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February 2012

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Floods, earthquakes, and landslides rocked the planet in 2011. Humans shook the earth as well. Dictators were toppled, global citi-zens shouted their displeasure in the streets, and America lost her coveted AAA credit rating. Unfortunately, we leave nothing more than a calendar technicality behind as the tumultuous characteristics will not dis-appear. Much like the decades of the 1970s and 1980s, pressures are building and every-one feels its reach. Whether you foresee pos-itive breakthroughs or complete disaster, we can all agree that 2012 marks a significant time of historical transformations. Putting the Mayan Calendar aside, the Chinese New Year begins on January 23—the Year of the Dragon. It is sure to be an interesting year, as the world is soon to be further awash in hot political breath.

We must all put fire under ourselves, not necessarily to change strategic plans and rotate into whatever worked last year (the biggest of big companies, Treasuries, Gold and Utilities), but to recommit to a thor-ough examination of objectives and unique financial planning inputs. It makes sense to first decipher and prioritize those items which are somewhat more controllable yet still often overlooked, ignored or procras-tinated away. We know that budget forma-tion, estate planning, mortgage decisions, timing of retirement, social security benefits and other cash flow judgments are hard to tackle; nonetheless, it must be done. We have to commit to providing complete and realistic information for ourselves and our advocates. Let us obligate ourselves to sound strategic and backup plans before the vola-tility escalates further. Do not let this hard and required work fall to the bottom of your to-do list, for the transformation that con-tinues in 2012 is far reaching. The Triangle Securities Wealth Management team plans

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to work harder than ever to gather informa-tion on your family, communicate the good, bad and the ugly in the financial markets, and to be the most trustworthy advocate your family can rely upon in 2012.

Investors sometimes seek the silver bul-let as protection when markets are stressed. Unfortunately, many investment vehicles that are popular during volatile times are expensive, complex, tax inefficient and take unfair advantage of investors’ fear. They also can have significant adverse effects on portfolios during normal market environ-ments. Behavioral research shows that typi-cal investors will let their emotions rule their financial decisions—letting fear or euphoria prompt them to exit and enter the markets at precisely the wrong times—severely impairing their results. TSWM believes in the merits of maintaining a well-thought-out plan of asset allocation and conservative balance. As your family’s trusted advocate, we will not rely on our gut reactions as 2012 unfolds. We will commit to sound portfolio and financial planning principles in order to mitigate the impact of emotional decision-making.

2012 – Year of the Dragon and the Politician

Michael D. Hakerem,

CFA®, Chief Investment

Officer. Michael leads the

TSWM portfolio manage-

ment team with a passion

for the highest standards of integrity and professional

excellence. He is responsible for advice that includes

asset allocation, tactical strategy, securities analysis

and portfolio implementation.

Highlights of our Baseline Thinking for 2012: Upward bias for stocks with a range of 1,100 to 1,550 and low bias for interest rates up to first-half of 2012: headwinds and uncertainty may surface quickly

Gross domestic product, manufactur-ing, retail sales still muddling through and below true unrestricted potential: no U.S. recession despite recession in Europe

Global debt-crisis can kicked down the road: reflation and manipulative efforts by the world’s central banks are in place and somewhat coordinated in the U.S., Asia and Europe

China will not implode in 2012 despite inflation, export, and real estate risks

Emerging Markets are attractive long-term with better growth prospects, young populations, et cetera: still rely on developed nation customers and carry risk

Watch key barometers like global yields (especially French, Spanish and Italian); Copper prices, Euro-to-US $; Chinese GDP +/-8% and CPI +/-6%

Triangle Securities Wealth Management (TSWM) believes in the merits of main-taining a well-thought-out plan of asset allocation and conservative balance. As your family’s trusted advocate, we will not rely on our gut reactions as 2012 unfolds. We will commit to sound port-folio and financial planning principles in order to mitigate the impact of emo-tional decision-making.

