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October 30, 2009

Dear Clients and Friends:

 It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness . . . it was the spring of hope, it was the winter of despair . . . in short, the period was so far like the present period.” – Charles Dickens

 Financial Markets and the Economy

 The financial markets continued their recovery in the third quarter. This recovery has been swift and significant, which has resulted in an understandable feeling of anxiety among investors that have stayed the course. A common question many people are asking, has the stock market moved too far, too fast? 

 The stock market is considered a leading economic indicator. In that role, stocks attempt to anticipate the direction of the economy.   Stock investors care about future profits and growth, not where the economy has been or is today. They seem to follow hockey great Wayne Gretzky’s description of his success on the ice when he said, “I skate to where the puck is going to be, not to where it has been.”

 Economists like to track the movement of several metrics that provide insight into the direction of economic activity. A well regarded and often referenced indicator is the Leading Economic Index prepared by the Conference Board. 

 As can be seen from the table that follows, stock prices are one of the ten components of the Leading Economic Index. 

 Leading Economic Index                                                                                             Factor

1              Average weekly hours, manufacturing                                                0.2549

2              Average weekly initial claims for unemployment insurance                  0.0307

3              Manufacturers' new orders, consumer goods and materials                 0.0774

4              Index of supplier deliveries – vendor performance                                0.0677

5              Manufacturers' new orders, nondefense capital goods                         0.0180

6              Building permits, new private housing units                                        0.0270

7              Stock prices, 500 common stocks                                                    0.0390

8              Money supply, M2                                                                           0.3580

9              Interest rate spread, 10-year Treasury bonds less federal funds            0.0991

10           Index of consumer expectations                                                          0.0282

Source: http://www.conference-board.org/pdf_free/economics/bci/flaky.pdf

There has been considerable speculation about whether the eventual economic recovery will take the shape of a “V,” “W,” “U,” or something else. The “V” shaped recovery would be quick with a rebound just as powerful as its descent. A “W” shaped recovery includes a period of positive economic improvement, only to be followed by a period of additional weakness before a solid recovery occurs. A “U” shaped recovery spends more time in recession before a firm base can be built for a sustained recovery. Any of these recovery trends would be satisfactory to us.


Our concern would be if we experience an “L” shaped economic trend line, reflecting a stalled economy with little or no real growth.

 Much of what we said in the July newsletter applies today. We encourage you to revisit that communication. We would like to see a more direct impact on job growth from stimulus funds, and a more realistic balancing of the needs of Americans today, with a reasonable expectation of the ability to pay for those needs tomorrow. 

 There are just too many significant items in play to feel comfortable about where we, as a nation, are economically. Health care reform, wars overseas, future tax levels, annual deficits, inflation expectations, currency devaluation, the list goes on and on.

 On a positive note, the stock market has been known to climb a wall of worry. These worries tend to keep investor enthusiasm in check, allowing for a reasonable, but unspectacular rate of advance.

 How do we deal with this uncertainty? First, we keep in mind that in order to make money in excess of inflation, going to cash will not work. Staying invested with a diversified portfolio gives us the best chance of success. According to data supplied by Standard & Poor’s, the average yearly return of the S&P 500 from 1994 to 2008 was 6.5% per year, if you were invested all 3,827 days. If you missed the 10 best days, your return would have been 0%.  

 That being said, we do believe the stock market is at levels slightly unjustified by our interpretation of the timing and extent of the economic recovery.   

Changing our recommended mix of Core Equity, Core Fixed Income and Satellite positions anytime we believe that the market is over or undervalued in an attempt to time the market would undoubtedly lead to shooting ourselves in the proverbial foot. To employ a disciplined approach, we have set up tolerance bands (minimum and maximum thresholds) to various asset categories. These can be referenced in your Investment Policy Statements. In most cases, these tolerance bands are set to a 20% relative deviation from your targeted allocation. Periodic portfolio reviews that highlight deviations in excess of acceptable bands will generate trade recommendations. These trades would be free from emotional bias, forcing a buy low and sell high discipline designed to produce positive results.


 Third Quarter 2008 Financial Asset Performance

 The Barclays Capital Aggregate Bond Index, previously known as the Lehman Brothers Aggregate Bond Index, was up 3.7%. The S&P 500 U.S. Stock Index, a representative index of large companies, was up 15.6%. The Russell 2000, a representative index of small companies, was up 19.3%. Foreign equities, as represented by the MSCI EAFE Index, were up 19.5%. 

 We have included a Morningstar table of performance figures for many of the mutual funds in your portfolio, plus some comparative market indices noted by the prefix “Idx.”

 Fall Income Tax Planning

 Advisors will soon be projecting your 2009 and 2010 income tax positions and looking for strategies to lessen those liabilities. In order to perform these reviews, it is important that we have recent pay stubs on hand for all employed clients. Please forward a copy of those paystubs to Lauren.

 Fidelity Correspondence

 Clients can receive statements, annual reports, prospectuses, and proxies, in any combination, in electronic form via email instead of paper form via regular mail. If you are currently receiving one or more of these written communications via regular mail and want to switch to electronic receipt via email, please contact Amit and he will process your request.

Fidelity will send confirmations of requests for standing instructions that establish links to related accounts, allowing for transfers of securities or cash. If you receive these confirmations, take a moment to confirm that all account numbers are valid within your household. If you cannot make a match, or something does not look right to you, please contact us immediately.

We cannot over emphasize the importance of reviewing all investment correspondence from Fidelity, or any other custodian of your assets, on a timely basis. Be on the lookout for unusual activity or confirmation of any account maintenance updates, such as a change of address that you did not authorize. Contact Vincent or Ravi about any concerns you may have in this area.  

Firm Brochure

We have recently finished work on our firm brochure designed to educate prospective clients on how we can help them meet the financial challenges they face. A copy has been included in this mailing if you are receiving this newsletter via regular mail. Clients receiving their newsletter via email will receive the brochure in a separate mailing.  Please contact Lauren if you would like to have additional brochures on hand, or if you would like us to mail one to a friend. 

We continue to work daily to earn your trust and confidence. 

 Best regards,                                  

Vincent A. Schiavi, CFP®, CPA/ PFS            Ravi P. Dattani, CFP®, CPA

President                                                         Vice-President           



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