As I write, the stock market is setting historic highs. The advance has been so dramatic and powerful that most observers are looking for a market pause and a decline in the averages. Typically, there would be an interim downturn after such a run as investors digest recent gains. We would not be surprised if a normal interim correction occurs. But what is the likelihood of a major bear market correction?

Given human nature, some investors sell whenever the market approaches new highs. Having recaptured any losses, and anchored on the previous record high, they have an understandable desire to capture elusive profits. The relief of positive returns is a powerful temptation to sell.

The notion is not wholly silly, as a market retreat could be triggered by any number of dark clouds: the upcoming debt ceiling politics; a global slowdown caused by strife in the Middle East; the serious economic challenges still facing Europe; or there is always the completely unexpected threat no one sees coming.

There are, however, some market positives that are hard to ignore and that support the discipline of investing rather than trading. One of the biggest is the golden rule of “Don’t Fight the Fed.” Whenever the

Federal Reserve stimulates the economy with low interest rates, it benefits the stock market. The Fed created the turning point in the markets on March 9, 2009, when the stock market bottomed and it first implemented quantitative easing. Since then, the markets have advanced over a “wall of worry.”

Investors were so scared by the near collapse of the economy in 2008 that they bought bonds to the exclusion of stocks during the recent run-up. Bonds were a rewarding safe haven for a while, but they have become increasingly less attractive as interest rates have reached remarkably low levels. As the economy recovers, bonds will lose the support of buyers interested only in safety and will be priced primarily on the income they generate, which can be characterized as meager at best.

We are watching the Federal Reserve carefully for any hint that it might

TIME FOR A DECLINE? by Ted Cronin, CEO

SPRING 2013

INSIDE THIS ISSUE:

CIO Report Severalfactorspointtoa

continuedmarketrun.

Living in a Social World ManchesterCapitalisexcited

toestablishaninformativeand

insightfulpresenceintheworld

ofubiquitoussocialmedia.

Water, Water, Not Yet Everywhere Aninvestmenttobringclean

watertopeopleseverywhere.

Cloudy with a Chance of Blizzards HowManchesterCapitalis

preparingforthestormcomingin

thefixed-incomeinvestmentworld.

Inside MCM DrewIsNamedto

Top40Under40

JeffandTedPresentatthe

Barron’sTop100Conference

ReceivetheInsightNewsletter

Electronically

UpcomingActivitiesat

ManchesterCapital’sNew

CharlottesvilleOffice

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change its easy money policy. The recent sequester, a modest cut in government spending, could curb growth a little. This only encourages the Fed to continue holding rates low. The Federal Reserve is pushing hard to reduce unemployment and spur growth today, whatever the future costs.

Meanwhile, several factors point to a continued market run. The valuation of stocks remains attractive at 13 to 14 times earnings. The median valuation over the last several decades is more than 17 times earnings. The average bull market of the past advanced as much as 25% higher than what the current bull market has achieved so far. Additionally, corporations and investors have excess cash to put to work—cash that is earning practically nothing.

Most importantly, the economy is healing, as evidenced by the increase in consumer confidence. According to the University of Michigan index, Consumer Confidence is now at 76.3, and consumers are returning to old habits. The housing and stock market declines experienced over the last decade severely hurt household wealth, but the recent rebound in both housing and stocks is doing a lot to restore wealth (an increase of $4.8 trillion in 2012) and a belief in the future.

The muted reaction to the current high of the stock market is partly disbelief by investors who have suffered two frightening bear markets in the last 13 years, but also a sober calculation

that the after-inflation, after- tax returns from stocks remain disappointing. Depending on how you do the math, the nominal stock market indices should be 10% to 15% higher in order for the purchasing power of stock portfolios to achieve a true increase. Stocks still owe investors further real gains.

Given the current circumstances, conservative investors trying to mitigate risk, or those who have seen their stock allocations appreciate so that they are now overweight, should reduce their exposure to appropriate levels. However, investors who are on the sidelines waiting for a market retreat to participate are more likely to continue missing future advances.

The general mood is shifting from fear of stock market losses to disappointment with cash returns and toward the greed of missing stock market advances. We haven’t gotten to greed yet, which invariably characterizes true market tops.

As a result, we believe the current momentum is likely to produce further gains even with interim setbacks. Perhaps the best indicator that the stock market has run its course will be a change in the Federal Reserve policy away from suppressing interest rates. The bond market would take control, recognizing the inevitability of higher real inflation, and the 10-year Treasury would begin to rise above 3% on its way toward 4%. Such a signal would be cause to reassess the commitment to current stock weightings, not current highs.

STOCK OWNERSHIP

Long term, stocks are under-owned, both here and abroad.

