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10 Items to check on your Statement

10 Items to check on your Financial Statement

 Brokerage and investment statements can be tricky to read. This is a quick read. The mantra is check, check, check and ask. It's your money. Here are 10 things to look for:

1.     Mutual Fund Share Classes: There are many! Check the five letter ticker. The last letter is always an "X". What you don't want to see are any “B” or “C” or “R” class shares. They're expensive and probably pay the broker a trail or 12b-1 fee. How can you tell? Well, one clue is that a B, C or R will be the penultimate letter in the ticker just before the “X.” What you do want to see is “A” or “I” in the ticker and, preferably, with “LW” or Load-Waived at the end (e.g. AGTHX.LW). (Note 1) 

If in doubt call and ask “Am I invested in the cheapest available share class?”

2.     ETFs: Most tickers will be three or four letters. There are some with clever ticker names, which are marketing driven and possibly geared more towards traders. So EEM is iShares $32bn Emerging Markets Fund. It carries an expense ratio of 0.7% and has underperformed its index. IEMG is another Emerging Markets ETF from iShares but it costs 0.14% and has outperformed its index. If you have an ETF with a cute name (AMPS, MOO, BLNG, CAFE) just, you know, double-check it.

Some ETFs are ETNs. This means that they invest in derivatives and they will probably incur roll costs. Some ETNs and ETFs will also have “ultra” or “2x” or 3x” which means they're leveraged. We won't touch these and you shouldn't either. Look in your statement under the ETPs (Exchange Traded Products) section.

3.     Tickers: U.S. listed ETF and stock tickers are straightforward. They're usually two to three letters. A lucky few have one. If they have “ADR” after them, they're foreign stocks listed in the USA and will usually end in "F" or "Y", so NSRGY for Nestle in the US. If the ticker has three or less letters, it means the stock is listed on the NYSE. If it has four, it’s listed on NASDAQ. (Note 2). If the ticker ends in a “Q” it means the company is bankrupt so, unless you’re into protracted legal dealings, don’t buy it.

Some tickers have cute names too but they don’t carry the same concerns that we have for ETFs. So, SAM is Boston Beer (from Sam Adams beer), TAP is Coors, Mammoth Energy is TUSK and Nordstrom is JWN, the initials of the founder John W Nordstrom. FIZZ is the National Beverage Corp. The list goes on.

Mutual fund tickers can be tougher. They will have five letters and an “X” at the end (e.g. POAGX). If they're a money market fund, they will have two Xs (e.g. AJLXX). The first letter usually shares the first letter of the fund company’s name. So, Vanguard funds start with a V, Fidelity funds with a F, and so on.

Option tickers are a different animal. The company ticker may not be the same as the regular ticker. Additional letters indicate the strike price and the month of the option. 

4.     And what if it's a bond? Then it won't have a ticker but a CUSIP (pronounced Q-SIP), which is a string of nine numbers and letters. The first four or six numbers identify the bond issuer, so 9128 means it's a U.S. Treasury, 13062 means it's the State of California, 037833 means it’s Apple and so on. The next two identify the actual bond and the last one is an accuracy check system.

5.     Cost Basis: Not all statements have these but you should know where to get them. The cost basis on mutual funds, ETFs and even stocks will change constantly if you have elected to have dividends or capital gains reinvested. You should also ask your broker or financial institution what basis calculation they use. They should ask you at the time of any sale of securities.

6.     Yield: For equities this is simply the latest quarterly dividend multiplied by four, divided by the share price. It’s a current yield and probably won't be the same as you have actually received in the prior twelve months.

For bonds, it’s more complicated. The yield is the annual coupon on the bond but if it’s a premium bond things can get tricky. First check if the price you paid for the bond was more than $100. If it is, you have a “premium” bond. Now you have a choice. For example, a bond that you paid $11,000 for will redeem in 10 years at par so you can either amortize the premium of $100 a year or you can pay income tax along the way and take a capital loss. (Note 3) 

7.     Transactions: In the back of the statement you will find a list of transactions. Some will reflect reinvestment of dividends and capital gains. We're not concerned with those. But look at other transactions for stocks, bonds, ETFs and funds. Transactions are not free. Many brokerage firms charge for a purchase or redemption of a security and even if they don't, you will still incur the cost of a bid/ask spread. Add up all the transactions on your statement and divide it by the market value. If the transactions amount to more than 30% of the market value, you may want to find out why.

