mo 2009 q4 commentary

A S S E T M A N A G E M E N T

Fourth Quarter 2009 Review

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An Economic and Market Commentary

The last quarter of 2009 confounded many of the market watchers and investors, adding another solid quarterly return to a record-breaking year. Strong 2009 returns fueled continued optimism for the future. However, it is also important to note that most of the equity market benchmarks are still in double digit negative territory for 2008 and 2009 combined and significantly down from their 2007 peaks (as of 12/31/2009 the S&P500 Index was still 24.40% lower than on 10/11/2007).

Whereas it is important to remember that we are still far below the recent peaks, the 2009 equity markets performance was quite spectacular. The S&P500 Index returned 26.46% despite the near collapse of the financial system. The Russell 1000 Growth returned 37.21%, while the Russell Top 200 Growth Index returned 34.01% for the year. As spectacular as these returns are, they turn out to be fairly typical for the year following the trough of a serious recession or depression, with the highest historical annual return for the S&P500 Index (+44.08%) occurring in 1933.

Earnings for many U.S. companies continued to be resilient. After several quarters of earnings growth driven primarily by cost cutting, profitability of many of the companies improved thanks to a combination of continued cost cutting, improvement in productivity and (especially for technology companies), an increase in revenues driven by improving global demand. Despite clear evidence of increasing global recovery, those countries most affected by the financial crisis (including the U.S.), are expected to continue on a growth rate trajectory below the typical post-recession rebound rates at least until some evidence of recovery in both unemployment and credit availability improve the consumer and business sentiments.

We continue to learn more about the events of 2008 and the many different players’ involvement in the resolution of the financial crisis that could have destroyed, if not severely damaged, the global financial system. Considering the time it takes financial media to obtain additional information (mostly under the Freedom of Information Act), we are likely to keep learning a lot more for some time into the future. In addition, the congressionally chartered Financial Crisis Inquiry Commission (FCIC) inaugurated its public work with testimony from several of the U.S. banks’ chief executives. Many commentators compare this commission to the Banking and Currency Committee of the United States Senate in 1933-1934 (popularly

know as the Pecora Commission) that investigated the causes of the financial collapse after the Wall Street Crash of 1929. As a result of the Pecora Commission’s findings, the U.S. Congress passed the Glass-Steagall Banking Act of 1933, the Securities Act of 1933 and the Securities Exchange Act of 1934, introducing strict regulation of the U.S. financial system. The U.S. banking industry finally prevailed in repealing the Glass-Steagall act with the passing of the Gramm-Leach-Bliley Act of 1999.

As a result of the recent financial crisis, efforts in the U.S. Senate, the House of Representative and the White House target reintroduction of parts of the Glass-Steagall Act. The most recent proposals focus on limiting both the scope and size of U.S. financial institutions. With strong opposition from the banking industry, it is unclear at this time which parts of these proposals will eventually be enacted as law, but the upcoming debate reminds me of words from Ferdinand Pecora’s memoir “Wall Street Under Oath,” written in 1939, just a few years after enactment of the new stringent financial market

Michael Obuchowski, Ph.D.Managing Director, Chief Investment Officer and Director of Research

Table 1 FEAM50 Composite, Russell 1000 Growth Index, Russell Top 200 Growth Index and S&P500 Index performance during 2009

By Michael Obuchowski, Ph.D.Managing Director, Chief Investment Officer and Director of Research

For more information...about our investment advisory services, please contact Jennifer Vernier at 631-630-2500, email [email protected] or write to First Empire Asset Management, 100 Motor Parkway, 2nd Floor, Hauppauge, New York, 11788.

