2010 Year-End Commentary and Planning Ideas

2010 Year-End Commentary and Planning Ideas

January 21, 2011

By Caves & Associates

Preston S. Caves, CPA, CFA, MBA

Sandra K. Gafney, CFP, MBA

Dear Clients and Friends,

We are pleased to present Caves & Associates' Market Perspective Full Year 2010 and Outlook. The review indicates 2010 provided another year in which securities markets recovered strongly from the deep bear market from November 2007 to early March 2009. U.S. equities were the stars, and most taxable fixed income securities managed moderate to very good returns; tax-exempts lagged. The U.S. governments' unprecedented fiscal and monetary stimulus efforts, increasing corporate profitability, and continued strength of overseas emerging economies were the underpinnings of the continuing rally. Additionally, the review provides information on five-year returns for perspective; for most stocks, the 2008 bear market was so severe that cumulative five-year returns were only in the low single digits; only emerging market stocks achieved double-digit returns for 2006-2010. We encourage you to read the Market Perspective for a fuller review of major economic and market events in 2010. The Market Perspective also presents 1) our 2011 Outlook and 2) a scorecard rating the 2010 Outlook and the 2010 performance of Caves & Associates portfolio strategies and recommended mutual funds.

The economic recovery that began in 2009 continued into 2010; sluggish rather than robust is the best description for both years. The extension of the rally in global equities and credit bonds continued the usual pattern of reversion to the mean. Like 2009, 2010's biggest winners were generally 2008's biggest losers. As a corollary, investors exhibited an increasing appetite for lower quality stocks and bonds during much of the year. Another key observation is that diversification worked and provided investors very good returns and a smoother ride in the year's down months in January, May, June, and August. As usual, we encourage you to avoid focusing on any short time period, because stock prices are historically quite volatile in the short-run.

A major waypoint for U.S. fiscal policy occurred in mid-December with enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 ("2010 Tax Relief Act"). The major observation is that the $858 billion legislation included provisions, particularly continuing tax cuts for the wealthy and new reductions in Social Security payroll taxes, that were both very stimulative of the U.S. economy and also unexpected. The accompanying Timely Topics provides a summary of key tax provisions. Earlier in the quarter, the Federal reserve announced another monetary policy initiative to stimulate the U.S. economy which has been dubbed Quantitative Easing II (or "QE II") because it is similar to QE I, which was executed in Spring 2009. QE II is a new $600 billion program; its goal is to put downward pressure on long-term interest rates to spur new business investment and to keep the housing recovery on track by restraining mortgage rates. See the Economic Review section of the accompanying Market Perspective for an elaboration.

We have also enclosed or attached a Market Review for the fourth quarter of 2010. The review indicates it was an explosive quarter for U.S. stocks and a very good one for foreign stocks. The effects of accommodative monetary policy plus the stimulative nature of the yearend compromise between President Obama and Congressional Republicans on income taxes and unemployment benefit extension combined to facilitate a surge in stock prices. On the flip side, U.S. and foreign bonds both had very weak quarters as expectations of continued economic recovery and fear of inflation led to increasing interest rates. Tax-exempt bonds were particularly weak as many states and municipalities struggled with extreme budget challenges. A table accompanies the review and provides global returns for the quarter and full year 2010.

Finally, we have enclosed or attached the latest from the Blog Department, our occasional opinion piece.

Outlook Summary and Caveats

As noted above, the 2011 Outlook is included in the accompanying Market Perspective. The outlook is optimistic for stocks and somewhat cautious but not pessimistic for bonds. We continue to have powerful positive and negative forces impacting the economy and stock market. As usual, their timing and future magnitude are impossible to reliably forecast.

We are sanguine not because long-term problems are decreasing; in fact, they are increasing. Nonetheless, we believe the U.S. has successfully "kicked the can down the road." We expect growing economic strength and corporate profitability to support improved stock prices most likely all the way through yearend 2011. Although it is over-generalizing, we also expect U.S. growth, along with that in emerging markets, to support foreign stock prices as well. As for bonds, an overdue correction of higher quality sectors has pretty much run its course. Results in 2011 should be acceptable at levels not much below historical standards.

