Copyright © Integrated Concepts 2011. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated businessentity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a completeanalysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party as-sumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.

4TH QUARTER 2011

Investing Doesn’t Have to Mean Income or Growthby John McCartin

We’ve all heard the old say-ing, “You can’t have your

cake and eat it, too.” There’s asimilar notion that applies to investing.

The common belief is that ifyou invest for growth, you sacri-fice income — and when itcomes to the stock market, thatadage generally holds true. Con-versely, it is commonly thoughtthat if you invest in non-stockmarket alternatives, designed togenerate income through interestand dividends, you sacrifice theability to grow your money.

Well, sometimes reality runscounter to clichés, especiallywhen the reality is that we’vebeen stuck in a secular bear mar-ket for almost 12 years. As I’vementioned several times in pre-vious newsletters, history showsus that a secular bear markettypically lasts 20 years or more,which means we could have another decade or so of zeromarket growth.

Now, here’s another old saying you may have heard:

“Over the long run, the stockmarket outperforms most other asset classes.” Obviously,

investors who believe that theyare sacrificing income in favor ofContinued on page 2

Economic Indicators: What Can They Tell You?

Sooner or later, every investor iscurious to know if economic

indicators can provide clues for investing. That’s why financial insti-tutions have economists on staff andwhy the latest government reportson this economic indicator or thatmake headline news.

However, the economy is a bitlike the weather: forecasters are al-ways talking about it, but what ac-tually happens is quite often a sur-prise. All the same, it helps to knowat least a little bit about what they’retalking about, if only to begin to fig-ure out for yourself what indicatorsyou should pay attention to andhow concerned you really should bewhen the indicators are announced.

With that in mind, here’s a briefintroduction to some of the mostwidely watched economic indica-tors. The organizing principle hereis whether they’re providing infor-mation about the past, the present,or the future.

Lagging IndicatorsThe family of “lagging” or

“trailing” indicators gets its name

from the fact that they reflect eco-nomic conditions that have passed.Instead of predicting the future,they confirm what has already hap-pened, so they tend not to causesharp market reactions when they’reannounced — unless they divergesharply from the consensus forecastof economists. Some of the majorlagging indicators are:• Consumer Price Index (CPI).

This is the most-watched mea-sure of inflation in America, mea-suring changes in the averageprice of a basket of consumergoods and services in the coun-try’s major metropolitan areas.Since 1945, the CPI has averagedjust above 3% a year. Significant-ly higher rates are often associat-ed with an economy that is grow-ing too fast, which can lead tosteps by the Federal Reserve toraise interest rates to curb bor-rowing and slow down the econ-omy. Issuer: U.S. Bureau of LaborStatistics. Frequency: monthly; mid-month, covering the prior month.

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Income or Growth

growth are only focused on “thelong run” and willing to makethat sacrifice for higher returns.

But if those same investorsaccept the lessons of history andthe notion that we’re only half-way through a secular bear mar-ket, they must also accept thatthis “long run” is likely to bevery long, indeed. Statistically,they won’t see the maximum return on their investments untilthe combined secular bear andbull markets have run theircourse. That — as regular read-ers know — takes about 35 years,according to history.

But many investors appar-ently don’t accept (or knowabout) the lessons of history. Ifthey did, they might have heeded the warning signs of bal-looning price-to-earnings ratiosin the late 1990s that signaled theonset of this secular bear marketand adjusted their investmentstrategies accordingly. Instead,they maintained the bulk of theirassets in the market and mayeven have been reinvesting divi-dends ever since. Nevermindthat the Standard & Poor’s 500Index is down 24% from where itstood in 2000, and still down6.8% even with reinvested divi-dends factored in.*

So, how is it that intelligentinvestors can continue to disre-gard history and remain loyal tothe market even after 12 years ofnegative growth? Why are theycontent with an even smallercake that they can’t eat?

Well, we can look to historyyet again for that answer. AsI’ve explained in this space previously, every secular bear

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market since 1899 (and even before that) has been marked byalmost non-stop volatility.Therefore, it’s not surprising thatstalwart buy-and-hold investorshave at least enjoyed the enticingthrill of temporary gains (twice,in fact) since this secular bearcycle began with a big drop in2000. Starting in March 2003, themarket climbed fairly steadilybefore a second big plungebegan in October 2007. Afterbottoming out in 2009, it hastrended upward more often thannot, although — again — thatrise has been marked by the kindof nerve-wracking bumpinessthat has typified secular bearmarkets throughout history.And just to reiterate: the net result of all this chaos is a 24%decline in the S&P 500.*

If history continues repeatingitself, committed market investors are likely to experiencemore of the same over the nextdecade as this secular bear slum-bers on; more big drops, moreslow rebounds, more volatilityand, ultimately, zero growth —and even less than that whenyou consider inflation.

