Page 1

July, 2015

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IMPROVING STOCK PORTFOLIO RETURNS

By Diane M. Pearson, CFP®, PPCTM, CDFATM, Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.

WAS THE POOL PARTY RAINED OUT? OR DID HE FIND SOME LONG DURATION BONDS IN HIS INVESTMENT ACCOUNT?

WAS THE POOL PARTY RAINED OUT? OR DID HE FIND SOME LONG DURATION BONDS IN HIS INVESTMENT ACCOUNT?

uly starts earnings season (companies will report their Second Quarter earnings in July, August, and September). Few things move a stock faster up or down, than an earnings announcement.

This is especially true now that most stocks are fully or even overvalued. Any stocks that miss their earnings estimates will be punished. This could lead to devastating losses in some cases for shareholders. Moreover, those companies that provide lower earnings guidance for the following quarters will be punished as well. However, stocks with positive surprises will be richly rewarded. Therefore, a reassessment of each company owned would be prudent. Strategy 1: Focus on Leading Indicators of Positive Earnings Surprises: Stock performance for companies with positive earnings surprises on average is very good. Buy more of those companies if and when appropriate. Improving Stock Portfolio Returns, continued on page 10

WHY DOES GOLD KEEP FALLING? By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc. Gold has been falling in price since September of 2011. Many people seem bewildered by this fact. Yet there are some sound factors as to why. Historically, gold usually moves opposite that of the U.S. Dollar. That is due to three primary factors: 1. Interest Rates: Interest rates are expected to rise within the United States soon. Higher interest rates mean that the U.S. Dollar is more attractive from an investment standpoint. Currently, the United States is one of the highest yielding countries in terms of interWhy Does Gold Keep Falling, continued on page 12

HOW BAD WILL FEDERAL RESERVE INTEREST RATE INCREASES HURT THE ECONOMY AND THE STOCK MARKET? By James J. Holtzman, CFP®, CPA, Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc. The Federal Reserve (Fed) has stated that they could enter a cycle of raising interest rates as soon as September, but it could be December. It all depends upon how strong they believe the economy is. Will the weak economic expansion collapse if the Fed increases interest rates? Will the stock market move into a prolonged downturn? The reality is that when the Fed does increase interest rates it is very unlikely the economy will stop growing. Many economists expect that the U.S. economy, as represented by Gross Domestic Product (GDP), will grow at least a 2.0% to 3.0% for at least the rest of 2015 and probably into 2016. Federal Reserve Interest Rate, continued on page 15

THE GLOBAL INVESTMENT PULSE July, 2015

1


ABOUT LEGEND FINANCIAL ADVISORS, INC.® Legend Financial Advisors, Inc.® (Legend) is a Non-Commission, Fee-Only U.S. Securities and Exchange Commission (SEC) registered investment advisory firm with its headquarters located in Pittsburgh, Pennsylvania. Legend provides a multitude of services, including Wealth Advisory Services, which incorporate Financial Planning and Investment Management strategies to affluent and wealthy individuals as well as business entities, medical practices and non-profit organizations. We analyze each client’s financial strengths and weaknesses, then recommend creative solutions for improvement. Additionally, we work closely with our client’s other professional advisors to achieve optimal results. WHY LEGEND IS DIFFERENT? 1. Legend is compensated exclusively by client fees, known as a Non-Commission, Fee-Only firm. Legend is unlike Fee-Based Advisors and brokerage firms who have numerous conflicts of interest due to the fact that both types of firms receive commissions. 2. Members of Legend’s Financial Advisory Team have been selected by National Publications such as Worth, Medical Economics and Barron’s more than 50 times as “The Best Financial Advisors In America”. 3. Legend and its advisors have chosen to be governed by the Fiduciary Standard of law, differentiating itself from most other advisory and brokerage firms. Fiduciaries are required to always work in their clients’ best interests. 4. Legend designs dynamic, creative and personalized financial planning and investment solutions for its clients.

ABOUT EMERGINGWEALTH INVESTMENT MANAGEMENT, INC. EmergingWealth Investment Management, Inc. (EmergingWealth), is the sister firm of Legend Financial Advisors, Inc.® (Legend) and is a Non-Commission, FeeOnly Securities and Exchange Commission (SEC) registered investment advisory firm. EmergingWealth provides Investment Management services to individuals as well as business entities, medical practices and nonprofit organizations whose wealth is emerging. All investment portfolios are sub-advised by Legend. Both Legend and EmergingWealth share a common advisory team, Investment Committee and Fee Schedule.