Both the stock and bond forecasts face increasing risk as the year proceeds. We face the threat of inflation in the next 9-18 months as well as continuing uncertainties about 1) the impact of the inevitable eventual withdrawal of government stimulus programs around the world, especially in the U.S., and 2) sustainability of the strength of emerging economies like China, India, Russia, and Brazil. The Federal Reserve is performing its usual balancing act: it is well aware of the inflationary implications of its easy money policy, coupled with renewed rather than decreasing fiscal stimulus in the short-run, but it is also aware of the risks associated with changing course while the economy is still in the healing process. How will investors react if and when the Federal Reserve raises rates? We also have to deal with the increasing overhang of government and consumer debt both here and abroad, and the on-going threats involving global warming and fundamentalist Muslims. These opposing forces and uncertainties make it again difficult to provide definitive forecasts for the next year, and at this point we have declined to make a point-by-point forecast for 2010. As a result of these uncertainties and our usual conservatism, we are also planning to refrain from overweighting stocks. See the Outlook section in the Market Perspective for some elaboration on various key issues and relevant government policy positions in 2011 and beyond.

Each year from 2001-2010 included multiple external shocks which hurt financial markets, the two most severe being 2001, when we endured the terrorist attacks of September 11th, and 2008, when the housing and credit crises revealing a shockingly overleveraged, undercapitalized global financial system and an equally overextended U.S. consumer. During these ten years we also faced major corporate, mutual fund, and accounting scandals; escalating geopolitical tension including in Iraq, Iran, Afghanistan, North Korea, Yemen, and Somalia; additional terrorist attacks; terrible natural disasters; spikes in energy prices; and the unprecedented BP offshore oil spill. Nonetheless, returns for all major global asset categories were positive for the 10 years, albeit at levels considerably less than long-term historical averages. We can only wonder what potential disruptions and unexpected economic twists lurk for 2011. As we have often indicated, investing in the capital markets involves not only understanding risks that may be apparent, but also planning for risks that are not.

As a reminder, most outlooks are saying the same thing. Also, there is typically a certain serial correlation in their thinking, meaning what they project is never significantly different from what has just happened. Further, since the consensus is already reflected in the prices of today's securities, it is the unexpected and very hard to predict events that will determine the future direction of stock prices, interest rates, etc. Accordingly, the consensus will in all likelihood be wrong.

As noted above, a brief scorecard at the end of the Market Perspective and Outlook rates last year's predictions. It also provides an evaluation of the success of Caves & Associates' investment strategies, mutual funds, and portfolio supervision in 2010. Generally speaking, the accuracy of economic projections was good. However, the prediction for stocks undershot their ultimate strength; we did not predict the fourth quarter break-out of stocks, particularly those in the U.S. To hedge economic and geopolitical risk, we overweighted bonds and alternative strategy positions to a limited extent for most of the year. The underperformance of both versus skyrocketing stocks "left some money on the table," accordingly. The underperformance of alternative strategies was particularly disappointing and detrimental, even when risk-adjusted. Their results should not have lagged stocks as much as they did, even considering their hedged nature (see the Market Perspective for additional reporting and analysis). We did make a number of small adjustments that were helpful. For example, we increased the weighting of emerging markets stocks and bonds. We also employed a small overweighting of growth management styles. Overall, our client portfolio returns were quite good on both a relative and absolute basis, especially when adjusted for the lower risk assumed.

We note that our outlooks have been off the mark for the past several years. Our "prudent" conservatism about the eventual negative impact of the twin deficits in the U.S. (government and trade) was pre-mature regarding 2009 and 2010. In that our 2008 outlook projected about what had just happened, it suffered from one of the typical forecast failings noted above. We had forecast positive 2008 results for stocks. The prior years from 2003-2007 had all been positive for stocks. Our 2009 forecast suffered similarly: the very cautious 2009 forecast was likely affected by the extremely poor results that had just happened in 2008.

Additional Perspective and Cautions

As we review the two years 2008 and 2009, the stock price collapse and rebound were both unprecedented and unpredictable. The lessons are that at least some level of volatility is a constant, markets inevitably run in cycles, and we must remain disciplined long-term investors, not market timers. Accordingly, even as broad asset allocators, we must be psychologically ready for periodic poor absolute returns, which are the inevitable result of an extreme bear market, as in 2008. Finally, some underperformance on a relative basis is also very likely when stock markets rally strongly, as they did in 2009 and the latter part of 2010.