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Did you know that more than 100,000 tweets are sent every minute on Twitter? Or that one out of every seven minutes spent

online is spent on Facebook?

Social media is taking over the way that we interact both personally and professionally. Not only has it affected how we keep in touch with our friends and relatives, but it has become a primary driver for business growth. More than 1 million websites are integrated with Facebook in some way, and almost 75% of marketers saw increased visits to their websites after spending just a few hours on social media initiatives.

Smartphones are a dominant driver in the space, with 73% of the more than 120 million U.S. users interacting with social networks at least once per day. More than 161 million minutes per month are spent on social media through mobile applications globally.

So what does this mean for Manchester Capital and our clients?

Foremost, Manchester Capital continues to make sure that trends such as these are captured as effectively as possible within

your investment portfolios. By investing with firms such as TrueBridge Capital Partners, our clients have benefited from the launches of several social sites such as Facebook and Pinterest.

Beyond investments, we want to make sure that as the times change, we communicate with you across a variety of mediums and let you choose how you would prefer to interact with us. Over the coming months, we will begin to establish our own social media presence not only to inform you of relevant market events and financial updates, but also to allow you to learn a bit more about the people here who steward your wealth. We hope that you will “Like” what is to come.

ACCELERATION OF TECHNOLOGY

92% of the world’s data was created in just the past two years.

Today’s smartphone would have been the most powerful computer in the world in 1985.

120 million people in the U.S. now own smartphones, up 30 million in just one year.

More than 48 million people own a tablet, representing 300% growth from last year. It is the fastest-growing electronic device ever created.

There are over 1 billion Facebook users. That’s more than one-seventh of all humanity.

Source— Michael Byrnes, Jr. of Byrnes Consulting, LLC

LIVING IN A SOCIAL WORLD

by Kristina Koutrakos, InvestmentStrategist

www.mcmllc.com 03

Most of us don’t think about the role water plays in our everyday lives. Like so many resources— e l e c t r i c i t y , sunshine, gasoline,

—we take them for granted until we are forced to do without them. I was reminded of this last week when I received the call that too many parents and homeowners are familiar with: Dad, there’s a broken pipe in the basement and there’s water squirting everywhere. Can you come home right away?

I did, and I turned off the water supply to our house while we tried to locate an after-hours plumber with no success. So, for the night, my family had no running water to drink, cook with, clean with, bathe with, shower with, flush toilets with, or to heat our house. It was a stark reminder of how important, or more accurately, essential, this simple commodity is to everyday living.

Birth of the Water FundIn 2006, working with several of our clients, we recognized the merit of a long-term investment in “blue gold.” Through water, we could meet the important social mandate of working to bring clean, safe water to people everywhere. We could also create a viable investment vehicle that could help diversify

client portfolios. At the time, we reviewed the very few investment vehicles in the water space, however none met both our social goals and our investment criteria. Unsatisfied with what we found, we decided to launch our own fund.

The Thesis for the Equinox Water FundThe thesis for the water fund begins with several important points:

• The world’s population is rising, increasing the demand for clean water. Since 1950 the world’s population has doubled, but water use has tripled.

• There is a finite amount of water on the planet.

• The global potable water supply is shrinking due to pollution and the drainage of aquifers.

• Water is necessary for life and there is NO substitute.

• Safe water must be made available to all peoples of the world.

WATER, WATER, NOT YET EVERYWHERE

by Brian Vogel,WealthManagerACCESS TO FRESH WATER

According to a 2012 U.S. intelligence community report, access to clean drinking water is increasingly seen as a major global security issue.

“Between now and 2040, fresh water availability will not keep up with demand absent our effective management of water resources,” the report states.

About 780 million people around the world do not have access to clean drinking water, according to a 2012 United Nations report.

Lockheed Martin has announced a new filter technology for desalinating water. The filter is 500 times thinner than the current best filter and would use 100 times less energy for the process.

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The fund seeks to capitalize on the growing demand for water—growth fueled by an expanding world population, a lack of water infrastructure in parts of the world, and an aging water infrastructure in other parts. Because of the emphasis on providing safe water to individuals, the fund focuses on water treatment, delivery, and recovery. We do not invest in bottled water companies, nor in utilities that have abusive practices, nor in companies for which water represents less than 40% of total revenues.

The Water WorldSomewhat surprisingly, there are slightly more than 360 public companies worldwide with water-related operations. We review each company to see if it meets our investment hurdles: that water revenues comprise at least 40% of total revenues; that operations center around the provision, treatment, delivery, or recovery of water (metering and piping equipment manufacturers are excluded); and finally, that the company has real earnings that render purchasing its stock a viable investment and not a charitable donation. Sadly, even companies that survive all these filters are sometimes passed over due to the illiquidity of their shares or the difficulty of trading stock in certain parts of the world.

