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Summer, 2011 Volume 1, Issue 1

QUARTERLY NEWSLETTER OF WATERSTONE INVESTMENT COUNSEL, LLC

M a r ke t U p d a t e

Don G. Brosz, J.D. Managing Partner

Mark A. Roberts, RFC Managing Partner

WaterStone Investment Counsel, LLC, is a unique, researchoriented investment management boutique. The company is privately owned. They are located in Cincinnati, Ohio. Four styles of investment management services are offered for taxable and tax exempt accounts:

The second quarter (Q2) of 2011 turned in mixed results for the market. The Dow finished with a 0.82% gain for Q2 while the Russell 2000 (small caps) lost 2.05%. Year-to-date, the Dow is up 7.23%, the S&P 500 is up 5.01% and the NASDAQ Composite is ahead by 4.55%. Of the major indices, the Russell 2000 was the worst performer (-2.05%) for Q2 while the Dow Jones Utilities Index was the best performer; +5.04%. On a year-to-date basis, the S&P MidCap 400 Growth turned in the best performance showing a gain of 10.25%. As for some of the major foreign markets, the Brazil Bovespa lost 10.02% for the year while the German DAX gained 6.68%. With all of the trouble that Japan has recently faced, the Nikkei 225 has only lost 4.04% through the first six months. The China market has been some what quiet in showing a year-todate loss of 2.77%. As for some of the more widely followed Dow stocks, the year-to-date performance is as follows: GE +3.12%, Intel +5.37%, J&J +7.55%, McDonald’s +9.85%, P&G -1.18%, Verizon +4.05%, and Wal-Mart -1.46%.

- Large Cap Growth - All Cap Growth - Balanced - Income WaterStone Investment Counsel, LLC, employs an unemotional, disciplined, and computerized screening process. They use a bottom up growth approach when selecting individual securities.

Alcoa, the world’s leading producer of aluminum, recently reported that their second quarter income from continuing operations more than doubled (+138%). They stated that even though the North America and Europe numbers were soft, Asia more than made up for any weak-

ness. They expect demand for aluminum to double by the year 2020. This is not a unique situation to Alcoa. There are many more companies in a very similar situation. U.S. companies are sitting on almost $1 trillion in cash; a record high amount. More money has been put into bond funds than stock funds for 37 out of the last 41 quarters; a contrarian indicator. The market is selling at 12 times earnings. The price of oil was down 10.6% for the second quarter; the largest drop since 2008. There have been more dividend increases declared by company boards during the first six months of this year than for all of last year. These companies must feel good about their future in order to increase the dividend. The last thing they would want to do is to lower or omit the dividend after they just increased it. We all know what usually happens when a company’s dividend is decreased or omitted. These are all very positive indicators for the market that is getting very little attention. The media would rather concentrate on the financial woes of the PIIGS (Portugal, Ireland, Italy, Greece and Spain.) We don’t want to downplay the significance of the fiscal problems of these countries, but there will always be negative news circulating around the globe at all times. We are not necessarily saying to own the market in general. What we are saying is that there are always undervalued companies for one reason or another. This is where you want your investment assets to be.


The Ticker

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Economic Update

“You are never too old to set another goal or to dream another dream. � C.S. Lewis

Recent economic data have generally confirmed a deceleration of US growth. However the overall trend is still showing moderate growth consistent with a mid-cycle phase of expansion. The outlook is for a steady but modest rate of growth with a low risk of recession. Trends in manufacturing and consumption remain strong; while trends in employment and housing are weak. Inflation is still a concern as prices have been accelerating in recent months. The global economic picture has weakened due to problems in Europe and Japan, although much of the developed world remains in firm territory.

sion lows. Much of the recent weakness in autos can be attributed to supply disruptions in Japan. Consumption has held up well during the current expansion. Excluding the volatile energy component, retail sales continued to accelerate. Retail sales grew 8.7% year over year through May, the highest rate since 2006. Consumer spending levels remain steady, but higher gasoline prices have weakened the near-term outlook.

