In our last Strategy Update at year's end, we suggested a number of events that would cause our team to become more optimistic about the global economy and financial markets. Some of these have begun to come to fruition. Namely, our leading economic indicators for global growth have improved somewhat and the European debt crisis is getting closer to a resolution. As you have noticed during the past two months, depending on your investment policy, we have been getting more growth oriented by increasing or changing your stock exposure. In response to these changes in data and a relatively better outlook, stock prices have advanced handsomely since the

beginning of the year. This current market advance has caused many investors to wonder a few things: Is this the beginning of a new bull market in stocks? Is it too late to invest? Have all of the risks of 2011 vanished?

This may be the beginning of a new bull market in stocks. As we have mentioned often in recent years, we may be in a new era of shorter bull markets and more frequent recessions or periods of little global economic growth. Given that economic data points are beginning to recover and the Euro zone crisis is closer to the end than the beginning, there is a case to be made that stocks may – with corrections along the way – continue to advance for a reasonably good length of time (years not months). We base this outlook on a number of issues which include, better economic data, very reasonable stock prices relative to earnings, and historically high corporate cash levels.

It is not too late to invest in global stock markets, however a correction or pull back in prices is overdue, according to our research. We will be using any future corrections in stock prices (assuming they are not tied to significant negative data) to increase or change your stock exposure, particularly in more growth oriented companies such as those in the industrial, financial, material and technology sectors. In addition, you may have noticed that while we were buying stocks in recent months, we also significantly reduced your "short" position. You may recall that this investment goes up when markets go down. This investment served us well to reduce volatility and buffer the declining stock market, however it may no longer be necessary and we are anticipating removing the balance of this position on any normal pullback in stock prices.

Our research suggests that there is less risk in global stock markets than we experienced in the third quarter of 2011 when the Euro zone crisis began and the US credit rating was reduced. However, we are in an era of higher than normal risk for the global economy and financial markets given unusually high leverage within national balance sheets in developed world economies. Therefore, weakness in global economic data, deterioration in the Euro zone debt crisis or geo-political shocks could put our more recent optimism in jeopardy. We will be watching all related data points and news closely. To manage risk, we will continue to employ our risk management tools such as your portfolio’s asset allocation, sector exposure and the use of carefully placed stop loss orders.

Lastly, as you know, we are in an election year. Though these years typically are positive for stocks, this year may be especially good if a leader – current or otherwise – can deliver a clear plan for reducing unemployment and debt, while getting the economy to grow…a difficult task but one that would be sure to send confidence and stocks higher.

We all hope that the New Year has been good to you so far. Please let us know if any of your circumstances regarding finance have changed. If you have questions or would like to meet for a review please let us know.

Sincerely,

James E. Demmert
Managing Partner