*Inception date of 12/31/2003

Oct-09 Nov-09 Dec-09 Q4 2009 YTD Trailing 12 Months

ANNuAlizeD

3Y 5Y Since inception*

FeAM50 Gross -3.67 7.34% 4.60% 8.16% 49.43% 49.43% -1.70% 1.93% 3.80%

FeAM50 Net -3.67 7.34% 4.35% 7.90% 48.01% 48.01% -2.65% 0.99% 2.89%

Russell 1000 Growth index -1.35% 6.14% 3.09% 7.94% 37.21% 37.21% -1.89% 1.63% 2.40%

Russell Top 200 Growth index -0.37% 6.67% 2.01% 8.40% 34.01% 34.01% -1.32% 1.42% 1.81%

S&P500 index -1.86% 6.00% 1.93% 6.04% 26.46% 26.46% -5.63% 0.42% 2.09%






with a 2.01% return. December’s positive returns helped to make the last quarter of the year another strong period for the equity markets with the S&P 500 Index ending the quarter with a 6.04% return (26.46% for the year), Russell 1000 Growth with a 7.94% return (37.21% for the year) and Russell Top 200 Growth Index ending the quarter with a 8.40% return (34.01% for the year). With a positive Q4 return, all of the S&P 500 sectors also had a positive return for the entire year. Information Technology led the sectors with a 59.92% return for 2009, closely followed by Materials with a 45.23% return and Consumer Discretionary with a 38.76% return. The lowest performing sector was Telecommunications Services with a 2.63% return for the year, Utilities with a 6.8% return and Consumer Staples with an 11.2% return.

First Empire Asset Management’s FEAM50 Large Cap Growth Equity strategy finished the quarter up 8.16% (gross of fees; 7.90% net of fees). For the year, the FEAM50 strategy returned 49.44% gross of fees (48.01% net of fees). The primary driver of FEAM50’s outperformance of its benchmarks during the year was stock selection within the sectors present in the strategy during the year. While Technology remained the largest sector in the FEAM50 strategy, all other sectors had a positive contribution to outperformance of the benchmarks during the year. It is important to note that the FEAM50 Large Cap Growth Strategy did not include any companies in the Consumer Staples and Utilities sectors, with only a minor exposure to the Financial sector in non-U.S. companies.

eCONOMY

After the initial signs of a global economic recovery during the earlier part of last year, the last quarter of the year provided clear evidence that the global economy is growing again. This time, the leadership is provided by large emerging economies and commodity exporters, with most developed nations displaying much more tepid growth rates.

In the United States, the economy has continued its recovery, with GDP moving into positive territory for the first time since September of 2008. The economic recovery has finally affected housing prices, with the S&P Case Shiller home price index showing a continuing positive (despite its volatility) pattern of monthly changes since the end of 2008,

regulations (also strongly opposed by the banking industry at the time): “Frequently we are told that this regulation has been throttling the country’s prosperity. Bitterly hostile was Wall Street to the enactment of the regulatory legislation. It now looks forward to the day when it shall, as it hopes, reassume the reins of its former power.” It is hard to believe that these words were written 70 years ago rather than in the last few months.

Because the FCIC isn’t due to issue its report until December 2010, long after the expected financial reform legislation will be enacted by Congress, the general expectations are that, rather than resembling the Pecora Commission, the FCIC will resemble the 9/11 Commission, publishing an extensive account of the circumstances surrounding the financial crisis that will be of a historical interest, rather than a cause for a policymaking action. Despite those somewhat low expectations, I believe that the subpoena power will enable the FCIC to bring to light a lot more currently unknown information about the crisis and its major players than most observers expect. Since the Commission’s investigation will proceed during the run-up to the midterm elections, there is a very high probability that both sides of the isle will attempt to utilize the Commission’s findings to their benefit, and the Commission’s findings might have much greater effect on the financial system than currently expected.

QuARTeRlY AND ANNuAl ReTuRNS

The consistent gains of the third quarter of 2009 were interrupted in October, with large intramonth volatility resulting in a first negative monthly return since April for the S&P 500 Index, and since March for the Russell 1000 Growth and the Russell Top 200 Growth indices. With increasing signs of global economic improvement, equity markets resumed their gains in the beginning of November, ending the month of November with a gain of 6.00% for the S&P 500 Index, 6.14% for the Russell 1000 Growth and 6.67% for the largest companies focused Russell Top 200 Growth Index. December turned out to be another volatile month, but unlike October (and despite the more than 1% decline on the last day of the year), ended with a positive returns for the benchmarks, with the S&P 500 Index returning 1.93%, Russell 1000 Growth returning 3.09% and the Russell Top 200 Growth ending the year

with 14 of the 20 areas covered showing a price increase on a seasonally adjusted month-to-month basis. With improvement in economy and housing, consumer sentiment also kept rising, reaching 55.9 in January 2010, the highest level since September of 2008. Continuing improvement in manufacturing activity, stimulated by global demand and retail sales, driven by increasingly confident consumers, complement the picture of an economy in the midst of a continuing recovery.

