Legacy Wealth Planning

Phillip S. Mahoney

The Cornerstone

August 2010

Dog Days of Summer

I often get questions on the economy, the markets and why they seem to move so randomly – especially lately – which confuses, angers, scares and disappoints investors and how we deal with it. I’ll be glad to review my process in a brief format, but remember that investing is a business in which things change rapidly, and what works one week may not work the next.

First, we consider Monetary Conditions. Are there adequate funds in the system to grow? Is the Federal Reserve pushing growth or trying to slow it down? (Remember the Fed never loses). What is the situation in other countries? What/where is the most attractive place for money to be because we know for sure one thing: Over the long-term, money goes where it is treated best. If the “trend is your friend”, then you should consider the Fed to be your very next best friend.

Secondly, is money flowing in or out of stocks, bonds or other investment categories? It’s important to note that just because the New York Stock Exchange “market” goes up, it doesn’t mean that it is necessarily going into stocks. It could be going into fixed-income exchange traded funds, preferred stocks or closed-end funds, all of which may be trading there. Some are bond substitutes, so it’s necessary to take a close look at exactly where cash flows are, and the likelihood of them continuing or reversing.

Third, investor psychology. Buying low and selling high is very hard to do (especially selling which is damaging to our ego) in all markets. In general, the public loses money because they buy when they feel good (market high) and sell when they feel bad (market low). So I try to do the opposite, which makes me look like a lunatic, but works better.

Fourth, the market valuation is where you can use historical measures and seems obvious, but unfortunately varies a great deal from industry to industry and year to year. I use price/earnings ratios, sales figures, orders, dividends, employment and more. I also really pay attention to the analysts who really know the industry/company. The answer I’m looking for: Is the stock/industry trading at a cheap price or an expensive price?

Fifth, is the market trend – are we going down or up? What is the technical analysis of the situation? Is there a danger of a reversal? Is it an Elliot Wave or Head and Shoulders?

Combining these factors in a meaningful way, in different economic conditions allows us to successfully help our clients invest and is really the “ART” of what we do.

I hope you have found this interesting reading in these dog days of summer and wish you all the best for a good August. Thank You for Your Business.

Phil

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The Cornerstone

July 2010

“2 Steps Forward and 1 Step Back”

I would like to put out an all points alert for Confidence – you know, that freedom from doubt and knowing all is well. Quite frankly I think it’s stuck in a drawer somewhere just waiting for the right moment. So, let’s review some of the facts about the current situation: The equity markets are taking on a full headwind with the collision between those countries who are driving austerity measures (Germany and Great Britain) and those who feel that additional spending is necessary in order to keep the recovery moving (U.S.). I feel this is one of 2 major reasons we are having the difficult sideways markets with the quick-drop-days, and the endless grinding. The other and perhaps larger is that the speculators and individual investors have removed themselves from the scene.

The facts speak for themselves: The current T-Bill rate is .19% and there is about 8.7 TRILLION sitting in money market, savings, and other cash like deposits, earning practically nothing. Zero. Nada. Corporations have cut the work force, and increased profits to near all-time highs, all the while using their cash to buy in the area of $150 Billion of their own stock since the beginning of the year. They have another $973 billion on the side, according to Hays Advisory, just waiting to go in. Our friends, the Hedge Funds have $500 Billion of their own waiting to strike. So we know that the regular mom and pop investor are not in, the hot money is on the side, and the buying that we have seen has been by those who actually see the numbers and know how cheap their own stock is. But, you may ask yourself - what about the economy and a double-dip? I’m glad you asked.

The Institute for Supply Management (ISM) reported this week that the manufacturing sector expanded again this month for the 11th time in a row and non-manufacturing expanded again for the 6th month in a row. These are the supply management professionals that see the orders – they are the boots on the ground. The numbers tell us that the economy is expanding, and that there is no double-dip. It’s just happening slowly. Ok, ok, so we’re growing, how about the valuations of these companies? I’m glad you asked.

The S&P valuation is now selling for a P/E of 11 times the projected 2011 earnings. This is because earnings are going up and prices (of stock) are going down. Now, it’s impossible to say whether the P/E should be 5, 10 or 20 but it is certainly on the lower end, and even a modest P/E of 14 indicates an undervaluation of 25-30%.

So, what to do? Everyone is different, but I believe that this is another excellent opportunity to add equities to those accounts where they are appropriate. Please call me if you have questions, and as always we want to Thank You for Your Business.