Investors should develop and maintain a plan that has the potential to work over most future scenarios. Thus, we believe the more useful approach is to maintain a broadly diversified investment plan customized to your specific time horizon which can meet your investment objectives over a variety of potential scenarios. Further, we continue to believe that a disciplined investment approach emphasizing diligent fundamental research, diversification, and rebalancing will provide sound long-term investment returns.

Caves & Associates discourages focusing much attention on short-term results because a broadly diversified portfolio is structured for the long-term. As we often state, there is no way to completely eliminate short-term risk from an investment portfolio.

Mutual Fund News

Our mutual fund managers continue to receive well-deserved plaudits. The latest example is a Morningstar accolade for Richard Aster, Jr., manager of Meridian Growth (MERDX). MERDX is owned by many of our clients and has been so for about a decade. We are proud our clients have been so well served.

What's Topical or Timely

We remain committed to continuing education as well as keeping you abreast of anything crucially affecting your wealth management. A separate enclosure or attachment summarizes the 2010 Tax Relief Act, reminds us of the April 2011 IRA deduction deadline, and notes one client situation when traditional IRA dollars should most definitely be converted to a Roth IRA
.
Blog Department

The Blog Department is our occasional expression of opinion and is enclosed or attached. Whereas Timely Topics may involve some disagreement among experts, its primary purpose is to educate in the realms of financial planning and wealth management. The Blog Department ventures into broader topics which may be more controversial.

As demonstrated by the tragedy in Tucson, calmness rather than unreasoning emotion and partisan extremes are needed at this time. Nonetheless, thoughtful opinion can properly focus our attention. The accompanying Blog Department is to some degree "Point" and "Counter-point." Dire warnings from Bill Gross, Managing Director of PIMCO, about the negative consequences of excessive debt are balanced by Norman Boone's good arguments for a positive, optimistic mid-term outlook for the U.S. and other developed nations.

Staff News

The operations and administrative staff is undergoing major change. Susan Mazzoni is leaving Caves & Associates at the end of this month. After over 15 years of service, Susan is planning a move out-of-state to be closer to family. Susan has been an always personable, dedicated servant of client needs while managing our "back office" and will be greatly missed by all of us.

Up to the challenge of filling Susan's very big shoes is Jeanne Oshiro, who has been working as Susan's assistant since last April. Susan has been training Jeanne for several months to take over her duties; we are seeing a very smooth transition. Please welcome Jeanne to her expanded duties, call her for all your client service needs, and give her every opportunity to get to know you personally.

We are very pleased to announce that Karen Chan has joined Caves & Associates recently. She will be assuming Jeanne's duties as assistant for client service and "back office" operations. Susan is also assisting with Karen's training, and she is coming up to speed very quickly. Prior to joining Caves & Associates, Karen spent 14 years with Compuware Corporation in computer software sales. Earlier in her career, she was an analyst in a Financial Control Department at Ford Motor Company.

Born and raised in Michigan, Karen spent three years living in New York City before heading west and settling in Manhattan Beach where she lives with her husband, Yu-Keung, and their two children, Zack and Tessa. Karen is an active volunteer for the school district, Manhattan Beach Little League, and other community events. When she isn't working, volunteering, or driving her children to their sports events, you will find Karen on the tennis court indulging in her favorite pastime.

Our Usual Guidance Regarding Attainment of Long-Term Life Goals

Although the outlook for 2011 and beyond is quite uncertain amid numerous continuing challenges to the U.S. and international community, our reasonable expectations for results over the next five to ten years do not need to be overly pessimistic. Nonetheless, to be prudent, we need to hope for the best, but also align our expectations lower just in case, to be ready for the possibility of reduced results. Prudent behavior includes: 1) reasonable reductions in spending and increases in our savings rates whenever possible, and 2) maintenance of reserves for all foreseeable large portfolio withdrawals, whether recurring or not.

Need a Planning Update?

If something important has changed in your personal situation (career, family, health, cash needs, etc.), don't hesitate to let us know. A significant change in your life may indicate you need a review of your insurance, financial, or investment planning. Examples are family matters (births, deaths, divorces, and marriages), business matters (promotions, lay-offs, sale, and impending retirement), and significant changes of your health or that of family members.

Quotes For Our Times and All Time

Warren Buffett:
"Rule No.1: Never lose money, Rule No.2: Never forget rule No.1."

