beacon hill summer 2009 newsletter

33 North Third Street, Suite 500 Columbus, OH 43215

In Defense of Diversification There has recently been a popular uprising against the idea of diversification in the press and in public opinion. While the past year has been difficult for most, diversification has been a saving grace for many portfolios. Lower risk assets have buoyed the performance of diversi-fied portfolios as can be seen by the compari-son of the equity markets (S&P 500) to fixed income markets (BarCap Aggregate Bond In-dex) and to a few Beacon Hill Asset Allocations.

Summer 2009

Scheduled Events: • August 4, 2009: Symposium in partnership with Victor Ferguson, Partner with Vorys,

Seymour, Sater, and Pease LLP, Location & Time TBA. • November 11, 18, and December 2: In partnership with Upper Arlington Library, A

“How To” guide to “Investment Management”, “Asset Allocation”, and “Uncertainty and Retirement Analysis”, Upper Arlington Main Library, Time TBA

(continued on page 3)

33 North Third Street,

Suite 500 Columbus, OH 43215

P: 888.614.4625

[email protected]

Quarterly Economic Review The market upturn that began in March continued through this quarter. The major impetus for this movement was a realization that the economic environment was not catastrophic, it was merely bad. Risk was generally rewarded. Many companies took advantage of the stabilizing markets to issue equity to deleverage their balance sheets. May equity issuance was at a record level. While the torrid pace of equity issuance in May is unlikely to be sustained, the motivation to deleverage will continue, creating a headwind for the equity markets. In addition, a few large bank-ruptcies will continue to reverberate throughout our economy. On the other hand, only a fraction of the fiscal stimulus is yet to ‘hit the streets’.

Consistent with risk being rewarded generally, small cap stocks outper-formed large cap stocks:

(continued, next page)

Economists Look to the Future

We are pleased to welcome guest commentary: William Strauss • Senior Economist and Eco-

nomic Advisor for the Federal Reserve Bank of Chicago

Bill LaFayette, PhD • VP of Economic Analysis for the Columbus, OH

Chamber of Commerce It should be stressed that the general stock market is a leading indicator of the general economy. By the time the economy rebounds, the market typically has already moved up. While we, at Beacon Hill, temper ours and others’ pre-dictions of the future in implementing investment actions, we were impressed while hearing William Strauss present at a recent investment conference. In addition, we welcome the views of Bill LaFayette PhD, Vice-President of Economic Analysis for the Columbus Chamber of Commerce for a more localized analysis.

(continued, 3rd page)

‐27%

-22%

-17%

-12%

-7%

-2%

3%

8%

S&P 500 BarCap Aggregate Bond Index

Conservative Moderate Moderate Aggressive

12 Month Return

-26%

6%

-17% -21%-13.6%

Beacon Hill Asset Allocations

0%

5%

10%

15%

20%

25%

Russell 1000 S&P 500 Russell 2000

Equity Markets: 2009 2nd Quarter

+16.5%

6%

+16%

+20.7%

Small StocksLarge Stocks

Clint Edgington Mark Fissel

Quarterly Economic Summary (cont’d from front cover)

In the fixed income market, risk was again rewarded, with junk bonds trouncing higher quality issues.

BarCap U.S. Aggregate Bond: 1.8%

BarCap U.S. Corporate High Yield: 23%

Interest rates along most maturities (i.e. the “yield curve”) have in general shifted up, with the longer term maturities shift-ing up slightly more. That being said, in-terest rates across all maturities are still fairly low, with room to move up signifi-cantly. Readers will recall that when rates go up, bond prices go down (generally), with the longer maturity bonds generally showing more volatility. This risk (“interest rate risk”) hurt the longer term bonds this quarter, and is a continued risk for the future.

BarCap U.S. Treasury 1-4 Year: -.4%

BarCap U.S. Treasury 10-20 Year: -6%

FTSE NAREIT Equity REITS: 28.9%

Consistent with the realization that our economy is merely bad, rather than catastro-phic, the commercial real estate portion of the market enjoyed broad gains as well.