The remaining areas of concern are access to credit for consumers, a rapidly increasing deficit and continuing high levels of unemployment. The expected changes in the laws governing financial institutions do not seem, at least at the present time, to be designed to support increased lending activity. With larger banks distracted by significant political risks, smaller banks and credit unions benefited from an increase in deposits and have increased their lending. In fact, according to research by the Financial Strategies Group of our affiliated broker-dealer, First Empire Securities, Inc., as of 9/30/2009, credit unions led small banks, thrifts and large banks with positive annualized loan growth (2.16%) and annualized growth in deposits (11.02%). With continuing economic recovery, we believe that this positive pattern of increasing support for the local communities will likely continue and help to alleviate consumers’ restrained access to credit. The rapidly increasing deficit is finally getting more attention from politicians. While President Obama has recently presented a proposal to freeze some of the discretionary spending for the next three years, the U.S. Senate has rejected Senator Judd Gregg’s plan to set up a bipartisan commission to make deficit-cutting recommendations requiring a fast-tracked, up-or-down vote by the House and Senate. One would not expect the political maneuvering to slow down during the next few months before midterm elections. The real effect of freezing a small part of discretionary spending, while in the midst of spending the majority of previously appropriated stimulus package, is certainly questionable. With Washington expected to remain in an increasing political gridlock, chances of passing any significant new laws before the midterm elections are quite small.

continued...






uNeMPlOYMeNT

As I mentioned in the Q3 2009 Review, it is certainly no surprise that employment conditions continue to lag the rebound in economic activity as unemployment is one of the prototypical lagging economic indicators. Considering the depth of the recent recession, we might expect an even slower revival of job growth during this economic cycle.

To better understand the unemployment statistics, it is important to recognize how the unemployment numbers are generated. The U.S. Census Bureau unemployment statistics are based on the Current Population Survey (CPS) conducted on a monthly basis by the United States Census Bureau. The CPS has been conducted in the United States since 1940 (as a Work Projects Administration program) and has undergone many revisions over time. Since the latest revision in 2001, CPS surveys about 60,000 households representing the civilian noninstitutional population. Each of the households is interviewed for four successive months, then not interviewed for eight months, then interviewed again for four months after that. An adult member of the household provides information about all members of the household. Based on responses to a series

of questions about work and job search activities, each person 16 years and over in a household is classified as employed, unemployed, or not, in the labor force.

People are classified as unemployed if they were not employed during the reference week (not because of illness, bad weather, vacation, labor-management disputes or personal reasons); if they were available for work at that time; and if they made specific efforts to find employment sometime during the 4-week period ending with the reference week (except for laid off workers expecting a recall).

Some people who are not in the Labor Force are classified as marginally attached workers if they are currently neither working, nor looking for work; but at the same time indicate that they want, and are available for a job; and that they have actively sought work in the past 12 months, but not within the past four weeks. A subset of marginally attached workers, consisting of those who have given a job market related reason for not currently looking for a job, are classified as discouraged workers.

The official Bureau of Labor Statistics unemployment rate (U-3) is defined as total unemployed, as a

percentage of the Civilian Labor Force. Since this statistic ignores those who stopped looking for work, U-3 typically underestimates the true unemployment situation, especially after an extended period of economic decline, during which many of the workers previously classified as unemployed become marginally attached or discouraged and no longer count as part of the Civilian Labor Force. To provide better information about the unemployment situation, the Bureau of Labor Statistics provides a number of alternative measures of labor utilization (see Table 2).

The two most followed unemployment statistics are U-3 (U-3: Total unemployed, as a percent of the civilian labor force) and U-6 (U-6: Total unemployed, plus all marginally attached workers, plus total employed part-time for economic reasons, as a percent of the civilian labor force, plus all marginally attached workers). Many economists believe that U-6, by including all the marginally attached workers, is a much better measure of how unemployment is experienced by the population. The difference between U-6 and U-3 typically

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Dec.2007

Dec.2008

Dec.2009

u-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force 1.6 3 5.9

u-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force 2.5 4.4 6.3

u-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate) 5 7.4 10

u-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers

5.2 7.8 10.5

u-5 Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers

5.8 8.5 11.4

u-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers

8.8 13.7 17.3

Table 2 Alternative measures of labor utilization (percent) Source: Bureau of Labor Statistics, Bloomberg.

