Index & Mutual Fund Categories	August 2010	2010 Year-To-Date
Dow Jones Industrial Average	-3.91%	-2.11%
S&P 500	-4.51%	-4.62%
MSCI EAFE (Foreign)	-3.10%	-7.95%
MSCI Emerging Markets	-1.94%	-0.33%
Barcap Aggregate Bond	1.29%	7.83%
Barcap U.S. LT Government	6.63%	20.66%
CSFB High Yield	0.13%	8.07%

 

An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is no guarantee of future results. The index returns are all “Total Return” with dividends re-invested, which means the return is not only the change in price for the securities in the index, but any income generated by those securities. See Index definitions on disclosure page. Source: Morningstar Direct. Total return data as of 8/31/2010. Returns are in U.S. Dollars.

EQUITY MARKETS

Concerns of a potential deceleration in economic growth once again weighed heavily on the equity markets in August, reversing much of the gains from July.  Slackened confidence amidst a backdrop of weak employment and a very slow housing recovery were joined with concerns about the safety of returns.  Will equities behave much like they did in the 1930’s offering much higher yields, but with much higher perceived risk than bonds?  Or is an unwavering commitment by the Federal Reserve to keep rates, in nearly all of their forms, low for at least the next 12-18 months helping to keep investors more comfortable with bonds over equities?  Only time will answer these questions.

After a strong rebound in July, global equity markets gave back some of their gains in August.   Relative to the U.S., overseas stocks outperformed with the MSCI Emerging Markets dropping 1.94% and the MSCI EAFE down 3.10% compared to the S&P 500 pulling back by 4.51%.  Japanese stocks have struggled of late with the Nikkei finishing August at a 16 month low, as investors’ concerns mount regarding the impact of the strengthening Yen on exports and the economic recovery which expanded at only 0.4% in the second quarter.  The Yen has reached a 15 year high vs. the U.S. Dollar, as the Dollar has weakened this year relative to the Japanese currency and China has also increased its purchases of Yen denominated bonds.  The continued Yen strength represents a major policy challenge for government officials as pressure for action increases from exporters whose goods as a result are less competitive in the global marketplace. 

 

BOND MARKETS

August saw yields on 10-year Treasuries fall below 2.5%, as the equity markets dropped due to fears that we were heading into a potential deflationary environment, inducing perhaps even more averseness among equity investors that the bond markets were right and the equity markets wrong about the future direction of the economy.  This dynamic has led to recent instances in which corporate bonds offered lower yields than their dividend paying counterparts in common equity.  Not surprisingly in this environment, U.S. Long Government Bonds were up more than 6.5% for the month, while bonds exposed to credit risks had more subdued gains.

THE ECONOMY

Most of the July economic numbers were pointing to a slowing economic environment and a job market that was showing few signs of improvement in the U.S.  However, some of the early economic releases for August showed some of the gloom may have been overdone and the economy wasn’t heading into the abyss of a double-dip.  August employment figures showed the private sector continues to add to payrolls, albeit at a slower pace than is likely to bring down the unemployment rate from its current 9.6% level much in the next year.  Manufacturing activity also picked up in August, another signal that GDP will likely continue its slow growth rate of between 1.5% and 2.5% for the rest of this year and into next.

The Eurozone reported its economy grew by 1% during the 2nd quarter led primarily by Germany which reported its strongest growth since reunification.  Within emerging markets, India reported its economy grew by 8.8% over the same period last year for the quarter ending in June, led primarily by manufacturing and services industries.  The data gives policy makers further evidence that the recovery is on solid ground as they continue to tighten monetary policy by raising rates four times since March.  There is some debate whether the pace of recovery in developed markets will maintain the level seen in the first half of the year as economic growth is projected to slow in the second half of 2010.  The OECD has reduced their growth estimates for G-7 countries to 1.4% in the 3rd quarter and 1% in 4th.

 

IN SUMMARY

With investor uncertainty high, the market may continue to move in a one step forward, one step back fashion, before there is more clarity that the recovery that started in 2009 is not slipping away from us.  As it does become more evident that we will steer clear of a double dip recession or a deflationary trap, patient investors who are willing to hold through periods of volatility may be rewarded the most in the coming years.  While some of the recent economic numbers have been low, they are continuing to point to slow growth over the next few quarters.  With the Fed poised to continue offering quantitative easing and more stimulus programs being promoted to help small businesses and improve payrolls, it is clear that all monetary and fiscal tools will be used to keep the economy moving on an upward trajectory.

