Recap Of The Financial Markets - Fagan Associates · Recap Of The Financial Markets ... and some...

Recap Of The Financial Markets www.faganasset.com

Week Ended September 14th

, 2012.

Can anything derail this “Bernanke Put” market? The S&P 500 rose 1.94%, this following a 2.23% increase during the first week of

September, a notoriously bad month for equities. The path resistance at least for the time being remains to the upside as skepticism

surrounding this much hated rally remains high and the majority of professionals are underwater when compared to the major indices,

so the pressure will remain to buy the dips. That said, we have come a long ways from the Q2 Presidential Election Cycle lows, not to

mention over the past year and some issues which had been pushed to the back burner will move to the front, not the least of which

include what will the impact be from the increasing rhetoric surrounding the Presidential Election, the pending expiration (fiscal cliff)

of the Bush Era tax cuts and mandatory spending cuts associated with this event and an approaching battle of the debt ceiling. We

believe that there exists tremendous upside risk for investors as well as downside risk. What to do? Everything in moderation. Hold

some cash. Buy dividend paying stocks. Don’t buy long bonds. Mix high yield with high quality bonds. As the most recent economic

data has illustrated, the U.S. economy is continuing to muddle through.

Index Weekly Change Closing Value % Change

Prior Week

Year-to-Date

% Change

Trailing 12

Mo. % Change

Dow Jones Ind. Avg. +286.73 13593.37 +2.15% +11.26% +18.11%

S&P 500 +27.85 1465.77 +1.94% +16.55% +20.54%

NASDAQ Comp. +47.53 3183.95 +1.52% +22.22% +21.42%

DJ US Mkt. Index +313.05 15310.35 +2.09% +16.79% +20.16%

Russell 2000 +22.43 864.70 +2.66% +16.71% +21.05%

Dow Utilities +0.27 472.13 +0.06% +1.60% +7.48%

Dow Transports +143.77 5215.97 +2.83% +3.91% +11.82%

Index Closing Record

High (ex-NDQ)

Date of Closing

Record High

% from Prior

Record High

March 9th

, 2009

Closing Low

% From Closing

Low Mar 9, 2009

Dow Jones Ind. Avg. 14164.53 9-Oct-2007 4.03% 6547.05 107.63%

S&P 500 1565.15 9-Oct-2007 6.35% 676.53 116.66%

NASDAQ Comp 3183.95 (5048.62) 14-Sept-2012 0.00% 1268.24 151.05%

DJ US Mkt. Index 15806.69 9-Oct-2007 3.14% 6858.43 123.23%

Russell 2000 865.29 29-April-2011 0.07% 343.26 151.91%

Dow Utilities 552.74 10-Dec-2007 14.58% 290.68 62.42%

Dow Transports 5618.25 7-July-2011 7.16% 2146.89 142.95%

Index Close on

Dec 31, 1999

Year End

2007 Close

Year End

2008 Close

Year-End

2009 Close

Year-End

2010 Close

Year-End

2011 Close

Dow Jones Ind. Avg. 11497.12 13264.82 8776.39 10428.05 11577.51 12217.56

S&P 500 1469.25 1468.36 903.25 1115.10 1257.64 1257.60

NASDAQ Comp. 4069.31 2652.28 1577.03 2269.15 2652.87 2605.15

DJ US Mkt. Index 13812.70 14819.58 9087.17 11497.41 13290.03 13109.55

Russell 2000 504.75 766.03 499.45 625.39 783.65 740.92

Dow Utilities 283.36 532.53 370.76 398.01 404.99 464.68

Dow Transports 2977.20 4570.55 3537.15 4099.63 5106.75 5019.69

Index Intra-Day Low

August 8/9, 2011

% From Intra-Day

Low August 8/9,

2011

Q2 2012 Closing

Election Cycle

Lows

% From Q2 2012

Closing Election

Cycle Lows

Dow Jones Ind. Avg. 10588.25 28.38% 12101.46 12.33%

S&P 500 1101.54 33.07% 1278.04 14.69%

NASDAQ Comp. 2331.65 36.55% 2747.48 15.89%

DJ US Mkt. Index 11677.50 31.11% 13329.32 14.86%

Russell 2000 639.85 35.14% 737.24 17.29%

Dow Utilities 380.91 23.95% 449.84 4.96%

Dow Transports 4286.41 21.69% 4847.73 7.60%

First Call/Thomson Financial Projected 2012 Earnings & Price to Earnings Ratios

For Dow Jones Industrial Average. (Barron’s MW 49)

Sept 14th Sept 7th Aug 31st Aug 17th Aug 10th 12-31-2011 12-31-2010

Projected Earnings $1136.21 $1138.67 $1139.37 $1138.86 $1128.70 $1057.64 $943.01

P/E Ratio 11.9 11.7 11.4 11.6 11.7 11.6 12.3

MARKET INTERNALS

Friday Monday Tuesday Wednesday Thursday Friday

Date Sept 7th

Sept 10th

Sept 11th

Sept 12th

Sept 13th

Sept 14th

Dow Change +14.64 -52.35 +69.07 +9.99 +206.51 +53.51

NYSE Volume 680 mm 616 mm 667 mm 664 mm 802 mm 900 mm

S&P500 Volatility Index 14.38 16.28 16.41 15.80 14.05 14.51

NASDAQ Close 3136.42 3104.02 3104.53 3114.31 3155.83 3183.95

NASDAQ Change +0.61 -32.40 +0.51 +9.78 +41.52 +28.12

NASDAQ Volume 1.718 b 1.566 b 1.579 b 1.680 b 1.852 b 1.965 b

NASDAQ Index (^vxn) 15.44 17.80 18.01 17.18 16.15 15.89

S&P 500 Close 1437.92 1429.08 1433.56 1436.56 1459.99 1465.77

S&P 500 Change +5.80 -8.84 +4.48 +3.00 +23.43 +5.78

Russell 2000 Close 842.27 839.37 841.92 845.12 856.12 864.70

Russell 2000 Change +4.32 -2.90 +2.55 +3.20 +11.00 +8.58

DJ US Mkt Index Close 14997.30 14910.24 14955.92 14995.62 15225.79 15310.35

DJ US Mkt Index Change +64.80 -87.06 +45.68 +39.70 +230.17 +84.56

Dow High (a) 13320.27 13324.10 13354.34 13373.62 13573.33 13653.24

Dow Low (a) 13266.22 13251.39 13253.21 13317.52 13325.11 13533.94

Dow at 10:00 a.m. 13297.27 13286.03 13321.97 13348.61 13335.97 13598.21

Dow 1 Hour Before Close 13284.08 13289.06 13329.05 13334.71 13525.27 13587.19

Dow Close 13306.64 13254.29 13323.36 13333.35 13539.86 13593.37

Variation 54.05 72.71 101.13 56.10 248.22 119.30

Variation vs. Prior Day Close 0.41% 0.55% 0.76% 0.42% 1.86% 0.88%

Close Off Low 40.42 2.90 70.15 15.83 214.75 59.43

Close Off High 13.63 69.81 30.98 40.27 33.47 59.87

Dow first ½ hr +5.27 -20.61 +67.68 +25.25 +2.62 +58.35

Dow Close v. 10:00a Price +9.37 -31.74 +1.39 -15.26 +203.89 -4.84

Dow Last Hour +22.56 -34.77 -5.69 -1.36 +14.59 +6.18

NYSE Advances 2024 1215 2041 1975 2398 2096

NYSE Declines 948 1797 980 1054 650 961

Unchanged 135 117 114 99 98 101

New Highs 308 228 202 260 379 495

New Lows 12 11 15 14 8 7

NYSE Up Volume 479 mm 192 mm 496 mm 416 mm 724 mm 650 mm

NYSE Down Volume 190 mm 415 mm 160 mm 237 mm 74 mm 240 mm

NASDAQ Advances 1430 1004 1448 1463 1780 1614

NASDAQ Declines 1014 1445 994 988 675 8444

Unchanged 131 127 140 124 129 131

New Highs 158 104 88 93 219 254

New Lows 29 27 23 16 19 24

NASDAQ Up Volume 829 mm 432 mm 910 mm 1.017 b 1.387 b 1.534 b

NASDAQ Down Volume 871 mm 1.105 b 649 mm 627 mm 442 mm 412 mm

Yield On Selected United Sates Treasury Obligations (Bloomberg Key Rates)