Figure 1 - U-3 Unemployment Since 1994Source: Bureau of Labor Statistics, Bloomberg.

Figure 2 - U-6 Unemployment Since 1994Source: Bureau of Labor Statistics, Bloomberg.






widens during a recessionary period. While most of the financial press reports only U-3, the common dissonance between the official unemployment rate and consumer sentiment during a period of economic decline is likely due to the increase in marginally attached or discouraged workers. The difference between U-6 and U-3 was 7.3% in

December 2009, as compared to 6.3% in 2008 and 3.8% at the end of 2007.

After reaching 10.1% in October 2009, U-3, the official unemployment rate has stabilized at 10% during the last two months of 2009 (see Figure 1). The much more liberal U-6 measure of labor underutilization reached 17.4% in October 2009 and remained at 17.3% in December, 7.3% higher than the U-3 unemployment rate (see Figure 2).

Since companies are likely to more fully utilize their existing resources before they start hiring temporary or new permanent employees, one of the early indicators of improving labor conditions is the Bureau of Labor Statistics’ measure of average weekly hours of production of nonsupervisory workers on private nonfarm payrolls. Weekly hours worked barely budged (33.2 in December 2009) from the record low of 33 in October 2009 (see Figure 3).

Based on the average population growth and the average Labor Participation Rate for the last 10 years, to keep up with the natural workforce growth, it will be necessary to start adding approximately 150,000 jobs every month. Even though job losses have drastically declined from the trough of 741,000 in January 2009, December’s decline of 85,000 jobs was a disappointing one after a slight gain in October. As one can see in Figure 4, this small decline was likely just a single volatile datapoint within the strong patter of continuing improvement during 2009. Nevertheless, we are still some time away from the sustained job gains at the level required to compensate for growth in population. It is interesting to note that the Labor Force Participation Rate is likely to increase with the improving economy. The combination of population increase and increase in Labor Force Participation Rate is likely to cause the Civilian Labor Force to expand faster than the rate of job growth. Because of that, the official U-3 unemployment rate might increase, or at least not decline for a longer period than expected, purely because of the way it is calculated, rather than a lower than expected growth in employed workers.

Another indicator that generally needs to continue improving before we experience sustained job growth is the Initial Jobless Claims measure. Since this Labor Department sourced measure is typically very volatile and subject to big revisions, it is best to evaluate it as a moving average, rather than in

terms of individual weekly data points. While still at the highly elevated levels not seen since 2001, the Initial Jobless Claims four-week average has been steadily declining since the end of August 2009 (See Figure 5).

With unemployment rates close to their highs, weekly hours worked close to its lows, and job growth still in negative territory, there is little risk that the policymakers will be hasty in unwinding the expansionary policies designed to support economic recovery. Instead, with a lack of any visible inflationary pressures and a continuing significant slack in labor utilization, I believe the policymakers will likely maintain the stimulus packages for too long and face political pressures when attempting to reverse the course (especially in the hotly contested mid-term election year). Eventually this may result in upward revisions of inflation expectations. Such expectations in the middle of an economic recovery would likely cause interest rates to rise, hurt the private-sector investment spending, damage the still-recovering housing market and compromise the economic recovery. Because of that, I was again tempted this quarter to start looking into the timing of the Fed’s withdrawal of accommodative policies, inflation and interest rates and the Federal Funds Implied Probability. However, at this point in time, the inflation expectations are still remaining below the radar of most market participants and observers; it is again too early to start focusing on those datapoints.

eCONOMiC iNDiCATORS

Since the first quarter of 2009, I have been presenting a matrix of economic indicators that I believed offered insight into the early stages of economic activity. These indicators were the result of my research into the empirical evidence of shifts in economic activity. This focus on empirical evidence was driven by my desire to limit the emotional and cognitive biases usually present after an extended period of consistent economic growth or decline. The interpretation of the results of these early indicators was a significant factor in my investment decisions during 2009 and they continue to play an important role at the present time.

