Quarterly Outlook Summary

The economy remains sufficiently weak that the Federal Reserve has postponed any further interest rate increases until at least next year. One of the complicating factors was the recent vote in the U.K. to leave the European Trade Union. The vote to leave was expected to be close, but few thought it would succeed. The mechanics of exiting that will take place over the next several years and no one can realistically predict what the economic consequences will be. It is safe to say however, that the vote has introduced uncertainty and risk to the global economy which will affect many investments. We will monitor this closely.

The U.S. economy continues to struggle along with sub-par growth even with interest rates hovering near zero for nearly eight years. Corporations and consumers alike continue to shun borrowing in favor of paying down debts. This is a tremendous headwind to the economy that should be easily remedied with government fiscal stimulus. The upcoming election that stands a good chance of removing the blockade in Congress to fiscal deficit spending stimulus. One can only hope.

In that regard, Japan has been in a slow to no-growth recession for nearly 25 years and is about to embark on a radical new form of quantitative monetary easing. Japan having been in the clutches of deflation and a strong currency during that time will attempt to fund government deficits by printing money. It will be the proverbial helicopter money drop. If this gambit does not work, it will solidify the notion that the remedy to deflation is more elusive than ever thought and that it is far more dangerous than inflation. At least we discovered decades ago how to cure inflation.

Our individual holdings continue to perform well despite these market and economic uncertainties. In June of this year, the buyout and merger of Sandisk, one of our largest holdings, was completed. It was a part cash and part stock buyout. Consequently, you will be seeing some substantial capital gains and the related taxes at tax time next year. There are many opportunities in which to re-invest the proceeds. We are constantly sniffing around and typically do not move hastily. Stay tuned for future updates.

Please remember that because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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Quarterly Outlook Summary

The markets and the economy continue to muddle along although with some volatility. Even though the Federal Reserve has raised short-term interest rates one notch, longer term rates surprisingly declined slightly. Try as they might, the cannot generate any inflation as commodities and especially oil prices remain weak. The employment numbers in terms of job creation and unemployment look very good. Weekly unemployment applications are now the lowest since 1973.

In this environment, interest rates are the driving force in the market. After the recent rate increase, the market dropped significantly in January before recovering. The outlook is problematic given a strong job market and wage gains, but alas, weak inflation and commodity prices. Arguably, these would be ingredients for strong economic growth if only the Fed could restrain its need to raise rates so that they could once again say they are in control.

Many risks remain. China has thus far been moderately successful in navigating an economic slowdown caused by over building. That could change. In a few months, the UK will hold a referendum on whether they will remain a member of the EU. If they leave, the EU itself will be significantly weakened and could be very problematic for continued growth there, which, would easily affect global growth.

Our individual holding continue to perform well despite these market and economic uncertainties. We continue to be on the lookout for additional and new opportunities in which to re-invest the proceeds of the Sandisk buyout after it is complete.

Please remember that because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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2015 Year-end Summary

Last year was a difficult year for the markets, but we were able to eke out some positive returns due to a late December surge. That surge quickly melted in early January due to perceived economic weakness in overbuilt China and by a free fall in oil prices. The oil price decline is a short term detriment to the economy as oil investment quickly evaporates. It should also be a net positive in the long term as consumers and business acquire more spending cash together with lower prices of goods and services.

Oil is the single most important raw material input to nearly all economic goods, but more importantly because oil producing countries rely upon the revenue for their national needs. In the face of the present oil glut, oil producers have continued their high production in an effort to preserve their market share, but, at this point the financial pain is becoming unbearable. It is expected the OPEC and other producers will come to some form of production quota arrangement…. that they will all promptly violate. However, the markets will recover and oil prices will stabilize but will remain low for the foreseeable future.

In the face of these volatile markets, it has become painfully apparent that with interest rates at zero percent for the last eight years, that monetary policy alone has used up its effectiveness as economic stimulus. There is no more ammunition left. Consequently, the U.S. and Europe are now beginning to discuss fiscal stimulus which is otherwise known as deficit spending. The recently passed omnibus budget package in the U.S. is a notable example as the bipartisan compromise threw overboard the economically disastrous budget sequester package that was originally designed to balance the budget. Federal spending is now set to increase eighty billion per year. More fiscal stimulus and spending will follow as the deficit/inflation ideology continues to lose credibility in the face of serious deflationary pressures, not only in oil, but in all commodities. It may be another difficult coming year as the markets try to work through these issues and stabilize in a moderate growth trajectory.

Because these quarterly thumbnail summaries are very abbreviated, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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Quarterly Outlook Summary

The past quarter (and year) has been fairly brutal to portfolio returns due to high volatility stemming from factors I’ll discuss below. Immediately following the end of September, the market staged a surprising rally that at present appears to have legs. If it continues, this year will produce good returns after having been stagnant all year.