--Phil

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Government bonds and Treasury Bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

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The Cornerstone

June 2010

“Bye Bye Brazil”

I have spent the last two plus weeks in Brazil visiting my daughter Kelly as she wraps up her Rotary youth exchange, having been there nearly a year now. In addition to the warm, generous people we met and the incredible food, I was able to bring back a few thoughts that I picked up and would like to share:

The rest of the world cares less and less what the United States does, because it affects them less and less. Outside of the oil spill in the Gulf of Mexico, there was very little interest in what was happening here. The recent big swings in our equity markets (DJIA) raised an eyebrow but that is really more about the European Debt Crises than the US.

Their sub-par infrastructure and getting ready for the Olympics is their long-term focus. For example in the city of Salvador, they purchased more than 400,000 cars in the first quarter of this year. They now need to work on roads and stadiums and everything that is relevant to their huge growth. (Except this Friday, June 11 when the entire country and indeed most countries in the world will shut down for the beginning of the World Cup.)

Mobile phones and computers are everywhere. Electronics are king with everything happening on or with them. Outside of the airports, I rarely saw a newspaper. Many of the television shows are in English or with sub-titles, but they don’t mind – it gives them a chance to learn other languages.

Iguazu Falls comes from the Tupi words “water” and “big”. It is on both the Brazil and Argentine sides of their common border and is one of the incredible wonders of our planet. If you go, plan on 2 days to get the full impact.

They are very family oriented and people friendly with most meals having everyone present including grandparents. Children are everywhere with about 30% of the population under 15 years old, and education is very important to the middle and upper classes. Unfortunately we saw some real poverty as well, as there is a huge lower class with many of the same ills found in other 2nd and 3rd world countries. It’s very difficult to imagine how they can even begin to fix those problems as they open their country to the world.

In reflecting on what I assumed before I went, what I learned and how little I still know about the country, it occurs to me that much of our information in life is based on what “They” say – that is, inaccurate information. We believe it because it’s written down or just easier to watch the video or TV than doing the hard research. There’s no doubt that everyone sees things differently and has different ideas, but it’s the questions that matter, for without them we won’t get the right answers. My goal then this year is to continually challenge the status quo, reframe the questions and to look for those answers that will allow us to push forward in our work. Thank You for Your Business.

--Phil

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The Cornerstone

May 2010

“Time for a Voltracement or Just Greece the Skids?”

Times of unrest, distrust and fear have always been the most difficult for investors. Just a week ago, I was contemplating the economic issues due to the volcano eruption in Iceland and Goldman Sachs being sued for fraud, China going from inflation to deflation, and now we need to think about the PIIGS (Portugal, Ireland, Italy, Greece and Spain) coming apart?

Let’s examine the big picture first: The Conference Board numbers from last week indicated that US consumer confidence rose to 57.9 in April vs. 52.30 in March, and consumers have had their biggest increase in spending in 3 years, following 6 straight months of increases. Institute for Supply Management (ISM) is showing that economic activity in the manufacturing sector expanded in April for the ninth consecutive month, and the overall economy grew for the 12th consecutive month. According to Ed Yardeni, S&P earnings for the first quarter have been very good, with 80% of reporting companies showing higher year over year increase and 79% showing positive surprises. These numbers enforce my belief that the economy really is improving.

In my April letter we discussed “Committing to the Recovery”, that phase in the recovery in which consumers and businesses begin to spend, and help fuel future growth. It’s clearer now, just 2 months later that this commitment is beginning to really take root and show promises of a higher stock market down the road. But as the economy goes from the negative trends and through multiple transitions to the positive, volatility and a shifting landscape become the norm. We would be mistaken to let these uncertainties and the day to day news cycles upset and define our portfolios.

Remember some of the key investment rules in transitional situations and markets:

Be flexible and nimble.

Take bigger bets in a fewer number of high conviction bets.

Try to establish trading ranges – look for pullbacks and rebounds.

Benefit from volatility. Opportunity may be waiting.

Don’t give it away in fixed-income. Interest rate hikes can be risky.

Don’t fight the Federal Reserve.

Consider Alternative Strategies.

Invest in what you know.

Manage your expectations. Every year is different than the last.

Keep your eyes on the horizon and don’t let the talking heads on television get in the way. Please call us with any questions or concerns you may have and as always, Thank You Very Much for Your Business.

Phil

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The Cornerstone

April 2010

“The Transition to Sustainable Growth”

First let me comment briefly on interest rates: An eventual move towards tighter monetary policy warrants a look at historical tightening cycles. Since the FOMC started targeting the fed funds rate in the 1980s there have been four tightening cycles lasting just over two years on average. Interest rates across the board have historically moved up during the tightening cycle, but a sharper move in short-term rates has helped to flatten the yield curve. In all these cycles, however, bond investors have experienced lackluster or negative returns, which is all the more reason we should be wary of any overweight towards bonds. The Federal Reserve may signal a rate hike later this year – we just don’t know when. We do know it will be when they expect the economy has had enough super stimulus and inflation fears become more prevalent.