2 www.trianglesecurites.com

Reflection on 2011In 2011, the S&P 500 posted a modest 2.11% return with dividends. International equities suffered large double-digit losses. Over the last five years, mutual fund investors collectively withdrew roughly a half trillion dollars from U.S. stocks and added nearly one trillion dollars to bond funds. These investments were made despite the seemingly cheaper equities

and overvalued bonds. In fact, the biggest gainer in 2011 was the 30-year Treasury with a total-return north of 30% as its yield fell by 145 basis points from 4.34% to 2.89%—the yield on the 10–year fell by 143 basis points to 1.88% after reaching a low for the year of 1.67% in October. Rates were supposed to go up due to runaway inflation and too much debt, right? (Yields and bond prices move inversely)

In our January 2011 market update, we outlined a 60% probability investment scenario driven by battles aligned with those waged in 2010: refla-tion versus def lation, austerity versus stimulus, et cetera. We outlined the case for an S&P 500 to trade from 1,100 to 1,463. In actuality, the S&P’s closing ranges were 1,099 and 1,364. We believed interest rates would remain low due to the Federal

Reserve’s documented fear of deflation alongside the world’s lack of long-term growth initiatives. Interest rates hit historic lows in the fall. We were completely baffled by the lack of urgency and compromise surrounding the U.S. debt-ceiling debacle and subsequent downgrade of America’s AAA credit rating in August. We endured severe volatility led by endless foreign rhetoric and European Summits. The investment climate was especially miserable from August to October as the S&P 500’s price dropped nearly 13% for the year at its close on October 3rd.

The combination of centrist political cooperation and stimulus activity sent the S&P 500’s price upwards by over 33% from the lows of July 2010 to the high reached on April 29, 2011. In 2012, an equivalent upward move in time and per-centage from October 2011’s low would drive the S&P to 1,465 by July 2012. We believe there is a high probability this will occur as we previously outlined in three past market updates. We reiterate that we are currently in the midst of that risk-on and reflation move; however, we importantly note the strong potential for a relatively short-lived rally into 2012 based on where the world stands today—shaky ground. Of course, we must also substitute the likes of China, Brazil and Australia’s rekindled efforts to stimulate their economies rather than give much credit to political cooperation! By the way, any political cooperation or advancement has mostly come from the European Central Bank’s willingness to institute its own stealth quantitative easing and bank liquidity facility.

Have you ever traveled north on I-95? Then you are familiar with the complete political traf-fic jam that is inside the Beltway. We still count Washington D.C. as a major point of risk as the only certainty is the opportunity to create more chaos. Unfortunately, the political power struggle is global in nature as countries throughout Asia, Europe, the Middle East and Russia are likewise set for elections. A continuation of the minutely positive economic trends of the fourth quarter 2011 and early 2012 could be claimed as a victory for the financial markets. Furthermore, despite our own set of monumental problems, the U.S. may gain traction as the winner of investor’s hearts and wallets while Europe fights its downward spiral. Nevertheless, we would much rather maintain long-term, balanced and conservative investment and financial planning strategies than wager on a political miracle.

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Source: Data provided by Zacks Research

Source: Data provided by Zacks Research

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A trip around the WorldThe World Bank cut its forecast for global economic growth this year from 3.6%, pre-dicted in June, to 2.5%, the biggest reduc-tion in three years. For the U.S. economy, the bank softened its prediction from 2.9% to 2.2% growth. For the Eurozone, the bank changed from 1.8% expansion to 0.3% con-traction. According to the International Monetary Fund (IMF), Europe’s debt crisis threatens to drag the world into recession. The IMF cut its forecast for this year’s global economic growth from 4% to 3.3%. Chief Economist Olivier Blanchard spoke out on the crisis, saying, “The epicenter of the danger is Europe, but the rest of the world is increasingly affected. There is an even greater danger, namely that the European crisis intensifies, and in this case the world could be plunged into another recession.”