Oscar Wilde:
"When I was young I used to think that money was the most important thing in life. Now that I am old, I know it is."

Sir Winston Churchill:
"The pessimist sees difficulty in every opportunity. The optimist sees opportunity in every difficulty."

Andrew Carnegie:
"Surplus wealth is a sacred trust which its possessor is bound to administer in his lifetime for the good of the community."

Max Eastman:
"Dogs laugh, but they laugh with their tails."

Form ADV Available for Your Review

The ADV is our registration as an investment advisor with the SEC. It shows fees and services and other information that may be of interest. It is available free upon request. Please call if interested.

In Conclusion

We are providing these materials for your information and as a means to educate and stay in touch. We hope you find this information helpful, and we would be pleased to hear your comments and questions.

We are always grateful for our many clients, and we are especially thankful for your continued confidence. This coming year, we will continue to focus on doing everything we can to help you preserve your hard-earned wealth, grow it in appropriate ways, and ensure your money is supportive of the most important values and goals in your life.

You are welcome to share our views with your family and friends if you think they will benefit. This letter and the enclosures, as well as an overview of our staff, advisory philosophy, and methods, are available on our website, http://www.cavesassociates.com. We appreciate your referrals and suggest you steer those who might be interested to our website as a convenient and private way to initially make our acquaintance.

The information in this letter and accompanying materials is of a general nature and should not be acted upon without further details and/or assistance.

Best wishes for a happy, healthy, peaceful, and successful 2011.

Thanks and credit must go to the many sources for this letter and accompanying materials, including Managers and PIMCO mutual fund families, Morningstar, the Wall Street Journal, the Los Angeles Times, the law firm of Paul, Hastings, Janofsky & Walker, LLP, and Mosaic Financial Partners, Inc. (advisory firm owned by Norman Boone).

This publication does not constitute an offer or solicitation of any transaction in any securities. Information contained in this publication has been obtained by sources we believe to be reliable, but cannot be guaranteed.

There is no guarantee that the views and opinions expressed in the newsletter will come to pass, and they are not meant to provide investment advice. There is also no guarantee of future results. These views are as of January 21, 2011 and are subject to change based on subsequent developments.