Not far away from our interest rates worries lies the incredible year we have had in equities. The combination of enormous amounts of cash in money markets and low interest rates, has forced those who need alternate income from dividends and some type of growth into the stock market. It’s really hard to believe that last March we hit 6500 on the DJI Average and we were in the middle of a serious panic, while today we have an incredible recovery to the DJI Average of 10,900. This number is still far from the 14,198 we hit in October of 2007, but we may get closer yet.

A recent White Paper by LPL’s Chief Investment Officer Burt White lays out the strategy we have been following as we transition from recession to recovery to growth. Burt has made the case how we have shifted from recession to recovery and how the sustainable growth road lies ahead. Briefly, Transition Stage 1 is Committing to the Recovery – an area we have just entered; Stage 2 is Preparing for Life without Help, where growth is happening without help and we may even find ourselves in the middle of a tighten cycle; and last, Stage 3, where the tightening cycle is in full swing and growth is completely on the backs of consumers and businesses. I’ll be referring to this paper over the next several months and for those of you who would like a copy, just let me know: paper or electronic, and we’ll get it to you

Lastly, with the weather changing, please give me a call so we can schedule a portfolio review along with your spring cleaning. Even if it looks fine it certainly doesn’t hurt to go over it once again. Have a great April and as always: Thank you very much for your business.

Phil

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The Cornerstone

March 2010

“State of the Economy”

I’m seeing a return to hypersensitivity to television “news” and realize even as I watch it that there is frequently a bear and a bull, they never agree, we go to commercial and we rarely have an idea of just what the correct answer is. Good T.V., bad economics.

So here we go – first please realize that economics is not a solo sport – there are no gurus, rather it takes a lot of work from a lot of people to come to a consensus of what IS happening let alone what will happen. I have tried to take the best information available, from the best sources, distill it down and present it to you.

Jobs: Current unemployment is at about 9.7% according to government reports. This will probably go up - maybe as high as 10.5% - as the economy improves. This does not necessarily mean more people are unemployed rather there will be more people looking for jobs (less discouraged). Then expect a drop of about 1% a year, eventually to 8.5% by the end of 2011 and continuing to 5-6% by 2014. This is how it usually works.

Where are the jobs coming from? The same place it has for the last 20 years. The biggest growth areas have been in education/health services; business professions; and leisure and hospitality. Mostly well paid, American jobs, but mainly in service sectors. The stimulus will provide some construction and manufacturing but this will not be huge.

Corporate Profits: Good, very good, with productivity growth being the best in about 40 years. We have rising profits, low interest costs and low depreciation costs. I believe this will continue for the next 2-3 years coming very close to the S&P price/earning we saw in 2007 – pre-depression. This should bode well for equities.

Interest Rates: Short-term rates will be held low by the Federal Reserve for now and I recommend that we keep our exposure mainly in short duration/short maturities. Long-term interest rates are a wild card and probably the most dangerous to play. Just as we thought we had plenty of time in 2000 to sell our tech stocks, the probability of the economy improving, large federal borrowing and the realization that there are better places to put our money, we have to be careful in managing the longer term bonds as they could drop extremely fast causing capital losses. We do not need to see inflation or fed rate hikes first in order for this to happen.

General Economic Growth: The “4 horsemen” of the economy; autos, home building, inventories, and business equipment spending account for a huge percentage of long-term GDP growth. They have currently retraced, from their lows, by about 32% of their average growth rate as measured by the Bureau of Economic Analysis. That means they have another 68% to go just to get to their average. I suspect that this could actually go further, to above the average growth grate and then maybe settle down. I conclude then that the levels of growth must go up – a lot. The future GDP growth has been predicted by the Federal Reserve at about (an average) of 4% this year, 3% in 2011, and 4% in

2012. It will not be a straight line and there will be setbacks we cannot see at this time. Remember that frequently the things that hurt our economy cannot be predicted: 911, AIGs inability to pay, soaring oil prices, and outcomes of current Iranian, Israeli/Saudi/American issues, to name a few.

Opportunities: The consumer is still holding on to their wallets, not just at the mall but in the equity markets as well. That is, they are underinvested in stocks. Stock prices have been relatively flat this month as the recent rally has stalled as measured by the S&P Index. I believe however, as the economic data improves, that some of the trillions of dollars that are now getting less than 1% interest will be coming back into the market. I currently prefer a mostly domestic, U.S. based equities portfolio and think that it may be time to include *small and mid-cap stocks. Internationally, I like the *emerging growth countries for those people whose risk profile allows it and would rather avoid international “developed countries” equity and debt markets. This of course varies for each of you and we need to discuss your issues before any changes are made.

