Many managers are missing the mark when it comes to demonstrating a unique value to investment
consultants and their institutional clients, consultants say.

As the asset management marketplace grows more crowded and increasingly competitive, consultants feel
that many managers aren’t seizing the opportunity to highlight their distinguishing strengths that may help
them win business. Several consultants speaking at the Investment Management Institute’s Consultants
Congress last week in San Francisco shared the qualities they believe help a manager to stand out, as well
as factors that can cause a manager to fall short of winning a big mandate.

“We really focus on character,” said Garth Flint, CEO and founder of consulting firm Beacon Pointe
Advisors. Though managers are getting more creative with their product offerings and strategic focus –
Flint specifically mentioned managers that are “more outside the style box” and offering more all-cap
products – he said communication and transparency still trump innovation when it comes to winning and
retaining institutional mandates.

“We’re going to check on your reputation,” he told managers. “We will normally be very patient, even with
underperformance. We’ll stay with you if the communication is there. We’re very focused on changes in
ownership, organization structure and people.”

But before a manager even wins a mandate, the company must ensure that its philosophy and products
match the needs of the consultants and clients they’re pursuing.

“It’s important to establish a fit,” said Natasha Bukalo, president of Chartwell Consulting. This includes
firm size, products, strategies, structure of services, and any other kinds of services offered.”
Bukalo said there are many other attributes her firm looks for in managers that can make the difference
between winning and losing a client’s business.

“Experience means you have sufficient longevity, an appropriate track record and a depth of resources,”
Bukalo said. “You also have to have a relevant client base, a diverse background of people from different
backgrounds, and access to growth capital, which makes us more comfortable and shows your staying
power.”

Leadership style and a firm’s cohesion can also play a major role in a consultant’s evaluation of a manager,
Bukalo added.

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One prevailing theme of the conference was the focus on long-term financial planning for tribes and the need for sovereign wealth funds
or long-term sustainability funds. Mr. Lomax discussed the idea of peak gaming revenues and the pressures/threats to gaming
revenue growth in the future.

Beacon Pointe Advisors is the investment advisor to several sovereign tribal funds. The tribal finance officers lean heavily on
Beacon Pointe’s vast experience advising large institutions with similar long-term objectives as those of tribal governments – capital
preservation and long-term growth of assets. Ultimately, the goal is to build a fund that can provide sustainable distributions to meet a
tribe’s annual operating needs.

The agenda also included keynote speaker Myron Scholes, Nobel Prize Laureate in Economic Sciences and Ron Insana, Senior
Analyst/Commentator at CNBC. Additionally, several breakout sessions covered topics which included financing and bond
issuance, health challenges, and regulations pertaining to benefits.

Garth and Mike also attended the President’s dinner with a small group of tribal finance officers, where they had a chance to discuss
the topics important to the various tribes. If you would like to hear more about the conference topics or how Beacon Pointe can help
your tribe, please call Garth Flint or Mike Breller at (949) 718-1600.

Click here to read the event recap (PDF)

After all the ups and downs, the S&P 500 Index closed the year with a small gain (+2.1%, including
dividends). Growth stocks generally outperformed Value stocks and Large Caps had a substantial lead
over Small Caps. Non-U.S. equities fared poorly, losing between 12% (developed non-U.S. markets) and
18% (emerging markets). U.S. Treasuries had a record year, with the 10-year bond advancing almost
17%. Commodities produced mixed results – oil and gold prices were quite strong (up 14% and 9%,
respectively), while industrial metals such as copper lost over 20% for the year.

Beyond these numbers, the themes that defined 2011 included heightened volatility, geopolitical tensions,
natural disasters, and fiscal challenges. Within the span of 12 months, markets swung back and forth
between a feeling of confidence (a “risk-on” mentality) and a flight-to-safety (extreme risk aversion).
After a positive first half of the year, the S&P 500 Index lost over 18% (excluding dividends) from late
July through early October. This was followed by a 14% rebound over the fourth quarter of 2011 as
buyers returned to the market and general investor sentiment improved. This summer’s volatility spike, as
shown in the following chart, was well below the levels of the 2008 Lehman Crisis, but was more longlasting
than the initial Euro Crisis episode that occurred in 2010.