Sept 14, 2012 Sept 7, 2012 Aug 31, 2012 Aug 17, 2012 Dec 31, 2011 Dec 28, 2007

3 month T-bill 0.10% 0.10% 0.07% 0.07% 0.01% 3.14%

6 month T-bill 0.12% 0.13% 0.13% 0.14% 0.06% 3.42%

12 month T-bill 0.16% 0.16% 0.16% 0.18% 0.10%

2 year T-note 0.25% 0.25% 0.22% 0.29% 0.24% 3.11%

3-year Treasury Note 0.35% 0.33% 0.29% 0.41% 0.35%

5 year Treasury Note 0.71% 0.64% 0.59% 0.80% 0.83% 3.50%

7-year Treasury Note 1.23% 1.09% 1.00% 1.25% 1.34%

10 year Treasury Note 1.87% 1.67% 1.55% 1.81% 1.88% 4.08%

30 year Treasury Bond 3.09% 2.82% 2.67% 2.93% 2.89% 4.50%

Current Prime Rate 3.25% 3.25% 3.25% 3.25% 3.25% 7.25%

Current 1-mo LIBOR 0.22% 0.23% 0.23% 0.24% 0.30% 4.63%

Current 3-mo LIBOR 0.39% 0.41% 0.42% 0.43% 0.58% 4.73%

TED-Spread* 29 bps 31 bps 35 bps 36 bps 57 bps

Spread b/t 10 & 2 Yr. T-Note 164 bps 142 bps 133 bps 152 bps 164 bps 97 bps

1 mo. LIBOR v. Fed Funds 05 bps 06 bps 08 bps 12 bps 26 bps 38 bps

*TED Spread = Diff b/t 3-mo. T-bill and 3-mo. LIBOR

Investor Sentiment (AAII Index, Barron’s)

Last Week Two Weeks Ago Three Weeks Ago

Bulls 36.5% 33.1% 34.7%

Bears 33.0% 33.1% 32.6%

Neutral 30.6% 33.8% 32.6%

Sept 14th

,

2012

Sept 7t h

,

2012

Aug 3 1s t

,

2012

Aug 17t h

,

2012

Dec 31st,

2011

Year-End

2010

Year-End

2009

Year End

2008

5/1 Year ARM 2.93% 2.86% 2.87% 2.98% 2.89% 3.90% 5.65% 5.65%

15-Year Mortgage 2.94% 2.89% 2.91% 2.98% 3.28% 4.35% 5.07% 5.12%

30-Year Mortgage 3.53% 3.54% 3.55% 3.69% 3.95% 5.02% 5.26% 5.30%

Pertinent Weekly Financial Data

Sept 14th

,

2012

Sept 7th

,

2012

Aug 31st,

2012

Dec 31st

2011

Dec 31st,

2010

Dec 31st,

2009

NYSE Total Issues 3202 3188 3195 3195 3203 3219

NYSE Advancing Stocks 2317 2445 1693 1218 1792 1214

NYSE Declining Stocks 837 678 1437 1896 1350 1947

NYSE Unchanged Stocks 48 65 65 81 61 58

NYSE New Highs 722 520 323 295 303 592

NYSE New Lows 36 58 61 72 41 5

NYSE Total Weekly Volume 3,648,986 2,730,821 2,788,152 2,157,296 2,648,260 2,668,023

NASDAQ Total Issues 2696 2683 2687 2755 2859 2941

NASDAQ Advancing Stocks 1874 1876 1357 1087 1438 1253

NASDAQ Declining Stocks 764 746 1262 1603 1349 1614

NASDAQ Unchanged Stocks 58 61 68 65 72 74

NASDAQ New Highs 403 293 163 92 317 333

NASDAQ New Lows 81 86 87 161 40 43

NASDAQ Total Weekly Volume 8,641,952 6,569,696 6,575,646 4,595,822 5,467,858 5,038,818

Unleaded Gasoline Prices Per Gallon $3.847 $3.843 $3.776 $3.258 $3.052 $2.607

West Texas Intermediate Crude Futures $99.00 $96.42 $96.47 $98.83 $91.38 $79.36

Natural Gas Futures Per mm BTU $2.943 $2.682 $2.799 $2.989 $4.410 $5.572

Copper Futures Per Pound $3.83 $3.64 $3.46 $3.44 $4.45 $3.35

Soybean Futures Per Bushel $17.39 $17.36 $17.57 $12.08 $14.03 $10.48

Corn Per Bushel $7.82 $8.00 $8.00 $6.46 $6.29 $4.15

Gold 100 Ounce Future (USD/t oz.) $1772.70 $1740.50 $1687.60 $1566.80 $1421.40 $1096.20

Silver Future (USD/t oz.) $34.65 $33.69 $31.44 $27.91 $30.94 $16.85

Oil Equivalents: On average, every $10.00/bbl rise in oil results in a $.25/gal rise in gasoline and for every $.25/gal rise in gasoline,

it costs Americans $30 billion or 0.20% of GDP over the course of the following year.

Value of U.S. Dollar versus the World’s Other Major Currencies (Bloomberg.com). Dollars to buy one…

Sept 14th,

2012

Sept 7th,

2012

Aug 31st,

2012

Dec 31st,

2011

Year-End

2010

Year-End

2009

Year-End

2008

US $ Index (DX-Y.NYB) 78.83 80.17 81.25 80.18 79.61 77.860

Euro 1.3128 1.2815 1.2581 1.2959 1.3384 1.4324 1.3978

British Pound 1.6216 1.6009 1.5865 1.5523 1.5612 1.6151 1.4648

Japanese Yen 0.0128 0.0128 0.0128 0.0130 0.0123 0.0107 0.0110

Canadian Dollar 1.0296 1.0217 1.0139 0.9789 1.0020 0.9499 0.8170

Chinese Yuan 0.1583 0.1576 0.1574 0.1589 0.1514

Swiss Franc 1.0781 1.0590 1.0477 1.0683 1.0693 0.9660 0.9350

SECTOR WEIGHTINGS – Sector Weightings of the iShares S&P 1500 Index Fund

Industry June 30th

,

2012

Mar 31st,

2012

Dec 31st,

2011

Dec 31st,

2010

Dec 31st,

2009

Dec 31st,

2008

Dec 31st,

2007

Financials 15.21% -0.35 15.56% 14.24% 11.68% 13.86% 21.04% 20.90%

Information Technology 19.18% -1.07 20.25% 18.69% 17.77% 15.17% 14.69% 15.08%

Industrials 10.98% -0.25 11.23% 11.33% 10.30% 11.50% 11.58% 12.27%

Health Care 11.94% +0.68 11.26% 11.64% 14.66% 14.54% 11.86% 11.99%

Consumer Discretionary 11.35% +0.05 11.30% 11.02% 9.49% 8.94% 11.08% 10.72%

Energy 10.05% -0.45 10.50% 11.48% 12.23% 12.47% 9.81% 10.14%

Consumer Staples 10.54% +0.61 9.93% 10.68% 11.81% 11.95% 8.82% 8.76%

Utilities 3.93% +0.41 3.52% 4.05% 4.49% 4.56% 4.11% 3.79%

Basic Materials 3.74% -0.02 3.76% 3.80% 3.66% 3.24% 3.42% 3.28%

Telecom Services 2.95% +0.44 2.51% 2.84% 3.65% 3.44% 3.36% 2.94%

Other/Undefined 0.13% -0.06 0.19% 0.23%

FAGAN ASSOCIATES COMMON STOCK HOLDINGS SECTOR WEIGHTINGS

Industry June 30th

,

2012

Mar 31st,

2012

Dec 31st,

2011

Sept 30th

,

2011

Mar 31st,

2011

Dec 31st,

2010

Dec 31st,

2010

Financials 6.24% -0.76 7.00% 4.93% 5.70%

Information Technology 20.57% +0.15 20.42% 17.71% 17.71%

Industrials 15.87% +0.97 14.90% 13.81% 12.56%

Health Care 8.28% +0.69 7.59% 8.77% 12.12%

Consumer Discretionary 15.87% -1.41 17.28% 19.58% 18.83%

Energy 9.49% -1.67 11.16% 11.53% 9.94%

Consumer Staples 5.58% +0.86 4.72% 5.94% 6.03%

Utilities 2.75% +0.08 2.67% 3.80% 3.97%

Basic Materials 3.15% -0.11 3.26% 2.46% 3.32%

Telecom Services 3.00% +0.67 2.33% 2.41% 2.56%

Index/Undefined 9.20% +0.53 8.67% 9.05% 7.24%

Sector Performance Week Ending September 14th

v. Week Ending September 7th

vs. August 31st

Trailing Week Year-to-Date Trailing Twelve Months

Pos/Neg Week of Sept 14th

83 / 15 92 / 6 91 / 7

Pos/Neg Week of Sept 7th

94 / 4 89 / 9 89 / 9

Pos/Neg Week of Aug 31st 41 / 57 82 / 16 79 / 19

Dow Jones U.S. Total Market Industry Groups for the Week Ended September 14th

(Barron’s MW 49)

Past Week Top Performing Industry Groups Past Week Worst Performing Industry Groups

1 Platinum & Precious Metals +14.08% BM 98 Distillers & Vintners -3.65% CG

2 Gold Mining +10.05% BM 97 Water -2.91% UTIL

3 Real Estate Investment & Services +9.48% FINL 96 Footwear -1.89% CG

4 Coal +9.42% BM 95 Tobacco -1.12% CG

5 Home Construction +8.35% CG 94 Airlines -1.08% CS

6 Nonferrous Metals +7.89% BM 93 Personal Products -0.94% CG

7 Aluminum +7.53% BM 92 Soft Drinks -0.79% CG

8 Steel +7.53% BM 91 Paper -0.75% BM

9 Heavy Construction +7.03% IND 90 Financial Administration -0.48% IND

10 Furnishings +6.59% CG 89 MultiUtilities -0.36% UTIL

Dow Jones U.S. Total Market Industry Groups for the Week Ended September 7th

(Barron’s MW 45)