Conclusion: None of us really knows what will happen tomorrow, but by taking real data, from real sources such as the Federal Reserve and our business partners such as J.P. Morgan and Goldman Sachs we can make reasoned decisions for our portfolios and the future. I welcome your comments so please feel free to call me if you would like to discuss the economy and how your portfolio fits within it. Thank you for sticking with this letter and as always, thank you very much for your business.

Phil

Small cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small-cap market may adversely affect the value of these investments. Mid-cap companies are subject to higher volatility than those of large-cap companies. International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

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The Cornerstone

February 2010

Tax Reporting - LPL Financial will be sending to clients 1099’s by February 16, not January 31, as it has been in the past. This decision is due to the many corrected 1099’s that are common today and this gives issuers of tax data more time to gather and distribute accurate information. Even with the later date, some of you may still receive corrected 1099’s after the February 16 date. It would be wise to wait until March 1 before assuming most 1099 information has been sent by financial firms and OID interest and some mortgage instruments have an even later reporting date of March 15.

The new 2010 Unlimited Roth IRA Conversion rules are now in effect. The basic change allows everyone to convert a portion or all of their traditional IRA into the Roth IRA regardless of their income level. Income Taxes are paid on the conversion amount, but the funds grow tax deferred and after 5 years is distributable tax free after 59 ½. Please contact us if you are interested in learning more about this new retirement account law.

On January 20th, the stock market began a 6.6% pullback as measured by the S&P 500 Index despite solid economic and earnings data. Stock market pullbacks of 5 – 10% are not uncommon; in fact, this is the 3rd 5 – 10% pullback during the stock market rally that began in March 2009. Interestingly, a pullback has accompanied each earnings season since the March 2009 low. News from the nation’s capital has dominated the media in the last week and a half:

The president’s proposals targeting the top banks
The Federal Reserve meeting on interest rates
The State of the Union Address
Fed Chairman Ben Bernanke’s contentious Senate confirmation vote

While the news certainly didn’t help the market, I suspect that the real reason for some of the pullback has been simply too few buyers against those sellers needing to feel more comfortable after the enormous push since the lows of last year. We still see a very large amount of cash on the sidelines and anticipate a renewed buying spree in the next few months. Recent economic activity continues to be supportive of an expanding economy and spending on equipment and software rose at a double digit annualized rate in the 4th quarter. The manufacturing sector expanded in January for the 6th consecutive month and the overall economy for the 9th consecutive month. Within the Purchasing Managers Index, new orders, production, employment, backlog of orders, exports and imports are all growing. Please call us with any questions or concerns and as always, thank you very much for your business

Phil

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The Cornerstone

December 2009

“All That Glitters…”

Merry Christmas!!

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I really wasn’t going to write a letter this month with all the cards and assorted things to do, but something has been bothering me that I need to discuss: Bubbles

We all can remember just a few bubbles that have recently bumped us around: Tech of 2000, Real Estate of 2007-08, and how about the $150 oil pop of last year? Whatever the bubble, we have learned that we want no part of it. So what are the current bubbles we might face and definitely want to avoid?

Gold – There is no doubt that there has been a great trend in place with buying coming from all areas including central governments. You can’t turn on the radio or TV without a talk show personality telling you how much they’ve made. But gold should be bought for inflation, uncertainty and jewelry and has very few, if any commercial uses other than dentistry. With no inflation and volatility on the S&P going down this is clearly a speculative, not a fundamental trend.

Lower Dollar – It’s been done and probably overdone on the downside. I feel that the real risk now is to have too much of your assets in overseas products. Even if you are getting better returns; those can disappear with a quick 5-10% dollar move upward. Don’t be on the wrong side of this one.

U.S. Securities – They are artificially high in price (low in yield), as interest rates are close to zero. There are very few reasons to keep money in these, except for being better than your mattress - especially the longer maturities. Just like the dollar, interest rates/bond prices can fluctuate quickly and go to extremes, trapping you into low yields and a loss in principal until their maturity.

U.S. Government – We don’t think about this often, but this could be the granddaddy of them all. According to Brian Westbury of First Trust, the government has benefitted most of all with the low rates. The Federal Deficit was 10% of GDP as of September this year, the largest on record – but the net interest on this debt was only 1.3% of GDP –the LOWEST in 40 years. (We ran about 3% in the 1980s and 90s). Just like homeowners a few years ago, the low rates make it appear to be an easy burden – until your ARM resets. When the bulk of this debt matures in 4.5 years or less, the government will be financing at higher and higher rates, forcing taxes much higher.

