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    BECKERADVISORY.COM

    Market Perspective

    Driving and the markets

    Back in January I took my first tripwithout my family. Sure, I have hadbusiness trips without the familybut since having kids I have yet totake a short trip without my family.In the end of January I went toDenver to visit with an old friend

    and to do some skiing.

    To miss traffic, we decided to driveup to the mountains on a Sundayevening. As we climbed throughthe mountains on I70 heading westtraffic went from at speed to stop ina blink. After about 15 minutes anemergency vehicle came up theshoulder of the road and let usknow that a Hazmat truck hadtipped over and hazardous material

    was covering both east and westbound lanes. Fortunately, the exitfor Georgetown, CO was rightwhere we were. With no other goodoptions we exited and found a nicelittle European restaurant to havedinner. After four hours the roadhad still not opened and we decidedto look for a place to stay along withmany other displaced travelers. Ittook some time, cajoling and almostbribes but we found a dumpy motel

    to spend the night.

    The next morning the roads wereclear and we headed up to BeaverCreek for two days on the slopes.You must understand I am a hugefan of skiing and love themountains. So, having a few daysskiing with friends in fantastic

    conditions left the weather at homein Maryland in the back of mymind.As I sat in the airport waiting tocome home a wake up call camefrom my wife. She asked if I hadseen the forecast for home. No,why? She informed me that when

    my flight arrived at BWI airportduring rush hour there was awhopper of a snow storm coming atthe same time. That explained whyso many people were switching offthe flight. I decided to stay on theflight and we agreed that she wouldnot try to come out and get me butmy father-in law would have theunenviable task.

    When my plane arrived there was

    already a few inches on he groundand it was dark outside. It was sixin the evening by the time we goton the road. What should havebeen a 45 minute drive to his housebecame a four hour drive. Besidestreacherous roads there were plentyof people on the roads adding to themayhem.

    At this point you may be askinghow is this story important to

    managing your portfolio. In thecourse of my driving adventures Ikept thinking about how similardriving is to managing money.

    Case in point is upon my return toMaryland I found snow falling sofast you could watch it pile up. Weall know that winter driving can be

    FIRST QUARTER 2011 UPDATE APRIL 2011

    Contents:

    1. Market Perspective

    2. Portfolio Approach

    3. Revisiting Strategy

    Henry L. Becker, Jr., CFP

    phone: 800.717.2527

    mobile: 301.471.7911

    fax: 301.865.0072

    email: [email protected]

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    treacherous for more than one reason. Sure, you candrive 50, 60, 70 miles an hour on snow covered roadsbut the likelihood of wrecking goes up exponentially.The point is when the roads are not safe a reasonableperson will slow down. This holds true for investingas well. It is one thing to drive at speed on a nicesunny day and quite another to drive at speed in poor

    conditions.

    Road conditions

    It is one thing to be all in with your investmentswhen risks are low it is another to be all in whenrisks are high. I would like nothing better than tohave bright sunny investing skies but that is just notthe case. Even though the talking heads might bestating otherwise, remember, few of those in themedia saw the storm coming in 2008.

    Right now market road conditions are more

    treacherous than they have been in decades. Very fewpeople have a full appreciation of how close oureconomy is to a possible derailment. Many folksthink that since the stock market has rebounded thenthe economy is back on track. Nothing could befurther from the truth. The stark reality is privatesector financial companies ran themselves into theground leaving a massive hole for an ill-prepared,debt laden government to fill in. The problem now isthe government (via the Fed) has taken on anunfathomable amount of debt and printed an equallyunfathomable amount of money which jeopardizesour economy and currency.

    The affect of the Feds monetary intervention andquantitative easing has been to force investors intohigher risk investments and out of low risk

    investments. If you think about it the Fed could notpush up housing prices but they knew they couldmake us feel richer by inflating risky assets likestocks. So, the market gains while nice have notreally come to us honestly and now stand on veryshaky ground.