1 Platinum & Precious Metals +8.73% BM 98 Delivery Services -0.72% IND

2 Tires +8.51% CG 97 Industrial Suppliers -0.55% IND

3 Nonferrous Metals +8.48% BM 96 Tobacco -0.37% CG

4 Marine Transportation +8.02% IND 95 Drug Retailers -0.05% CS

5 Business Training +7.98% IND 94 Insurance Brokers +0.01% FINL

6 Automobiles +7.97% CG 93 Food Products +0.06% CG

7 Investment Services +7.28% FINL 92 Semiconductor +0.29% TECH

8 Coal +7.07% BM 91 Personal Products +0.30% CG

9 Steel +6.75% BM 90 Railroads +0.35% IND

10 Aluminum +6.05% BM 89 Home Improvement Retailers +0.56% CS

Dow Jones U.S. Total Market Industry Groups for the Week Ended August 31st (Barron’s MW 57)


1 Gold Mining +3.10% BM 98 Coal -7.73% BM

2 Recreational Services +3.02% CS 97 Steel -3.86% BM

3 Clothing & Accessories +2.30% CG 96 Airlines -3.83% CS

4 Tires +2.07% CG 95 Delivery Services -2.26% IND

5 Travel & Tourism +1.78% CS 94 Oil Equipment & Services -2.06% O&G

6 Mortgage Finance +1.65% FINL 93 Trucking -2.04% IND

7 Hotels +1.47% CS 92 Commercial Vehicles -1.95% IND

8 Distillers & Vintners +1.46% CG 91 Soft Drinks -1.88% CG

9 Investment Services +1.12% FINL 90 Railroads -1.85% IND

10 Recreational Products +1.06% CG 89 Marine Transportation -1.65% IND

Dow Jones U.S. Total Market Industry Groups or the Week Ended September 14th

(Barron’s MW 49)

Past Week Year-to-Date Trailing 12 Months

1 Basic Materials +4.75% +2 Financials +23.47% Consumer Services +30.04%

2 +1 Oil & Gas +4.26% -1 Consumer Services +22.74% +3 Financials +28.44%

3 -1 Financials +3.53% -1 Technology +22.20% -1 Technology +26.89%

4 +1 Industrials +2.06% Telecom +19.90% -1 Telecom +25.65%

5 +2 Technology +1.59% Health Care +16.55% -1 Health Care +24.31%

6 -2 Consumer Services +1.58% Industrials +13.99% Industrials +23.11%

7 +1 Telecom +0.95% +1 Basic Materials +11.13% +2 Oil & Gas +15.98%

8 -2 Health Care +0.39% +1 Oil & Gas +9.94% -1 Consumer Goods +15.24%

9 Consumer Goods +0.38% -2 Consumer Goods +9.75% -1 Utilities +9.19%

10 Utilities -0.30% Utilities +0.76% Basic Materials +6.54%

Dow Jones U.S. Total Market Industry Groups or the Week Ended September 7th

(Barron’s MW 45)


1 +7 Basic Materials +3.99% Consumer Services +20.83% Consumer Services +28.06%

2 Financials +3.25% Technology +20.28% Technology +27.11%

3 +4 Oil & Gas +2.77% +1 Financials +19.26% Telecom +24.91%

4 -3 Consumer Services +2.49% -1 Telecom +18.77% Health Care +21.57%

5 +4 Industrials +2.39% Health Care +16.09% +1 Financials +21.37%

6 -3 Health Care +2.19% Industrials +11.69% -1 Industrials +20.14%

7 -2 Technology +2.18% Consumer Goods +9.33% Consumer Goods +13.79%

8 -2 Telecom +1.85% +1 Basic Materials +6.08% Utilities +9.48%

9 -5 Consumer Goods +1.41% -1 Oil & Gas +5.46% Oil & Gas +8.78%

10 Utilities +0.89% Utilities +1.06% Basic Materials -1.03%

Dow Jones U.S. Total Market Industry Groups or the Week Ended August 31st (Barron’s MW 57)


1 +2 Consumer Services +0.30% +2 Consumer Services +17.89% Consumer Services +23.25%

2 +3 Financials +0.20% -1 Technology +17.71% Technology +22.69%

3 +5 Health Care +0.16% -1 Telecom +16.62% Telecom +20.11%

4 -2 Consumer Goods -0.28% Financials +15.50% Health Care +18.59%

5 -4 Technology -0.35% Health Care +13.61% Industrials +14.11%

6 +3 Telecom -0.49% Industrials +9.09% Financials +14.07%

7 Oil & Gas -0.79% Consumer Goods +7.81% Consumer Goods +10.79%

8 -2 Basic Materials -0.79% Oil & Gas +2.62% Utilities +7.04%

9 -5 Industrials -0.84% Basic Materials +2.01% Oil & Gas +4.77%

10 Utilities -0.90% Utilities +0.17% Basic Materials -6.39%

Economic Releases Majority of Economic Data found at www.haver.com

Friday, September 14th

INDUSTRIAL PRODUCTION, a measure of strength of the manufacturing, factory and utility sectors, fell 1.2% during August, this

after rising 0.6% in July and by 2.8% y/y. CAPACITY UTILIZATION fell to 78.2% during August from 79.2% during July and

from 77.1% one year ago. Finally, MANUFACTURING CAPACITY fell to 77.0% in August from 77.7% in July and from a

recession low 65.4%. On a side note, the nation’s mines, factories and utilities operated at an average of 80.4% of capacity from 1972

to 2009.

The CONSUMER PRICE INDEX rose 0.6% during August, this after remaining unchanged during both July and June, respectively.

Over the past year the CPI, a measure of inflation at the retail level, rose just 1.7%. Energy prices rose 5.6% during August, but have

fallen 0.6% y/y. Food and beverage prices rose 0.2% in August and by 2.0% y/y. Excluding food and energy, the so-called core CPI

rose 0.1% in August and by 1.9% y/y.

RETAIL SALES rose 0.9% during August, this after climbing 0.6% during July. That said, over the past year Retail Sales have risen

4.7%. Spending on MOTOR VEHICLE & PARTS rose 1.3% (6.2% y/y) while RETAIL SALES EXCLUDING AUTOS rose

0.8% (8.8% y/y). EXCLUDING AUTOS AND GASOLINE, Retail Sales rose 0.1% during August (6.7% y/y).

during June.

The Commerce Department reported that BUSINESS INVENTORIES rose 0.1% during June and by 5.0% y/y. BUSINESS SALES

slipped 1.1% during June, but have risen by 3.0% y/y. This relationship between business inventories as compared to sales helped

push the INVENTORY-TO-SALES RATIO up to 1.29 months in June from 1.27 months during May, the highest the ratio has been

since Q1-2010.

The University of Michigan reported that its PRELIMINARY SEPTEMBER READING OF CONSUMER SENTIMENT rose

to79.2% from a final August reading of 74.3% and from a mid-August 73.6%. The expectations component rose to 73.4% from a

final August reading of 65.1% and from a mid-August level of 64.5%. Lastly, the preliminary September current conditions

component slipped to 88.3% from a final August 88.7%, but rose from a mid-August 87.6%.

Thursday, September 13th

INITIAL CLAIMS FOR UNEMPLOYMENT BENEFITS for the week ended September 8th

rose 15,000 to 382,000 from an

unrevised 367,000 one week prior, the forty-first consecutive week that initial claims held below the key 400,000 level, an

encouraging but nonetheless stubbornly high number consistent with an economy that is growing, but not sufficiently enough to

create an adequate number of jobs to substantially benefit the labor market. The four-week rolling average rose 3,250 to 375,000

from 371,750 one week prior, while continuing claims for the week ended September 1st was unchanged at 3,322,000 while the

continuing claims four-week average fell 7,500 to 3,316,500 from 3,324,000.

The PRODUCER PRICE INDEX rose 1.7% during August, this after rising 0.3% during July and by 2.0% over the past year.

Energy prices jumped 6.4% in August and 2.0% y/y. Finished food prices rose 0.9% in August. Excluding food and energy, the so-

called core PPI rose 0.2% in August and by 3.5% y/y. Prices for INTERMEDIATE GOODS rose 1.1% (-1.1% y/y) during August

as CORE INTERMEDIATE GOODS fell 0.2% during August, but have risen by 1.5% y/y.

Wednesday, September 12th

U.S. Import Prices fell 0.7% during August, this after falling 0.7% in July. Over the past year U.S. Import Prices have fallen by

2.2%. Petroleum prices jumped 4.1% during August, but have fallen 6.4% y/y. Export prices rose 0.9% in August, but have fallen

0.9% y/y. Agricultural export prices jumped 5.1% during August (7.7% y/y) while Non- Agricultural Export Prices rose 0.4% in

August, but have fallen 1.9% y/y.

