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First Quarter, 2010


For this first quarter letter we are modifying our information format to prioritize and streamline the information you receive from us.  The following bullet point list presents our current thoughts regarding the most important issues which influence your asset mix and the specific securities held in your portfolio.


              3 months ending March 31, 2020        

Money Market Fund Proxy                                   0.0%                                                 

Russell 3000 Index (US stocks)                             5.9%       

MSCI EAFE Index (foreign stocks)                      0.9%       

MSCI Emerging Market Index                              2.4%       

Lehman Aggregate Bond Market                          1.6%          

MSCI REIT Index                                              10.0%  

Gold (Commodity)                                                1.5%  

Philadelphia Gold/Silver Mining Cos.                    -1.6%

CRB Commodity Index                                       -3.5%  

CPI Inflation (12 months)                                     2.3%


Cash Returns


Money market funds, treasury bills, short term certificates of deposit (CD’s) and commercial paper continue to offer yields that are close to zero percent.  The Federal Reserve has repeatedly stated that it will continue to hold short term interest rates at close to zero until the economic recovery demonstrates unambiguous signs that employment is in a clear uptrend and consumer spending is showing meaningful rates of growth.  Futures markets are projecting that there will be no increase in short term interest rates until the fourth quarter of 2010, or perhaps sometime thereafter in 2011.


Our present investment strategy with respect to cash in your account remains to hold only an amount of cash sufficient to pay periodic distributions and account management fees.


Equity Returns


The typical outperformance by non-U.S. stock markets relative to domestic stock markets came to an end during this year’s first quarter possibly due to concerns over global contagion from Greece’s escalating financial crises.  Furthermore, the surprisingly strong financial performance of domestic consumer-related companies has raised the prospect of an unexpectedly strong domestic recovery as the year progresses.


We continue to maintain the equity portion of your portfolio at approximately 50% domestic and 50% international companies.  Furthermore our domestic stocks typically have a significant global component to their sales and earnings, so at times when enthusiasm for the global recovery story temporarily loses its appeal, U.S. equity markets may enjoy a relative outperformance vis-à-vis foreign markets, as has been the case during the first quarter.


As we explain in detail in the accompanying special report, we are becoming increasingly alarmed about Greece’s downward financial spiral, unfolding at a time when developed nation economies in general, and their banks in particular, have not yet fully recovered from the 2007-08 recession.  The seeds of financial crises typically take root among those entities that are employing the greatest leverage, and now that dubious distinction belongs to the governments of many of the world’s developed countries.


Fixed Income Returns


For yet another quarter, the Federal government’s prodigious need for capital failed to result in any meaningful rise in interest rates.  In fact the opposite occurred: interest rates all along the yield curve held steady or actually declined by a few basis points during the first quarter (a basis point is equal to 1/100 of a percent).  Corporate debt yields continued to decline (causing bond prices to rise) as the economic recovery improved the financial health of companies across America.  The interest premiums over Treasury yields demanded by investors for risk associated with owning corporate bonds is expected to decline further as the year progresses, assuming investor confidence is not tested by some extraneous shock to the system such as a default by Greece on its debt.  This means that corporate bond investments will probably continue to generate strong total returns over the balance of 2010.  Currently, yields on long term investment grade corporate bonds exceed 4% and current yields on higher risk, below-investment-grade bonds exceed 8%.


Your account owns a combination of higher quality and lower quality corporate bonds and/or bond funds.  These investments have been a significant factor in the outperformance of your fixed income return, relative to the return of the aggregate bond market index for the first quarter.


To complete this picture, your portfolio also owns some foreign-based fixed income securities.  What attracted us to these securities was a) higher interest rates than those available from investment grade bonds at home b) the potential for currency appreciation from local currencies or c) a combination of the above. 


The poorest performing segment of the bond market was U.S. treasury securities.  We continue to not own any treasury securities in your portfolio at the present time.

Other Assets Returns


In the “other asset” category, gold and precious metals mining companies took a breather during the first quarter which was prior to the date when the crisis in Greece became news.  REITS on the other hand, experienced a continuation of their strong stock market behavior which began in 2009.  The domestic economic environment remains favorable for further gains in the REIT sector as investors continue to position themselves for an eventual real estate recovery.




Fear of rising inflation is strong not only among our clients, but also among most investors and the financial media in general.  This concern is in sharp contrast to the actual behavior of financial markets where inflation has been in decline for many years including up to the present moment.  What is surprising to most people is how inflation can remain so benign around the world in the face of such massive government injections of liquidity into many countries’ banking systems.  The answer to this riddle, according to BCA Research, is that extra money injected into the financial system is only inflationary if it fuels rapid credit growth causing consumer demand for goods and services to increase relative to supply.  This is clearly not the situation today given banks’ ongoing reluctance to lend and consumer reluctance to borrow.  Inflation may become a problem again someday, but not any time soon.


As always, we encourage you to call us regarding the contents of this quarterly report package or any other issues which are relevant to your portfolio.


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