2. "It is impossible for a man to learn what he thinks he already knows.“ -Epictetus March 8 th Announcement 9:30am Market Outlook SIG Alice and I will do a program on High Yield Bonds (Junk Bonds)

4. A YEAR IN REVIEW Did you notice the record, gravity-defying, streak of the last couple of years? The market remained in the black for two consecutive years, a feat it accomplished just once before in modem history, in 1975 and 1976. (That would have been right in the middle of the go nowhere streak from February 1966 to August of 1982.) You didn't see too much about it in the press, nor on television. It was rather like Jeff Somer said in the New York Times: "It was a string of no- big-deals, Steady Eddie achievements - much like... Cal Ripkin Jr. who showed up at the baseball park every day for so many years that people finally realized that they were staring at acts of unprecedented, monumental proportions."

5. So, are stock valuations being stretched? (Is the Pope Catholic and Argentinean?) You can count on it! As many of our loyal advisors know, we have written about the Ben Bernanke equity markets as well as the Bernanke bond market of 2013. Quite the show. Interesting to note that this streak ended when trading began for the year on January 2nd and as of this writing, is down more than a point for the first few days of the year. But what a streak! What a stealthy rally! Can't argue with that, but what RISK was taken and what's the risk going in to the future? What are the implications of that streak? Well, for advisors and investors who are focused on risk, "a rally of the dimensions of the last two years has consequences", says Somers. The first consequence is that the increase in stock market

6. prices outstripped corporate earnings. They were cheap in the beginning but expensive today. Paul Hickey and Justin Walters of Bespoke Investment Group put it this way in their report: "2013 really marked the year where investors recognized that equities were attractively valued." But then, that realization changed the market: Investors bid up prices, and by year-end, valuations had shifted sharply. In other words, let's all jump on the bandwagon! Whoopee! The Bespoke analysis focused on price-to-earnings ratios and when coupled with Bernanke's pronouncements, that valuation shift accounted for nearly all of the market's gain. Many analysts have noted that stocks may no longer be a bargain; that investors now will be taking on greater risk. (Risk: not our cuppa tea, as you know.) Another way of looking at it is the market is not now a bargain. (Surprise")

7. Do we expect a reversal? No. Markets sometimes rise after they are overvalued. Do we expect more of the same rally to continue? No, although markets can expand further at the end of a rally and maybe even further than they should, they also have a tendency to overshoot. Do we expect the markets to extract punitive damages such as they did beginning in January of 2000 or what came after July of 2007? Let's just say we respect the ferocity of an unbridled market. As those of you who have been reading this column for many years realize, WE DON'T WORRY about the market rising or falling. We advocate using non-correlated, tactical managers who have the ability take advantage of both sides of the market, or at least use cash in a downturn.

8. Unfortunately, it is not as easy to assess the risk investors are taking in their portfolios as it is to look at performance. Weare all being bombarded by performance, performance, performance in the press and TV. It's hard not to focus just on performance because quantifying risk can be a difficult process. That's the best reason that our advisors use a measurement of semi-standard deviation, to better define how much downside protection an investment has had. So, look carefully at the risk in the markets. Again: not just performance, but market risk! That's definitely the focus in 2014 and brings up the question: Are buy-and-ho1d investors counting on a third year of abnormal returns? At this point in the narrative, we are reminded of the Dos Equis TV advertisement where the roue says "Stay thirsty, my friends." Our take on that is "Stay vigilant, my friends, and tactical."

9. GENERAL MARKET COMMENTARY The stock market had an amazing year in 2013 with the S&P up 32.1%, but the consistency of the gains throughout the year in a lackluster economy raises some questions. What do these strong 2013 returns mean, if anything, for the 2014 outlook? Although economic reports have shown recent improvement, and bearish technical warning flags are absent, this is not the time to get complacent. One reason for concern is that 2014 is a mid-term election year. In the 4- year presidential election cycle, the year of presidential elections has been the strongest, but the mid-term election year has been the weakest as well as the most volatile. The chart at the right shows the average quarterly performance for each year of the cycle since 1940.

11. Looking at year two (where we are now) shows a small gain of.7% for the first quarter, but losses for the second and third quarters. Then, the 4th quarter finishes the year out with the largest quarterly gain of any of the entire cycle. Actually, the S&P has finished the 4th quarter with gains about 90% of the time with an average gain of 7.8%. Based on the overbought condition of the current market and the optimism among investors, the most likely path may be a pause until later in the year. As far as the bond market is concerned, although the Federal Reserve will continue buying smaller amounts of bonds back to keep liquidity in the system, short term interest rates may have another two years before they actually start rising. We will continue to watch for signs of inflation which may accelerate the efforts of tightening monetary policy

12. STOCKS, BONDS, AND INFLATION Sometimes it is a good idea to take a few steps back to gain the big picture perspective when evaluating investment alternatives. While over the short run it is easy to get caught up in investment opportunities, it is important to keep expectations in check. Gold, for example, has been used as a fiat currency, and when uncertain times arise, many investors flood the market and have unrealistic expectations. Over the long term, gold has appreciated at about the rate of inflation, with big movements that eventually play out, and prices that revert back to the mean over longer periods of time. This chart is an interesting study of the rate of appreciation of various assets since 1934. The S&P Stock Index has appreciated at an annualized rate of 10.7%, or about 7% after adjusting for the inflation rate. At that rate an investor’s assets will double every 10 years, even after adjusting for inflation. However, there are some years when there are losses even when investing for a decade, causing investors to lose heart and many times do the wrong thing.,

13. High yield bonds have produced a return averaging about 3% less than stocks but with much lower volatility or losses. This makes them ideal lower-risk vehicles for people who don’t want to ride the investment roller coaster. They also trend much more consistently and can be easier to trade when the time is right. Three-month treasury bills or short term CDs have returned only the rate of inflation, causing no net investment gain, yet investors must pay tax on the privilege. Study this chart and ask yourself what kind of investments may be suitable for your future.