The ResultsThe Equinox Water Fund market value as of the end of February was $18 million, consisting of 42 individual equity holdings with an average position size of $400,000. Since its inception in January 2006, the fund has generated a compound annual return of 6.54% through the end of February, compared with 4.79% for the S&P 500. Because of the nature of the companies the fund invests in, the fund’s standard deviation is actually higher than that of the S&P 500 at 17.31% compared with 16.57%, though the fund’s correlation to the S&P 500 is only 0.94.

Is It for Me?Maybe. Manchester Capital does not market the fund, nor do we actively recommend it to clients. Despite the fortunate strong performance record, the fund structure is that of a socially responsible directive that seeks to be a viable investment vehicle. Its diversification characteristics, and certainly its volatility, are not for everyone, and since we started in 2006, several other water-centered mutual funds and exchange-traded funds have been created. We monitor and review them, to see if our clients would be better served in those vehicles rather than the Equinox fund, however, just as we found in 2006, none of them meet our strict social and investment criteria. Until such time as they do, we will continue to use the fund to seek out viable investments on behalf of our clients to bring clean water to peoples everywhere.

WATER, WATER, NOT YET EVERYWHERE

www.mcmllc.com 05

In Vermont, we recently dug out from the latest winter storm. Like most of the storms we have seen this year, its bark was worse than

its bite. By my count, we have faced two Nor’easters—about average for a winter. A classic Nor’easter involves the convergence of cold air from the north and warm air from the south. When, how, and where the storm gathers determines everything. Growing up in New England, you learn that the winters are, more than anything else, unpredictable. All you can do is prepare for the worst and deal with what comes your way.

There is a storm coming in the fixed- income investment world. Fixed- income has been in a rally for decades. The yield on a 10-year Treasury note is currently below 2%, far below its historic average and indicative of huge demand for the security. While such extremes might be argument enough to call for an end to the rally and a return to a more “normal” interest rate, the fixed-income market is being driven by another force—the Federal Reserve. Federal Reserve Chairman Ben Bernanke continues to implement a program known as Quantitative Easing—the purchase by the Federal Reserve of U.S. Treasury notes to create demand, hold down long-term interest rates, and inject funds into the economy

to spur economic growth. So as the clouds of a new Nor’easter gather over fixed-income investors and prepare the way for the coming spring, the Fed’s intervention is keeping the North and South currents apart.

Being able to predict when and how quickly rates will rise is difficult—like predicting snowfall in a particular town from a particular storm a month in advance. The list of investors and analysts calling for an end to the bond rally gets larger by the day, like weathermen watching those clouds. At some point they will be correct. But rather than considering the if and when, let’s look at the potential aftermath of rising rates.

The price impact of a 1% increase in interest rates to a 10-year bond is a 9% drop in price. Factor in inflation, and to the investor, a bond paying a 3% coupon loses 9% in value and 2% in purchasing power. If rates rise by more than 1%, the price decrease becomes more dramatic, particularly on long bonds. The opposite is also true—a 1% decrease from where we are now would result in a 1% coupon and a 9.1% price increase on that same 10-year bond. That’s not too bad for the implied security of owning an asset backed by the full faith and taxing authority of the U.S. government. But here’s the problem: the yield on a U.S. Treasury note has been in the 1.5% to 2.0% range for the better part of the past two years, so there has been little to no price component. Again,

factor in an inflation bite at 2%, and investors getting that 1.5% to 2% coupon lose money in real terms by holding a 10-year note. If you assume that yields cannot fall below zero from their current levels, the upside to Treasuries becomes quite limited, while the potential for prices to drop if rates rise is significant.

The demographics in the U.S. point to an aging population that needs retirement income to support itself. As a result, there will always be an appetite for low-risk income. Net new flows into bond funds were steadily positive throughout 2012 and now into 2013. As fixed-income demand increased and yields fell, investors looking for current income were pushed further out on the risk spectrum. Student loans are a prime example. Education costs continue to rise and lenders (backed by investors) are stepping in to fill the need, charging higher than Treasury interest rates for the loans. Students are graduating and finding it difficult to get work and so falling behind on loan repayment. Currently more than 30% of those paying back student loans are 90 days or more overdue. In reaching for yield, investors are taking greater risks.