Economists Look to the Future (cont’d from front cover)

General Economic Review

In general this recession has been brutal, yet Mr. Strauss points out that “the contraction appears to be slowing, had the Fed and the fiscal side not reacted we would be looking at something that is bad being quite catastrophic”. All leading indicators but Real Estate are up, with decreased consumer spending and real estate presumed to continue to be a head-wind. The Chicago Fed National Activity index (a compilation of leading indicators) bottomed in January of 2009 and ap-pears to be rebounding.

“Most outlooks show a very slight positive (growth) in the 3rd quarter moving to more robust growth in the 4th quarter, albeit still muted growth” says Mr. Strauss. There was “quite a sharp drop in inventories in the first quarter, the manufacturing sec-tor specifically has been extremely aggressive about cutting back on production and have kept inventories relatively in bal-ance. Due to this, manufacturing might be able to rebound more quickly than it historically has due to the need to in-crease production when sales come back (due to the inability to rely on inventory stockpiles).”

Our Local Economy

In the Midwest specifically, Mr. Strauss points out that the “automotive industry problems and the expectation for clo-sures and layoffs will probably cause the Midwest to lag the (general economic) turnaround.” Mr. LaFayette generally agrees with the Midwest lagging the general economies turn-around, but points out that “it is less applicable to the Colum-bus economy. Since the beginning of the recession, the U.S. overall has lost about 4.3% of total employment while Colum-bus has lost 2%. The primary reason is that we’re not being as affected by the bust as we were not as affected by the boom.”

Inflation

The current Beige Book release (6/10/09) points out that “With few exceptions, the District Banks reported that prices at all stages of production were generally flat or falling.” Mr. Strauss points out that “there is still tremendous slack in the economy.

Seen in the Press

“Small Business Owners– Ways you can embrace retirement in a bear market!” by Mark Fissel AffluentMagazine.com 6/15/09 “6 Ways to Profit from the Fal-ling Dollar” by Roger Fillion Fidelity.com 6/11/09 (Clint Edgington) “The New Retirement Reali-ties: What to do and How to cope.” by Tom Gray, Achieve Solutions 1/15/09 (Clint Edgington) “Ohioans taken in by Ponzi schemes,” by Steve Wartenberg Columbus Dispatch 12/21/08 (Clint Edgington) “Practice triage in your spend-ing...” by Gregory Karp, Chi-cago Tribune 11/30/08 (Clint Edgington) “Market Fears, Stay the Course,” by Clint Edgington, Columbus Dispatch 10/5/08

www.BeaconHillAdvisory.com

Capacity utilization (a measure of how much production ca-pacity our economy is using) is still extremely low by histori-cal standards”.

While Mr. Strauss does not give personal views on inflation, he does note that “if you look at the TIPS (see Spring 2009 newsletter) market or the surveys they seem to be pointing to relatively contained inflation…however, there are a lot of challenges regarding the fiscal deficits and the very signifi-cant increase in the Fed’s balance sheet. We are very much aware of the risks out there and it will be up to the Fed to be nimble and aggressive to make sure inflation stays under control”. We at Beacon Hill also take note that while the Fed controls monetary stimulus, other parts of the govern-ment will need to be nimble and aggressive at reining in fiscal stimulus (historically that can be much more difficult).

Regarding unex-pected spikes in inflation, Mr. Strauss did not explicitly com-ment on predic-tions but con-f i r m e d o u r thoughts that “bad things hap-pen with proba-bly a higher prob-ability that we w o u l d h a v e thought a year ago”.

The views of William Strauss are his personal views and do not reflect the views of the Chicago Federal Reserve Bank or the Fed-eral Reserve System.

Clint Edgington, Partner [email protected] 888-614-4625 ext. 2

Mark Fissel, Partner [email protected] 888-614-4625 ext. 3

Scheduled Events (cont’d): • August 18, “Investing for Retirement” Webinar, Back to the Basics: Structuring a Retirement Portfolio, 6

p.m. See an Event you’d like to attend? Please email [email protected] for instructions!