Much of the recent volatility stems from a lack of leadership from the Fed and Congress together with abundant speculation about what they will ultimately do in the form of interest rates and fiscal stimulus. Interestingly, a much anticipated interest rate hike will only further strengthen the dollar hurting exports and earnings. This in turn also puts downward pressure import prices and energy with the consequence of defeating in part the Fed’s goals of killing deflation and stimulating inflation closer to its goals.

The economy really can’t expect any further help from Congress in the form of fiscal stimulus as the deficit continues to fall and Congress seems intent of further budget cuts. Absent the necessary leadership from the Federal fiscal and monetary authorities, the private sector investment and credit creation will continue to be tentative, the economy will grow slowly, employment will continue to remain stable without much impetus to further expand the workforce. In other words, more of the same slow growth with investment volatility as private sector investment and credit growth continues to look and wait for more economic certainty for the future in the form of leadership from the monetary and fiscal authorities.

We continue to hold investments that we believe will outperform the overall market, but in light of the above, we remain cautiously optimistic. Given the above, the market’s driving force is dependent upon private sector lending and growth.

Please remember that because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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Quarterly Outlook Summary

The economy continues to grow. Unemployment is low and interest rates remain at zero. On the downside, labor force participation is the lowest since the 1970’s and continues to decline. Unemployment is declining because prospective employees have stopped looking for work. It is against this backdrop that the deficit continues to decline taking money out of the economy, Congress continues to look for more ways to cut spending which would take even more money out of the economy, and the Federal Reserve is looking for any reason whatsoever to raise interest rates.

The exchange value of the dollar continues to be another risk factor. The dollar will continue to strengthen and the Euro will continue to decline negatively affecting domestic corporate earnings. All of the ingredients are in place, such as Congress’ fixation with deficit reduction, the Fed’s fixation with raising interest rates, together with catastrophic European economic policies threatening the survival of EU member states and ultimately the Euro project itself.

On the other side of the globe, the Chinese stock market is in the bust portion of a boom-bust cycle. This could be of concern, but on the positive side, that market must return to sustainable levels. It has crashed 30% in recent weeks to the level it was in April of this year, and had risen 150% in the last twelve months. It still has more correction to go. Thus far, it has not measurably affected our markets. We don’t think it will yet.

We continue to hold investments that we believe will outperform the overall market, but in light of the above, we remain cautiously optimistic. Given the above, the market’s driving force will have to be private sector lending and growth. Confidence continues to slowly return and increase.

Please remember that because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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Quarterly Outlook Summary

In general terms, the overall economy continues to gradually improve. Labor unemployment and job creation is improving. Although consumer demand is also improving, this is moderated by consumers’ continuing to avoid debt and leverage that got us all into trouble prior to the last financial melt-down. There is plenty of room for further dramatic improvement, but there remain many hurdles to overcome to get there.

We previously wrote that the EU economy was weakening and that because allegiance to austerity, any stimulus would be unlikely. We were wrong. The ECB stepped in with what is called “quantitative easing” in central banking parlance, “money printing” to the rest of us. On foreign exchange markets, the Euro subsequently and predictably, took a nose dive, meaning in turn, that the dollar went up, their exports improved and a small recovery seems to be taking hold. On the other side, American imports become cheaper curtailing further inflationary pressures and exports become more difficult with the effect being that corporate profits are hurt and the economy slows.

These effects lead squarely back to the Federal Reserve and whether they will be able to raise interest rates as they seem so determined to do. Even though labor markets are marginally improving, the prospects are, “not anytime soon”. Higher interest rates would only make a strong dollar even stronger exacerbating the earnings and export problems. Furthermore, since a strong currency curtails inflationary pressures, the Fed’s need and desire to raise rates is further diminished. In our view, the longer the Fed keeps “jawboning” for minimal tightening in the form of higher rates, the markets will remain choppy. As a practical matter, given the above, most Fed watchers now believe, as do we, that even in the face of stronger labor markets, any interest rate increases will now be pushed off until late this year or more likely, next year.

Please remember that because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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2014 Year-end Summary

As discussed recently, the economy has been slowly gathering momentum. It is still far from operating at full capacity. Despite the respectable unemployment numbers, over the last five years millions of workers have left the workforce and are now only beginning to return. However, government stimulus, both from the Federal Reserve and from Congress is now nearly negligible. The private sector has been gaining steam, but has not yet been able to fully compensate for the withdrawal of government stimulus. This is likely to continue for some time resulting in continued sluggish and choppy economic growth.

Despite murmurings from the Fed that they hope to raise interest rates this year, they won’t. There is no chance that they will be able to raise interest rates in an environment of sluggish growth and falling food, energy and commodity prices. The vanishing federal deficits and drastically falling oil prices have put to rest any fantasies of rising interest rates in the foreseeable future. They are, after all, still unsuccessfully trying to achieve a 2% inflation target. Far more likely, we will see, as we are seeing in Europe, negative interest rates before they ever begin to rise.