Back to Market Reviews


		2010 Year-End Commentary and Planning Ideas
		January 21, 2011
		By Caves & Associates
		Preston S. Caves, CPA, CFA, MBA
		Sandra K. Gafney, CFP, MBA
		Dear Clients and Friends, We are pleased to present Caves & Associates' Market Perspective Full Year 2010 and Outlook. The review indicates 2010 provided another year in which securities markets recovered strongly from the deep bear market from November 2007 to early March 2009. U.S. equities were the stars, and most taxable fixed income securities managed moderate to very good returns; tax-exempts lagged. The U.S. governments' unprecedented fiscal and monetary stimulus efforts, increasing corporate profitability, and continued strength of overseas emerging economies were the underpinnings of the continuing rally. Additionally, the review provides information on five-year returns for perspective; for most stocks, the 2008 bear market was so severe that cumulative five-year returns were only in the low single digits; only emerging market stocks achieved double-digit returns for 2006-2010. We encourage you to read the Market Perspective for a fuller review of major economic and market events in 2010. The Market Perspective also presents 1) our 2011 Outlook and 2) a scorecard rating the 2010 Outlook and the 2010 performance of Caves & Associates portfolio strategies and recommended mutual funds. The economic recovery that began in 2009 continued into 2010; sluggish rather than robust is the best description for both years. The extension of the rally in global equities and credit bonds continued the usual pattern of reversion to the mean. Like 2009, 2010's biggest winners were generally 2008's biggest losers. As a corollary, investors exhibited an increasing appetite for lower quality stocks and bonds during much of the year. Another key observation is that diversification worked and provided investors very good returns and a smoother ride in the year's down months in January, May, June, and August. As usual, we encourage you to avoid focusing on any short time period, because stock prices are historically quite volatile in the short-run. A major waypoint for U.S. fiscal policy occurred in mid-December with enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 ("2010 Tax Relief Act"). The major observation is that the $858 billion legislation included provisions, particularly continuing tax cuts for the wealthy and new reductions in Social Security payroll taxes, that were both very stimulative of the U.S. economy and also unexpected. The accompanying Timely Topics provides a summary of key tax provisions. Earlier in the quarter, the Federal reserve announced another monetary policy initiative to stimulate the U.S. economy which has been dubbed Quantitative Easing II (or "QE II") because it is similar to QE I, which was executed in Spring 2009. QE II is a new $600 billion program; its goal is to put downward pressure on long-term interest rates to spur new business investment and to keep the housing recovery on track by restraining mortgage rates. See the Economic Review section of the accompanying Market Perspective for an elaboration. We have also enclosed or attached a Market Review for the fourth quarter of 2010. The review indicates it was an explosive quarter for U.S. stocks and a very good one for foreign stocks. The effects of accommodative monetary policy plus the stimulative nature of the yearend compromise between President Obama and Congressional Republicans on income taxes and unemployment benefit extension combined to facilitate a surge in stock prices. On the flip side, U.S. and foreign bonds both had very weak quarters as expectations of continued economic recovery and fear of inflation led to increasing interest rates. Tax-exempt bonds were particularly weak as many states and municipalities struggled with extreme budget challenges. A table accompanies the review and provides global returns for the quarter and full year 2010. Finally, we have enclosed or attached the latest from the Blog Department, our occasional opinion piece. Outlook Summary and Caveats As noted above, the 2011 Outlook is included in the accompanying Market Perspective. The outlook is optimistic for stocks and somewhat cautious but not pessimistic for bonds. We continue to have powerful positive and negative forces impacting the economy and stock market. As usual, their timing and future magnitude are impossible to reliably forecast. We are sanguine not because long-term problems are decreasing; in fact, they are increasing. Nonetheless, we believe the U.S. has successfully "kicked the can down the road." We expect growing economic strength and corporate profitability to support improved stock prices most likely all the way through yearend 2011. Although it is over-generalizing, we also expect U.S. growth, along with that in emerging markets, to support foreign stock prices as well. As for bonds, an overdue correction of higher quality sectors has pretty much run its course. Results in 2011 should be acceptable at levels not much below historical standards. Both the stock and bond forecasts face increasing risk as the year proceeds. We face the threat of inflation in the next 9-18 months as well as continuing uncertainties about 1) the impact of the inevitable eventual withdrawal of government stimulus programs around the world, especially in the U.S., and 2) sustainability of the strength of emerging economies like China, India, Russia, and Brazil. The Federal Reserve is performing its usual balancing act: it is well aware of the inflationary implications of its easy money policy, coupled with renewed rather than decreasing fiscal stimulus in the short-run, but it is also aware of the risks associated with changing course while the economy is still in the healing process. How will investors react if and when the Federal Reserve raises rates? We also have to deal with the increasing overhang of government and consumer debt both here and abroad, and the on-going threats involving global warming and fundamentalist Muslims. These opposing forces and uncertainties make it again difficult to provide definitive forecasts for the next year, and at this point we have declined to make a point-by-point forecast for 2010. As a result of these uncertainties and our