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Quarterly Commentary
3rd Quarter 2011
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Stock markets had a turbulent quarter caused primarily by investor anxiety—Europe is in a debt crisis, the U.S. is flirting with a double-dip recession, and fast-growing economies around the world, such as China, are slowing down.   The Dow Jones Industrial Average ended the quarter down 12%, its worst percentage decline since the first quarter of 2009. The Standard and Poor’s 500 Index suffered a 14% decline. The damage was much worse in Europe—the French and German stock indexes both lost more than 25% of their value. Asian stocks also suffered losses into the double digits.  Hong Kong’s index, for example, lost about 21%.  (Source: WSJ, October 3, 2011)

Many investments had the worst quarter since the collapse of Lehman Brothers. Like 2008, many investors are worried about the health of banks (this time primarily in Europe) and have lost confidence in the system. Many bank stocks fell 25% or more. Many Wall Street strategists have reduced their forecast for growth and company earnings for the rest of the year. (Source: WSJ, October 1, 2011)

Unfortunately, leading indicators for the world economy—such as China’s stock market, copper prices and crude oil—have tumbled. Here at home, economic data in July showed the U.S. recovery was slowing considerably, and policymakers in Washington took the country to the brink of default in early August due to the debt ceiling problem. Standard and Poor’s downgraded the U.S. credit rating, sparking a rush out of U.S. stocks. Many investors felt that the fate of the markets was in the hands of the politicians, which made risk management very difficult. Many economists believe we are stuck in neutral:  job growth is anemic at best, the housing market remains stuck, and the stock market still needs to recover. However, consumer spending continued at the same pace, and corporations continued their record profits (although they remain afraid to spend all their cash).

Stampede into Bonds

U.S. Treasury debt had its best quarter since the first quarter of 2008. Treasuries maturing in 10 years or more returned 23% during the quarter, according to Barclay’s Capital index data. However, according to the Fed economists, expectations for interest rates, growth and inflation indicates 10-year notes are the most overvalued on record. (Source: WSJ, October 1, 2011)

Yields on the U.S. Treasury 10-year note fell to 1.71%, the lowest yield since the 1940s. With overall inflation running around 3.6%, that indicates that many investors were effectively accepting a loss.  Investors at times throughout the quarter bought securities that offered no yield at all, essentially parking money with the U.S. Treasury, expecting to get back the same amount in 3 months. (Source: WSJ, October 3, 2011)

The Federal Reserve has promised to keep short-term rates low for another 2 years and it keeps the rate on 10-year bonds down by printing money and using that to buy the bonds. Artificially low interest rates may stimulate people to buy homes and use their credit cards, but they have the opposite effect on people with money in the bank, who can no longer live off the interest on their deposits.

Bullish Opinion

Now for a bit of good news—corporate earnings are close to all-time highs and we are hoping for more of the same.  More important, stocks overall are trading at the lowest prices since prior to the great Bull market in August 1982.

Many American companies have some of the largest cash positions in their history. The Federal Reserve said that there was $2.05 trillion in cash and other liquid assets as of the end of June, the most since 1963, primarily due to better earnings and record profits in some recent quarters.  “The cash should act as a shock absorber,” says John Lonski, chief economist at Moody’s Investors Service.  “With more cash, companies would be less inclined to cut…capital expenditures and staff.” (Source: WSJ, October 5, 2011)

The U.S. economy is extremely difficult if not impossible to predict accurately, despite the fact that many economists make predictions with great confidence. Third quarter earnings could potentially boost share prices, but timing such a rally, if it does happen, is difficult indeed. Before the economy can recover, confidence must be restored.