Earlier in 2009, I expected that the US economy would move from early recovery into a more mature stage. However, with the slow pace of economic

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Figure 3 - Average Weekly Hours of Production on Nonsupervisory Workers on Private Nonfarm Payrolls.Source: Bureau of Labor Statistics, Bloomberg.

Figure 4 - US Employees on Nonfarm Payrolls Total Monthly ChangeSource: Bureau of Labor Statistics, Bloomberg.

Figure 5 - Initial Jobless Claims Since 1994Source: Bureau of Labor Statistics, Bloomberg.






expansion, the six early economic indicators included in the matrix continued to present evidence of an early economic recovery in the last quarter of 2009.

This quarter, I will again present only a quick summary of the indicators, referring readers to previous quarters’ updates for a more extensive description of the indicators and how I have interpreted their respective historical patterns.

The Core Crude Goods Producers Price Index, which I believe is one of the best leading economic indicators for insight into the early stages of capital goods production, continued its recovery during the last quarter of 2009, ending December at 286.00, up 28.37% from its December 2008 trough.

The Baltic Dry Index (BDI), published daily by the London-based Baltic Exchange, provides an assessment of the price of moving raw materials by sea. It covers 26 shipping routes worldwide and

is a composite of the Baltic Capesize, Panamax, Handysize and Supramax dry bulk carrier indices. Despite reaching new 2009 highs in the middle of November, this very volatile index dropped again to the October 2009 levels at the end of the year. Nevertheless, the pattern since its 2008 lows remains positive, if volatile, and still significantly below 2007 and 2008 highs and long term averages.

The Architecture Billings Index (ABI) is a leading economic indicator of commercial construction activity, capturing the approximately nine-to-twelve month lag between architecture billings and actual construction spending. Despite reaching its 2009 high in October (comparable to the middle of 2008), the ABI remained below 50 for the rest of 2009. The related Inquiry Index, which tracks an architectural firm’s capacity to take on additional work, rose to 58.5 during October and November, then dropped to 55.3 in December. Since a score above 50 indicates an increase in billings, the Inquiry Index’s score above 50 for the tenth consecutive month in a row is

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Figure 6 - The Core Crude Goods Producers Price IndexSource: Bureau of Labor Statistics, Bloomberg.

Figure 7 - The Baltic Dry IndexSource: The Baltic Exchange, Bloomberg.

Figure 8 - The Architecture Billings Index (ABI) Source: American Institute of Architects’ Economic & Market Research Group, Bloomberg.

Figure 9 - The Primary Metals IndexSource: US Census Bureau, Bloomberg.

supporting the expectations that the ABI is likely to continue on its path towards recovery.

The Primary Metals Index is one of the indicators included in the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories, and Orders (M3). The Primary Metals Index captures information about raw materials being ordered by large manufacturers. The increase in orders for primary metals suggests that industrial production is likely to increase in the near future. The Primary Metals Index has been one of the last of my matrix indicators to start moving higher. The latest three months were again positive, bringing the index another 8.31% higher.

The Core Capital Goods Orders Index (New Orders of Nondefense Capital Goods Excluding Aircraft) is another indicator selected from the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories, and Orders (M3). The Core Capital Goods Index is considered to be one of

Figure 10 - The Core Capital Goods IndexSource: US Census Bureau, Bloomberg.

Figure 11 - The Building Permits IndexSource: US Department of Commerce, Bloomberg.






the best leading indicators of business investment spending. The index continued its recovery from the April 2009 trough, moving higher from the previous three months’ bottoming-out pattern, and ending November 2009 at its highest level in 2009.

The Private Housing Authorized by Building Permits Index is an early indicator of residential housing industry activity, and typically one of the first sectors to turn around in an improving economy. The recovery in housing prices seems to be a necessary precursor of construction activity. Improving house pricing was clearly reflected in the Building Permits Index, finally showing a clear upward movement in the last two months of 2009, ending the year above its November 2008 level.

These six early economic indicators presented above have continued to successfully add another layer of information to my critical thinking toolset. While the interpretation of these indicators assisted me at the end of the first quarter of 2009 with my decision to move away from large cash positions and back to a fully-invested status, their increasingly consistent patterns provided additional evidence of continuing economic recovery.