Have a great December and again, a Very Merry Christmas and a Happy New Year from all of us at Legacy Wealth Planning.

Phil

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The Cornerstone

November 2009

“The magic of 10,000”

Much has been made of the Dow 10,000 level over the last few weeks and since we hit the lows this last March, nothing has caused so many phone calls. Psychologically, we like to see big milestones fall and perhaps that’s what makes us such a nation of sports statistics. Who can run a bit faster or have their batting streak last just one more game? But the Dow 10,000 is just another number and not really a remarkable one at that. According to Burt White, LPL Financial’s CIO, this level has been crossed 28 times since 1999. So while it gets the headlines, the reality is that it shouldn’t be your focal point.

The bigger picture is that it’s the strength of the government stimulus and the powerful demand of China and other growing economies that has pulled us from contraction. To move to expansion we will need corporations, through capital spending, and the hiring of new workers with higher compensation. This should encourage the consumer, with historically 70% of the GDP to finally take over and sustain the economy. The difference is that the economy just won’t look the same as it was before the damage- it never is. We will have less consumer debt including home and automobiles, higher savings rates and more regulations on financial companies. Perhaps we’ll even see health care and energy policies that are reality based and good for consumers and corporations alike.

The changes we have been through have undoubtedly slowed the medium and longer term growth rates we can expect, but I believe this is ultimately good for our economy. I would much rather see reasonable growth rates and an economy built on a rock than the crazy excesses of one built on sand. I think it will be good for our equity markets as well. The intermediate trend now seems more positive with better earnings starting to come in on both a bottom line and top line basis. So while I am still cautious and don’t mind a bit of cash on hand, I believe we have a long, long way to go on the upside. Our portfolios are still weighted towards equities, with municipal bonds and fixed income generally focused on shorter maturities and durations. Other alternative products are also being explored and I will discuss those in the next issue.

Guess what is just around the corner? That’s right – Thanksgiving, Christmas and the end of the year. All of which means we need to start considering tax planning now for the end of 2009. While we aren’t tax professionals and you should always consult your own tax advisor, I want to make sure we’re on the right track going into the holidays. Special attention should be paid to those accounts that tend to trade a bit more – especially equities and also mutual funds – so this is going to cover a lot of you. Please call me if you have any concerns and make an appointment so we have no surprises.

Have a great November – Phil

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The Cornerstone

October 2009

“Turbulence is Inevitable, Misery is Optional”

Thanks to Howard Putnam, former CEO of Southwest Airlines for that pearl of wisdom and reminding us that times like this will happen – but what matters is how we handle it.

I have been receiving many of the same questions over the past 3-4 weeks and want to share with you my personal opinions and thoughts on them:

When will inflation return? Since unemployment is still rising in most areas of our country, capacity utilization is still low, and since wages are the biggest component of inflation, I feel we are probably at least a full year out, or possibly longer. These economic factors should also preclude a major increase on interest rates initiated by the Federal Reserve.

Why is the stock market still climbing if the economy is not yet well? Several reasons: the stock market discounts the economy weeks if not months ahead of time, and currently it is discounting that the worst is behind us – keep in mind that many of the companies were priced to go out of business just 7 months ago. Money is flowing where it is being treated best and with money market rates under 1%, many are willing to buy companies for the dividends and capital gains, despite some risk.

What are you (Phil) doing? I have raised some cash recently for clients who had too high of a percentage of equities in their portfolio. Longer term, however I do like the equity markets, and feel that we will see it significantly higher over the next few years. In the fixed-income arena I am trying to keep my maturities shorter – 5 years or so. I am skeptical about the ability of longer term bonds to perform for very long. High yield Municipal bonds are also attractive for the appropriate clients. Still, short-term forecasting is difficult if not impossible. Economist John Kenneth Galbraith observed, “The function of economic forecasting is to make astrology look respectable.”

So keep your eyes on the horizon, not the day to day value of your portfolio.

Should we invest internationally? I believe the answer is yes, for most serious long-term investors. Only about five percent of the world’s population lives in the U.S., so from viewpoint of consumer demand, it makes little sense to have all your eggs in the domestic basket. The percentage of (world) GDP that the US makes up globally is also falling, and reflects other countries growing faster than the U.S. Lastly, the effects of the drastic increase in our federal budget indicate that we could have a continued slide in the value of the dollar relative to other currencies. From an investment standpoint, this could add to the overall potential of your international portfolio as well.

Have a great October – Phil

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

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The Cornerstone

September 2009

I spent the middle of August at Focus09, the annual conference held by LPL Financial in San Diego meeting the best and brightest in our industry and learning from them. There was so much information that I will be unable to unload it in just one letter, but I intend to get it all out to you either in letters or conversations.

