Q3 2014 Market Commentary

Current Outlook

Earnings season is kicking off and this quarters results are about as important as they have been in some time.
With the Fed steadily decreasing their Quantitative Easing program by an estimated 10 billion each month, and
stating a defined end date to the program in October of this year, the stock markets will now have to come off its
cheap liquidity euphoria and determine whether that liquidity has done its job. In the past we have compared the
economy to a flywheel and all the stimulus programs created by the Fed the force put upon it in an attempt to get
it moving. The question now becomes, has that flywheel picked up enough momentum to move on its own? Or
will it come to a grinding halt without the Feds extra force?

Both the Dow and S&P have reached new highs in the last quarter on lower volume. So these higher prices are
being created by fewer buyers while many remain on the sidelines unconvinced of the Bulls ability to continue.
At an estimated $126 per share of earnings forecasted, the S+P is selling at a little under 16 times expected 2014
earnings. We would consider that fully priced until earnings growth becomes clear. Thus, this quarters
announcements and outlook hold great sway. If earnings come in weaker or outlook is tepid then we have to
begin questioning how long the Bull can run without taking a serious breather. If they come in robust and the
outlook is for earnings growth to pick up steam, because the flywheel is actually spinning on its own, then there
is opportunity for further expansion.

So lets look at some of the themes that could have importance in the coming months in determining the
direction of market growth, risk and return.

Complacency

Paying attention is good for the market. When investors become complacent they begin to ignore the data that
should be important to them. They begin to believe that the upward movement of the market is a forgone
conclusion and will continue without pause. We tend to see less volatility and less volume in general with
shallower movements on the indices, while they still move higher. And as that flattening line pushes stock gains
incrementally, without downward motion, valuations become fatter and more extended. We have not
experienced a 10% or more decline, otherwise known as a correction, since October of 2011. Thats over a
1,000 days. Thats not to say a Bull cant run a lot longer, and we have had smaller declines, but without some
real volatility this market may be setting itself up for deeper declines in the future, when investors begin to sit up
straight and listen to what the economy is telling them.

Mergers and Acquisitions

M&A activity has been on the rise, an indicator that corporations are looking at how to utilize the historic levels
of cash on their balance sheets. Unfortunately they are finding it better to acquire other companies than to invest
in the innovation of their own products and services, to hire new people, or to distribute it to shareholders in the
form of bigger dividends or one-time special distributions. While M&A is not a bad strategy it is not additive to
employment, in fact one could argue that mergers create unemployment as synergies and overlaps are found and
headcount reduced. Likewise it does not spur the development of new ideas, new products, or new technologies.
It is a left pocket-right pocket move and is positive for shareholders of one or both of those companies, but not
for the broad economy as a whole.

At times, mergers are done to avoid taxes. Inversions have become the hottest strategy of late where a US
based company will look to acquire a foreign company in an effort to reincorporate in that foreign country,
where tax treatment is seen to be better. While that should raise discussions about US corporate tax rates, the
need for reform and the inefficiencies of our political system, for the purposes of this discussion wed like to
stay focused on the fact that these inversion deals reduce US tax revenues and can create job migration to
foreign countries. Neither aspect supports a strengthening US economy, though it may support the stock price
of the companies in question.

Asset Rich but Income Poor

On June 19
th
the Wall Street Journal ran a wonderful article entitled The Asset-Rich, Income-Poor Economy that
did a fantastic job of explaining why the Fed monetary policy has worked in one manner but not another. After
the financial crisis the Fed did everything in their power to support the financial infrastructure and set about
rebuilding wealth and assets in this country. The authors suggest the Fed was half successful. On one hand they
have helped to rebuild the balance sheets of corporations and some individuals. Wealth, as a balance sheet
measure, is at new highs. But assets are only one part of the equation. Income is the other. Without addressing
the need for higher incomes across more workers we run the very real risk of moping along with a barely
growing economy.

As we have discussed in past commentaries, robust growth takes greater amounts of consumption. Consumption
takes spending and spending needs income. Its great to have assets but when those assets are not utilized to
promote growth and income, it does nothing for the broader economy. For economies to grow there needs to be
investment on the part of corporations to expand and innovate and to hire. For employees there must be an
ability to achieve upward mobility in ones career which is typically coupled with an increase in potential
earnings. There needs to be a shift from asset hoarding to asset implementation.

Spending

Our concerns about spending can be summed up when looking at two figures, the actual rise in both spending
and inflation. According to the US Bureau of Economic Analysis, the increase in spending over the last 12
months has been 3.37 %. Over the same period inflation has average about 1.55 %. So a sizable portion of the
spending increase can be attributed to the rise of costs for the goods and services we have already been buying
(especially core food and energy costs) versus the fact that we are earning and spending more in general.
Granted, anything positive is something to be pleased by, but we would prefer that the increase to spending were
a lot more substantial.

The Bond Market Glide

It is our opinion that the Fed has been doing a pretty good job gliding the bond market to what they hope will be
a safe landing. With the extraordinary actions taken via QE, the Fed in essence was an indiscriminate buyer of
Treasuries and mortgage backed securities. The volume of their buying pushed up prices and decreased yields,
accomplishing many different results to support the post-financial-crisis economy. The big fear has been what
happens to prices after they stop? Would there be a wholesale decline in prices and rapid increase in yield?
Would the bond investors suffer great losses?

By being very vocal about what they anticipate doing in the future, and letting investors know what they are
thinking about and the moves they anticipate making, the Fed has been allowing for an orderly re-pricing of the
bond market. Their full disclosure has allowed for managers to make moves with more certainty and has kept
surprises from happening in the bond market, real estate and by extension the equity markets. That said any
unaccounted for increase in inflation will cause the Fed to tighten and raise rates more quickly than they wanted
and out of sync with the timeline they have announced to investors. That would cause volatility to return to the
bond market.

The Flywheel

Has this all been enough? The Fed has clearly put an end to their bond buying though they plan on leaving short
term interest rates as low as they are for a while longer, or until inflation shows signs of picking up. Likewise
they stand ready to act should regression occur but we cannot delude ourselves that QE or QE-like strategies are
always available and indefinite in their ability to be enacted. So has 4 trillion of capital infusion, directly and
indirectly, into the post crisis economy been enough to keep that flywheel momentum going or will we find that
the flywheel, slowly but surely, begin to wind down until it stops? Time will tell.

At Northstar we believe in managing client asset allocation in a manner that seeks necessary returns for planning
success with as reduced an amount of risk as we can build in. This leads us to avoid really embracing euphoria
when the bulls are running, but it also keeps us from falling into despair when markets turn south. As such we
have remained moderately conservative in our approach since the financial crisis and will continue to do so until
such a time that we feel confident that future growth is stabilized, is organic in nature and is sustainable.

As always we remain diligent in our approach as we navigate this still very unique time in our global economy
and markets. Should you have any questions or thoughts on these themes or on your planning and investment
allocation please feel free to reach out to us by phone at 800.220.2161 or by email at steve@nstarfinco.com and
julia@nstarfinco.com.


Steven B Girard
President

The opinions expressed are those of Northstar Financial Companies, Inc. and are based on information believed to be from reliable sources. However, the
informations accuracy and completeness cannot be guaranteed. Past performance is no guarantee of future results.


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