May and June payrolls came in well below expectations, with 54,000 jobs created in May and just 18,000 jobs created in June. The unemployment rate ticked The Conference Board’s Index of up to 9.2 % in June from the 9.1 % rate Leading Economic Indicators has rein May. The softness was indicated by bounded from its spring lows. Eight an upward trend of initial jobless claims out of ten indicators rose in May, after in April and May. Claims shot up to a only four rose in April, while seven trend above 425,000, a level not associwere up in March. The longer term ated with strong employment gains. Emtrend remains strong with eight out of ployment growth remains positive, but ten indicators showing solid but some- at a much slower pace than earlier in the what decelerating activity over the expansion. previous six month time period. The current soft patch in the US economy Housing remains a drag on the econmay provide some difficulties, but in omy. Home prices have fallen close to the near term, the economy remains on their 2009 cycle lows. Inventories of solid footing. unsold homes have trended higher throughout 2011, as sales levels have Manufacturing activity remained remained depressed. New housing perstrong during the second quarter. Pur- mits have rebounded somewhat, but rechasing managers surveys continued main well below their pre-recession to show expansion. New orders for highs. On a more positive note, mortdurable goods have risen in recent gage delinquencies which peaked in months underscoring ongoing sturdy 2010 have been consistently trending capital spending. Auto manufacturing downward in 2011. That said; the outis a concern as recent production lev- look for housing remains weak. els have declined. However, overall production remains well above reces- Inflationary pressures continued to rise


The Ticker

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in April and May. In April, headline consumer prices were up 3.1% year over year; while in May they were up 3.4 % year over year. Excluding food and energy prices, core inflation remained relatively low. The core rate of inflation for May was 1.5 % compared to 1.3 % in April. Inflationary pressures remain in an upward trend and are being carefully watched by the Federal Reserve.

though much of the developing world remains in firm territory. Japan has struggled to begin reconstruction efforts due to the continued power supply problem, but industrial output in Japan has begun to pick up. Overall, global economic growth has begun to decelerate, but most of the world remains in expansion.

The outlook is for continued modest growth in the economy. The current sovereign debt crisis will continue to On the global front, economic in- place a blanket of uncertainty over dicators have decelerated. The debt the economy and the financial marcrisis both here and in Europe has kets. We remain cautiously optimistic created much uncertainty for the regarding the current environment for global economy. The pace of financial assets. growth in China has slowed, al-

FACTS AND FIGURES

WaterStone Investment Counsel, LLC 9435 Waterstone Blvd. Suite 120 Cincinnati, OH 45249 513-573-0440 800-774-2855 Fax: 513-573-0361

Company Website: www.waterstone-ic.com Personal e-mail addresses: Don Brosz, J.D. dbrosz@waterstone-ic.com Mark Roberts, RFC mroberts@waterstone-ic.com Jim Bien jbien@cinci.rr.com

$3.4 Billion – The sum that U.S. airlines collected in luggage fees last year, up 24% from 2009, led by Delta Air Lines, Inc. with $952 million.

Kyle Lohrman, CRPS klohrman@waterstone-ic.com

44.5 Million – The number of Americans who relied on food stamps in March, up 11.1% from a year earlier.

Matt McCann mmccann@waterstone-ic.com

$21.35 – The mean hourly wage for all U.S. occupations. Of the 10 most popular occupations, only registered nurses have an average wage that exceeds that. $9.3 Million – Median compensation in salaries, bonuses and incentives for CEOs in 2010, up 11% from the previous year. Viacom’s, Philippe Dauman, was the highest paid chief executive last year, earning $84.3 million, double his 2009 pay. 18 – Expected stockpile, in days, of America’s corn crop available for domestic consumption. Much of the harvest has been diverted to ethanol production. Only once has the supply been so tight since the 1930s Dust Bowl era. Sources: Associated Press, Supplemental Nutritional Assistance Program, Labor Department, Hay Group, Department of Agriculture

WaterStone Investment Counsel "The Ticker"  

WaterStone Investment Counsel presents "The Ticker". The Ticker gives market comments and economic updates on the second quarter of 2011. Al...

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