From Mr. Ed Slott, CPA, on Roth IRAs:

Recharacterization of Roth IRAs – If you rolled any part of an IRA into a Roth in 2008, you have until October 15 of 2009 in order to “undo” it. The reasoning is that you probably rolled your account when the stock market was higher, and you paid taxes on the amount rolled. You can “undo” this roll, get a credit back on the tax paid and re-roll it this year, presumably when the account is smaller – thus paying a smaller amount of taxes. You probably don’t want to do this on your own – call us for help.

Roth IRAs- The odds are good for higher tax rates in the future. I don’t know when, but I do know that paying taxes at low rates today is much more preferable than paying higher rates later on, when you’re retired. In 2010 you are able to roll your IRAs to Roth IRAs without the traditional MAGI ceiling cap that disallows it. The tax consequences (taxes, yes – penalties, no) can also be deferred to 2011 and 2012. Remember, as long as the rules are followed, the money in a Roth grows and comes out tax-free. One last note - Roths have no Required Minimum Distributions (RMDs), thus the money does not have come due to your age. This is ideal for tax and estate planning.

Portfolios and Asset Management – Several things came up, staring with LPL Financial’s own turn-key portfolios. I am humbled after performing an analysis of their portfolios, and believe their research is second to none. I will be introducing these portfolios to you as your needs arise. In addition, I’m proud of their “Clients First” approach which includes not only you, as clients, but me as well.

Goldman Sachs Asset Management discussed the ever present need of improving our own investment processes. Not only do we need diversification in equities, bonds and geography, but ways to efficiently add alternative investments, without creating illiquidity issues. In this tough market environment we are also reminded that while even the best portfolio can suffer intense losses like last year, one must be patient with it, weighing the relative risks and rewards, and perhaps even making tactical changes in order to be successful in the investing environment.

Have a great September – Phil

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. *Stock investing involves risk including loss of principal Roth IRAs: Restrictions, penalties and taxes may apply. Unless certain criteria is met, Roth IRA owners must be 59 ½ or older and have held the IRA for 5 years before tax-free withdrawals are permitted.

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The Cornerstone

August 2009

“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria” – Sir John Templeton. The discussions at Legacy Wealth Planning this week have revolved around the very large rebound we have seen in the equity markets and whether it is sustainable in both the short and long term time periods. There are certainly more bulls and believers than last month, but we are still not seeing a lot of cash holders participating yet – some where around 4 trillion dollars in short-term holdings. What will change their mind?

Unemployment trends reversing - We will still likely see a rate over 10% by the end of the year, though it is not unusual for unemployment to continue up even as a recovery occurs in the economy.

Housing trends improving – Since 06 we have had a softening real estate market that has only started to recover over the last month – and from a low level.

Continued market appreciation- Nothing succeeds like success and the skeptics will need a consolidation and continued advance in the equity markets in order to participate.

Although it’s been positive since March, there is much to repair.

Pain – That’s right! When the .005% investors are getting on their money market accounts hurts more than their fear of the market, it’s likely that their strategies will change. Remember – money goes to where it is treated the best.

I believe the opportunities for the next 6 months, and perhaps longer will be as follows: In the fixed-income arena, treasuries, long considered the safest, have had the poorest returns, while the riskiest bonds have generally done the best. Investment grade bonds are attractive right now to me, with good yield premiums over treasuries. These notes will also be quite attractive if the growth in the economy is more moderate than I expect. Municipal bonds are also priced favorably at this time and may be appropriate for those clients in the higher tax brackets. Whether taxable or municipal, I am in favor of staying under the 5 year maturity area for most people, due to possible inflation risks later on.

We are beginning to see an unlocking of the credit markets, and this bodes very well for the equity markets as well. A renewed flow of credit will allow expansion and growth – much of what we have seen shut down over that last year. Many companies have also done a great job cutting costs and managing their inventory as evidenced by recent earnings reports. Improvements in the economy and earnings will be extremely positive, and I anticipate will be reflected in their stock prices. As always, my criteria for purchasing equities include sustainable growth, backed by high quality management teams at good valuations. In short, it’s time to add them back in to your portfolios.

Have a great August - Phil

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Subject to availability & change in price – subject to market & interest rate risk if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

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The Cornerstone

Mid Month Update

13 July 2009

In order to keep up with rapidly changing events, we are introducing our mid-month letter that will be sent only electronically. You can also view our letters going back 2-3 months on our website at: http://www.lwpreno.com/newsletter_mahoney.html.

You may want to add this to your favorites in your browser as we are striving to add information more frequently.