Tuesday, September 11th

The U.S. TRADE DEFICIT rose to $42.0 billion during July from $41.9 billion during June. The value of EXPORTS fell 1.03%

to $183.3 billion from $185.2 billion while the value of IMPORTS fell 0.80% to $225.3 billion in July from $227.1 billion in June.

The value of petroleum imports fell 6.5% (-14.1% y/y) during July, a dip that will most likely not last. Of note was the fact that our

trade deficit with China rose to $29.3 billion during July from $27.4 billion in June.

http://www.haver.com/

Monday, September 10th

The Federal Reserve reported that CONSUMER CREDIT fell $3.3 billion during July, this after rising by $9.7 billion during

June Over the past year Consumer Credit has risen by 4.4%. The calendar year 2011 increase of 3.7% follows reductions of 1.7%

and of 4.4% recorded during calendar years 2010 and 2009, respectively. According to Haver Analytics, “annualized, credit

growth averaged 8% during the fifteen years ended 2007. Over an even longer time period that increase does not loom particularly

large. However, against an average 5% growth in disposable income during those years, it precipitated a rise in the ratio to disposable

income to 24% from a longer term norm of 17%.”. Non-revolving Credit (automobiles, consumer durables and student loans), which

accounts for nearly two-thirds of total consumer credit, rose by $1.6 billion during July and by 6.3% y/y while revolving credit

(credit cards) fell $4.9 billion during July, but has risen by just 0.4% over the past year.

Friday, September 7th

NON-FARM PAYROLLS rose by 96,000 during August, marking the fourth consecutive month which gains registered below

100,000 and below the consensus estimate of 135,000. Furthermore, payroll gains during the months of July and June were revised

downward to 141,000 and 45,000 from an initially reported 163,000 and 64,000, respectively. Approximately 129,000 jobs have

been created per month during calendar year 2012, below 150,000, a number consistent with a stable labor force. PRIVATE

SECTOR companies created 103,000 jobs as the PUBLIC SECTOR shed 7,000, its twenty-third consecutive month of job losses.

Payroll numbers were influenced by the manufacturing (-15,000), professional & business services (28,000) and the trade,

transportation and utilities sector (29,000). The leisure and hospitality sector added 34,000 positions. The UNEMPLOYMENT

RATE ticked down to 8.1% from 8.3% as employment fell 119,000 while the labor force fell by a greater 368,000. The 8.1%

recorded during August is well off its recession high of 10.0%. The above noted Unemployment Rate has been above eight percent

since February 2009, the longest continuous stretch since monthly records began in 1948. The LABOR FORCE PARTICIPATION

RATE dropped slightly to 63.5% during August from 63.7% one month prior, near 63.3% recorded during April, which had marked

the lowest level since 1981 while the UNDER-EMPLOYMENT RATE, which includes the unemployed as well as those who were

either marginally attached to the labor force or were involuntarily working part-time (U6-A8) fell to 14.7% from 14.9% while

AVERAGE HOURLY EARNINGS fell to $19.75 from $19.76, but rose by $0.25 or 1.28% over the past year. The AVERAGE

HOURS WORKED held steady at 33.7 hours in August when compared to July. This combination helped push AVERAGE

WEEKLY EARNINGS down $0.33 or 0.05% to $665.58 during August from $665.91 one month prior. Average Weekly Earnings

over the past year have risen by only $0.38 or just 0.05%. Finally, the number of the long-term unemployed (twenty-seven weeks or

longer) fell to (Table A) 5.033 million from 5.185 million or 39.98% as the number of unemployed fell to 12.590 million from 12.748

million. The AVERAGE DURATION OF UNEMPLOYMENT rose fractionally to 39.2 weeks during August from 38.8 weeks

one month prior, but has fallen from 40.3 weeks one year ago, a number that will most likely remain stubbornly high for several years

as “structural” unemployment will continue to be an issue.

Thursday, September 6th

The Institute for Supply Management’s composite index of non-manufacturing (service) sector activity rose to 53.7% in August

from 52.6% during July. The level recorded during August is far above the 37.2 low recorded during Q4-2008 in a sector that

employs 80% of the U.S. workforce. Of note were New Orders (53.7% v. 54.3%), Employment (53.8% v. 49.3%), Business

Activity (55.6% v. 57.2%) and the Backlog of Orders (50.5% v. 44.5%). The Prices Paid Component rose to 64.3% from 54.9%.

Wednesday, September 5th

SECOND QUARTER PRODUCTIVITY rose at a REVISED annualized rate of 2.2%, this as compared to an initially reported rise

of 1.6%, this after falling 0.5% during Q1, but rising by 2.8% during Q4, 2011. Over the past year U.S. Productivity has risen 1.2%.

Meanwhile, HOURLY COMPENSATION rose at an upwardly revised 3.7% as compared to an initially recorded 3.3%, this as

compared to 5.1% during Q1 and 1.9% y/y. UNIT LABOR COSTS (defined as output per hour of work and can be determined by

dividing hourly labor costs by output per hour) rose at a revised annualized rate of 1.5% as compared to the initial 1.7%, by 5.6%

during the first quarter and by 0.9% y/y.

Tuesday, September 4th

U.S. CONSTRUCTION SPENDING fell 0.9% during July, this after rising by 0.4% during June and by 9.3% y/y. Private

Construction Spending slumped 1.2%, this after rising 0.6% in June and by 15.0% y/y. Private Residential Construction

Spending fell 1.6% in July, but has risen 19.0% y/y. Nonresidential Construction Spending fell 0.9% (+11.7% y/y) and finally,

Public Construction slipped 0.4% in July, after remaining unchanged during June and down 0.7% y/y.

The Institute for Supply Management’s composite index of manufacturing sector activity slipped to 49.6% in August from 49.8%

during July marking the third consecutive time the index has been below 50%, the first time this has happened since July 2009 and the

lowest reading also since that month. Generally speaking, “a reading above 50% indicates that the manufacturing economy is

expanding; below50% indicates that it is generally contracting.” Of note were the changes in New Orders (47.1% v 48.8%),

Production (47.2% v. 51.3%), Supplier Deliveries (inverse, indicates faster deliver times) (49.3% v. 48.7%), Inventories (53.0% v.

49.0%) and Employment (51.6% v. 52.0%). The Prices Paid Component rose to 54.0% v.39.5%.

Friday, August 31st

U.S. FACTORY ORDERS surged 2.8% during July, this after falling 0.5% during June, but rising 1.9% y/y. FACTORY

SHIPMENTS rose 2.0% during July, this after falling 1.2% in June, but rising 2.4% over the past twelve months. FACTORY

INVENTORIES rose 0.5% in July and by 3.1% y/y. Finally, the BACKLOG OF FACTORY ORDERS rose 0.8% in July, rose

0.4% in June and by 8.0% y/y.

Thursday, August 30th

The Bureau of Economic Analysis reported that PERSONAL INCOME rose 0.3% during July, this after climbing 0.3% during June.

Over the past year, Personal Income has risen 3.6%. DISPOSABLE PERSONAL INCOME (personal income less taxes) rose 0.3%

in July, by 0.3% during June, and by 3.4% y/y. Encouragingly, the WAGE & SALARY COMPONENT rose 0.2%during July and

by 3.5% y/y. PERSONAL CONSUMPTION, which represents approximately 70% of economic activity, rose by 0.4% in July, this

after remaining unchanged during June, but rising 3.3% y/y. PERSONAL SAVINGS (Disposable Personal Income Less Outlays)

rose by an annualized rate of 4.2% during July, by 4.3% in June and by 4.2% y/y. The PCE CHAIN PRICE INDEX one of the

Fed’s favorite measures of inflation rose 0.0% in July (+1.3% y/y), while the core PCE Chain Price Index also remained unchanged

during July, but has risen 1.6% y/y.

Wednesday, August 29th

In its FIRST REVISION TO SECOND QUARTER GROSS DOMESTIC PRODUCT, a tally of the output of all goods and

services in the United States, the Commerce Department reported that the economy grew at an annualized rate of just 1.7%, up from

an initially reported 1.5%, but down from growth rates of 2.0% and 4.1% recorded during the first quarter of 2012 and the final

quarter of 2011, respectively. Over the past four quarters GDP rose by 2.3%, continuing to make this recovery the weakest on record.