Defensive sectors, such as Utilities, Consumer Staples, Health Care, and Telecommunication Services,
held up well during 2011. Economically-sensitive and cyclical sectors underperformed — Industrials,
Materials, and Financial Services lost ground for the calendar year, as shown in the left-hand bar chart
below. Since the start of 2012, however, sector leadership has once again reversed course. For the YTD
2012 period, the best performing sectors are last year’s laggards (Materials, Financial Services, and
Industrials), while defensive sectors have fallen to the bottom of the pack. 2012 sector returns are shown
in the right-hand bar chart below.

For most of 2011, media attention was focused primarily on the natural disasters in Japan, the Arab
Spring and regime changes in the MENA (Middle East/Northern Africa) region, the U.S. debt ceiling
debate and subsequent credit downgrade, and the escalating sovereign debt crisis in Europe. There is no
doubt that resolving these issues will require time, strong leadership, and compromises. Struggling to
grow for years, Japan could ill-afford another setback of this magnitude. MENA continues to reshape
itself, but its future is still highly uncertain. The state of the U.S. national balance sheet is likely to be the
battleground on which the next Presidential Election campaign is won or lost. And Europe has finally
come to the realization that the “can” has reached the end of the road. Another European recession is
most likely already a reality, with a comprehensive austerity plan yet to be agreed upon and implemented.
During a December summit, the member countries slowly and reluctantly started to move toward greater
fiscal union and agreed on certain measures that provided relief to the liquidity-constrained market.
However, much more needs to be accomplished in order to ease the European debt crisis.
One bright spot in the midst of all this appears to be the domestic economic front. U.S. GDP growth
appears to have regained momentum towards the end of the year, surprising many forecasters who
expected (or feared) a double-dip recession. The Index of Leading Economic Indicators remains in
positive territory and has been for 26 of the last 28 months, as shown in the chart below.

Furthermore, recent reports on Initial Claims for Unemployment are seen as evidence that the labor
market is finally showing signs of improvement. According to InvesTech Research, and based on 50
years of data, Unemployment Claims usually start climbing 12 months or more prior to a recession, and
then soar as the recession takes hold. The latest Unemployment Claims reading dropped to 352,000, the
lowest level since 2008. As shown in the graph below, the four-week moving average has continued to
drift down throughout the year. In addition, the unemployment rate recently dipped down to 8.5%. In
summary, current job market trends seem to indicate an improving economy.

Meanwhile, U.S. corporations are continuing to report solid results. Many are generating revenue growth,
gaining market share, and reporting increasing profits. In addition, a shrinking share count, a result of
share buybacks, is a further boost to earnings per share. Dividends are on the rise and, at currently
modest payout ratios, have further room to grow. Finally, the yield on equities currently exceeds the yield
on government bonds (using the 10-year Treasury as a proxy).

Commenting on the 3Q2011 earnings season, Bespoke Research stated that “on a four quarter trailing
basis, earnings for the S&P 500 are set to total $94.77, which would eclipse the old record of $91.47 set
in Q2 2007. If you thought the market was volatile, the swings in earnings have been just as violent
(which is partly responsible for why stocks have become so volatile). Since the prior record in earnings
for the S&P 500 was set just over four years ago, the S&P 500 saw earnings drop by more than 55% in a
little over two years. After bottoming out in Q3 2009, earnings have now rebounded by 139% in the
course of two years. Based on current forecasts, earnings for the S&P 500 are expected to rise to
$108.01 by the end of 2012. If, and this a pretty big if, analyst forecasts are correct, the S&P 500 is
currently trading at a relatively meager 11.6 times next year’s earnings.”

Perhaps the biggest risk to the current forecast for earnings growth is in the area of profit margins.
Presently, corporate America is operating at record margins. Further cost savings and productivity gains
are likely limited from current levels. Historically, margins have been both cyclical and mean-reverting.
In the future, downward pressure on margins could be driven by rising input prices, wage inflation (if the
job market continues to improve), or the onset of a new capex spending cycle by corporate managements.
A material change in any of these factors could lead to a revision of aggregate earnings expectations.
U.S. Treasuries benefited from the flight-to-safety during the second half of 2011 and, as mentioned
previously, posted record returns, especially at the long end of the yield curve. During the year the yield
on the 10-year Treasury fell below 2% and the yield on the 30-year Treasury fell below 3%. Investors –
retail as well as institutional — continued to move money out of equities and into bonds. In fact, 2011
marked the fifth consecutive year in which mutual fund flows have favored bonds over stocks. Given the
discrepancy in performance between the two asset classes over the last decade, that is probably not
surprising. However, the shift has left many investors materially underexposed to equities. Going
forward, a bond-heavy portfolio is unlikely to match the returns of the last 10 years, given the current low
level of interest rates.