The National Deficit

American national debt held steady in the $2-3 trillion range for 3 decades until the early 1980s. It began to rise rapidly at that point, reached the $7 trillion mark in the late 1990s, and then took off again after 2000. In recent years, public debt growth has accelerated further, climbing up to $14.3 trillion by the spring of 2011. We are now dealing with the third-biggest deficit in U.S. history, after the

deficits in 2009 and 2010. This staggering amount represents about 25% of all goods and services produced annually by the entire world and is projected to equal 71.2% of the size of our economy in 2012. (Source: BTN, October 3, 2011)

During the last quarter one of the major debates was about raising our debt ceiling. Many Americans were strongly opposed to the idea and didn’t want to pass the debt burden down to their children. 

According to the Congressional Budget Office, 2011 will see almost $900 billion more spending than in 2007. Total federal outlays will have increased by roughly one-third in only 4 years. This hasn’t happened since World War II. The government is trying to spend their way out of a recession, but where is the promised economic growth? (Source: WSJ, August 25, 2011). The 2011 deficit did not come from extraordinary spending to fight the recession; these expenses are due to increases in business-as-usual spending, mostly on Medicare, Medicaid and defense, as well as a variety of entitlements.  (Source: Barron’s, October 3, 2011 – The Books Are Closed)

The main problem is that consumers aren’t spending, and consumer spending makes up about 70% of GDP in the U.S.  Why aren’t they spending?  They’re unemployed, or at least worried about possible unemployment; they’ve lost access to their “home equity ATM” (household equity is down about $8 trillion since 2006), and they feel less wealthy, less secure, due to the poor performance of the stock market over the past decade. Recovery from these economic conditions is estimated to take a very long time. (Source: WSJ, July 21, 2011)


Gold, often a favorite in times of turmoil, suffered a loss of 12% in one week in September, which was its worst week since 1983. It appears that the primary destination for nervous investors was cash and government bonds, despite yields below the rate of inflation. The worrying part about gold’s plunge in September was that it occurred as stocks and other assets were also falling. Some skeptics are now questioning its credentials as one of the few shelters from financial storms.  Gold is still up 14% for the year. Will gold regain its demand for a less risky investment and resume its climb or has its significant run come to an end? Please remember that gold is considered an extremely risky investment, so you shouldn’t put a significant percentage of your total assets in this volatile investment. 


European investors endured a rollercoaster of volatility in the third quarter; stocks soared, and then sank due to almost

every pronouncement from a Central banker, finance minister or rating firm. But, unfortunately, the market’s broader direction was downward, as Europe’s debt problems flowed into the “core” countries of Germany and France. Those two markets, which had managed to defy debt concerns for much of the year, joined the sell-off as fresh growth worries and fears of contagion from these problems persuaded many investors to dump even the less risky, most liquid stocks. France’s CAC-40 and Germany’s DAX Index each dropped by 25% for their worst quarter since 2002. Greece was sitting at the center of this storm and led the plunge, with its index stumbling 38% as investors braced for a possible default.  The speed and ferocity of this crisis took many investors by surprise.

The crisis shook almost all of Europe, and many investors worried about a Greek default rippling across the balance sheets of European lenders. Economic indicators recently have offered fresh signs that Europe’s risk of sliding into another recession has been dampened.  That’s no guarantee, but at least it is a start.

Income Tax Increases

A very real risk is the tax hike Obama proposes in 2013, which could result in subpar economic growth for many years to come. Even worse, it could cause the economy to enter into a double-dip recession at a time that we need desperately to rev up growth to put 20 million unemployed Americans back to work. If the rest of the world is cutting tax rates to attract capital and jobs while the U.S. is raising them, it is hard to see how that story has a happy ending for many American workers. The major impact of the rate hikes is expected to reduce the return on investment in the U.S. relative to other places such as
China, India, etc.   (Source:  American Spectator June 2011)


U.S. businesses hired more workers in September than August, according to a recent report, but the growth remains far too slow to bring down the high unemployment rate of 9.1%. Unfortunately, this report showed that layoffs surged in September and service businesses were not hiring more workers despite this sector’s relatively strong growth. There are many reasons U.S. companies give for not rehiring employees, from weak consumer spending to uncertainty about the direction of government policies on debt and spending. But a closer look at hiring provides a different picture.  Some industries have significantly boosted employment over the past year while others continue to shed workers. Many companies have improved their technology, and many of these companies only need one machine doing the work of 3 employees.  (Source: WSJ, July 12, 2011) 