GOVERNMENT SPENDING was the main drag falling a by revised 0.9%, as compared to an initially reported 1.4% during Q2, this

after falling by 3.0% during Q1 and by 2.4% y/y. The decline in Government Spending was the sixth consecutive and has thus slowed

to its weakest since 1983. This illustrates the dilemma the government is facing, how to fuel economic growth as it has in the past, but

without increases in government spending. Meanwhile, PERSONAL CONSUMPTION rose at a revised annualized rate of 1.7%,

this as compared to an initially recorded 1.5% and as compared to growth rates of 2.4% during Q1 and 1.9% y/y. BUSINESS FIXED

INVESTMENT, a key contributor to recent economic growth rose at a revised rate of 4.2% as compared to an initially reported rate

of 5.4%, and as compared to growth rates of 7.5% during Q1 and 10.2% y/y. The impact from FOREIGN TRADE added a revised

0.3% to Q2 GDP, a mirror image of the 0.3% drop that was initially reported while Domestic Final Sales rose by a revised 1.6%

during the Q2, as compared to 1.5% that was initially reported, but down from 2.0% in Q1 and from an annualized pace of 1.7% y/y.

The INVENTORY EFFECT subtracted 0.2% from Q2 GDP, down from what was an initially reported gain of 0.3%.

RESIDENTIAL INVESTING rose at a revised annualized rate of 8.9%, down from an initially reported gain of 9.8%, and down

from a growth rate of 20.6% reported during Q1 and 10.7% y/y. Finally, of note, the PCE Chained GDP Price Index rose at a rate

of 1.6% during Q2, unrevised from what was initially reported, but down from 2.0% recorded during Q1 and 1.7% y/y.

Tuesday, August 28th

The CONFERENCE BOARD’S CONSUMER CONFIDENCE INDEX fell to 60.6 during August from 65.4 in July. The present

situation index slipped to 45.8 in August from 45.9 during July while the expectations component plunged to 70.5 during August

from 78.4 one month prior. Those surveyed saying that jobs are “hard to get” fell to 40.7% in August from 41.0% during July while

those claiming that jobs are “plentiful” decreased to 7.0% from 7.8%.

Friday, August 24th

ORDERS FOR DURABLE GOODS (those expected to last at least three years) rose 4.2% during July, this after rising by 1.6%,

1.5% and 4.9% over June, May and y/y, respectively as Transportation Orders rose 14.1% (+16.2% y/y). Orders for NonDefense

Capital Goods, Excluding Aircraft, fell 3.4% in July and by 5.6% y/y. Orders for nondefense capital goods jumped 6.8%

(6.7% y/y) during July.

Thursday, August 23rd

The Commerce Department reported that SALES OF NEW HOMES rose during July to 372,000 from 359,000 during June. Sales

of New Homes rose by 25.3% y/y, but have fallen by nearly 75% since the peak in July 2005 of 1,279,000 units. At the current sales

rate, it would take just 4.6 months to sell the current inventory of unsold homes, down from 4.9 months one month prior, the lowest

since Q4-2005. The median price of a new home fell 2.13% to $224,200 during July from $229,100 in June (-2.5% y/y).

Wednesday, August 22nd

SALES OF EXISTING HOMES rose 100,000 during the month of July to 4.47 million from 4.37 million one month prior and have

risen 10.4% y/y. The inventory of unsold homes fell to 6.4 from 6.6 months, a six year low. Finally, the median existing-home

sales price fell $1,500 to$187,300 during July from $188,800 in June. Over the past year, median home prices have risen 9.4%, but

still sit near their April 2002 levels. According to Haver Analytics, “mortgage payments as a percentage of income rose m/m to

13.9% versus the high of roughly 25% in 2006. The average monthly mortgage rate fell to 3.81%.”

Friday, August 17th

The Conference Board reported that its INDEX OF LEADING ECONOMIC INDICATORS rose 0.4% during July, this after

falling 0.4% during June. Seven of the ten components that comprise the LEI increased including, in order of impact, average weekly

initial claims for unemployment insurance (inverted), building permits, the interest rate spread, stock prices, the Leading Credit Index,

manufacturers’ new orders for non-defense capital goods excluding aircraft, and manufacturers’ new orders for consumer goods

and materials. The negative contributors include, in order of impact, were the ISM New Orders Index and the average consumer

expectations for business conditions. Average weekly manufacturing hours went unchanged during July. According to Ataman

Ozyildirim, Economist at The Conference Board, “with this month’s increase, the U.S. LEI returned to its May level. The majority

of its components improved, led by large contributions from housing permits and initial unemployment claims. The LEI’s six-month

growth rate seems to be stabilizing, pointing to a continuing but slow expansion in economic activity for the rest of the year.

Meanwhile, the coincident economic index, a measure of current conditions, has been rising slowly but steadily, with all four

components improving over the last six months.””

Thursday, August 16th

HOUSING STARTS fell 1.06% or 8,000 to 746,000 during July, just off June’s post-recovery high of 754,000, but nonetheless

remain nearly two-thirds off their 2005 average. Over the past year Housing Starts have risen 21.5%. Of note is the fact that there

must be approximately 300,000 housing starts per year just to replace those lost to natural causes, man-induced causes or by the

growing U.S. population. Single-family housing starts fell 6.52% or 35,000 to 502,000 from 537,000 during June. Multi-family

housing starts rose 27,000 or 12.44% to 244,000 in July from 217,000 during June. BUILDING PERMITS, a preview of future

housing starts bolted 13.16% higher to 812,000 during July from 760,000 in June (+29.5% y/y). Our take – the housing market has

begun to show some signs of bottoming and most likely, at least will not be a drag on the economy in 2012.

Tuesday, July 31st

According to the Department of Labor, the EMPLOYMENT COST INDEX, a “measure of quarterly changes in compensation

costs, which include wages, salaries, and employer costs for employee benefits for civilian workers (non-farm private and state and

local government)” rose by 0.5% during the second quarter, this after having risen 0.4% during Q1 and by 1.8% y/y. The wages &

salaries component (70% of ECI) rose by 0.4% (1.8% y/y) during the second quarter, down slightly from the 0.5% gain during the

first quarter. The cost of benefits rose by 0.6% over the past quarter, by 0.3% during the first quarter and by just 2.0% y/y.

Economic & Investment Definitions

Strength of Dollar

A Weak Dollar increases exports while a Strong Dollar decreases exports. The reasoning is that a Weak dollar makes goods

and services cheaper abroad while a strong dollar makes exports more expensive abroad. A strong dollar also helps keep

inflation at bay by making imports cheaper, thereby helping keep wage and other inflationary pressures below the boiling

point. It also provides foreign Treasury buyers two ways to profit – through bond price and dollar appreciation.

A weak dollar can be inflationary since it makes imports more expensive. This, in turn, gives domestic companies

room to increase prices. Conversely, a strengthening dollar makes imports more competitive on a price basis.

“Let’s imagine the dollar quickly dropped by a further 25% against each major world currency, roughly parallel to housing’s

unprecedented 30% decline. That would mean it would take $2 to buy a single euro. On the good side, U.S. manufacturers

would find it easier to compete globally, and foreign tourism would boom in the U.S. On the bad side, inflation in the U.S.

would zoom because of the rising cost of imported products. Americans would have even more trouble getting a loan as

foreign buyers pull out of the debt market. Abroad, the cheap dollar would make it harder for other nations to export to the

U.S., hurting their growth. China could face social unrest. Trade wars could break out.” (Business Week, What Happens If

The Dollar Crashes; October 26, 2009)

Trade Deficit

An expanding trade deficit (imports exceeding exports) hurt the dollar because more dollars are held by foreigners. Some

fear that foreigners will tire of holding declining dollars and sell them for other currencies putting added pressure on the

greenback. In addition, foreign investors with U.S. assets are seeing those holdings decline as the dollar falls. As these

investors sell these holdings and move to investments in other countries, it adds to selling pressure of the dollar.

Employment Cost Index

Compiled by the Bureau of Labor Statistics, is considered the most accurate measure of wages, salaries and benefits,

measuring compensation per hour, including wages, salaries and the cost of benefits - from health insurance to Social Security

contributions. Wages and salaries account for approximately seventy percent of the employment cost index with benefits

(health insurance and pension benefits) accounting for the rest.

Put/Call Ratio

The put-to-call ratio measures the sentiment of options traders. When the number of puts compared to calls is high, that

means that many traders think the market will go down. When call volume outnumbers puts, many think the market is going

to rise. Many use this as a contrarian indicator meaning that if options traders are too bullish, the market may actually fall.

Put option buyers bet that stocks will fall while call buyers bet that stocks will rise. Conversely put option sellers bet that

stocks will rise while call sellers bet that stocks will fall. Options buyers and sellers are subject to expiration dates. Buyers

of call options bet that a stock will be worth more than the price set by the option (the strike price), plus the price they pay for

the option itself. Buyers of put options bet that the stock’s price will drop below the price set by the option. When the

number of puts compared to calls is high, that means that many traders think the market will go down. When call volume

outnumbers puts, many think the market is going to rise. Many use this as a contrarian indicator meaning that

if options traders are too bullish, the market may actually fall.

Volatility Indices (^vix and ^vxn)

According to the Chicago Board of Options Exchange, the Volatility Index, “known by its ticker symbol “vix,” was

introduced by CBOE in 1993, and measures the volatility of the U.S. equity market. It provides investors with up-to-the-

minute market estimates of expected volatility by using real-time OEX index option bid/ask quotes.”