Europe is taking the marathon approach to its problems; nevertheless, it faces a sprint of maturing debt, bank insolvency threats, unpopular austerity, social and cultural conflicts and upcoming elections. “Please take the long-drawn-out processes with a degree of acceptance,” Chancellor of Germany Merkel said in a question-and-answer session at the World Economic Forum in Davos, Switzerland on January 25, 2012. Euro nations have hundreds of billions in euro principal and interest pay-ments due in 2012-2013 alone.

Germany is in a crisis of historic mag-nitude. It must have a free-trade zone in Europe as 40% of its economy is export-driven with a great deal of the goods sold to Euro nations. Germany has taken a leader-ship role in deciding the balance between growth objectives, austerity and prudence in borrowing practices for many of its brothers and sisters in the Euro Community. While Greece is at the forefront of today’s head-lines and discussions, other nations are not far behind. Germany must be careful not to fester too much of the anti-German feelings of previous eras. How far is Germany will-ing to push its own national interests? Let us not forget that it is culpable for this crisis, too! The Germans are faced with a number

of critical decisions, none of which come as “easily” as deciding whether to pay your debts. Germany is scheduled to begin its 18th parliamentary (Bundestag) elections in September 2013.

The year of the politician goes without say-ing in the United States of America where we vote on November 6th for the office of President, the House of Representatives and one-third of the Senate. The mudslinging and negative campaigning is sure to make us feel even worse about America the beau-tiful. President Obama offered Americans a populist economic vision in his State of the Union address.

At the latest Federal Open Market Committee meeting on January 25th, the Federal Reserve indicated a current strat-egy of keeping rates low into at least late 2014. Bond yields have been artificially dis-torted by the Federal Reserve’s programs as a means to stimulate the economy and keep U.S. borrowing costs low. For exam-ple, the Federal Reserve was the buyer of about 61% of the long term Treasuries auc-tioned in January 2012. So, we obviously have unusual activity impacting rates and whenever that adjustment back to reality shall pass, it will be quick! What is that next fork in the road? More quantitative easing? More money supply?

On Ja nuar y 27th, t he Commerce Department announced the first estimate of real U.S. gross domestic product growth at an annualized pace of 2.75% in the fourth quarter of 2011, the fastest pace in more than 18 months yet well below more typical recovery rates. The Congressional Budget Office projects we could see an extra $11 trillion in cumulative national debt over the coming decade, pushing the total to over $26 trillion. It is clear that we have a two-pronged problem: too low growth and too high debt. Negative structural problems of debt and entitlements, unemployment and education, growth initiatives, and big government are very real, very big, and no genuine and sustainable plan is underway. The payroll tax cut is a prime example of limited thinking in order to win votes.

On the positive side, two major structural influences on U.S. gross domestic product have renewed interest in today’s rhetoric. Manufacturers are mobilizing produc-tion and jobs back to our shores as demand shifts and cost gaps with overseas opportu-nities narrow. If government can remove barriers and provide a favorable business and investment climate, the trend may gain significant traction this decade. Speaking of decades . . . decades of presidents have promised energy independence. In his Oval Office address on June 15, 2010, President Obama laid out high ambitions and called for a “national mission” to wean the U.S. off its “addiction to fossil fuels.” Hopefully we are not faced with another pie-crust prom-ise. On February 1st, Navistar announced its launch of a comprehensive natural gas strategy, including integrated natural gas product offerings that will provide custom-ers with a sustainable, commercially viable solution for adding natural gas powered trucks to their fleets. The United States has been called the Saudi Arabia of natural gas and we have lots of black gold, too.