In their latest earnings announcement, Nike executives stated that “Uncertainty is the new normal.” To a
large extent, this is always true in the world of investing. But it rings especially true as we look ahead at
2012 and beyond. Investors need to consider the many unknowns, including: how forceful and effective
will the policy response be in the EuroZone; when will the U.S. start making progress toward reducing its
fiscal deficit; how well will China manage its precarious growth/inflation balance; what will transpire in
geopolitical hot-spots around the world (Iran, North Korea, Russia, MENA, etc.); and, of course, how
sustainable will corporate profit growth prove to be. Notwithstanding the high level of uncertainty, there
are several encouraging developments taking place, particularly in the U.S. Three recurring themes in our
discussions with investment managers are the resurgence of domestic manufacturing, the potential for
U.S. energy independence, and an eventual improvement in housing and consumer sentiment. Although
still in the early innings, each of these has the potential to drive growth in the coming years and restore
America’s economic health. On balance, the current environment poses both risks and opportunities and,
therefore, investors would be well-served by the old adage “handle with care”.
Please feel free to call Beacon Pointe at 949-718-1600 should you need additional information or have
any questions.

Frequently overlooked is the third dimension of the analysis — time. Beacon Pointe has stressed the importance of a long-term investment horizon in many of our past client letters. We strongly believe that our long-term focus and discipline allow us to stay the course, while others chase performance or swing from one extreme camp (bear) to another (bull). As we have argued in the past, extrapolating a current trend — be it positive or negative — into the future is a dangerous way to formulate one’s investment strategy. An especially strong month of market performance (like October 2011) offers more noise than real information about the future direction of major indices. Similarly, a period of short-term weakness does not necessarily spell the beginning of another major downturn. Today, there is certainly no shortage
of reasons to worry. The ailing Eurozone and a divided Washington, DC continue to test an already frail market sentiment. These are two worthy candidates for addition to the list of possible reasons to stay on the sidelines. The list below and the accompanying graph on the next page, courtesy of GE Asset Management, highlight the importance of a long-term mindset. Despite the constant macroeconomic, political, and natural disaster headwinds, equities have gained 9.6% per year from 1/1/26 to 12/31/10.

Of course, time is a matter of perspective. The appropriate time horizon varies among clients and may be quite different for institutional versus private clients. These differences should be addressed at the asset allocation stage in conjunction with a thorough evaluation of each client’s circumstances, investment objectives, spending needs, and risk tolerance. Finally, the selection of investment managers should also take into account the specific goals and needs of each client. While Beacon Pointe’s recommended managers are typically long-term investors, they are active managers with strict buy and sell disciplines. As such, they adjust client portfolios to protect against risk or take advantage of investment opportunities presented by the market.

The uncertainty generated by the ongoing sovereign debt crisis in Europe and policymakers’ deadlock in the U.S. is likely to persist for a while, but it should not drive long-term investors out of the market. We believe it is prudent to stay focused on the third dimension — time — and to remain committed to one’s long-term investment strategy with an emphasis on diversification, capital preservation, and careful manager research and selection.

Please feel free to call Beacon Pointe at 949-718-1600 should you need additional information or have any questions.

Not surprisingly, this improved market performance was accompanied by an easing of volatility. As shown below and discussed in the last edition of Beacon’s Point, the CBOE VIX Index spiked above 40 during August and September as economic doubts and fears became widespread. During October, the so-called “fear gauge” fell back below 30, implying that market sentiment has exited panic territory, although it is still above the long-term historical average of approximately 20.