Now, think again about theidea that these investors are enduring all this because they’re more interested ingrowth than income, and thenask yourself: “What about theother guy? What about the investor more interested in secu-rity and income than growth,who heeded those warning signsin 2000 and shifted assets to acertificate of deposit offering a4% return rate?”

Well, the fact is, that FDIC-insured CD could have been reliably generating that returnannually for the past 12 years —to the cumulative tune of 58%with compounding! That’smoney the CD holder couldhave reinvested to grow hismoney organically. Regularreaders know this is what I like to call the “bird-in-hand”approach to investing, which isthe alternative to crossing yourfingers and toes and hoping forgrowth in the stock market.

My point is simply this: thenumbers suggest that sacrificingincome for growth may not onlybe unwise during a secular bearmarket, it may not even be necessary. Even if you need little or no income and are onlyinterested in getting the highestpossible return on your invest-ments, conservative, non-stockmarket instruments may still beyour best option in a secularbear market. By reinvestingsmartly, with the help of your financial advisor, any number ofalternatives might handily out-perform your aggressive stockmutual funds over the nextdecade.

So enjoy your cake.*Source: advisorperspectives.com/dshortOctober 9, 2011

Economic Indicators

• Unemployment rate. This mea-sures the latest number of initialclaims for unemployment insur-ance, as well as the number ofpeople who are out of work as apercentage of the U.S. work force,defined as people who are al-ready working or looking forwork. This is considered a lag-ging indicator because unem-ployment continues to increaseseveral months after the economystarts to improve. Issuer: U.S. Department of Labor. Frequency:weekly; Thursdays prior to marketopening.

• Consumer credit report. Thismeasures the dollar balances ofconsumer debt, including creditcards and bank loans, excludingloans backed by real estate. Sinceconsumer spending accounts for70% of the U.S. economy, risinglevels of consumer credit reflect astrong economy, while declininglevels indicate economic weak-ness. Issuer: Federal Reserve. Fre-quency: monthly; five weeks aftermonth’s end.

Coincident IndicatorsCoincident indicators give a pic-

ture of the economy’s current condi-tion. These tend to cause more market volatility after their releasethan the lagging indicators. Some ofthe major coincident indicators are:• Gross Domestic Product (GDP).

This is the sum total of an econo-my’s output of goods and ser-vices, measured in each nation’scurrency. The absolute number isless important than the changeover time, expressed as a percent-age. In the U.S., GDP growth hasaveraged between 3% and 4% annually since the end of WorldWar II. Two consecutive quartersof negative growth is typicallyconsidered evidence of a reces-sion. Issuer: U.S. Bureau of Economic Analysis. Frequency:quarterly; advance release threeweeks after the end of each calendarquarter; final report released three

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months after the quarter ends.• Retail sales report. This indicator

is very closely watched by botheconomists and investors. Ittracks changes in the dollar valueof big- and small-ticket goodssold in retail stores, by mail order,over the Internet, and in vendingmachines. It’s taken as a sign ofeconomic strength (again, becauseconsumer spending accounts for such a huge percentage of the U.S. economy), as well as inflationary pressures and an indicator of whether the FederalReserve is likely to raise or lowerinterest rates. Issuers: U.S. Commerce Department and CensusBureau. Frequency: monthly; mid-month.

Leading IndicatorsLeading indicators are typically

the ones used to help make key day-to-day decisions, because they tendto indicate economic conditions sixto nine months into the future. As aresult, these are the indicators withthe greatest potential to move themarkets noticeably when they’re released. • Institute for Supply Manage-

ment (ISM) index. This index isbased on a survey of purchasingexecutives at some 300 major in-dustrial companies, reflectingtheir firms’ activities aimed at future production. The index cov-ers nine production factors, in-cluding new orders, production,employment, supplier deliveries,inventories, prices, new export or-ders, imports, and order backlog.Considered to be the single bestbarometer of conditions in themanufacturing sector, a value of50 and higher signals economicexpansion, and a value below 50signals contraction. Issuer: Insti-tute for Supply Management. Fre-quency: the first business day ofevery month; covering the previousmonth’s data.