Well, what’s been happening over the last few weeks? For starters we have had indexes fall fairly quickly and substantially, and as of this writing, the S&P is off about 4.3%. Volumes are lower, having been hit by summer doldrums, and interests have drifted away from our markets to the Sotomayor hearings, the events in Iran and political fiascos. Earnings have been generally good, which means that they are not a disaster - in short - there’s a lot of smoke but not a lot of fire.

It’s interesting that while the U.S. is still having difficulty in its recovery, the global situation may be turning more rapidly. Estimates from the J.P. Morgan show that following steep declines in 4Q2008 and 1Q2009, World GDP growth in 2Q2009 is about + 0.6%. Not a home run, by any means but an indication that international growth and especially ex-Asia may be leading the way out of the global recession.

The year-to-date index numbers are as follows, in USD:

S&P 500 -1.27%

MSCI-EAFE +3.90

United Kingdom +8.11

Europe ex-UK +0.31

Japan +0.59

Asia ex-Japan +29.41

(Sources: J.P. Morgan)

This certainly doesn’t tell the whole tale of how low the indexes initially went or the problems with their economies. It does tell us that while we may want to stay invested primarily in the U.S., we cannot underestimate the importance of diversifying globally.

Looking forward over the next few weeks, I will be focusing more on growth stocks and earnings momentum. With this recent retracement to 8100 on the DJI, there is another chance to purchase high quality equities at what I believe will be historically low prices. Please call me if you would like to discuss this further. My number is 775-850-2500 or 866-591-2500 – I look forward to speaking with you.

Phil

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. ** Stock investing involves risk including loss of principal. International investing involves special risks including currency fluctuation and political instability and may not be suitable for all investors.

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The Cornerstone

July 2009

There probably has been no year in which we have experienced the level of emotional stress that we currently have. The Internet, Twitter, anonymous e-mails and postings in addition to the 24 - hour cable networks have made this the biggest free for all that we have ever seen. The fear we have seen is evolving from the next great Depression to fear of inflation – the new boogeyman of the day. Let me offer an opposing view:

The recession has created a ballooning of unemployment and an enormous amount of capacity in the U.S. industrial system which will take at least 2 years, if not longer to absorb. In addition, global competition in labor along with smaller trade union membership will also help to keep a cap on wages. Oil price hikes may be seen as an inflationary issue, but only in the short-term. Longer-term, we are effectively spending money internationally by importing more and more oil at higher prices. That money is not staying in the US, being spent on food, clothing, or autos rather it is being spent by oil producers in other countries, effectively producing a deflationary factor here. The weak/falling dollar is traditionally an inflationary factor as well. However, according to J.P. Morgan, if the dollar fell by 10% tomorrow, the price of our imports would go up 10% in dollar terms. But since our imports are only 18% of our GDP, this sudden drop of 10% would only cause a 1.8% rise in inflation (10% x 18%). Even this is unlikely since not all exporters to the US would immediately hike their prices.

Will inflation come? Of course – but it doesn’t have to be another tsunami that will rob you of your purchasing power in a New York minute (but a minute in New York can!) and it may actually be quite moderate for some time. We really won’t know that until we’re there.

What moves to make? I very much believe we are in an opportunistic situation where real estate, stocks and other real assets are cheaply valued and should be bought for long-term investors. I encourage you to begin a program that matches both your risk and time objectives, as well as your overall goals to determine if it’s right for you.

Let’s discuss your situation and see – I look forward to speaking with you.

Phil

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The Cornerstone

May 2009

I was fortunate to spend a few days with the financial professionals at J.P. Morgan and get their opinions and outlook for the economy, markets and where we possibly go from here. I will share what I feel is pretty insightful information, but remember these are my comments taken out of the meetings are condensed due to the shear amount of information we went over. If you would like to discuss them, please give me a call and I’ll be glad to go into more detail:

Housing – The bubble is most certainly over and we are seeing signs of stability. This does not mean recovery, because in order to get that we will need money flowing more easily from the banks, along with confidence from buyers. According to the U.S. Census Bureau (2004) the number of marriages each year in the US is about 2.2 million or at a 7.5% rate (divorce is 3.6%). How many of these newlyweds will want to live with their parents or in-laws? There will be buyers of homes. Housing starts and inventories or homes are way down from their high levels, so we should see some new building by the end of the year.

Inflation – We will probably not have inflation until the end of the year at earliest – perhaps as long as 18 months from now. We need Growth, then Jobs, then Profits and then comes inflation.

Inventories – We are going into a “classic” inventory cycle where inventories are much lower and as demand picks up, production will need to follow. Take for example automobiles – millions are scrapped each quarter here in the US, and the congress is thinking about giving rebates to people to trade their old ones and buy new.

