Global stock markets continue to exhibit extreme volatility on "news of the day" headlines. In the past 3 months, the S&P 500 has swung back and forth 10 times in excess of 10%, mostly on fear and hope regarding economic fundamentals and the European debt crisis. Today's report that the Europeans may have a remedy for their debt crisis has once again sent stock prices soaring. When markets were 15% lower — only one month ago — investors feared that we were on the verge of a global meltdown and now, just 30 days later,investors are scrambling to participate in a potential "melt up". As we have suggested

in recent updates, this volatility is not a positive sign for markets and should serve as a reminder to remain diversified with a bias towards less volatile investment positions until economic fundamentals become more constructive. Today's Euro plan is a step in the right direction.
Over the past 3 months we significantly reduced the volatility of your portfolio given the confluence of declining economic fundamentals and the Euro crisis. Given the gyrations of the stock market, this change has essentially given you stock market performance with significantly reduced risk. However, when markets skyrocket — as has been the case in recent weeks — one must question this more conservative approach. We feel that the best way to do so is to re-examine the economic fundamentals and the details of recent "news of the day" headlines. In this light, not much has changed. The leading indicators of future economic growth continue to point to a global economy that is likely to offer very little, if any growth at all. The Economic Cycle Research Institute, an organization that predicted the last 4 recessions with uncanny accuracy, believes that we may already be in a recession. On a micro level, a large percentage of companies are reducing their future earnings guidance — not a great sign for corporate profit growth. Lastly, though the European debt crisis plan is a step in the right direction, it is far from a "done deal".
Ultimately, economic growth drives stock prices and the current prognosis for such growth is not constructive. However, it does not mean one should "throw in the towel" in regard to stocks. Companies that can generate profits regardless of the economy and pay above average dividends (the companies in your portfolio) can thrive in this environment.
The recent move in stock prices reminds us of April 2008, a period when the economy (trending down) and the stock market (briefly rising) were moving in opposite directions Then, as now, we were more conservatively postured and the short term rise in stock prices caused us to question, but thankfully not change, our strategy. Shortly after that time, as you may recall, stocks performed terribly.
As we have mentioned in recent updates, this business of an economy that needs to retrench and a stock market that may need to find a lower level, is something that will not take years, but most likely only a handful of months. In the meantime, your portfolio is more stable than market indexes and producing dividend yields far superior to money market returns. In the short term, we anticipate that stock prices will pull back from their over extended recent run and at lower levels we will once again review our strategy and economic data.
We hope this update finds you and your family well. If you have any questions or would like to get together for a portfolio review, please let us know.

Sincerely,

James E. Demmert
Managing Partner