    So where are we know?At the time of writing the US is about to breechits debt ceiling of $14.2 trillion not including offbalance sheet wars and unfunded liabilitiesPrices of food and energy are risingInterest rates are as low as they can go with nowhere to go but up which will increase the cost ofpaying our nations massive debtUnemployment is still high at 8.8% really muchhigher when counting folks that have fallen of thestatistics radarNew home sales are at the lowest level recorded

    Residential real estate prices fell the most in ayear over year figures since December 2009Japans disaster(s) which are just starting to playout in the global economyLastly, the boiling hot Middle East

    So, I ask myself is this really the time to be steppingon the gas or are the roads still too treacherous? Ithink the later. We are at a point in the markets whereit is more prudent to drive cautiously and arrive alivethen speed up and risk an unnecessary accident.

    We have a few more months of the Fed pumpingmoney into the markets so we are likely to see themarkets hold up but they may get more choppy thecloser we get to the possibility of the punch bowlbeing taken away.

    Portfolio Approach

    Nothing comes for free

    There is no doubt we have witnessed a fantastic rally

    in the markets since March 2009. The key is not tomistake this rally for something other than what it isand that is a debt-fuelled, bear market rally. What itis not is a bull market rally. The difference is theformer happens amongst poor fundamentals and thelatter happens amongst solid fundamentals.

    A good example of a bull market rally was from 1982to 2000 where we saw the computers, the internet andsmart phones coming into the market.

    A good example of a bear market rally was from 2003

    to 2007 where we saw phony profits spun by financialengineers and a housing boom (thanks to artificiallylow interest rates. There is a saying in the marketsthat states we should rent bear market rallies and ownbull market rallies. The current rally has been built onunbelievable monetary intervention and massiveamounts of government debt and the rental term maybe nearing its end

    FIRST QUARTER 2011 UPDATE APRIL 2011

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    I will be the first to admit that for sometime I held outhope that our government would see the errors intheir approach to getting the US economy back ontrack. The last few weeks has, for the most part, sunkmy hope that this economy will have any meaningfulrecovery. Besides the continued debasement of our

    currency and the massive debt we now carry, myhope has been dashed more by what is not beingdone than by what is being done.

    This government and the Fed have dragged theeconomy to the brink of disaster. In the last fewweeks our fearless leaders have bickered over tryingto establish a budget but have only come up withrelatively meaningless proposed budget cuts. Thisbickering over peanuts and ridiculous earmarksshows a clear lack of understanding of the direstraights of the economy. So, how do we plan for a

    continuation of reckless decision by our government?

    The first item to consider is possible outcomes for theeconomy and how that will affect portfolios. Foranswers to this we must look at history which pointsto one of two paths. Historically, fait currencies(currencies backed by nothing) never last. Whatdooms fiat currencies, even in our own history, is thereckless printing of money which leads to a currencycollapse. The other outcome could be for thegovernment to default on its debts. Keep in mindthat a default can range from renegotiating debts to

    just inflating the debts away. Either path is possibleand both come with bad outcomes.

    By nature I am not an alarmist. But, the trajectory weare on with bailouts, money printing, supportingzombie banks and a lack of conviction from our

    leaders all points to an unpleasant outcome if historyis the guide.

    Therefore, I am approaching markets at this pointwith caution and looking to areas that can benefitfrom a weaker dollar and inflationary pressures. Inthe fourth quarter of 2010 I sold all direct bondholdings and only now have bond exposure througha floating rate bond fund that tends to do well ininflationary, and rising rate environments. On theequity side I have positioned to mining stocks,agricultural stocks, energy stocks, US Industrials and

    global dividend paying stocks. By looking to theseareas I avoid (for the most part) US banks, healthcareand many consumer related names. I havepositioned portfolios with 8-15% positions in preciousmetals and may increase that to 15-20% should theeconomy get worse. The metals serve to protect theportfolio from a declining dollar/inflation.

