Market Commentary

FOURTH QUARTER 2011

Shashi Mehrotra, CFA Executive Vice President and Chief Investment Officer Legend Advisory Corporation

2011 was an interesting year for the market, with an unusual amount of volatility. I believe 2012 may be similar in that respect. 2011 was the third year in the presidential election cycle, which historically has been a great year for the market. When taking the average of the S&P 500 Index over the last 15 election cycles, the average in year 1 of a presidential cycle is about 4.4%, year 2 is 5.4%, year 3 is 18.3%, and year 4 is 6.1%. After reviewing these figures, we can conclude we had a very disappointing 2011 at 2.1%. Going strictly by the averages for the last 15 election year cycles, we may have a better year ahead – even better than the averages suggest – since we have to make up for last year's underperformance.

Based on the indicators we are watching, we feel pretty bullish about the markets, at least for the first and the last few months of the year. We hesitate to make that call for the whole year because we may have to resolve some of the global economic clouds that are still hanging over our heads. Fortunately, most of our short-term concerns are outside of the United States. Europe has been at the forefront recently. With new leadership in the European Central Bank (ECB), there is reason to believe the euro should continue to weaken and at a greater pace than seen in the past year. Mario Draghi, President of the ECB, seems to be more dovish than his predecessor, as more and more evidence points toward the ECB being forced into a mentality of "Print, baby, print." Although Mr. Draghi has made public comments suggesting he does not believe quantitative easing would be beneficial, other ECB officials have made comments to the contrary. In an interview published in the Financial Times, Mr. Bini Smaghi, a member of the ECB, said he would not be opposed to utilizing easing if euro conditions were justified. These conflicting reports and the recent backdoor $636 billion in U.S. currency quantitative easing from the ECB in the form of 3-year low interest rate loans to banks, suggests to us that more easing cannot be ruled out. These expectations argue for the U.S. dollar to stay strong, particularly relative to the euro and thereby our expectation is for more pain in foreign developed markets. I believe Europe is currently going through a recession. I’m not sure how the European sovereign debt problem will be resolved, but I believe it will be over the next year or so. As for the U.S. economy, we have avoided a double-dip recession so far, and although we may flirt with one in 2012, we should not fall into a full-scale recession.

In the case of fixed income, the outlook seems to be diametrically opposite. We have more of our fixed income assets allocated to higher-yielding corporate bonds than the perceived higher-quality government bonds. Although financial textbooks have taught us that government bonds are safer than private company bonds, we feel differently this time around. We feel that our money is safer in the hands of well-run, blue chip, multinational companies than in the hands of many of the governments around the world – including our own. Moreover, with the expectation of a slow-growing economy, high-yield bonds may not appreciate in price, but may keep us happy with their richer yield. Ten-year U.S. Treasuries are currently yielding less than 2% annually, while the average yield for the high-yield index is over 8%.

Finally, I would like to remind investors not to sweat the short-term stuff. It turns out to be noise over the long-term. My thoughts above are by no means cheery, but please remember these thoughts are relevant to short- to intermediate-term implications on the financial markets, which are not as relevant to the markets over the long term. I am often asked how these thoughts should affect an investor's long-term investment/retirement plan. My response is always the same: I don’t think market fluctuations should ever be the reason for deciding where to put your money – your investment horizon should be. Investing is a long-term game and you have to be “In it to win it.” I think moving your assets out of the market because of fluctuations can be a serious mistake, which could cost you returns and compromise your standard of living in retirement. The dynamics of fear and greed should not dictate what you do with your retirement funds.

Going forward, using what we believe is some of the most advanced technology in the industry, our team of investment professionals will continually oversee our model portfolios and proactively make changes to investment positions as deemed necessary. With the dynamic nature of our asset allocation programs, we believe our clients are well positioned to overcome emotion and ride out the market’s inevitable gyrations.

As we emerge from what will arguably be one of the most challenging market cycles in history, we pledge to remain steadfast in the application of our investment disciplines as we move forward. We believe the current market environment may offer plenty of opportunities for investors with the fortitude to look past the short-term uncertainty and focus on their long-term investment strategy.

•  The views represented in this commentary are solely the opinions of Shashi Mehrotra, Chartered Financial Analyst and Chief Investment Officer of Legend Advisory Corporation. The views expressed are not intended to predict or depict the performance of any particular investment. These views are as of December 30, 2011 and are subject to change at any time, without notice, based on market or other conditions.

•  Information has been obtained from sources believed to be reliable, but is not guaranteed.

•  Direct investment cannot be made in any index and index performance is not indicative of any specific investment. The S&P 500 Index is a market value weighted index that measures the performance of U.S. large-capitalization stocks.

•  Performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate, so that investor’s shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted.

• Investment in equities involves more risk than other securities and may have the potential for higher returns and greater losses. The main risks related to fixed-income investing are interest rates and credit risk. As interest rates rise, existing bond prices fall and can cause the value of an investment to decline. Changes in interest rates have a greater effect on bonds with longer maturities than on those with shorter maturities. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal or interest payments. Investments in foreign securities involve risks relating to political and economic developments abroad, foreign taxation, currency exchange rate fluctuations and differences in accounting standards.  

•  Advisory services offered through Legend Advisory Corporation, a registered investment adviser.