 8.     Fees: If you use a broker or adviser, the statement should show the management fees. If it’s a quarterly statement, multiply the amount by four to get an annual rate and divide that by the total market value. Anything over 1% is high.  

 9.     Income: Every line item on your statement should have an income number. Even if it's a stock that pays no dividend, there will typically be a dash (“-“). Income should also be consolidated with your account summary. Check it. It's one of the most important numbers of your investments. Review the maturity dates of your bonds. The capital will usually be reinvested but, again, check. Don't confuse 1) yields with total investment returns or 2) estimated annual income (EAI) or estimated yield (EY). These are only an estimate and will change.

10.     Current Price: All investments should have a current price as of the date of the statement. Some illiquid stocks may have an old price from a prior date and some (and this is bad) will have a n/a, which means it's no longer traded. Also, check the prices of a security you don't recognize against an older statement. If the price hasn't changed much, it may indicate it doesn't trade. (See Note 4) 

Useful websites

Everything you need to know about CUSIPs

Investopedia: Wikipedia for investing. Generally (but not always) good.

Understand option tickers

Notes

1. Also look to see if you are invested in more than one share class of the same fund. This can happen if you have a consolidated or household statement, which combines multiple accounts (e.g. IRA, Roth, Trust, taxable). You want the one with the highest price because that will be the cheapest.

2. If you see something like LON, SWX, MEX, WBO or BATS after the ticker, it means the stock is listed overseas (so London, Switzerland, Mexico or Austria) or on multiple exchanges (BATS is an electronic exchange).

3. Here's where your CPA and the 1099-INT IRS form comes into play. Worst case is that you end up paying full income tax on the fixed income yield and end up with an undeclared capital loss. So, pay attention to those bond prices.

4. A good rule of thumb is that the longer the company name (e.g. Vantage Drilling UTS, INTL STPLD C/O Ord SH & 1%/11/2% Step up SR SECD), the more likely it's an illiquid stock.

The Lawyer's Financial Stages - Stage 1 - The Early Career

We work with many associates and partner attorneys in large firms. There is often a professional and financial lifecycle as lawyers progress. Here’s what we see:

Early Career: Congratulations! Graduating fresh out of law school and passing the bar exam is an accomplishment. You start at a leading firm in a practice you always wanted. Starting salaries are generous and there are usually annual bonuses of up to 30% of base. Expenses are high. Some of that is setting up a new house, often with a new spouse, and becoming familiar with regular household expenses. Housing, travel and food expenses can run as high as 50% of income (more if you’re in New York, the Bay Area or Washington).

And there’s one big and often intimidating expense. Yes, student loans. It’s best if you can consolidate these (but be careful you don't run afoul of the community property commingling principles) for nothing else than ease of repayment. You may also pay a lower rate.

Start with the basics. Create a budget. Stick to it. Start saving some cash reserves. Three months of expenses is a good number to start with. That’s mostly so you can pay for emergencies or any time off work without having liquidate investments.

Set up a low cost investment savings account. Use ETFs or low cost index funds. Invest $100 a month. Saving $100 a month at a 5% return can grow to $80,000 in 30 years and $192,000 at 10%. So save more if you can. Get into the habit of “paying yourself first”.

You’ll never miss $100 but it can grow considerably with time. If your firm offers a 401(k), invest as much as you can. It's a gift from the IRS and they are not in the habit of gifting. Do not borrow from your 401(k).

Investment and saving success is about time, discipline and patience. You may get Facebook at $5 and retire early. Or you may get Yahoo at $125 and retire late. But with either, you hear about it more than you see it. Most of what we see is consistent saving and staying in the market. So start now.

And watch your expenses. Yes, again with the expenses. You will be working 60 hours a week so simplify your life where you can. Stuff like expensive phone plans, dining out, Uber, cable bills and club memberships can run into hundreds of dollars a month. Get into the habit of managing all expenses. Sweat the small stuff.

If you have any questions on these, or would like to discuss further, please feel free to e-mail us or call 415 435 8330.

Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

Attorneys: Your Red Flag Insurance Issues

Attorneys: Your Red Flag Insurance Issues

Ok, we have to talk insurance. Not life or health insurance. Hopefully, you're well covered there and they are both relatively straightforward compared to the world of Property and Casualty (P&C) insurance. With life and health insurance, you're insuring against having to pay for something you may not have the money for. But the liability is mostly known. With P&C insurance, you’re insuring against something you may cause and the liability is almost certainly unknown.

As a lawyer, you're particularly at risk. There are plenty of good plaintiff attorneys out there, so you need sound policies to protect your assets and family. And let’s be candid. Litigants don't go after massive damages if there’s nothing to collect. As a successful lawyer, you have a big target on your back. They know you have assets. Here's a quick review:

1.     What’s insurable? What do you want insured? The chart below is a quick way to review the frequency and severity of losses. This is entry level P&C stuff but shows how insurance companies assess risk. It’s the top left corner we’re worried about. The others are either minor, and so losses relatively easily absorbed, or are essentially uninsurable because of adverse selection or the potential loss size. As a successful professional, we need you to concentrate on the top left where, if not covered, you can quickly find your assets at risk, particularly around liability. The good news is that this is exactly the quadrant where the insurance industry works well.

2.     Excess Liability Insurance:  Does your insurance coverage exceed or match your net worth? If a lawsuit puts your assets at risk, you don't want to be running out of insurance. Make sure your regular homeowners, rental and auto insurance covers you adequately and that you carry umbrella insurance.

3.     Personal Umbrella Insurance: Protects you against claims and lawsuits above the limits of your personal auto or homeowners insurance. It can also protect you from claims like libel, slander and liability coverage on rental units. And from events like these:

·      A guest trips on the ottoman in your home and develops sciatica

·      A friend drinks in your home and causes an accident on the way home.

·      Your dog causes that annoying jogger to take a header into the curb

·      You hit someone’s 1955 D-Type Jaguar

·      You chaperone a class field trip and Sebastian breaks his foot kicking a tree stump

·      Your child damages college property (sure you can disown them later but…)

·      Your neighbor sues you for mental anguish over that drone you haven’t quite got the hang of yet

·      Your cat pees on a priceless Persian rug

Sure, some of these can be frivolous, but we saw the second one happen and cause years of anguish. Discovery, depositions and documents all take time and you don't want to represent yourself. An insurance company will have an obligation to defend you in court. That alone can be a primary benefit for the policy. So, umbrella insurance is not really an option for our lawyer clients. It’s a must.

4.     How much and how much? Premium costs will depend on many things (don't they always). If you have a pitbull, children under 25 with access to your cars, a bad driving history, firearms, a swimming pool…you're going to pay more. Most of the major insurance companies offer umbrella insurance, even GEICO. Some require that you carry your home and auto insurance with the same company (which is a pain and messes with your no-claims history) but many do not (which is better). Rough cost? Start at $200 per $1m of coverage and work up.

One million dollars of coverage will pay for litigation defense and all the nuisance lawsuits. But if the claim is larger, you don't want to be in a position where wages are garnished or inheritances diverted. A reasonable amount of coverage is one-for-one of the family net worth up to around $5m. Settlements can be higher but it’s rare and the insurance cost can start climbing fast. It’s a self-selection problem.

5.     The Three Quick Questions on Umbrella Insurance: You can buy most insurance direct but this is one case where you should talk to a broker. And not a tied broker, who represents one company, but a full service, multi-carrier broker who can provide multiple quotes. Make sure the insurance company is rated at least “A+” from A.M.Best.  And it’s the “claims paying” rating you're looking for, not the credit rating. You're a policyholder not a creditor.

And the Three Questions are:

1. What are the risks you face? Consider your risk as a homeowner, the risk of causing an accident while commuting and any potentially dangerous activities you participate in that could put those around you at risk. Its not your personal risk at question here it’s your risk to others. That’s why riding a motorcycle may cost you less than driving a car. Sure it’s more risky to you, the rider, but not to “Joe Texts while Drives”.

2. What is the value of your assets? These include properties, possessions, stocks, bonds, savings and retirement funds. And in your law firm, it will be your deferred compensation and your capital. The more assets you have to protect, the higher the umbrella policy limit you need.

3. What's your potential loss of future income? Liability lawsuits can result in loss of both current assets and future income, so even those early in their law career may want to consider the consequences of a serious claim.