 

                                                                      

Jeffrey Spitzmiller, CFA                          Jim Worden                                   Amar Chauhan

Chief Investment Officer                       Portfolio Counselor                       Portfolio Counselor

 

All opinions and estimates included in this report constitute the firm’s judgment as of the date of this report and are subject to change without notice. This report is provided for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets.

DISCLOSURES – Index definitions:

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.

The Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE Index) is a widely recognized benchmark of non-U.S. stock markets. It is an unmanaged index composed of a sample of companies representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index. As of May 2005, it consisted of indices in 26 global emerging economies.

Barclays Capital Aggregate Bond Index is an unmanaged index comprised of U.S. investment grade, fixed rate bond market securities, including government, government agency, corporate and mortgage-backed securities between one and ten years.

The Barclays Capital Long U.S. Treasury Index includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non convertible.

Credit Suisse High Yield Index is designed to mirror the investable universe of the $US-denominated high yield debt market. Issues must be rated “5B” or lower. That is, the highest Moody’s/S&P ratings are Baa1/BB+ or Ba1/BBB+

The MSCI Europe Index is a free-float weighted equity index designed to measure the equity market performance of 16 developed markets in Europe. Countries include: Austria, Germany, Spain, Belgium, Greece, Ireland, Sweden, Denmark, Italy, Switzerland, Finland, Netherlands, United Kingdom, France and Norway.

The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange.

Gross Domestic Product  (GDP)- The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living.

The Organization for Economic Co-operation and Development (OECD) is an international economic organization of 33 countries. It defines itself as a forum of countries committed to democracy and the market economy, providing a setting to compare policy experiences, seeking answers to common problems, identifying good practices, and coordinating domestic and international

RISK DISCLOSURES:

Investments in model strategies have additional management fees and expose the investor to the risks inherent within the model and the specific risks of the underlying funds directly proportionate to their fund allocation.

 

Cash Equivalents – There are risks associated with these investments including credit risk, interest rate risk shortfall risk and loss of purchasing power due to inflation.

International Markets – The risks associated with investing on a worldwide basis include differences in regulation of financial data and reporting, currency exchange differences, as well as economic and political systems that may be different from those in the United States.

Emerging Markets – International investing involves special risks not found in domestic investing, including increased political, social and economic instability. Investing in emerging markets can be riskier than investing in well-established foreign markets.

Corporate Bonds – There is risks associated with fixed income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Non-investment-grade securities, commonly called “high-yield” or “junk” bonds, generally have more volatile prices and carry more risk to principal and income than investment grade securities.

U.S. Government Bonds – Although backed by the full faith of the government, there are risks involved to include: relative yield risk, reinvestment risk, inflation risk, market risk, selection risk, timing risk, legislative risk, duration risk and call risk

Foreign Bonds – These are issued by governments or corporations located outside of one's domestic market and trade on foreign financial markets. Also, as one may expect, these bonds most often trade in the currencies of their domestic markets. A strong move by the U.S. dollar against the foreign currency would reduce the effective interest/principal payment you would receive after conversion. As such, it is important when investing in foreign bonds to understand this risk and evaluate the likely move of the relevant currencies before purchase. Default risk is of particular concern for foreign bonds that are issued in less industrialized countries or nations where there is considerable political strife. Under these conditions, interest rates and monetary policy can fluctuate more widely than in more established countries.

Alternative investments- These provide investors with exposure to markets and investment strategies that cannot be accessed through traditional fixed income and equity markets (such as real estate, commodity or natural resources). Investing in these investments is speculative, not suitable for all clients, and intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investments.

Investing involves risk, including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. An investor's shares, when sold, may be worth more or less than the original purchase price.

Investment advisory services offered by Brecek and Young Advisors Inc., an SEC Registered Investment Advisor. Iron Point Capital Management (Iron Point) is the marketing name of the asset allocation and management services provided by Brecek and Young Advisors, Inc. Iron Point is not a separate company. Brecek and Young Advisors Inc. is affiliated with Securities America Inc. member FINRA/SIPC.

© Copyright September 2010, Brecek & Young Advisors, Inc. All rights reserved. Updated 9/10.

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