Some of the drivers of the October rally included an oversold technical condition and seasonal strength. More importantly, however, economic and business fundamentals were stable to improving. Of course, the month’s media headlines included the now-familiar repertoire of “Greek drama”, the Eurozone’s backand-forth, the emerging economies’ precarious balance between growth and inflation, and the U.S.’s lack of meaningful progress in fighting unemployment, a stagnant housing market, and escalating fiscal deficits. But incremental news were encouraging. The brilliant Oscar Wilde once said “We are all in the gutter, but some of us are looking at the stars.” The stars shone a little more brightly in October, as
evidenced by the following headlines:

Even the jobs market showed signs of life. The U.S. economy added 80,000 jobs last month, as strong private sector hiring helped offset local government job losses. In addition, both the August and September readings were revised upward. Manufacturing and service sector reports indicated slow but positive growth. Meanwhile, corporations continue to report solid results, with 65% of U.S. companies beating expectations on the bottom line (reported earnings vs. analyst forecasts) and 62% beating consensus revenue estimates. Collectively, the companies comprising the S&P 500 Index are earning record profits, as shown in the graph on the following page.

According to S&P, with 88.1% of U.S. companies having reported, Q3 operating earnings are on pace to total $25.42 for the S&P 500. On a four quarter trailing basis, earnings for the S&P 500 are set to total $94.77, which would eclipse the old record of $91.47 set in Q2 2007. If you thought the market was volatile, the swings in earnings have been just as violent. Since the prior record in earnings for the S&P 500 was set just over four years ago, the S&P 500 saw earnings drop by more than 55% in a little over two years. After bottoming out in Q3 2009, earnings have now rebounded by 139% in the course of two years. Based on current forecasts, earnings for the S&P 500 are expected to rise to $108.01 by the end of 2012. If, and this a pretty big if, analyst forecasts are correct, the S&P 500 is currently trading at a relatively meager 11.6 times next year’s earnings.
Source: Bespoke Research
Wall Street analysts have a less-than-stellar record of accurately forecasting aggregate profits and, for this reason, we share Bespoke Research’s caution regarding the current consensus expectation for 2012 S&P earnings and the forward resulting P/E. There is no doubt, however, that the current environment offers opportunities for active managers that rely on their thorough and independent bottom-up research to build high-conviction portfolios of quality businesses trading at substantial margins of safety. These are the investment managers we recommend to our clients. In our discussions with them, we hear an honest assessment of the macro risks facing both U.S. and global companies, but also an enthusiasm for specific
investments that have rarely, if ever, been available at such discounts to fair value. Most of them share Benjamin Graham’s philosophy, highlighted recently by the managers of the Longleaf Fund:

Although written 37 years ago, the words sound painfully familiar today: zero growth, less consumption, mistrust of Wall Street, scandalous behavior… The 1970s were a challenging time for investors, as have been the past few years. However, as managers Mason Hawkins and Staley Cates pointed out in the same Longleaf Letter to Shareholders referenced above, the fear and frenzy of those years created tremendous opportunities for long-term investors. Might we be in for a repeat? There is, of course, no way to know how markets will behave in the next week, month, or year. They could continue to swing from one extreme (“Wake Me Up When September Ends”) to another (“Oktoberfest”); or they could stabilize and
resume a more normal routine with smaller daily movements and measured monthly advances or declines. History has shown that over the long run, financial markets can and do generate attractive returns despite multiple headwinds. For example, the following graph by Fidelity Investments highlights non-U.S. equities’ performance in the 1973-2011 period in the face of “a series of unfortunate short-term events.”

Another of our favorite Oscar Wilde quips is “I am no longer young enough to know everything.” Our collective experience has given us the wisdom to know that forecasting is a futile endeavor. Thus, rather than making predictions, we continue to rely on our core investment and philosophical tenets: 1) maintaining a long-term investment horizon in building and managing clients’ assets in accordance with their risk/return profiles; 2) optimally diversifying portfolios across asset classes/investment styles and formulating strategic asset allocation targets; and 3) entrusting the management of each allocation within the portfolio with carefully researched and selected managers that have proven track records, high-caliber teams, strong research culture, and fundamentally-driven investment styles. We strongly believe that these are the cornerstones of successful investing and that they will serve Beacon Pointe’s clients well regardless of the market environment.
Please feel free to call Beacon Pointe at 949-718-1600 should you need additional information or have any questions.

Mike brings with him over 15 years of institutional and private client service. Prior to joining Beacon Pointe Advisors in 2010, he worked for 11 years as a financial analyst and fund specialist for Capital Research and Management Company, the investment advisor to the American Funds. Mike graduated magna cum laude, from Boise State University with a BBA in Finance and served one year as President for the Financial Management Association, Boise State Chapter. To find out more about Mike’s background, please refer to the “About Us” page of our website www.bpadvisors.com.