• Consumer confidence index.This indicator is a summary of in-terviews with some 5,000 con-sumers nationwide (for a randomsample of Americans) on their

feelings about their own financialcondition, the strength of theeconomy, and their outlook forthe next six months. Historically,changes in this index havetracked the leading edge of thebusiness cycle well, as it indicateshow willing consumers are tospend more and make big-ticketpurchases (like a car or a home).A strong report when the econo-my has been weak can spur ashort-term rise in stock prices.Some economists look for an in-crease of at least five percentagepoints before calling for a changein the economic trend. Issuer: TheConference Board. Frequency: thelast Tuesday of every month; cover-ing the previous month’s survey.

• Housing starts and building per-mits. This indicator reports onboth the number of housing unitson which construction has begun,as well the number of units forwhich permits have been issued.It’s generally regarded as a goodindicator of future home sales andconsumer spending in general.Permits typically are a good indi-cator of housing starts three tofour months in the future. Issuer:the U.S. Census Bureau. Frequency:monthly; around the 18th of themonth.

• Stock market prices. Stock pricetrends are considered one of themost important indicators of fu-ture economic conditions, whichtend to indicate future economichealth some six to nine monthsinto the future.

Only a portion of major econom-ic indicators that economists and in-vestment professionals watch on aregular basis have been reviewed.The truth is that all of the major indi-cators are meaningful, but tend tomake the most sense when taken incontext with each other. Even whenthey tell a clear story, what they can’ttell you is whether you need to ad-just your portfolio and how. To getthe latest reading on what the eco-nomic indicators are saying andwhat they might mean for your in-

vestment strategy, please call. zxxx

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Month-endIndicator Sep-12 Oct-12 Nov-12 Dec-11 Nov-11Prime rate 3.25 3.25 3.25 3.25 3.253-month T-bill yield 0.11 0.13 0.10 0.03 0.0210-year T-note yield 1.81 1.79 1.67 1.95 2.0220-year T-bond yield 2.60 2.55 2.40 2.63 2.73Dow Jones Corp. 2.72 2.66 2.68 3.74 3.79GDP (adj. annual rate)# +2.00 +1.30 +2.70 +3.00 +1.80

Month-end % ChangeIndicator Sep-12 Oct-12 Nov-12 YTD 12 Mon.Dow Jones Industrials 13437.13 13096.46 13025.58 6.6% 8.1%Standard & Poor’s 500 1440.67 1412.16 1416.18 12.6% 13.6%Nasdaq Composite 3116.23 2977.23 3010.24 15.5% 14.9%Gold 1776.00 1719.00 1726.00 9.9% -1.1%Unemployment rate@ 8.10 7.80 7.90 -9.2% -12.2%Consumer price index@ 230.40 231.40 231.30 2.3% 2.2%Index of leading ind.@ 95.30 95.80 96.00 -18.2% -18.2%

# — 1st, 2nd, 3rd quarter @ — Aug, Sep, Oct Sources: Barron’s, Wall Street JournalPast performance is not a guarantee of future results.

18-Month Summary of Dow JonesIndustrial Average, 3-Month T-Bill& 20-Year Treasury Bond YieldJune 2011 to November 2012

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verageBusiness Data

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McCartin Financial

What Is Causing the Jobless Recovery?Although the recession officially ended in June 2009, unemploy-

ment rates are decreasing slowly, the average length of unemploy-ment remains at a historical high, and the unemployment rate is projected to remain above 7.8% until 2013. The concern is that we areagain facing a jobless recovery, with economic activity growing, whilethe unemployment rate remains high. The prior two recessions, in1990–91 and 2001, were also considered jobless recoveries, with theunemployment rate continuing to increase 15 months after the end ofthe recessions. However, the most recent recession has even more per-sistent and unusually high unemployment. What is causing this jobless recovery?

Many researchers consider a labor market mismatch as a signifi-cant cause for the persistently high unemployment. One study of employment opportunities over the past three decades found that employment growth has polarized into relatively high-skill, high-wage jobs and low-skill, low-wage jobs, while middle-skill

routine jobs have declined. Some middle-skill jobs have been replacedby technology while others have been outsourced overseas. Duringthe most recent recession, employment in middle-skill and middle-wage jobs declined 7–17% (Source: The Regional Economist, April 2011).

Another study found that job opportunities have significantly reallocated between industries. During the recent recession, employ-ment in the construction industry declined 20% and 6% in the finan-cial industry. Between June 2009 and December 2010, employmentdropped an additional 7% in the construction industry and 2% in thefinancial industry. Manufacturing and information service industrieswere also severely impacted (Source: The Regional Economist, April2011).

During the recent recession, small firms lost proportionately morejobs than larger firms. Small firms accounted for approximately 10%of total net job loss despite their 5.3% employment share. They alsotake longer than large firms to rehire. FR2011-0614-0001