So while you may not have many assets now, if you’re on track for a high paying career, you could be involved in a lawsuit that can target money you haven’t earned yet. Fun, isn’t it?

6.     D&O Insurance: if you or your spouse serves on a non-profit board, make sure your general liability insurance (for example, your umbrella insurance) carries a D&O and E&O rider. They’re not expensive but if something happens in that non-profit, for example an accounting, investments or employment problem, you don't want the plaintiff coming after directors’ personal assets. Those assets are likely to exceed those of the non-profit.

7.     Consolidate: You may have acquired assets over time and so insured them in different ways. So, your fine art, second home or jewelry may have separate policies. You don't want to wait until claim time to find out what’s protected.

8.     Staff: You may have a housekeeper/cleaner, part-time gardener or babysitter. All could be deemed employees. You should review Employment Practices Liability Insurance. This will cover wrongful dismissal, discrimination or visa problems.

9.     Travel: A worldwide travel protection plan is a good idea. Not for cancelled trips (Amex can do that) but for medical emergencies and flights back home if you put your back out on that Provence bike-trip-of-a-lifetime. (That one cost a client $75,000.)

10.     Make sure the insurance policies sync with the estate plan: Many wealthy people own property in LLCs or trusts. Not all insurance providers enable policies to reflect alternative ownership structures so these should all be aligned. Again, not something you want to deal with at claim time.

Brouwer & Janachowski, LLC

Mill Valley, CA

415 435-8330

Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

All charts from Factset unless otherwise noted.

Hitting the Ceiling

The Days Ahead: More fallout from Irma and Harvey

Markets were keyed into the Florida hurricane. We already saw a big jump in jobless claims last week from 236,000 to 298,000. That’s only one week of Harvey. Katrina pushed up claims by 100,000 back in 2005 and Houston and Florida have twenty times the population of New Orleans. It will be difficult, in the next few months, to get a read on the data and the underlying trends.

Elsewhere, the ECB left rates unchanged. They're on a different track from the Fed. They are still buying bonds at the rate of Euro 60bn a month but beginning to run out of eligible bonds. It’s likely they'll follow the path of i) tapering ii) reducing the balance sheet and then iii) raise rates. The Fed went i) taper ii) raise rates and is about to iii) reduce the balance sheet. President Draghi also mentioned some concerns in commercial real estate. Which we’re watching.

And the Fed lost its Vice Chair: Stanley Fischer This is a very big deal. For a start, it means there will be three board members and four vacancies, which is probably a record. It also means the Regional Presidents are now in the majority of the FOMC and the size of the FOMC, which should be 12, is now eight. We still have no read on the next Fed Chair. We’re hopeful Yellen will re-up or at least stay on as a non-Chair. But precedent is against us.

1.     Growth and Value: It should be easy. Growth stocks have a record of, er, growth, high multiples and increasing sales. Value stocks are cheap relative to their book value, generate lots of cash and sell below market levels. So, a Value Index tilts towards Financials, Energy and some Health Care (the basic stuff like supplies and long term treatments). Those three sectors alone account for over 55% of the Value index. They should be attractive as core long-term holdings and a solid investment. But not so:

Blog 1 9-8-2017growthvalue2_.jpg

Over three years, Growth outperformed Value by 22%. Is this end point dependent? Well, for five years Growth was better by 25%, 10 years by 60% and by even larger amounts over 20 and 30 years. The time when Value really paid off was in the 2000s after the tech bust. In the five years to 2007, Value outperformed by 20%.

What’s going on? One problem is financials. They may trade at a discount to book value but determining the actual value of bank assets, as opposed to the published value, can be tricky. Are all those loans good? Should we discount the Deferred Tax Asset? After all tax rates may fall and is that really an “asset”? It certainly wouldn't be if you applied for a mortgage. Are those lease assets (say, putting your bank branches into a lease agreement), really worth what they say they are? Will regulatory change help or hurt earnings? If these are all uncertain, then the stocks may trade at a permanent discount to book value, and then you have a classic “Value Trap.”

On the other side, in a period of low growth, Growth stocks sell at a premium. This is especially true when many growth stocks are effectively monopoly platforms and there simply aren’t that many growth stories around. That seems to be the case today.