Real Estate

Many economists, builders and mortgage analysts are predicting the weakened U.S. economy will depress housing prices for a number of years, restraining consumer spending, pushing more homeowners into foreclosure and clouding prospects for a sustained recovery. If the economists’ forecast is accurate, this will leave millions of homeowners with little, if any, equity in their homes. In fact, 1 in 5 Americans with a mortgage owes more than their house is worth and $7 trillion of homeowner’s equity has been lost during this bust. (Source: September 21, 2011 – Home Forecast) Eroding home equity contributes to the so-called reverse wealth effect that prompts people to spend cautiously because they feel poorer.

While home prices aren’t falling at anywhere near the pace of 2008, one of the major worries is that even modest declines become self-reinforcing, pushing more homeowners underwater and exaggerating the downward attitude caused by more foreclosures. That, in turn, could prompt more credit tightening by lenders, further shrinking the pool of homebuyers when more are needed to purchase bank-owned foreclosures.


On Tuesday, October 4th, the S&P 500 Index lost as much as 2.2% before a rally in the last hour sent the index up 4.5% and ended up 2.3% for the session. In the 46 trading days since the beginning of August, the S&P 500 has seen 29 swings of 1% or more. Many investors feel that the market is manic and there is no consistency.  Volatility is usually associated with market losses, and the current period is no exception.  Since April 29th the Standard and Poor’s 500 Index has fallen by 17.6%.  In fact, many investors are selling all of their stocks because they can’t stomach the ups and downs. (Source: WSJ, October 5, 2011)   However, the frequency of big swings doesn’t match 2008 or 2009.

Unfortunately, investors who sell now could be left stranded on the sidelines when the market begins to rise. Bull markets are often sparked by a single rally so powerful and so fast that individual investors fail to react in time. This is what happened for many of them when the market rebounded in 2009 after plummeting the year before.  Volatility is part of investing. Declines are bound to happen: it is how one deals with this uncertainty that separates those who thrive from those who languish. 
Unfortunately, it is difficult for some investors right now to think positively about the long term. Remember that most people adapt, most businesses evolve, and the U.S. economy is difficult to hold down for long. For example, Microsoft, Apple and Hewlett Packard were all launched in lousy economies.  Remember that people often perform

best with their backs to the wall.  (Source: Financial Advisor Magazine, October 2011 – Page 18) 

Here are a few rules of thumb to take into consideration: 

  • Don’t panic or let your emotions drive your investment decisions. If you are taking a long-term approach, confirm your previously set goals and assess your risk tolerance in view of the market.
  • Raise some cash if it will make you comfortable. You need to consider whether you have the liquid assets to weather another decline in the market. 
  • Consider how you will react if the market takes a big dive. In other words, create a backup plan when you are rational and not under pressure, then refer to that plan if the market should take a big drop.
  • Keep an open mind and be skeptical when an analyst (or anyone else) attributes a big market move to a specific news development.
  • Don’t fixate on your purchase price if the market drops. Once you make a purchase, focus on whether the stock still represents one of your best ideas, not on whether it is up or down from your purchase price.
  • If your portfolio allocations are off due to market volatility, rebalance by buying stocks while prices are low and taking profits when prices are high.
  • Anticipate your breaking point.  If another 10% - 20% drop is going to put you over the edge and force you to sell, you should probably not be in stocks.  Set your stock market exposure at a level that allows you to ride through ups and downs without panicking.  Your investments should not keep you up at night.

Investors who remain committed to their long-term investment plans, even when it’s tempting to head to the sidelines, many times end up better positioned to realize their short and long-term goals. Again, emotional decisions tend to be impulsive and irrational decisions that compromise the realization of your stated goals. Before you act impulsively, make a list of your concerns, revisit your goals and review your strategy. If your goals and/or priorities have changed, or if you believe your strategy is no longer appropriate given the economic environment, then contact us to review your particular situation. 