    Ultimately, should the worst happen and we go into adouble dip recession and the market sells off, equitiesfor the most part will be sold should my sell sidetriggers be met. In the article that follows I will

    revisit my strategy on the sell side.

    FIRST QUARTER 2011 UPDATE APRIL 2011

    Revisiting Strategy

    Assumes all

    dividends are

    reinvested. The

    study is for

    illustrative purposesand not the result of

    any particular

    investment made by

    Becker Advisory

    Services.

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    INVESTOR NEWSLETTER ISSUE N3 FALL 2008FIRST QUARTER 2011 UPDATE APRIL 2011In the last few weeks I have seen more articles and interviews about howinvestors that held on through the downturn are turning out fine. Thefinancial media is underpinning their argument with the fact that themarkets are back to their pre 2008 level (for now). This kind of reportingunnerves me for two reasons. First, it does not consider that there arebetter, simple strategies with better results. Second, the current run in the

    market is a Fed induced, debt-fuelled, phony, rally that will eventuallyend with another large sell-off (then what).

    So, I thought this might be a good time to revisit the heart of myinvestment strategy. Remember that a sound investment strategy willhave both buy and sell points. In my investing decisions I consider bothboth technical and fundamental aspects of the markets and individualinvestments. But, at the very heart of my strategy is the goal of limitinglarge losses. Most investors are fine with the day to day fluctuations inthe market and will tolerate 5-10% drops. What investors do not want tosee are 20%, 30% or 40% drops. Therefore, my strategy is designed tolimit exposure to the portfolio killer drops.

    My strategy for equities is simple. If a holding is above its 200 dayexponential moving average (EMA) it is held. If a holding closes belowits 200 day EMA it is sold. The proceeds can go to another healthierinvestment or sit on the sidelines. In todays world everything is movingtogether. Therefore, it is likely that the proceeds of a sale will sit on thesidelines. A reentry point is when an investment is above its 200 dayEMA and the same investments 50 day EMA is above its 200 day EMA.In the case of a steep drop, the reentry point is the crossing of the 50 dayEMA above the 200 day EMA this is known as the Gold Cross.

    The moving averages are widely recognized (and used) as indicators of health of markets and securities. Thechart above and on the previous page show the results of implementing my strategy with the Vanguard Index500 fund (VFINX). The study compares buying and holding from 1989 through the end of 2010 versus selling atthe 200 day EMA breech and reentering at a cross above the 200 day EMA or on a steep drop reentering at thegold cross. The results speak for themselves.

    Keep in mind there is no perfect investment strategy. If there were everyone would be a millionaire. As iseverything in life there are tradeoffs. The tradeoff with my strategy is that in an effort to manage risk and limitthe downside you have to give up some of the upside in some volatile years. The true power of the strategy liesin outperforming in the periods that count the most - the bad periods. The bottom line is that this strategy isproven, has outperformed over a relevant period of time (last 22 years), manages risk and has limited losses inthe really ugly years.

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    Disclaimers

    Investing involves substantial risk. Becker Advisory Services (BAS) makes no guarantee or other promise as toany results that may be obtained from their views.

    No reader should make any investment decision without first consulting his or her own personal financialadvisor and conducting his or her own research and due diligence, including carefully reviewing the prospectusand other public filings of the issuer.

    To the maximum extent permitted by law, BAS disclaims any and all liability in the event any information,commentary, analysis, opinions, advice and/or recommendations in the update prove to be inaccurate,incomplete or unreliable, or result in any investment or other losses.

    The information provided in the update is obtained from sources which BAS believes to be reliable. However,BAS has not independently verified or otherwise investigated all such information. BAS does not guarantees theaccuracy or completeness of any such information. The commentary, analysis, opinions, advice andrecommendations represent the personal and subjective views of the BAS, and are subject to change at any time

    without notice.

    The update is not a solicitation or offer to buy or sell any securities.

    FIRST QUARTER 2011 UPDATE APRIL 2011