Much like the heart, the global economy is one big muscular system pumping wealth and value among the populace. A few rogue cells can interrupt its efficient functioning and progress. Equity markets, through their discounting mechanism, frequently serve as an early warning system for economic arrhythmia and the potential need for a defibrillator. At present, the message is clear – markets have lost confidence in Washington, DC; leverage is still too high at the government and individual level; European banks are on the brink of insolvency; businesses will not fully commit to hiring, capital spending, and growth until they see some resolution to the prevailing tax and regulatory uncertainty. Volatility (measured by the CBOE VIX Index) has once again spiked, as economic doubts and fears became widespread. As shown below, the so-called “fear gauge” reached 48 on August 8th, 2011 and has remained elevated ever since.

With one week left in the seasonally weak third quarter, it is all but certain that the S&P 500 Index will end September down for the YTD period and flat on a trailing one-year basis. From its near-term high of 1,364 (reached on April 29th, 2011), the S&P 500 has lost almost 17%. Macroeconomic concerns have been the dominant force in media headlines and on investor minds. As a result, correlations among stocks (that measure the extent to which stocks move together, regardless of company-specific fundamentals) have reached extreme levels, as shown in the graph on the following page.

The sell-off started in late July, intensified in August, and has persisted throughout September. The debt ceiling stalemate and an unprecedented U.S. credit rating downgrade by Standard& Poor’s gave rise to a risk-off sentiment, while a round of disappointing economic data suggested slowing economic growth. Second quarter GDP advanced just 1% on a year-over-year basis and the first quarter reading was revised down to 0.4%. Unemployment remains above 9% and U.S. housing prices are still falling. As shown in the map below, Minneapolis, MN (-11.1%), Portland, OR (-9.2%), Phoenix, AZ (-8.8%) and Chicago, IL (-8.6%) recorded the most significant declines. Washington, DC (+4.0%) and – surprise! – Los Angeles, CA (-2.1%) were the best performers in the 20-city S&P Case-Shiller Home Price Composite Index.

That being said, core fundamentals for manufacturing, retail sales, personal consumption, and corporate profits remain positive. Furthermore, global trade, spurred by the emerging middle class, could prove to be just the catalyst needed to restart the world’s growth engine. Finally, interest rates are at historic lows. In August, the Federal Reserve announced its intent to keep short-term rates low through mid-2013. Last week, as expected, the Fed launched “Operation Twist”, the latest in a series of efforts to promote sustainable economic growth. In essence, the Fed plans to partially shift its existing Treasuries portfolio out of short-term maturities and into longer-dated bonds. Fixed income securities rallied on the news, with the 10-year Treasury yield falling below 1.75% for the first time since the end of World War II.

A few contrarian indicators point to an oversold condition, implying that markets may be bottoming out. Mutual fund flows this year decidedly favor bonds over stocks. Broadly speaking, investors regard the world as insecure and seek the safety of fixed income instruments.

With risk appetite virtually non-existent, investors are pulling money out of domestic stocks and moving into fixed income and money market funds. According to Bloomberg, more than $75 billion have been withdrawn from U.S. equity funds since April, 2011. This is a larger amount than the five-month total withdrawal following the collapse of Lehman Brothers in 2008. Other sources report that investors currently have $3.17 trillion sitting in money-market funds. In addition, Barron’s Mike Stanoli notes that short interest relative to market capitalization “has exceeded any level going back to 2009″.

And then there is the issue of valuations. Beacon Pointe’s research team just returned from a trip through the middle of the country that included investment manager site visits in St. Louis, Kansas City, Louisville, and Columbus. The Portfolio Managers and Research Analysts we spoke with were closely monitoring macro-economic events and undeniably concerned about the increasing risks to global growth. At the same time, their bottom-up fundamental research-intensive approach is currently leading them to more numerous attractive opportunities than at any other time since March 2009. The following charts and analysis by Mr. Scott Grannis, investment blogger and former Chief Economist of Western Asset Management Company, reinforce the valuation case for equities.