The stock market is driven significantly by fear and greed.  Continued high unemployment is one of the biggest factors in holding back stock market confidence.  In fact, Jeffrey D. Saut, managing director of research at Raymond James and Associates, Inc. and firm’s chief investment strategist, is also a cautiously optimistic bull.  He feels that “we are just a little bit of confidence away from things turning around. Now is a great time to be buying U.S. stocks.” It remains to be seen whether investors can gain that confidence during the next 3 months, which are likely to be filled with plenty of drama surrounding the Euro Zone and how to fix our finances—especially with the debate on income tax increases and balancing our budget. (Source: Morningstar Advisor, October 4, 2011)

All investors have a unique situation regarding their finances. The solutions to your financial concerns will vary dramatically depending on your particular set of circumstances.  We highly recommend meeting with us to confirm your specific strategies and hopefully reduce your concerns and worries. 

P.S.  Obviously, no one knows for sure what the final outcome of this will be, so that is why we suggest that everyone remembers to always review your investments with a careful eye on your risk tolerance.

Best regards,


Norman Santori Skip Santori CFP®, ChFC®, AIF®


Member Ed Slott's MasterElite IRA Advisory Group -

CFP®, Certified Financial Planner

ChFC®, Chartered Financial Consultant

AIF®, Accredited Investment Fiduciary


As always, our commitment is to work closely with you, staying fully engaged at every step, so that you are empowered to make smart decisions with your money To help insure that you do so, please contact us if you have any life situation changes, such as financial, family, career, risk tolerance or expect a change in your or your family’s future.


Santori & Peters, Inc.
3824 Northern Pike #450
Monroeville, Pa. 15146


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Note:  The views stated in this letter are not necessarily the opinion of the custodians that we work with, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal.  With any investment vehicle, past performance is not a guarantee of future results.  Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary.  Therefore, the information should be relied upon when coordinated with individual professional advice.

Due to volatility within the markets mentioned, opinions are subject to change without notice.  Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.
Indexes cannot be invested in directly, are unmanaged and do not incur management fees, costs or expenses. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.
There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.
 This optimism about the future does not minimize the fact that we have gone through one of the worst economic periods in market history.  Remember that equity markets are volatile and an investor may lose money and there is no guarantee that securities will appreciate.  This material contains forward looking statements and projections.  There are no guarantees that these results will be achieved.
 The price of commodities is subject to substantial price fluctuations of short periods of time and may be affected by unpredictable international monetary and political policies.  The market for commodities is widely unregulated and concentrated investing may lead to higher price volatility.
In general, the bond market is volatile, bond prices rise when interest rates fall and vice versa.  This effect is usually pronounced for longer-term securities.  Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.  The investor should note that investments in lower-rated debt securities (commonly referred to as junk bonds) involve additional risks because of the lower credit quality of the securities in the portfolio.  The investor should be aware of the possible higher level of volatility, and increased risk of default.
The payment of dividends is not guarantees. Companies may reduce or eliminate the payment of dividends at any given time.

Sources: Wall Street Journal (7/12, 8/5, 8/12, 9/17, 9/19, 10/1, 10/3, 10/4, 10/5, 10/12/11), Barron’s (10/3/11), Time Magazine (6/6/11, 9/26/11), Bob LeClair’s Newsletter (8/13/11), Forbes (8/22/11, 9/12/11, 9/26/11), Investment News (10/3/11), The Week (7/29/11, 9/23/11), Kiplinger’s (September 2011), Money Adviser (October 2011), Investment Advisor (June 2011, September 2011, October 2011), Fortune (9/26/11), Research Magazine (September 2011), Morningstar Advisor (9/27/11, 9/30/11), By The Numbers (9/12/11, 9/26/11, 10/3/11), Nick Murray (August 2011), Bottom Line (9/15/11), American Spectator (6/2011, 9/ 2011).