usual conservatism, we are also planning to refrain from overweighting stocks. See the Outlook section in the Market Perspective for some elaboration on various key issues and relevant government policy positions in 2011 and beyond. Each year from 2001-2010 included multiple external shocks which hurt financial markets, the two most severe being 2001, when we endured the terrorist attacks of September 11th, and 2008, when the housing and credit crises revealing a shockingly overleveraged, undercapitalized global financial system and an equally overextended U.S. consumer. During these ten years we also faced major corporate, mutual fund, and accounting scandals; escalating geopolitical tension including in Iraq, Iran, Afghanistan, North Korea, Yemen, and Somalia; additional terrorist attacks; terrible natural disasters; spikes in energy prices; and the unprecedented BP offshore oil spill. Nonetheless, returns for all major global asset categories were positive for the 10 years, albeit at levels considerably less than long-term historical averages. We can only wonder what potential disruptions and unexpected economic twists lurk for 2011. As we have often indicated, investing in the capital markets involves not only understanding risks that may be apparent, but also planning for risks that are not. As a reminder, most outlooks are saying the same thing. Also, there is typically a certain serial correlation in their thinking, meaning what they project is never significantly different from what has just happened. Further, since the consensus is already reflected in the prices of today's securities, it is the unexpected and very hard to predict events that will determine the future direction of stock prices, interest rates, etc. Accordingly, the consensus will in all likelihood be wrong. As noted above, a brief scorecard at the end of the Market Perspective and Outlook rates last year's predictions. It also provides an evaluation of the success of Caves & Associates' investment strategies, mutual funds, and portfolio supervision in 2010. Generally speaking, the accuracy of economic projections was good. However, the prediction for stocks undershot their ultimate strength; we did not predict the fourth quarter break-out of stocks, particularly those in the U.S. To hedge economic and geopolitical risk, we overweighted bonds and alternative strategy positions to a limited extent for most of the year. The underperformance of both versus skyrocketing stocks "left some money on the table," accordingly. The underperformance of alternative strategies was particularly disappointing and detrimental, even when risk-adjusted. Their results should not have lagged stocks as much as they did, even considering their hedged nature (see the Market Perspective for additional reporting and analysis). We did make a number of small adjustments that were helpful. For example, we increased the weighting of emerging markets stocks and bonds. We also employed a small overweighting of growth management styles. Overall, our client portfolio returns were quite good on both a relative and absolute basis, especially when adjusted for the lower risk assumed. We note that our outlooks have been off the mark for the past several years. Our "prudent" conservatism about the eventual negative impact of the twin deficits in the U.S. (government and trade) was pre-mature regarding 2009 and 2010. In that our 2008 outlook projected about what had just happened, it suffered from one of the typical forecast failings noted above. We had forecast positive 2008 results for stocks. The prior years from 2003-2007 had all been positive for stocks. Our 2009 forecast suffered similarly: the very cautious 2009 forecast was likely affected by the extremely poor results that had just happened in 2008. Additional Perspective and Cautions As we review the two years 2008 and 2009, the stock price collapse and rebound were both unprecedented and unpredictable. The lessons are that at least some level of volatility is a constant, markets inevitably run in cycles, and we must remain disciplined long-term investors, not market timers. Accordingly, even as broad asset allocators, we must be psychologically ready for periodic poor absolute returns, which are the inevitable result of an extreme bear market, as in 2008. Finally, some underperformance on a relative basis is also very likely when stock markets rally strongly, as they did in 2009 and the latter part of 2010. Investors should develop and maintain a plan that has the potential to work over most future scenarios. Thus, we believe the more useful approach is to maintain a broadly diversified investment plan customized to your specific time horizon which can meet your investment objectives over a variety of potential scenarios. Further, we continue to believe that a disciplined investment approach emphasizing diligent fundamental research, diversification, and rebalancing will provide sound long-term investment returns. Caves & Associates discourages focusing much attention on short-term results because a broadly diversified portfolio is structured for the long-term. As we often state, there is no way to completely eliminate short-term risk from an investment portfolio. Mutual Fund News Our mutual fund managers continue to receive well-deserved plaudits. The latest example is a Morningstar accolade for Richard Aster, Jr., manager of Meridian Growth (MERDX). MERDX is owned by many of our clients and has been so for about a decade. We are proud our clients have been so well served. What's Topical or Timely We remain committed to continuing education as well as keeping you abreast of anything crucially affecting your wealth management. A separate enclosure or attachment summarizes the 2010 Tax Relief Act, reminds us of the April 2011 IRA deduction deadline, and notes one client situation when traditional IRA dollars should most definitely be converted to a Roth IRA . Blog Department The Blog Department is our occasional expression of opinion and is enclosed or attached. Whereas Timely Topics may involve some disagreement among experts, its primary purpose is to educate in the realms of financial planning and wealth management. The Blog Department ventures into broader topics which may be more controversial. As demonstrated by the