The CBOE NASDAQ Volatility Index, known by its ticker symbol “vxn,” is the “benchmark of “tech stock” volatility based

on the implied volatility of the NASDAQ 100 Index options. Calculated using the same methodology as the CBOE Market

Volatility Index, the VXN is constructed so that, at any given time, it represents the implied volatility of a hypothetical at-the-

money NDX option with thirty calendar days to expiration.”

Arms Index (^sti.n)

A contrarian index that indicates the bullishness or bearishness of investors. A reading below one indicates more action in

rising stocks and a figure above one indicates more action in declining stocks. As a contrarian indicator, a reading above one

is bullish for investors while a reading below one indicates bearishness.

Advancing Stocks / Declining Stocks + Advancing Volume / Declining Volume = The result is the Arms Index

Federal Reserve Data, Dates, Releases & Definitions

2012 Scheduled FOMC Meetings:

September 12; October 23-24; December 11

Federal Funds Rate

The rate set by the Federal Reserve and that banks charge each other to borrow money overnight (the overnight inter-bank

lending rate). The Fed Funds target rate currently is between 0.00% and 0.25%; the most recent rate change being a 75 to

100-basis point rate cut on December 16th

, 2008. This was the tenth rate cut after the Fed Funds Rate peaked at 5.25% on

June 29th

, 2007.

Discount Rate

The interest rate charged to commercial banks and other depository institutions on loans they receive from the Federal

Reserve. Currently at 0.75%. Most recent change was a 25-basis point rate hike on February 18th

, 2010 intra-meeting.

This was the first hike in the Discount Rate since June 29th

, 2006 when the Fed hiked from 6.00% to 6.25%.

Money Supply

The Federal Reserve controls the supply of money in the economy through open market operations with banks. If the Fed is

buying U.S. Treasuries from banks, the banks receive cash, which they then can lend out. The Fed required banks to maintain

reserves of ten percent of deposits. Therefore, for every dollar they receive by selling Treasuries to the Fed, $9.00 can be lent

out to borrowers. Therefore, new dollars are entering the economy. The Fed therefore drains liquidity from the economy

through selling U.S. Treasuries to member banks.

M1-A currency plus demand deposits

M1-B M1-A plus other checkable deposits

M2 M1-B plus overnight repos, money market funds, savings and time deposits less than $100,000,000

M3 M2 plus large time deposits and term repos

M4 M3 plus all other liquid assets

Statement by The Federal Reserve following the July 30th

& August 1st, 2012 Meeting

Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat

over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated.

Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the

year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year,

mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee

expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee

anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.

Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee

anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual

mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided

today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions –

including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant

exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of

securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency

debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee will closely monitor incoming

information on economic and financial developments and will provide additional accommodation as needed to promote a stronger

economic recovery and sustained improvement in labor market conditions in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A.

Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C.

Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time

period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.

Statement by The Federal Reserve following the June 20th

, 2012 Meeting

Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding

moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated.

Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier

in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower

prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.


expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee

anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.

Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee

anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.



today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--

including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally

low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of

securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the

current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less.

This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make

broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments

from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee is

prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market

conditions in a context of price stability.


Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C.

Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed continuation of the maturity extension

program.

Statement by The Federal Reserve following the April 15th

, 2012 Meeting

Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding

moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated.

Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector

remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term

inflation expectations have remained stable.


expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee

anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains

in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices

earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or

below the rate that it judges most consistent with its dual mandate.



today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--

including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally

low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in

September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and

agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as

appropriate to promote a stronger economic recovery in a context of price stability.


Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting

against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low

levels of the federal funds rate through late 2014.

Limits, Limitations, Data & Dates

Social Security Data

New York Tax Freedom Day for 2011 May 1st

2012 Social Security Cost of Living Adjustment (COLA) 3.6%

Average Monthly Benefit $1,177.

2012 Social Security Wage Base $110,100.

Social Security Recipients Under Age 65 in 2010 Can Earn $14,160.

Social Security Recipients Ages 65 Until Full Retirement Age $37,680.

Social Security Recipients At Full S.S. Retirement Age Unlimited

Re-characterization of Roth IRA back to Traditional IRA

The Internal Revenue Service gives you up to October 15th

of the year following the year of the Roth conversion to re-

characterize that conversion. So for 2011 Roth conversions, the re-characterization deadline is October 15, 2012. The

re-characterization treats the funds as if the conversion had never occurred. Should you re-characterize, don’t forget to file

an amended return and claim a refund for any tax paid on the conversion.

Retirement Savings Facts

2012 401(k) limits are $17,000 for individuals under fifty years of age.

2012 401(k) limits for over age fifty are an additional $5,500 as a catch-up provision.

2012 IRA limits are $5,000 for individuals under fifty years of age.

2012 IRA limits are $6,000 for individuals over fifty years of age.

2012 Traditional IRA contributions phased out for Joint Filers w/ AGI between $90,000 and $109,999.

2012 Traditional IRA contributions phased out for Individual Filers w/ AGI between $56,000 and $65,999.

2012 Roth IRA contributions phased out for Joint Filers w/ AGI between $173,000 and $182,999.

2012 Roth IRA contributions phased out for Individual Filers w/ AGI between $110,000 and $124,999.

Largest Holdings Regardless of Asset Class

Ranked by Market Value as of July 31st, 2012.

Percent of Total

Assets Managed Company Name Symbol As of

July 31st,2012

As of

June 30, 2012

As of

May 31, 2012

12.00% Cash & Equivalents 1 1 1

5.38% Payden GNMA Fund PYGNX 2 2 2

4.03% Apple Computer AAPL 3 3 3

3.32% SPDR Dividend ETF SDY 4 4 4

2.77% Loomis Sayles Bond Fund LSBRX 5 5 5

2.25% PIMCO Total Return PTTDX 6 6 7

1.98% MetWest Tot Ret Bond Fund MWTRX 7 8 9

1.92% DoubleLineTotal Return DLTNX 8 7 8

1.77% Nike, Inc. NKE 9 11 6

1.77% MasterCard, Inc. MA 10 9 10

1.75% General Electric GE 11 10 12

1.59% iShares Barclays TIP Bond TIP 12 12 11

1.51% Conoco Phillips COP 13 13 13

1.50% Altria Group, Inc. MO 14 14 15

1.50% Visa, Inc. V 15 15 16

1.38% Intel Corporation INTC 16 16 14

1.34% Ridgeworth High Income STHTX 17 17 17

1.12% Celgene Corporation CELG 18 20 19

1.06% Exxon Mobil XOM 19 19 20

0.99% Google, Inc. GOOG 20 24 23

0.96% JP Morgan Chase JPM 21 22 27

0.94% EMC Corporation EMC 22 23 26

0.94% Schwab 1000 Fund SNXFX 23 21 22

0.93% McDonald’s Corp. MCD 24 18 18

0.89% Permanent Portfolio PRPFX 25 25 24

0.69% Las Vegas Sands LVS 33 29 25

0.60% Ford Motor Company F 38 30 22

Portfolio Concentration: Top 25 holdings represent 55.60% of the Assets Managed at Fagan Associates

as of July 31st, 2012.

Largest Mutual Fund Holdings as of July 31st, 2012.

Domestic Equity Funds International Equity Funds Hybrid/Fixed Income/ Muni Fund/ETF

Schwab 1000 Fund Oakmark Global Select Payden GNMA Fund

Parnassus Equity Income Fund Harbor International Fund Loomis Sayles Bond Fund

Baron Asset Fund Tweedy Browne Global Value PIMCO Total Return

Dow Jones Broad Market Index Vanguard International Growth MetWest Total Return Fund

Oakmark Fund Harding Loevner Emerging Markets Double Line Total Return Fund

Common Stock & Equity ETF Portfolio Holdings**

Ranked by Market Value as of July 31st, 2012.

Percent of

Common Stock

Company Name Symbol As of

July 31, 2012

As of

June 30, 2012

As of

May 31, 2012

9.02% Apple Computer AAPL 1 1 1

7.43% SPDR Dividend ETF SDY 2 2 2

3.97% Nike, Inc. NKE 3 3 3

3.96% MasterCard, Inc. MA 4 4 4

3.91% General Electric GE 5 5 6

3.37% Conoco Phillips COP 6 6 6

3.37% Altria Group, Inc. MO 7 7 8

3.35% Visa, Inc. V 8 8 9

3.09% Intel Corp. INTC 9 9 7

2.50% Celgene Corp. CELG 10 12 11

2.38% Exxon Mobil XOM 11 11 12

2.21% Google, Inc. GOOG 12 15 14

2.15% JP Morgan Chase JPM 13 13 17

2.10% EMC Corporation EMC 14 14 16

2.09% McDonald’s Corporation MCD 15 10 10

1.97% Verizon Communications VZ 16 16 18

1.85% Direct TV DTV 17 17 19

1.73% Pfizer, Inc. PFE 18 20 21

1.70% Ebay, Inc. EBAY 19 22 23

1.63% iShares DJ Select Divd Index DVY 20 21 20

1.53% Las Vegas Sands LVS 21 18 15

1.40% S&P 500 ADR’s SPY 22 23 22

1.34% Abbott Labs ABT 23 24 25

1.34% Ford Motor Company F 24 19 13

1.24% Microsoft Corp. MSFT 25 25 24

Portfolio Concentration: Top 25 holdings represent 70.65% of the Common Stock

portfolio, as of July 31st, 2012.