As in the previous quarters, I continue to believe that, despite the very visible high levels of

unemployment, it is very important to both fully understand the design and possible interpretations of such indicators as described above, and to focus on the empirical evidence of patterns of economic activity. With the expected stubbornness of the unemployment indicators as described above, the expectations of continuing positive U.S. GDP will be an important factor in improving consumers’ and investors’ expectations. The continuing recovery will still depend on the effectiveness of both fiscal and monetary stimulative measures, and on the consistency of increase in demand from the developing countries. After several quarters of earnings increases driven primarily by cost cutting, the large U.S. listed growth companies that I follow once again began reporting increasing revenues as one of the contributors to earnings. Together with improvements in productivity, and increasing demand slowly spreading beyond emerging market and commodity exporting countries, there are reasons for cautious optimism for the New Year.

As I described earlier, the improving U.S. economy is likely to cause an increase in the Labor Force

Participation Rate. I believe that the Labor Force Participation Rate increase (people moving back to the Labor Force from marginally attached or discouraged status), combined with the natural population increase, will likely cause the Civilian Labor Force to initially expand faster than the rate of job growth. Because the employment rate is calculated as a percentage of Labor Force, we might see the official U-3 unemployment rate initially also increase (or at least not decline for a longer period than expected) as a direct result of improving economic conditions and the way unemployment rates are calculated. With such counterintuitive expectations, it will be very important to closely follow a variety of employment related indices described earlier to correctly interpret changes in unemployment driven by the continuing economic recovery.

- Michael Obuchowski, Ph.D.First Empire Asset Management, Inc.

DiSClOSuReS The foregoing letter is qualified by the following notes:

1. The S&P 500 Index consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value. The Index is one of the most widely-used benchmarks of U.S. equity performance.

The Russell Top 200 Growth Index measures the performance of the especially large cap segment of the U.S. equity universe represented by stocks in the largest 200 by market cap that exhibit growth characteristics. It includes Russell Top 200 Index companies with higher price-to-book ratios and higher forecast growth values. The companies also are members of the Russell 1000 Growth Index. The Russell Top 200 Growth Index is constructed to provide a comprehensive and unbiased barometer of this larger cap growth market. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Growth Index is constructed to provide a comprehensive and unbiased barometer for the large-cap growth segment. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics.

The indices referred to herein are unmanaged and therefore do not have any transaction costs, advisory fees or similar expenses to which a client account would be subject. It is not possible to invest in these indices. The indices are for comparison purposes only. It should not be assumed that a composite will invest in any specific securities that comprise the indices. The composites managed by First Empire Asset Management, Inc. may not be as diversified as the indices and may experience differing degrees of volatility. Performance for all indices includes the reinvestment of dividends.

2. All net performance figures include the reinvestment of dividends and other income, and reflect the deduction of actual advisory fees paid quarterly in arrears and actual trading and other costs incurred by each account in the composite, which varied based upon the client’s directed broker or custodian. Differences in client trading costs will affect each client’s actual returns. Only clients invested in the FEAM50 composite with balances above $100,000 are included in the performance figures. The amount below $100,000 was not significant and has no material impact on these numbers. Performance up to September 30, 2008 was achieved while Chief Investment Officer, Michael Obuchowski, Ph.D., was at Altanes Investments. Dr. Obuchowski continues to remain the principal investment officer for the composite, and the investment strategy of the composite has not changed in strategies, policies or objectives.

3. There is no guarantee that the matrix of economic indicators (or each indicator individually) can accurately predict profits or losses in the markets or the composite. The matrix of indicators discussed herein is not intended to determine investment decisions. Such indicators were chosen by First Empire Asset Management, Inc. among many potential economic indicators. Other indices or economic indicators may reflect differing or contrary results. There is always the potential for gains as well as the possibility of losses.

4. Past performance should not be construed as an indicator of future returns or results. These results should not be indicative of the skill of FEAM and do not guarantee that similar results can or will be achieved in the future. As with any investment vehicle, there is always potential for gains as well as the possibility of losses.

5. This letter is not an offer or solicitation.

FiRM uPDATe

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mo 2009 q4 commentary

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