We anticipate that the markets will continue to grow although at a somewhat diminished pace. As interest rates continue to fall, U.S. Treasury bond prices and fixed income investments will rise. We may begin adding some of these to our holdings. The long-term outlook for the markets remains positive. There is still vast untapped and pent-up consumer demand. Business investment will continue to grow as technology advances and as obsolete plant and equipment continues to be replaced. Europe and Asia will pursue aggressive monetary stimulus in an attempt to ward of deflationary pressures now exacerbated by falling energy costs. There is still a painfully long way to go to put the global economy on a stable footing and growth path.

Because these quarterly thumbnail summaries are very abbreviated, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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Quarterly Outlook Summary

The markets recently have been modestly stable considering that the Federal Reserve has nearly ended its economic stimulus programs. One can always argue that given the still relatively weak growth of the economy, this ending of the stimulus is premature. It is remarkable that the economy has performed as well as it has, all while fiscal stimulus has been effectively absent. The Federal deficit is now at its lowest in a decade. With U.S. growth slowing and Asia and Europe facing stagnant growth at best, or even recession, there is a likelihood that the Fed will begin to temporarily re-start the stimulus. There are also better than even odds, that after the elections, and given the disappearing deficit, Congress will begin finding new ways to spend money. We can only hope. Because the Fed had already maximized its available tools, fiscal deficit stimulus has been the missing ingredient that would have had the economy on a strong growth trajectory by now.

However, other risks remain. As mentioned above, the global economy is faltering. The European Big Three, Germany, France and Italy, may already be in recession and facing deflation. Because of the rigid monetary structures of the Euro, there is no assurance that the ECB, the European Central Bank, will begin any meaningful monetary stimulus anytime soon. In addition, as we have seen for over a decade now, the Europeans are also firmly wedded to austerity and budget cutting as a remedy. Recession and deflation presently are a very real concern awaiting their action.

If these and other risks continue to develop we will likely begin allocating significant portions of each account into U.S. Treasury instruments as a defensive measure. Please remember that because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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Quarterly Outlook Summary

The economy continues to grow albeit slowly. However, despite a weak first quarter, unemployment continues to decline, yet employment has yet to come close to pre-meltdown levels. Again, although the Fed maintains an accommodative policy, they have curtailed their bond purchases which will end entirely within a few months. Congress has no will to provide additional stimulus, quite to the contrary continues to look for ways to cut spending further. This despite the fact that the deficit is now lower than before the melt-down. The month of June actually ran a surplus of fifty million. The fact that the economy is doing so well without congressional fiscal stimulus is evidence of the fact that business confidence in the private sector is increasing and picking up the slack.

We will aggressively monitor emerging public sector (government) policies for evidence that it would possibly affect, or curtail the positive growth now taking place in the private sector. For example, there is academic evidence that the federal government budget surpluses late in the Clinton presidency may have exacerbated, if not contributed to the dot com bust that occurred one year later. Absent the government injecting money into the economy by means of the deficit, the only means of monetary growth is private sector indebtedness which quickly results in an over leveraged economy. Household and business balance sheets are now very healthy having undergone drastic debt restructuring during the last six years. That can change rapidly if the government begins taking additional money out of the economy by means of further budget cuts or by running budget surpluses.

We expect continued growth in the economy but we also understand the usual volatility and the policies described above can cause serious periodic corrections that we hope to avoid when possible. Please remember that because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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What’s holding back the recovery?

By Adam Hersh
April 30, 2014

Nearly five years since the start of the business-cycle expansion, the U.S. economy is still struggling to gain traction.

Compared to the prior three U.S. expansions, going back to 1982, the economy is recovering at merely 60% of that pace. (See Figure 1) Whereas at this point in past recoveries, the economy expanded by an average of 19%, today, the U.S. economy has grown just 11% overall since the economy’s June 2009 trough.

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In past expansions, government spending continued supporting economic recovery, rising 20% for two years beyond the start of the upswing and leveling out only thereafter.

But the fiscal policy response in this recovery was much different. Instead of expanding to support the economic recovery, the January 2009 American Recovery and Reinvestment Act, or ARRA, and related measures merely to offset the sharp fiscal contractions experienced widely across state and local governments. As one-time spending from the ARRA waned, Republicans won control of the House of Representatives in 2010 and set U.S. fiscal policy on a downhill course.

As a result, rather than supporting economic recovery, the public-sector contraction has cut one-third of a percentage point per quarter from the growth rate on average since the start of the expansion.

The rest of today’s GDP report from the BEA shows that investment overall continues to basically keep pace with what has been seen in other recent recoveries, even though investment shrank 6.1% overall in the first quarter. Persistent U.S. international trade deficits also continue to pose a drag on the larger U.S. economy, although with fairly stable downward pressure.

Thus the lackluster growth that we are seeing nearly five years since the U.S. economy began expanding can be traced back to two main factors: the ongoing financial stress faced by most American families whose incomes are struggling to keep up with household demands; and the abnormal fiscal austerity that undermined government’s usual contribution to smoothing downturns and laying the foundations for the next round of economic growth — this despite the fact that fiscal deficits will fall back to just 2.8% of GDP this year.

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