Financial Advisors (Brokers)

1.) Revenue generated by Sales Commissions, Sales Incentives and Back-door fees.

2.) What they offer? Transactions with advice “solely incidental to a transaction”

3.) Do they have a duty to you? a.) As a Non-Fiduciary, no legal duty to hold your interest above theirs. b.) No legal duty to monitor your portfolio

Did You Know 74% of respondents* were not aware that only Investment Advisors have a fiduciary responsibility to act in investors’ best interests in all aspects of the financial relationship?

*TD AMERITRADE survey of 1,000+ U.S. investors conducted by Penn, Schoen & Berland Associates, 2006

Investor Confusion Investment Advisors

1.) Revenue is generated directly through fees from the client.

2.) What they offer? Investment Advice

3.) Do they have a duty to you? a.) As a Fiduciary, they legally must hold your interest above theirs.

b.) Must monitor your portfolio regularly

33 North Third Street, Suite 500 Columbus, OH 43215

In Defense of Diversification There has recently been a popular uprising against the idea of diversification in the press and in public opinion. While the past year has been difficult for most, diversification has been a saving grace for many portfolios. Lower risk assets have buoyed the performance of diversi-fied portfolios as can be seen by the compari-son of the equity markets (S&P 500) to fixed income markets (BarCap Aggregate Bond In-dex) and to a few Beacon Hill Asset Allocations.

Summer 2009

Scheduled Events: • August 4, 2009: Symposium in partnership with Victor Ferguson, Partner with Vorys,

Seymour, Sater, and Pease LLP, Location & Time TBA. • November 11, 18, and December 2: In partnership with Upper Arlington Library, A

“How To” guide to “Investment Management”, “Asset Allocation”, and “Uncertainty and Retirement Analysis”, Upper Arlington Main Library, Time TBA

(continued on page 3)

33 North Third Street,

Suite 500 Columbus, OH 43215

P: 888.614.4625

[email protected]

Quarterly Economic Review The market upturn that began in March continued through this quarter. The major impetus for this movement was a realization that the economic environment was not catastrophic, it was merely bad. Risk was generally rewarded. Many companies took advantage of the stabilizing markets to issue equity to deleverage their balance sheets. May equity issuance was at a record level. While the torrid pace of equity issuance in May is unlikely to be sustained, the motivation to deleverage will continue, creating a headwind for the equity markets. In addition, a few large bank-ruptcies will continue to reverberate throughout our economy. On the other hand, only a fraction of the fiscal stimulus is yet to ‘hit the streets’.

Consistent with risk being rewarded generally, small cap stocks outper-formed large cap stocks:

(continued, next page)

Economists Look to the Future

We are pleased to welcome guest commentary: William Strauss • Senior Economist and Eco-

nomic Advisor for the Federal Reserve Bank of Chicago

Bill LaFayette, PhD • VP of Economic Analysis for the Columbus, OH

Chamber of Commerce It should be stressed that the general stock market is a leading indicator of the general economy. By the time the economy rebounds, the market typically has already moved up. While we, at Beacon Hill, temper ours and others’ pre-dictions of the future in implementing investment actions, we were impressed while hearing William Strauss present at a recent investment conference. In addition, we welcome the views of Bill LaFayette PhD, Vice-President of Economic Analysis for the Columbus Chamber of Commerce for a more localized analysis.

(continued, 3rd page)

‐27%

-22%

-17%

-12%

-7%

-2%

3%

8%

S&P 500 BarCap Aggregate Bond Index

Conservative Moderate Moderate Aggressive

12 Month Return

-26%

6%

-17% -21%-13.6%

Beacon Hill Asset Allocations

0%

5%

10%

15%

20%

25%

Russell 1000 S&P 500 Russell 2000

Equity Markets: 2009 2nd Quarter

+16.5%

6%

+16%

+20.7%

Small StocksLarge Stocks

Clint Edgington Mark Fissel