An escalation of events surrounding Iran will heighten volatility and add upward pressure on oil and gas prices. With assassi-nations of scientists, war games in the Strait of Hormuz (20% of the world’s traded oil passes daily) and further sanctions by some U.S. allies, a transformation in Iran can be expected in 2012. The United States report-edly sent a letter to Iran via multiple inter-mediaries warning Tehran that any attempt to close the Strait of Hormuz constituted a red line for Washington. In Ankara, Iranian parliamentary speaker Ali Larijani met with Turkish officials, floating hints of flexibility in negotiations over Iran’s nuclear program. A parliamentary election will be held in Iran on March 2nd to elect new members of the Islamic Consultative Assembly, Majlis. This is the first national vote since the 2009 disputed presidential poll when popular

Dragon and the Politician

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A Few Thoughts on Asset Allocation and Portfolio Positioning for 2012:

Negative for all assets and especially stocks: If no compromise is reached on extensions, what are the implications if investors sell in 2012 to avoid a higher tax regime in 2013? It depends on what is at stake on the buy-side of investors’ motiva-tions later in the year; however, Triangle already implements strategies to harvest tax-losses, promote low turnover of holdings, defer gains, and invest in potentially tax-efficient securities like municipal bonds and Master Limited Partnerships.

Positive for stocks and especially U.S. stocks: Domestic, International and Emerging Market equities are cheap. For example, the S&P 500 trades at roughly 12-13 times estimated 2012 earnings of $106, 3 multiple points below the last 50 years’ average (when the yield on the 10-year U.S. note approached 6.70%) and nearly 7 multiple points below times in history when interest rates and inflationary expectations were similar to today’s 2% levels. The future is so unreliable due to among other things, terrorism and war, political and regulatory uncertainty, and the perceived unfairness of financial markets resulting in investors refusal to pay for $1 of earnings like they did in the past. We expect a varying degree of discount to persist indefinitely; however, some of this gap could close. Individual and institutional investors have fled U.S. stocks since the highs of October 2007 so there is ample room in portfolios for renewed demand. Developed International stocks may get cheaper if Europe goes into full blown recession, the debt crisis further deteriorates and the Euro’s existence is perceived as vulnerable. Any failure in the global reflation effort may knock off worldwide demand for goods and services. This would translate into another bad year for emerging market stock performance despite the favorable balance sheets, demographics and strong long-term growth potential.

Positive for stocks if you believe in contrarianism: Consumer confidence and investor sentiment has improved. Then again, distrust and skepticism remain for everything from housing to the perceived fairness of the stock market. We will watch mutual fund flow data, retail sales and sentiment polls to gauge any return to exuberance. Historically, activity and interest in the Initial Public Offering (IPO) market has been a reliable indicator of risk-taking and euphoria. Will the Facebook IPO mark a top on the 2012 market advance? Hmmmm . . . .

Positive for portfolio performance: Diversification and conservative balance have historically delivered positive risk and inflation adjusted after-tax returns. Points of emphasis should include cash in-hand strategies where many securities pay dividends or interest. While dividend income has been a major aspect of returns for decades, its appeal is heightened by investor concerns over market volatility, low bond yields and the threat to bond values from an eventual rebound in interest rates and inflation. A balanced portfolio could also include a mix of complementary securities that TSWM refers to as Hybrids, where specific events, strategies or market niches are targeted. Many of our clients tend to favor large blue-chip companies, which is positive. However, another hybrid of sorts that may prove beneficial is to emphasize the stocks of mid-sized companies where earnings growth is potentially higher than average, yet liquidity and valuation are possibly more attractive versus the stocks of smaller companies.*

Short-term pain for long-term gain: After selling off early in the year over credit concerns and a weak Treasury market, municipal bonds finished the year with benchmarks of 10-year and 30-year AAA rated municipal bonds trading at low levels of 1.86% and 3.86%, respectively (Municipal Market Data). Low yields and shorter-durations (sensitivity to interest-rate movements) hurt portfolio performance in 2011. This “safer” strategy of avoiding long maturity bonds may hurt again if rates stay the same or actually retreat in 2012. The trend of ever lower rates will reverse at some point when high rates (lower bond prices) and inflation are perceived as threats. It makes sense to pass on short-term performance in order to avoid long-term pain in fixed-income.