Largest Mutual Fund Holdings as of May 31st, 2012.

Domestic Equity Funds International Equity Funds Hybrid/Fixed Income/ Muni Fund/ETF

Schwab 1000 Fund William Blair International Growth Payden GNMA Fund

Baron Asset Fund Tweedy Browne Global Value Loomis Sayles Bond Fund

Parnassus Equity Income Fund Harbor International Fund PIMCO Total Return

Dow Jones Broad Market Index Vanguard International Growth Double Line Total Return Fund

Oakmark Fund Harding Loevner Emerging Markets MetWest Total Return Fund

Common Stock & Equity ETF Portfolio Holdings**

Ranked by Share Balance as of July 31st, 2012.

Notes & Stock Splits;

Avg. Cost Per Share

Company Name Symbol As of

July 31, 2012

As of

June 30, 2012

As of

May 31, 2012

$23.68 1 2 General Electric GE 143,290 136,503 133,983

$9.84 2 1 Ford Motor Company F 110,483 142,023 145,506

$50.29 3 3 SPDR Dividend ETF SDY 99,896 96,921 95,730

$20.99 4 4 Intel Corporation INTC 91,391 90,651 91,051

$24.13 5 5 Altria Group, Inc. MO 71,097 71,169 70,844

$13.27 6 6 Bank of America BAC 65,256 67,356 68,606

$22.27 7 7 EMC Corporation EMC 60,975 60,450 60,080

$18.02 8 8 Pfizer, Inc. PFE 54,543 54,543 54,535

$10.67 9 9 FNB Corp, PA FNB 51,800 48,130 48,630

$44.65 10 10 Conoco Phillips COP 47,076 46,171 45,157

$40.15 11 11 JP Morgan Chase JPM 45,375 44,015 42,940

$23.07 12 12 Northern Oil & Gas NOG 41,330 41,330 41,500

$34.37 13 13 Verizon Communications VZ 33,212 32,387 32,762

$72.49 14 15 Nike, Inc. NKE 32,291 31,836 31,371

$28.28 15 14 Microsoft Corporation MSFT 32,012 32,012 32,399

$46.81 16 16 Las Vegas Sands LVS 32,005 31,640 31,750

$39.26 17 19 Ebay, Inc. EBAY 29,180 27,195 25,030

$49.87 18 17 Direct TV DTV 28,297 28,297 28,297

$57.70 19 18 Celgene Corp CELG 27,732 27,532 27,532

$7.97 20 20 TrustCo BankCorp TRST 24,589 24,549 24,549

$27.17 21 23 Cardtronics, Inc. CATM 21,790 21,335 21,120

$50.16 22 22 iShares DJ Select Divd Index DVY 21,659 21,734 21,830

$42.27 23 24 Exxon Mobil XOM 20,833 20,933 20,932

$26.57 24 25 CBOE Holdings, Inc. CBOE 20,610 20,680 20,680

$28.82 25 26 AT&T Corp T 20,490 20,490 20,490

$44.94 28 21 McDonalds Corp. MCD 17,765 22,759 22,659

**Please note that all data listed on this and the preceding page are for general information purposes only and are not meant to be

specific recommendations. Any change in ranking by either market value or share balance are not meant to conclude that Fagan

Associates recommends a purchase or sale of the referenced security. Please consult with your financial advisor prior to making any

changes to your portfolio.

Market Commentary

“Try The Irrational”

The Record, 03.29.2009

As human beings, most of us are rational. We don’t run in front of moving cars or put our hands on hot stovetops. Quite often

becoming a successful investor requires that you take a seemingly irrational step. The more rational you are the less likely you are to

buy low and sell high and the less likely you are to have faith that it’s not different time. It is for this reason that, after talking to many

investors, clients and non-clients alike, that we thought within the body of this column we would, in no particular order, present some

thoughts and questions for the readers regarding investing.

If the entire objective of investing is to buy low and sell high, why then when investors have the chance to actually buy low and sell

high very few do?

If it has never been “different this time” before regarding the stock market, why then do investors think it is different this time and

investing will never again be profitable? If you do think it is different this time and it is not then you may also be making a life

changing decision.

At the top of a bull market there are few pessimists. At the bottom of a bear market there are few optimists.

From top to bottom the S&P 500 dropped more than fifty-six percent. Sounds to us like it priced in a pretty severe recession.

Sometimes you can do everything right and still not be rewarded. That doesn’t mean you aren’t making the right choices. We

recognize that stocks have gone nowhere in more than a decade. We recognize that this is very frustrating. We recognize that you are

feeling somewhat insecure. However, whenever we think of this we are reminded of the author of “The Complete Book of Running,”

James Fixx, a picture of health who was very instrumental in converting millions of Americans during the 1970’s, including ourselves,

into avid runners. Unfortunately, Mr. Fixx died at the age of fifty-two from a heart condition while running in Vermont. Is the moral

of this story that Mr. Fixx should have not exercised and not eaten healthy or is it that sometimes things just don’t work out as

planned? We would suggest the latter.

We often get the claim that “I’m going to get back into the market once the economy looks better.” To that we respond that the stock

market is a discounting mechanism and it therefore bottoms approximately six to nine months ahead of economic turns for better and

for worse.

This is the worst economic downturn since the Great Depression. Pure rhetoric. Who says? During the 1970’s the national

unemployment rate peaked above nine percent; inflation was above ten percent and mortgage rates were above fifteen percent. Despite

the fact that things may get worse, as of today unemployment is just over eight percent; inflation is near two percent and mortgage rates

are at a forty year low, 4.85%.

Gold is a hedge against inflation and not an asset class.

At the current time, investors are experiencing the worst ten-year stretch since the ten years ending 1938. Sounds like investors over

the next ten years might be amply rewarded for their pain they have endured over the prior ten.

At the bottom of the bear market most investors will be severely under allocated to stocks.

This is just some food for thought. We all have different goals and objectives. We all have different sources of income leading up to

and in retirement so that we must all plan accordingly. However, over the past century, for the average American the surest way to

achieve wealth has been through investing in the stock market. Oh, we forgot. It’s different this time.

“Perform Your Own Stress Test”


Beginning this past Wednesday and continuing through the end of April, U.S. Federal Bank and Thrift Supervisors will be conducting

an extensive analysis of banking institutions with assets greater than $100 billion to determine if such banks have sufficient capital

buffers to withstand “the impact of an economic environment that is more challenging than is currently anticipated.” According to this

agency, this assessment will test financial institutions under a “baseline scenario [that] reflects a consensus expectation among private

forecasters and the more adverse scenario [that] reflects a deeper and longer recession.” The more adverse scenario includes

unemployment rates above ten percent and a housing market that continues to decline.

With this in mind, we believe that investors should conduct their own “stress test” to determine whether or not the current allocation of

their assets can withstand a stock market that continues to decline. The question that this stress test should answer is “if the stock

market declines another twenty percent from its present level of approximately 7,270 on the Dow Jones Industrial Average and remains

at this subdued level of approximately 5,800, will my standard of living be impacted, and, if so, to what extent?”

When performing the above referenced stress test, be careful to include all of your assets that can produce income such as a Defined

Benefit Pension Plan, Social Security, and the values of your 401(k), 403(b) or other Employer-Sponsored Defined Contribution Plan.

If you are already retired, include a conservative value of your home for a potential reverse mortgage. On the liability side, don’t

forget your daily living expenses as well as entertainment costs and gifts in addition to housing costs, insurance costs, energy costs and

the cost of your automobile.

If the outcome of your own stress test indicates that your life will not change, then ignore the noise coming out of the financial markets

and focus on what is really important, your life. If, however, a decline to this extent would impact your standard (quality) of life, then

perhaps you should make some changes to your investment portfolio. Or, if you are retired, perhaps what you will leave to your heirs

might need to be adjusted. If such an unanticipated “adverse scenario” becomes a reality, tough choices, like this, might be necessary

to preserve your standard of living.

The probability of such a scenario is relatively low, less than twenty-five percent, but if you were to conduct such a stress test, it may

allow you to invest more appropriately for your needs without the mental highs and lows that are part and parcel of a bear market.

Finally, if you pass your own stress test, be patient and let time heal our economic woes. We realize that this may be difficult because

we live in a media-saturated country, a country where instant gratification is the rule rather than the exception, in a country where

solutions such as liposuction and diet pills garner attention rather than diet and exercise. Once again, we ask that should you pass your

own stress test, be patient and tune out the daily noise.