Should we give up on Value? No. We like companies that throw off a lot of free cash flow. This avoids i) highly leveraged companies (debt tends to do a number on cash flow) and ii) manipulated GAAP accounting that allows deferred sales or high warranty costs. Berkshire Hathaway is a great example of avoiding both. And it has the added benefit of some strong businesses that are valued at cost, sometimes from years ago, and with goodwill mostly written off. We also like companies with strong balance sheets and cash generation. But, in general, we’re not big fans of “pure value” and can't really see a catalyst for change (h/t John Authers.)

2.     Debt Ceiling (again): We posted this chart earlier in the week. But things changed. It shows the spread between 1-Month and 3-Month Treasury bills. It should be a spread of around 6bps but look at this:

Blog 2 9-8-17 3m 1m spread_TRYUS3M-FDS.jpg

For a while in the week, 1-Month bills yielded more than 3-Month bills and briefly yielded more than 2-Year Notes. The explanation is easy. The expiration of the debt ceiling fell smack in the middle of when the 1-Month bills matured. So, why take the risk? Investors went for longer dated maturities on the basis that those would be less likely to delay principal payments.

We know now that the debt ceiling problem has been well and truly kicked down the road until December. Which is good. Except that coincides with the FOMC meeting on December 12th, which is the probable time of a rate increase. It’s never good to see money markets twitchy. They’re the backbone of the payments system. So, last week was both a reprieve and a heightening of the problem.

3.     The Lucky Country: Meanwhile Australia has just recorded its 26th straight year without a recession. Australia is around 7% of the MSCI-EAFE index, the leading large cap tracker of non-U.S. stocks, and 20% of Pacific stock markets. One tends to think of Australia as a resource economy. They're about 5% of GDP. Exports are around 18% of GDP and GDP per capita around the same as the U.S. Here's the chart:

blog 3 9-8-17 Australia GDP pop_.jpg

The top part shows GDP growing consistently with only the occasional quarter of negative growth (it generally takes two consecutive quarters to record a recession). Even 2008-2009 barely dented growth. The line shows declining unemployment.

How do they do it? Well, part of it is immigration. The lower chart shows growth of the labor force overlaid with that of the U.S. As is clear, the number of workers entering the workforce has far exceeded that of the U.S. Average growth is 1.7% compared to the U.S. of 0.8%. At that rate the population doubles in 40 years, compared to the U.S. of 90 years. So, it would seem if you want to keep growth up, you need healthy population growth. Either by birth rate or immigration. Mmmm.

There are other factors contributing to the Australia success story. Low interest rates, a strong housing market and household debt growth. Sure, a drop in mining and metals will hurt but that seems not to be in the cards. The biggest industry in the stock market is financials, which tend to be solid GDP trackers and benefit from industrial and housing growth. There are other reasons we like Asia as an investment opportunity. But for now Australia’s winning streak looks set to continue.

Bottom Line: Stocks have gone sideways for most of the quarter. The 10-Year Treasury yield, on the other hand, has dropped from 2.4% to 2.06%, for a return of more than 3%. We expect stocks to stay well bid. If nothing else, the weak dollar (down 12% this year) and foreign growth path will help large companies.

Please check out our 118 Years of the Dow chart  

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 Other:

Bad things at the Fed

Regulators and ICOs.

Moody’s on South Korea

Blankfein on Cohn: “He’s not that bright but should be OK for the Fed”

--Christian Thwaites, Brouwer & Janachowski, LLC

Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

All charts from Factset unless otherwise noted.

Debt ceiling fears just got real

When do one month bills yield more than three month bills? When your'e afraid you may not get paid back. 

3m 1m spread_TRYUS3M-FDS.jpg

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Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

All charts from Factset unless otherwise noted. 

Trade Balance: drag on growth

Trade Balance: drag on growth

  • Trade deficit fell but Q2 averages are worse than Q1
  • Consumer good imports rose
  • Cap goods exports rose
  • All in all modest drag on GDP 

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Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.
All charts from Factset unless otherwise noted. 

All you need to know about Durable Good Orders

All you need to know about Durable Good Orders

 

Not the most exciting series but a very good indicator of future manufacturing activity.

Orders fell 1.08%. Total orders have fallen for the second consecutive month.

All in all, not inspiring. No market reaction.

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Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

All charts from Factset unless otherwise noted.