tragedy in Tucson, calmness rather than unreasoning emotion and partisan extremes are needed at this time. Nonetheless, thoughtful opinion can properly focus our attention. The accompanying Blog Department is to some degree "Point" and "Counter-point." Dire warnings from Bill Gross, Managing Director of PIMCO, about the negative consequences of excessive debt are balanced by Norman Boone's good arguments for a positive, optimistic mid-term outlook for the U.S. and other developed nations. Staff News The operations and administrative staff is undergoing major change. Susan Mazzoni is leaving Caves & Associates at the end of this month. After over 15 years of service, Susan is planning a move out-of-state to be closer to family. Susan has been an always personable, dedicated servant of client needs while managing our "back office" and will be greatly missed by all of us. Up to the challenge of filling Susan's very big shoes is Jeanne Oshiro, who has been working as Susan's assistant since last April. Susan has been training Jeanne for several months to take over her duties; we are seeing a very smooth transition. Please welcome Jeanne to her expanded duties, call her for all your client service needs, and give her every opportunity to get to know you personally. We are very pleased to announce that Karen Chan has joined Caves & Associates recently. She will be assuming Jeanne's duties as assistant for client service and "back office" operations. Susan is also assisting with Karen's training, and she is coming up to speed very quickly. Prior to joining Caves & Associates, Karen spent 14 years with Compuware Corporation in computer software sales. Earlier in her career, she was an analyst in a Financial Control Department at Ford Motor Company. Born and raised in Michigan, Karen spent three years living in New York City before heading west and settling in Manhattan Beach where she lives with her husband, Yu-Keung, and their two children, Zack and Tessa. Karen is an active volunteer for the school district, Manhattan Beach Little League, and other community events. When she isn't working, volunteering, or driving her children to their sports events, you will find Karen on the tennis court indulging in her favorite pastime. Our Usual Guidance Regarding Attainment of Long-Term Life Goals Although the outlook for 2011 and beyond is quite uncertain amid numerous continuing challenges to the U.S. and international community, our reasonable expectations for results over the next five to ten years do not need to be overly pessimistic. Nonetheless, to be prudent, we need to hope for the best, but also align our expectations lower just in case, to be ready for the possibility of reduced results. Prudent behavior includes: 1) reasonable reductions in spending and increases in our savings rates whenever possible, and 2) maintenance of reserves for all foreseeable large portfolio withdrawals, whether recurring or not. Need a Planning Update? If something important has changed in your personal situation (career, family, health, cash needs, etc.), don't hesitate to let us know. A significant change in your life may indicate you need a review of your insurance, financial, or investment planning. Examples are family matters (births, deaths, divorces, and marriages), business matters (promotions, lay-offs, sale, and impending retirement), and significant changes of your health or that of family members. Quotes For Our Times and All Time Warren Buffett: "Rule No.1: Never lose money, Rule No.2: Never forget rule No.1." Oscar Wilde: "When I was young I used to think that money was the most important thing in life. Now that I am old, I know it is." Sir Winston Churchill: "The pessimist sees difficulty in every opportunity. The optimist sees opportunity in every difficulty." Andrew Carnegie: "Surplus wealth is a sacred trust which its possessor is bound to administer in his lifetime for the good of the community." Max Eastman: "Dogs laugh, but they laugh with their tails." Form ADV Available for Your Review The ADV is our registration as an investment advisor with the SEC. It shows fees and services and other information that may be of interest. It is available free upon request. Please call if interested. In Conclusion We are providing these materials for your information and as a means to educate and stay in touch. We hope you find this information helpful, and we would be pleased to hear your comments and questions. We are always grateful for our many clients, and we are especially thankful for your continued confidence. This coming year, we will continue to focus on doing everything we can to help you preserve your hard-earned wealth, grow it in appropriate ways, and ensure your money is supportive of the most important values and goals in your life. You are welcome to share our views with your family and friends if you think they will benefit. This letter and the enclosures, as well as an overview of our staff, advisory philosophy, and methods, are available on our website, http://www.cavesassociates.com. We appreciate your referrals and suggest you steer those who might be interested to our website as a convenient and private way to initially make our acquaintance. The information in this letter and accompanying materials is of a general nature and should not be acted upon without further details and/or assistance. Best wishes for a happy, healthy, peaceful, and successful 2011. Thanks and credit must go to the many sources for this letter and accompanying materials, including Managers and PIMCO mutual fund families, Morningstar, the Wall Street Journal, the Los Angeles Times, the law firm of Paul, Hastings, Janofsky & Walker, LLP, and Mosaic Financial Partners, Inc. (advisory firm owned by Norman Boone). This publication does not constitute an offer or solicitation of any transaction in any securities. Information contained in this publication has been obtained by sources we believe to be reliable, but cannot be guaranteed. There is no guarantee that the views and opinions expressed in the newsletter will come to pass, and they are not meant to provide investment advice. There is also no guarantee of future results. These views are as of January 21, 2011 and are subject to change based on subsequent developments.

		Back to Market Reviews