*All clients are unique and not all securities will be deemed suitable for specific goals.

uprisings against the results challenged the legitimacy of the regime. The elections will be of great interest in the Islamic republic, as economic and political discontent in Iran is accelerated with fears of a major confronta-tion with the West over its nuclear program. The other dynamic is the covert operations of Iran. The Arabian Peninsula is fertile ground for power struggles and the trans-formation of essential relationships in places like Iraq, Syria and Lebanon are at stake. Another test of influence should play out when Egypt holds elections “no later than” June 30, 2012.

China will not bring the global economy down in 2012. In fact, it will add upward pressure on global ref lation and ref lation oriented trading. Some large global inves-tors worry that a financial and real estate collapse is looming and regard China as the single greatest threat to the global economy. We see this risk as very minimal in 2012 as the Chinese are extremely incented to pre-vent, push-out or “control” such news. The ruling Communist Party is shifting focus to support growth rather than dampen infla-tion as Europe’s debt crisis threatens to curb exports and threaten 8-9% GDP growth. To “promote social harmony,” China will continue to focus on rebalancing growth, restructuring the economy and increasing consumer and investment demand to sup-port the economy. “Priority will be given to key projects and projects under construc-tion, and we will limit industries suffering from overcapacity, those that cause heavy pollution and are energy intensive,” said Premier Wen.

Three areas must be viewed as success-ful in 2012 in order for China to exhibit its place in the world order. First, the trans-formation to a fifth generation of political leadership scheduled for the 18th National Congress of the Chinese Communist Party must be smooth. The current top leaders of President Hu Jintao, Premier Wen Jiabao and Chairman of the National People’s Congress Wu Bangguo are all expected to retire. It is interesting to note that new lead-ership is much less the traditional engineer and more trained in management, finance

and entrepreneurship. China will also begin staggered parliamentary transitions in October 2012. Second, the 12th Five-Year economic plan (2011-2015) announced in March 2011 sets the nation’s course for social and economic measures that will have a deep impact on the business landscape, both within China and in countries that do business with China. Three of the main pri-orities in this plan are sustainable growth, industrial upgrading and the promotion of domestic consumption. Most importantly, leadership must demonstrate significant efforts to address the root causes of rural discontent fuelled by poverty, inequality, corruption, rising healthcare costs and illegal land requisition. The last item that causes us to minimize the global risk threat posed by China in 2012 is less visual and more cultural. The Year of the Dragon car-ries great symbolic significance for the Chinese people. In Chinese astrology the dragon was seen as a powerful almighty king because it was made up of different parts of animals such as a tiger, fish, snake and an eagle. The Chinese dragon was not seen as a threatening evil being—rather a symbol of power and wisdom. Still today, the dragon is a revered symbol as seen in many sculptures and carvings. Let us hope that the Chinese five blessings of harmony, virtue, riches, fulfillment and longevity reach us all!

The United States relationship with China has been called one of the most important factors of our future. On the one hand, Xi Jinping, China’s vice president who is widely expected to become president this year, will visit the White House on February 14th. It is the second of planned reciprocal visits between the vice presidents, as U.S. Vice President Joe Biden visited China in August 2011. Xi is scheduled to meet with President Barack Obama, Biden and other senior officials, and also travel to Iowa and California. On the other hand, it is reported that the Obama administration is considering significantly expanding the U.S. military presence in the Philippines, two decades after the island nation evicted American forces from their biggest base in the Pacific. Such an expansion would be the latest in a series of strategic moves aimed at countering China.

Play with fire and someone gets burned…The investment and asset allocation sce-narios for 2012 are endless. Investors who choose to make big concentrated bets will be rewarded if they are right. Smart people think you can make another double-digit return in thirty-year Treasuries as the rate drops back to 2.5% from today’s 3.1%. Still others believe all Gold, all of the time, will win no matter inflation, deflation, or Black Swan event. We can argue for new highs in equities and new lows in bond prices (higher rates) and we can rationally put forth rationale for the complete opposite. Most investors can agree that, with each new phase of the moon, the end game of the super debt cycle gets closer. Though, nowhere is it written that 2012 will be a year of investment turmoil. The Mayans could not possibly have foreseen a super debt cycle and over spending followed by a massive deleveraging and austerity, right?