At Manchester Capital, we see the storm coming, and we have been preparing. In addition to managing portfolio allocations to fixed-income, we have enhanced our fixed-income investment options, providing greater stability in the

CLOUDY WITH A CHANCE OF BLIZZARDS

by Griffin Sivret,WealthManager

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near term while increasing our nimbleness for the rising rate storm. We have shifted allocations toward tactical positions and away from more crowded Treasuries. High-yield securities have provided a nice return recently, and while there is some concern about “junk bond” issuance rising, default rates have been below historic averages. Even in high yield, however, fund flows into this area have driven prices up and consequently pushed yields down. Looking outside the U.S., global bond fund returns have justified their use as a moderate tactical option. And when rates do begin to rise, we can add floating rate notes to portfolios as a way to keep durations short.

The Fed believes it has the tools to manage inflation and perform a successful exit strategy when the decision is made to end Quantitative Easing. Maybe. And maybe keeping this Nor’easter at bay has allowed the storm to gather greater force. If the Fed is right, the economy will gain traction, Fed intervention will no longer be necessary, and the Fed’s withdrawal will allow the Nor’easter forces to dissipate, or at least proceed peacefully. But the Fed’s position is not without significant risk. The Fed’s inventory of bonds is larger than it has ever been and is growing month by month. If rates are rising when the Fed is selling what it holds, the Fed may suffer losses, ultimately fueling

inflation. This is where the Fed’s exit strategy, its response to inflationary pressure, and the market’s response to Fed action will all be tested.

The forces affecting bonds right now are as difficult to predict as the consequences of a Nor’easter. We see the warning signs and the clouds building in the distance. Internally, we are preparing for the worst and readying ourselves to deal with what comes our way. If the systems converge overhead, we will be in for a wild one. Then again, we may just get lucky one more time.

Source: J.P. Morgan

www.mcmllc.com 07

INSIDE MCM

MANCHESTER, VERMONT // 3657 MAIN STREET // (P.O. BOX 416) // MANCHESTER, VT 05254 // {TEL} 802.362.4410

MONTECITO, CALIFORNIA // 1157 COAST VILLAGE ROAD // MONTECITO, CA 93108 // {TEL} 805.969.5670

NEW YORK, NEW YORK // 410 PARK AVENUE, SUITE 1610 // NEW YORK, NY 10022 // {TEL} 212.588.1120

CHARLOTTESVILLE, VIRGINIA // 123 EAST MAIN STREET, CHARLOTTESVILLE, VA 22902 // {TEL} 434.260.8293

Drew Named to “Top 40 Under 40”We are proud to announce that Drew Beresford, a Wealth Manager with Manchester Capital since 2006, was recently named by Rep. magazine as #12 in its “Top 40 Under 40 Registered Investment Advisors” in the country.

Ted and Jeff Present at the Barron’s Top 100 Conference As a result of being named in Barron’s Top 100 Independent Financial Advisors in its August 27, 2012, issue, Ted Cronin and Jeff Hall were asked to lead a session regarding Manchester’s real estate advisory services at the Barron’s Winner’s Circle Top Independent Advisors Summit in Orlando, Florida. Their presentation was made on March 7, 2013, and was greeted with much enthusiasm and interest from a group of more than 400 top advisors selected to attend the event.

Receive the Insight Newsletter ElectronicallyManchester Capital has started distributing the Insight Newsletter electronically. Please contact the firm at any of the numbers listed below if you would like to receive future editions electronically.

Upcoming Activities at Manchester Capital’s New Charlottesville OfficeWe will be hosting our upcoming Board of Advisors meeting at our Charlottesville, Virginia office this spring. Manchester Capital employees now located in our office on the Downtown Mall include Jeff Hall (Managing Director, Real Estate), Kristina Koutrakos (Investment Strategist), Angela Flora (Investment Associate), and Jeff Laffond (Investment Analyst). We are excited about the growth of the office and welcome anyone in the area to stop by for a visit.

We are also hosting a breakfast titled “Proven Strategies for Building Family Legacies” at the historic Farmington Country Club in Charlottesville on Thursday, May 2. If you are interested in attending, please contact Angela Flora at AFlora@mcmllc.com or 434.465.6030.

ETICA

That’s the Portuguese word for ethics, and it’s relevant for a couple of reasons.

First, we hold ourselves to the highest ethical standards. We put client interests ahead of our own and act in the best interests of our clients. It is our fiduciary responsibility and the foundation of our business.

Second, we’re pleased to announce that Greg Dienna, CFA, a Wealth Manager in our New York office, was invited to teach a day long class in the CFA Institute’s Code of Ethics to graduate business students at ISCTE, a top European university, in Lisbon, Portugal. Greg will write an article on his experience for the next newsletter.

Finally, we consider the Chartered Financial Analyst (CFA) designation to be the pinnacle of technical investment expertise as well as ethical standards, and we are proud that four of our senior professionals are charterholders, with another expected to complete the program this summer.

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