Quarterly Market Updates

MARKET UPDATE AND OUTLOOK : July 2010

What’s new at J.P. King & Associates, Inc.?

We begin with a special welcometo the three new clients who joined our firm this quarter. We’re pleased to welcome you aboard and look forward to successful, long term relationships. Thank you to our existing clients for continuing to think of us and sending great referrals from near and far (one of our new clients is located in Arizona). As markets become increasingly volatile, we seem to get more referrals as clients’ friends and family realize that they may not be as diversified or properly invested as they once thought. We appreciate you thinking of us and continuing to refer friends and family.

In June, Jim, Scott, and Nancy all attended the Financial Planning Association’s regional Northern California conference. As a team we were able to “divide and conquer”, attending almost 20 different course sessions providing current updates as well as new and alternative strategies in tax law, health care legislation, estate planning, investments, and retirement income planning. This is in addition to the monthly meetings and National Conferences that we attend to keep our knowledge and expertise current.

Looking Back

What a difference a quarter makes! The economic recovery is showing signs of slowing. The stock market (S&P 500 Index) has revalued itself downward, declining nearly 12% this past quarter. In our last Market Outlook, we said there was a reasonable chance we would see a meaningful correction. The bad news? We were right about that. We also said we expected our portfolios would decline much less than the stock market. The good news? We were right about that, too. Our rigorously diversified approach combined with our cautious stance worked quite well relative to the stock market this past quarter. Our portfolios experienced only a fraction of the stock market’s decline and, in some cases, were even positive for the quarter. Even our most aggressive models were down less than half of the decline of the stock market. Although we hate to see losses of any magnitude, we’re pleased to see that patience, discipline, and true diversification do pay off. When the market was heading straight up, it wasn’t always easy to hold on to the investments that weren’t going up much, or were even going down. Those same investments solidly outperformed stocks this past quarter and rewarded our patience by helping our portfolios do as well as they did. Having a sound and structured process is the foundation of successful investing, especially in uncertain environments.

This past quarter we successfully rebalanced many accounts and at the same time introduced the Matthews Asia Dividend Fund, as well as the Ridgeworth U.S. Government Ultra-Short Bond Fund. Shortly after our new investment in Asia, China announced they would reform their exchange rate policy and allow more flexibility in valuing their currency. This change in policy will likely lead to a gradual rise in China’s currency, which will benefit many of the securities held by the Matthews Asia Dividend Fund. This is a positive development and we continue to believe that Asia will be a global leader in economic growth for many years to come.

Gold continued to do well and was up approximately 12% for the quarter. Gold is a unique asset class. It is tough to decipher a proper valuation because it provides no income yield. It’s simply worth what people will pay for it. As governments around the world attempt to reflate their way out of their huge debts, pressures on paper currencies will likely mount. We view Gold as an insurance policy and also somewhat as an alternative currency. The allure of Gold as an alternative currency is that Governments cannot simply print more of it. Because it is difficult to value, it is a potential candidate for over valuation. We don’t think we’re close to that yet, but we are aware of the possibility and it is something we will be watching closely.

Although the second quarter of 2010 was quite weak for stocks here and abroad, our portfolios did very well on a relative basis. We’re pleased with our results and we encourage you to look closely at your performance reports this quarter. We think most clients may be surprised to see how little their portfolios actually declined this past quarter given such a big drop in the stock markets. As we have often said, protecting capital is our primary concern. So far this year stock markets are down approximately 6.0% (U.S.) and 12.0% (Foreign), while our client portfolios are mostly up slightly or down slightly. Importantly, over the past twelve months, which included both up periods (8 months) and down periods (4 months), our portfolios have had strong positive gains with significantly less downside volatility than global stock markets (see Time Weighted (net) returns compared to the Indexes on your Portfolio Performance Review reports). Of course, past performance is not a guarantee of future results. Nevertheless, we are very pleased with the performance of client portfolios during the past 12 months.

Looking forward

The past two quarters we summarized our outlook as cautiously neutral. We maintain our conservative bias, as the weight of the evidence continues to point to a challenging road ahead for the economy and financial markets. So far, this economic recovery is much weaker than past post-war recoveries. One reason is that much of the recovery has been the result of government spending, with little spill-over into the private sector. We are concerned with the continued prospects for a weak recovery, including the issue of a so-called “jobless recovery”, and the fact that roughly 10% of the workforce remains unemployed. Also disconcerting is that we’re facing scheduled tax increases next year; perhaps not the best timing in the midst of a tepid recovery.

A slight positive from this past quarter is that we are no longer as concerned about rising interest rates in the near term. It’s unlikely the Fed will raise interest rates anytime in the next twelve months. This is positive for all of the fixed income investments we hold. It is however possible that if the Fed postpones raising rates for too long, the “inflation genie” could be let out of the bottle. While this isn’t an immediate threat, we are definitely monitoring the situation. Near term, however, deflation may be more of a concern. Another positive is that, compared with last quarter, rich stock valuations and somewhat overbought conditions are no longer quite the issue they were before.

We’ve been saying for two quarters now that it was unlikely stocks would continue nearly straight up, as they did from March, 2009 through April, 2010. Unfortunately, we were right about that. No surprises here - nothing goes straight up forever. Given the global economic picture, it wouldn’t surprise us to see this correction possibly expand into a bear market, with stocks going down another 5 to 10%. If that happens, we expect similar results from our portfolios as demonstrated this quarter: that they would decline much less than the stock market. We seek to achieve this goal by diversifying among a wide range of asset classes, beyond just stocks and bonds. The power of true diversification is in minimizing the downside (like this past 3 months), while meaningfully participating in the upside (like this past 12 months). At some point, if not already, we are likely to enter into a broad trading range in the stock market. Such an environment is not great for the pure “buy and hold” investor. It is more conducive for a strategy that utilizes structured asset allocation combined with periodic rebalancing and tactical adjustments. Such an environment is one where our disciplined approach may do well. We will continue to diligently monitor your portfolios, strictly managing risk while attempting to optimize return.

We would enjoy discussing any of our comments in greater depth with you. We encourage you to call with any questions you may have or to schedule a mid-year appointment for a more thorough review of your situation. As always, we appreciate your confidence and trust.

James P. King, CFP®, Scott Horton, CFP®
July 08, 2010