signs of improvement in the labor market the past two months); and concerns over the long-term impact of a sizeable budget deficit continued to bubble. In addition, the Federal Reserve's second round of quantitative easing (QE2), which fueled market rallies and resumption in investors actively seeking risk, is set to end in June. The Fed plans to make a historic unprecedented change in the month of April as Chairman Bernanke will hold a press conference after the board's next meeting in April to provide clarification on the written statement that is released after each such meeting.

What Does The Future Hold?

Given the uncertainties regarding U.S. monetary policy and the domestic and geopolitical headwinds, it is helpful to remain focused on a clear definition of your investment objectives, your tolerance for risk and an appropriate time horizon and a disciplined asset allocation policy and methodology. Since the March 2009 low, equities have risen over 100% (cumulative return as measured by the S&P 500 Index).

I believe that markets have been fueled by investor optimism and risk seeking, as well as cheap and easy money arising from the Federal Reserve's monetary policies. Sustaining these or higher levels requires, in my opinion, real fundamental support that is not yet evident. Because of the deep impact of the recession, a return to sustainable growth, full employment and a housing recovery will be a slow painful process. Patience and moderated expectations for growth, job creation and security price appreciation are needed. As well as a willingness to continue to look beyond the typical investment holdings offered and the mantra's repeated by both Wall Street and the financial press, while we strive together to implement truly diverse portfolios.
In the words of Robert Rodriquez, CEO of the $15 billion First Pacific Advisors, who called the coming 2008-09 crises in 2007, "The Fed policy is an abject, unmitigated attack on savers -- and a horrendous attack on people who are in or near retirement. It's the height of lunacy! The purpose of QE2 is to lower interest rates and encourage asset price appreciation so that consumer balance sheets are improved and there's a higher propensity to spend. You do not build long-term, productive resources by encouraging people who are overleveraged to go out and borrow more. The consumer added more debt to his balance sheet between 2000 and 2007 than in the prior 40 years."