As stated at the beginning of this letter, some of the cells that comprise the global economic heart are not functioning properly. Financial markets are flashing a warning signal: things need to change in order to prevent a more serious condition. The onus is on the U.S. and European leaders to make real progress toward problem resolution on all fronts: political, fiscal, monetary, regulatory, and social. Absent such progress, the world’s economy – especially in the developed camp – risks cardiac arrest. The defibrillator will then have to be pulled out of storage to shock the system back into sinus rhythm. Beacon Pointe believes that the steps necessary to prevent this scenario will be undertaken and a crisis will be averted. In the meantime, the investment managers we recommend to our clients are working tirelessly to uncover investment opportunities that will help anchor portfolios through turbulent times and achieve client objectives over the long run.

The current environment of heightened uncertainty presents investors with both perils and opportunities. We have highlighted some of challenges in this and prior market letters. However, once the uncertainty on both sides of the Atlantic begins to clear up, markets could propel forward, considering the amount of cash on the sidelines and on corporate balance sheets. This type of down-and-up market generally favors those with a focus on security selection, a strong research effort, and unwavering valuation discipline. These are the managers Beacon Pointe has always recommended for client portfolios and, we believe, they will continue to make good decisions that position your portfolios well for preserving and growing capital in the future.

Please feel free to call Beacon Pointe at 949-718-1600 should you need additional information or have
any questions.

Please feel free to call Beacon Pointe at 949-718-1600 should you need additional information or have any questions.
Don’t Panic About the Stock Market
Investors who resist the urge to get out during rough times like this will
be glad they did.

By BURTON G. MALKIEL

‘The sky is falling! The sky is falling!” Chicken Little’s admonition may strike many observers as particularly apt today. I disagree. This is not the market meltdown of 2008 all over again. And panic selling of U.S. common stocks will prove to be a very inappropriate response.

The sharp decline in stock prices last week has renewed fears that the economy is headed for a double-dip recession. Economic growth has been reduced to stall speed, with gross domestic product rising at less than a 1% annual rate during the first half of 2011. Real consumer spending has been negative over the past two quarters. Just as a rider risks falling over when his bicycle slows sharply, so the economy is dangerously close to slipping into recession even before a real recovery has taken hold. And now Standard & Poor’s has downgraded the U.S. credit rating, citing inadequate progress in Washington on long-run budgetary problems.

The headwinds restraining the economy are many. Consumers are still over-indebted and household finances are perilously balanced. House prices, after sharp price declines, threaten to fall further. The effect has been a big hit to households’ net worth and has prevented any recovery in construction activity, which normally plays a big role in the early stages of any economic expansion. The unemployment rate is stuck above 9%, and even optimistic economic forecasters see little chance of a meaningful decline, even if a tepid economic recovery resumes in the second half.

Making matters worse, Europe has not really fixed its economic problems. Growth prospects there are gloomy. In the United States, government policy is dysfunctional and powerless to help reduce unemployment. While any restraint on spending from the recent budget agreement is back-end loaded, fiscal policy is scheduled to be significantly less stimulative over coming quarters. Monetary policy, which has driven short-term rates to near zero and 10-year Treasury rates to 2.5%, appears to be out of ammunition. And, of course, the sharp decline in stock prices has a negative wealth effect and a pernicious effect on consumer confidence.

Is it time to sell all your stocks, which are still well above their lows of 2009? I think not. No one can predict what the stock market will do in this and coming weeks. Stocks may continue their decline, but I believe it would be a serious mistake for investors to panic and sell out. There are several reasons for optimism that in the long run we will see higher, not lower, market valuations.

First, I believe that stocks today are cheap. Price/earnings multiples are just over 14 and forward P/E multiples, which use forecasted earnings, have shrunk to less than 12. These multiples are low relative to historical precedent and are especially low when considered in comparison to a 10-year Treasury yield of 2.5%. Dividend yields of 2.5% also compare favorably with 10-year Treasurys. Multiples do not look cheap relative to average 10-year earnings (the so-called Shiller P/E multiples), but today’s earnings are so much higher than average earnings that a 10-year average is not a good estimate of today’s corporate-earning capacity.

Moreover, the structure of U.S. corporate earnings increasingly reflects economic activity abroad—including the rapidly growing emerging markets—rather than activity in the U.S. This is why corporate earnings have been growing so rapidly even though U.S. economic growth has been so tepid. For large U.S. multinational corporations, the continued growth in emerging markets will be the most important determinant of the future growth of corporate earnings. For many companies, what happens in China, India and Brazil is more important than the inability of Europe to get its house in order and the paralysis in the U.S. and Japan.