“Goldman Sachs Is Right on Target”


This past Wednesday, in a note to clients, economists at renowned investment bank Goldman Sachs, the brokerage firm that was

brilliantly shorting and therefore profiting from fixed-income products that were related to the subprime mortgage mess, predicted that

the U.S. economy would enter into a modest recession during 2008. We couldn’t agree more.

Most economists define a recession as two consecutive quarters of negative growth in Gross Domestic Product (GDP) which, also by

definition, measures the expansion of contraction of the economy of a nation. Goldman Sachs predicts that “the recession is likely to

last two to three quarters and should be relatively mild by historical standards, with a cumulative decline in GDP of only about a half

percent,” this according to Goldman Sachs economists’ Jan Hatzius and Ed McKelvey. For all of 2008, Goldman Sachs expects GDP

to rise by 0.8%. According to the two economists, keeping the recession “relatively mild” is the assumption that the Open Market

Committee of the Federal Reserve, the body that determines the direction of short-term interest rates, will aggressively lower rates in

order to provide liquidity to the credit markets and ease the credit crunch. Ultimately, the impact of this mild recession will be an

increase in the unemployment rate from its current level of 5.0% to 6.25% by the end of this calendar year.

All of the above loudly begs the question, “fine, but what does this mean for my investments?” Simply put, we believe that the

during the fourth quarter of 2007 the U.S. economy entered a period of slow to somewhat stagnant economic growth that will most

likely last throughout the majority of 2008. Whether this is the slight majority or vast majority of 2008 has everything to do with just

how aggressive the Fed is when it responds to interest rates. Thus far, we believe that the Fed has not acted aggressively enough when

regarding interest rates and that the downturn in the economy, if one thinks of it as a moving car or other vehicle, has maintained its

distance over the Fed. The Fed must do something to close this gap and to eventually move ahead of the economic downturn. It is

with the efforts of the Fed, perhaps along with fiscal (tax) policy relief coming from congress and the Bush Administration that the

economy will eventually turn for the better.

The Chairman of the Federal Reserve, Ben Bernanke, in a recent luncheon speech in Washington, D.C., stated that the Fed stands

“ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”

The jury is still out as to what Chairman Bernanke defines as “substantive” when it comes to the action required to stem the economic

downturn that is facing America.

To determine where the stock market may go one must look back at historical data. We did just that and found that during economic

downturns when the Federal Reserve has lowered interest rates at three consecutive meetings, the stock market has responded

favorably as measured by a time frame of one year. In fact, there have been thirteen times in which the Fed has cut interest rates at

three consecutive meetings and the stock market has been higher one year later on every occasion, save one. That was during the early

1930’s when the United States was on the verge of the Great Depression. Therefore, if you believe as we do, that we are not entering

into an era of depression, stock investors have a golden opportunity to add to their holdings and reap capital gains one year hence.

Unfortunately, during times like this it is very uncomfortable to invest in stocks, but we cannot see anything other type of investment

that we would rather be in than equities. That said, maintain a disciplined investment approach and always have a plan for selling a

position after making the purchase.

“Secular vs. Cyclical Bear Market”


There is a great debate raging in the investment community over whether we have entered a secular bear market or have we, since

early 2000, merely been correcting the excesses of the late 1990’s in a cyclical bear market within a bull market that began in 1982.

For the purposes of this article, secular can be defined as the general trend (or climate) that lasts for a long period of time. Typically,

the secular pattern is dotted with abnormalities that run counter to the overriding trend, but are relatively short in nature. For example,

the Dow Jones Industrial Average rose from a closing level of 776.90 on August 12, 1982 to 11,723.00 on January 14, 2000 for a gain

of more than 1400%! However, within this long-term or secular bull market there were four cyclical or short-term bear markets

including one that lasted approximately three months in 1987; one that lasted approximately four months during 1990; one that lasted

ten months during 1994; and one that lasted a mere two months during 1998.

Prior to the beginning of this bear market that has now lasted nearly forty months, the longest bear market since the beginning of

the secular bull that dates back to 1982, was the bear of 1994 that lasted ten months. Keep in mind that it is not only the depth of a

bear market, but the length of one that determines an investor’s appetite or lack of appetite for stocks!

Having analyzed a secular bull market, one that perhaps concluded in early 2000, let us now turn our attention to the most recent

secular bear market, one that peaked on February 9, 1966 at Dow 995.20 and one that, fifteen years later, on February 9, 1981 closed

at Dow 947.20, obviously below the prior high set one and one-half decades ago! It is interesting to note that within the secular bear,

there were no less than four cyclical bull markets; one that lasted twenty-six months, from October 7, 1966 to December 3, 1968 when

the Dow rose from 744.30 to 985.20 representing a gain of 32.37%; one that lasted more than thirty-one months, from May 26, 1970 to

January 11, 1973 when the Dow rose from 631.20 to 1051.70 representing a gain of 66.62%; a cyclical bull that lasted twenty-two

months, from December 6, 1974 to September 21, 1976 when the Dow rose from 577.60 to 1014.80 representing a gain of 75.69%;

and a move that lasted nearly three years, from March 6, 1978 to February 9, 1981 when the Dow rose from 742.70 to 947.20

representing a gain of 27.53%.

It is safe to conclude from the above paragraph that it is possible to make money in a flat, secular bear market. (Please note that the

data utilized above does not include dividends.) The heavy nature of this article hopefully reflects the importance of the following

question and the impact that this question will have upon your financial future. Is this a long-term bear or a pause amidst the bull that

began in 1982?

Despite the fact that it is too early to tell whether this is a cyclical bear market or a secular bear market, it is important to note that

regardless of which type of market we are in, the Dow has risen more than 17.70% off its recent lows; the S&P 500 close to 20% while

the NASDAQ Composite has risen more than thirty-five percent indicating a bullish pattern. It will be interesting to see how the bears

react if the Dow rises more than twenty percent from its closing low of 7286.27 set on October 9, 2002. A close above twenty percent

is the definition of a bull market trend. This will happen if the Dow closes at or above 8743.52 and will put the pressure on the bears.

Despite the question of whether we may be about to embark on a new secular bull market or a cyclical bull within a secular bear,

investors should have upside and downside targets for their stocks and utilize stop/loss provisions to protect their capital. Stay tuned.

“China, A Country to Reckon With”


As investors receive and then open their April statements sometime later next week or early the following week and see the slight

decline in their portfolio values, it will probably occur to only a few of them that the Chinese economy may be to blame.

Late this past week, in an effort to slow down an economy that had grown at an annualized rate of 9.7% during the first quarter of

2004, Chinese economic officials told banks to stop lending to certain industries, including the aluminum, cement, real estate and steel

industries, fearing that their economy was in danger of overheating. Furthermore, the People’s Bank of China has decided to raise

interest rates for the first time since 1955 also indicative of their intention to slow the economy to a more sustainable pace.

Given the fact that many, including us, attribute a good portion of the run-up in commodity prices to soaring demand from China, we

thought it would be a good idea to familiarize readers of our column to some of the demographics and demand emanating from the

Chinese.

China is the most populous country in the world with over 1.29 billion people inhabiting an area slightly smaller than Canada, but

larger than the United States. This represents approximately one-fifth of the global population. According to the State Statistical

Bureau for the People’s Republic of China and noted in a Prudential Research report, “the percent of the population living in rural

areas fell to 61% last year, down from 79% in 1982 and 88% in 1952. This trend toward urbanization is very similar to the experience

in the United States during the 1800s and through the 1970s. In 1800, 94% of the U.S. population resided in rural areas. By 1900, this

percentage declined to 60%. It fell to a record low of 26% in the 1970s.” The result is an average annual increase of urban population

of approximately 20 million people!

China’s main source of energy comes from coal, which they mine themselves. China consumes approximately 5.4 million barrels of oil

per day, a number which should increase to approximately 7 million barrels per day by 2010. By contrast, the United States consumes

over twenty million barrels per day. China now imports approximately 30% of its oil consumption.

There are ten million cars, trucks, and buses in all of China. This compares with 134 million registered cars, trucks, and buses

in the United States.

China consumes approximately 50% of the world’s cement, and 36% of its annual production of steel.

The average hourly earnings of a Chinese manufacturing worker is $0.61 compared with the average hourly earnings of a United States

worker of $16.14! Despite being the largest country in terms of population, there are more than one hundred countries in the world

with higher per capita incomes!

Agriculturally, China’s annual grain output is approximately 500 million tons, not enough to feed the billion-plus people. Therefore,

China is a net importer of grain. With the United States, this amounted to over 800 million bushels of soybeans during 2003. All this

with only 7% of the world’s farmable land.

With China’s population increasing by approximately ten million people per year and with average hourly earnings well under $1.00,

the economic potential is mind boggling. However, thinking back to the trials and struggles of the United States over the past two

centuries and one realizes that this potential will not be easily realized. Investors in China must be patient. However, we believe this

patience will be well-reward over the next three to five years.

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