Wealth preservation is the single most important objective we hear from TSWM’s family of clients! Our conversations high-light a desire to protect principal and pur-chasing power, with a majority uninterested in sharing more of their hard-earned dollars with that drunken ole’ sailor Uncle Sam. Conservative factors such as income pro-duction, liquidity, transparency, low costs, diversification, and tax efficiency are top priorities yesterday, today and tomorrow. Sure, all clients want to grow their assets and it is natural to compare your portfo-lio’s absolute performance versus the S&P 500 or to some “homerun” story written in the Wall Street Journal. As you know, we are your family’s advocate and we are prepared to evaluate the risks of 2012 much more than the “homeruns.” Buying the best performing asset in 2011, the thirty-year U.S. Treasury bond was risky last year. Of course, that is why it paid over 30%. In 2012, concentrated positions in U.S. Treasuries, emerging markets, European developed markets, commodities and the highest risk stocks could pay off handsomely. If wealth preservation is a serious objective, then we cannot prudently ignore diversification and risk management, no mat-ter how convicted we are on any given investment.

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Dragon and the Politician

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considered Wins in 2012: Real U.S. GDP Growth: 3–4% (annualized after inflation adjustment)

S&P 500: Any positive that pays for the risk incurred

�10–Year U.S. Treasury Rate: rises to 3% due to sustainable growth trajectory

Unemployment Rate:�9% with an average participation

rate of 66% (now reported at 64%)

Oil: $85-$100 a barrel and working lower based on domestic supplies

and use of natural gas; for instance, 18-wheeler fuel conversion

Inflation: 2% with a belief that a Japanese-style deflationary cycle is avoidable

Still Super:1. The United States of America is still the

most powerful country on the planet. Its downfall has been called for many times: our democracy, growth and GDP per capita, innovation, diversity, quality of global franchises, expertise, operational execution and political foundations are still envied the world over.

2. Right or wrong on the methods used; our banking system is recapitalized, liquid and funded with the solid deposits of global cash.

3. U.S. corporations boast the strongest balance sheets and best margins, are the most productive, and are arguably the most solid operators in the world. Even through the recent depression, U.S. corporations advanced their global fran-chises and brands and now serve more diverse end markets and geographies than ever before. Our corporations are positioned for offensive dominance if we can just remove the barriers of uncertainty.

4. The U.S. currency, debt and system of corporate reporting and checks and bal-ances are still among the strongest in the world. Compare, for example, the global statistics on opaque reporting and regulations, pirating and corruption, and political stability. We are by no means perfect; however, look at the compari-sons to countries like China and India and you may feel a little prouder.

5. The U.S. is rich in self-reliant resources, has important geographic distinctions such as trade routes like the Mississippi, and has the most powerful Navy and military force in the world.

6. We were fortunate enough to hear Tony Blair speak last November in San Francisco, and he noted that a true test of a country is whether people want to leave it or come to it. The world’s citizens are still drawn to the United States of America for a better life and to pursue all the golden opportunities it can offer! Despite all the news of the aging Baby Boomer generation, the U.S. is the third most populous country (315 million) and has waves of new younger generations. Our demographic trends are particularly more favorable for growth than those trends seen in other industrialized nations.

Past performance does not indicate future results and there is no assurance that any forecast/targets will be obtained. The charts and indices have been included to provide you with an understanding of their historic long-term performance and are not presented to illustrate the performance of any security. Source of Graphs: Thomson Reuters Baseline. Investors cannot directly purchase an index. The S&P 500 is (a registered trade-mark of McGraw Hill Inc.) an unmanaged, index of common stocks. This was prepared by, or obtained from, sources believed to be reliable and represent the views of Michael Hakerem. Any market prices are only indication of market values and are subject to change. The material has been prepared, or is distributed, solely for informational purposes and is not a solicitation or an offer to buy any security or instrument, or to participate in any trading strategy. Triangle Securities Wealth Management, Inc. does not provide tax or legal advice.