There is no doubt that our economy is in a deep hole. The huge amount of deleveraging that is necessary after the housing bubble of the early 2000s can only be accomplished over time. Fortunately, household balance sheets are improving. Debt-to-income ratios have improved considerably since 2008, though they still have far to go. Household debt-service payments relative to income have fallen sharply to levels existing in the 1980s and ’90s. The recent decline in oil prices should also help consumers’ financial situations. And corporate balance sheets are unusually healthy today.

Simply working off the excess housing (including the shadow inventory of foreclosure property) will take a long time to accomplish. But if there is a bright spot in the housing picture it is that housing affordability is at an all-time high. With some real improvement in the labor market we could see a substantial uptick in housing sales. Yes, we have problems, but the current situation bears no resemblance to 2008. And for those who believe that the decline in the stock market reliably predicts a new recession, remember the famous dictum of the late economist Paul Samuelson: “The stock market has predicted nine of the last five recessions.”

A strong dose of modesty is clearly in order. We all need to be aware of the limits of our ability to forecast future stock prices. No one can tell you when the stock market will end its decline, but there are some things that we do know. Investors who have sold out their stocks at times when there have been very large declines in the market have invariably been wrong. We have abundant evidence that the average investor tends to put money into the market at or near the top and tends to sell out during periods of extreme decline and volatility. Over long periods of time, the U.S. equity market has provided generous average annual returns. But the average investor has earned substantially less than the market return, in part from bad timing decisions.

My advice for investors is to stay the course. No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world. Indeed, it is in times like this that investors should consider rebalancing their portfolios. If increases in bond prices and declines in equities have produced an asset allocation that is heavier in fixed income than is appropriate, given your time horizon and tolerance for risk, then sell some bonds and buy stocks. Years from now you will be glad you did.

Source: The Wall Street Journal, August 8, 2011

The implications of the S&P downgrade for credit and equity markets will become clearer in the coming days and weeks. We believe that last week’s sell-off in risk assets was, at least in part, driven by expectations for a possible downgrade. Today’s market action shows more signs of frantic trading, increased volatility, and a flight-to-safety that results in relative outperformance by high-quality stocks and – ironically – Treasury bonds. Global blue-chip companies benefit from their diversified revenue sources, cash reserves, and ability to grow market share. U.S. government obligations remain the most liquid safe-havens in the world.

While a serious matter, the downgrade of the U.S. debt by the S&P is not a good reason to materially alter one’s long-term portfolio strategy. Beacon Pointe’s client portfolios are deliberately and broadly diversified across global equity and fixed income assets. The fixed income managers we work with – on both the taxable and tax-exempt side – do not rely on the rating agencies for their due diligence, but maintain their own credit analysis and ratings. The equity investment managers we work with invest in excellent businesses with superb balance sheets and the flexibility to reallocate their resources globally to take advantage of growth opportunities and protect against economic, regulatory, or political risk.

In fact, the higher market volatility generates improved valuations and more plentiful buying opportunities for these quality-biased and valuation-focused investment managers. For instance, Mr. Kevin Tanner of Saratoga Research & Investment Management stated that: “The downgrade impacts our investment approach and long-term perspective not at all. In an AA+ world, a business is still worth the net present value of the future cash flows to be generated over its remaining lifetime. And because that remains true, we believe that our portfolio is deftly positioned for today’s uncertainties — populated as it is with rock-solid businesses, and the ample cash balances necessary to either add to existing positions or take new ones opportunistically when market conditions warrant it. That holds true regardless of whether investors panic or yawn over the coming few weeks.”

This is the type of challenging market environment that Beacon Pointe prepares for when we design our asset allocation and manager selection recommendations. We will continue to exercise caution given the ongoing uncertainty, but we strongly believe that our clients are well positioned for what lies ahead. Our differentiated, intensive, and focused research process helps us identify investment managers that protect principal in down markets, yet are able to grow capital through the power of compounding over the long run. Furthermore, each client’s strategic plan is customized according to their specific investment objective and risk tolerance. We are confident that this strategy will serve our clients well going forward, as it has done so in the past.

Please feel free to call Beacon Pointe at 949-718-1600 should you need additional information or have any questions.