Unemployment – It will continue up and perhaps hit double digits by the end of the year. It is a lagging indicator though and any attempt to gauge the economy by that number will leave you months behind. The depression of the 1930’s had 25% unemployment and even in the pre-war 40’s it was still in the teens.

Federal Reserve/Government – Generally positive on the stimulus package given historical times (like the 30’s) when government cut taxes and didn’t spend money. Most economists agree this was a major problem and caused the depression to run several more years than if they had stimulated the economy. WWII was the biggest influence in getting the country out of the hole and if you think of all the guns and tanks we purchased and then ruined or just left behind. So nonproductive spending isn’t as bad as it seems. There is some criticism of the current Fed. however, and interest rate movements were discussed. When the Fed. saw the banking and housing issues occurring, they should have cut all the way – right away. If the economy is better they should say so – because if people believe it’s better they will buy now in order to get good prices. This would lead to quicker growth - otherwise we all wait for one more cut in interest rates or prices.

Valuations – Cheap, cheap, cheap – but don’t try to time the market or overextend yourself because it may take a fair amount of time to right ourselves. Asset allocation is still the preferred way of investing, and consider dollar-cost-averaging due to volatility.

Where to go? – Real assets. Think real estate, think stocks, but be wary of those with too high of dividends. They may still cut them in order to protect balance sheets. Many corporate bonds and munis are still attractively priced. Remember to consider your goals and objectives as well as risk requirements before investing.

What could go wrong with our scenarios? – We may be building a new generation of savers. The savings rate has gone to 4.2% from negative numbers just a few years ago, cutting into spending. If you remember where Japan went from 1989 when some real estate values in the Ginza District went for the equivalent of $1,000,000 a square meter, then into a recession for the next 10 years. A big part of which was the compulsive savings by their population which in early 1990s went to 15-18%!

Oil prices could soar again, possibly due to a Middle East war. Hurricanes, another swine flu, you name it, it can screw things up.

Above all – Remember the three most dangerous words:

“Wait and See”

No one can see the future, but we know that this has been an extraordinary time and with it comes extraordinary opportunities. Right now there is somewhere in the neighborhood of 5.5 Trillion dollars in short-term money market, T-Bills and cash getting nearly nothing in returns. It will come out sooner or later, and when it does you need to be allocated to those areas that fit your risk perameters as well as goals.

Phil

*Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing though periods of low price levels. Such a plan does not assure profit and does not protect against loss in a declining market.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. ** Stock investing involves risk including loss of principal.

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The Cornerstone

April 2009

The first thing you will notice is the new title of the newsletter I put out each month. We are adding the letter to blogs and other electronic formats and needed a way for it to standout and not to be just another series of run-on words. In addition, we are starting to send it via e-mail for those who prefer it. Paper users – Don’t Worry! We’ll still use hardcopy for you.

What huge change from early March, when we were hitting 6500 on the Dow- levels we had not seen since 1997, when the Dow was on it’s way up to 12,000 by Jan. of 2000. So what has changed that has pushed us up from those drastic lows? Like any oversold condition there was certainly bound to be a reversal as short sellers start to abandon their positions. There were even some brave souls with cash to spend that saw the opportunity to make quick cash. But I think there’s more: When you begin to add the pieces together, not only did the pullback make sense, but we may have seen the bottom of this cycle in the equity markets. The evidence is compelling in that the Federal Reserve has lowered interest rates to nearly zero, forcing the banks – which we know had the biggest hand in this disaster - into a position of profitability again. The banks and financial companies are now borrowing money at zero and lending 5% or higher. Think about the credit card debt that needs to be paid at high double figures. But what about their bad assets still on the books, marked to market at nearly nothing? This has been solved by changing the rules to reflect more reasonably the true or at least the best estimated value. How about those short sellers? Surely they’ll be waiting with their billions of dollars, ready to pounce on weaker companies? The SEC and Federal reserve has announced a major change to the short sellers market that will come in the next few months, slowing that line of attack.

Don’t get me wrong – in a perfect world Citi, Bank of America and AIG would probably all be out of business by now, waiting for some Phoenix to rise out of the ashes – creating stronger banking companies than ever before. But if that had happened, most of us would be out of business and the 1929 crash would be seen as the little brother of the one today. Spending the money on the bailout is extremely distasteful, but I don’t have a different option, nor did Obama, nor McCann nor Bush.

Where from here? To go out on yet another limb, I believe that we’ll most likely take a bit of a breather for a week or two as earnings reports come out. If we have very few surprises on the downside, we could see a range of 7400-8400, with an emphasis on the upside. It will take a significant amount of money coming out of money market (now at about 5 Trillion) for us to see the higher levels of 10,000 and beyond. That takes trust from investors and that will take time.

Phil

Opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.