LOUIS P. STANASOLOVICH, CFP®, EDITOR Louis P. Stanasolovich, CFP® is founder, CCO, CEO and President of Legend Financial Advisors, Inc.® (Legend) and EmergingWealth Investment Management, Inc. Lou is one of only four advisors nationwide to be selected 12 consecutive times by Worth magazine as one of “The Top 100 Wealth Advisors” in the country. Lou has also been selected 11 times by Medical Economics magazine as one of “The 150 Best Financial Advisors for Doctors in America”, twice as one of “The 100 Great Financial Planners in America” by Mutual Funds magazine, four times by Dental Practice Report as one of “The Best Financial Advisors for Dentists In America” and once by Barron’s as one of “The Top 100 Independent Financial Advisors”. Lou was selected by Financial Planning magazine as part of their inaugural Influencer Awards for the Wealth Creator award recognizing the advisor who has made the most significant contributions to best practices for portfolio management. He has been named to Investment Advisor magazine’s “IA 25” list three times, ranking the 25 most influential people in and around the financial advisory profession as well as being named by Financial Planning magazine as one of the country’s “Movers & Shakers” recognizing the top individuals who have done the most to advance the financial advisory profession.

2

THE GLOBAL INVESTMENT PULSE July, 2015


#1 RANKED U.S. SECTOR: HEALTH CARE By Greg Swensen, The Leuthold Group, LLC The common thought was that the Affordable Care Act (ACA) was too complicated to and burdensome to allow health care (HC) companies to perform well. In reality, the law brought them more customers and a more stable revenue stream. Add that to the already growing customer base driven by demographics and it has been a perfect storm for the sector. Traditionally viewed as a defensive sector, it has been anything but during this bull market; outperforming our all-cap index every year since 2010 and also year-to-date in 2015. While not as cheap as it once was, Health Care is the top rated sector in our view. Estimate revisions, which have performed particularly well over the last year, also look good. Managed Health Care is the top ranked industry group from the Health Care sector. Over that time, it has returned

450.0% versus 129.0% for the S&P 500. Despite that, the group is still reasonably priced and is a rare group that has maintained its prior levels of sales growth. Health Care Distributors also rank very high in our scores. Moving product from point A to point B, they benefit from any increase in turnover, which has happened due to the previously mentioned ACA and demographic influences. Low margins keep HC Distributors out of the government crosshairs. Biotech (Large Capitalization) stocks are also attractive. We differentiate between Large Cap Biotech and Small/Micro Caps because they behave fundamentally different. Large Caps are far less speculative and have positive earnings and sales growth (See the chart “Large Cap Biotechnology Sales Growth” below). With a median Price-To-Earnings Ratio (P/E) of 39x, they aren’t exactly cheap relative to

the rest of the market, but they are cheap relative to their own valuation history. Most of the speculative excess surrounding Biotech has been concentrated in the Small/Micro Caps. Health Care Facilities and Health Care Services also rank attractive. Source: This article was excerpted from “Health Care & Consumer Sector Strength Explored”, by Greg Swenson, The Leuthold Group, LLC, (Perception Express, June 5, 2015), http://leuth.us/equity-strategies COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

LARGE CAP BIOTECHNOLOGY SALES GROWTH YEAR-OVER-YEAR December 31, 1985 to May 31, 2015 90.0% 80.0%

70.0% 60.0%

50.0%

40.0% 30.0% 20.0%

10.0%

0.0% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

As of: June 5, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, June 5, 2015, http://leuth.us/equity-strategies REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

PULSE THE GLOBAL INVESTMENT PULSE July, 2015

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U.S. STYLE PERFORMANCE HISTORY Total Returns Year-To-Date

2014

2013

2012

2011

2010

2009

2008

2007

2006

Large Cap Growth

+7.1%

+11.6%

+39.9%

+16.2%

+0.3%

+16.0

+26.9%

-37.9%

+11.3%

+2.8%

Large Cap Value

+1.6

+13.1

+33.9

+12.2

-10.7

+12.1

+37.0

-51.0

Mid Cap Growth

+4.2%

+11.9%

+35.7%

+15.8%

-1.6%

+26.4%

+46.2%

-44.3%

Mid Cap Value

+0.4

+14.8

+33.5

+18.5

-1.4

+24.8

+34.2

-38.4

-1.4

+20.2

Small Cap Growth

+8.7%

+5.6%

+43.3%

+14.6%

-2.9%

+26.7%

+34.5%

-38.5%

+7.1%

+13.4%

Small Cap Value

+0.8

+4.2

+34.5

+18.1

-5.5

+26.9

+20.6

-28.9

-9.8

+23.5

-4.7 +11.4%

+18.7 +10.7%

As of: July 8, 2015 Source: The Leuthold Group, LLC, Perception Express, July 8, 2015 REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC www.leutholdgroup.com

S&P PERFORMANCE BY MARKET CAP QUINTILES

* Performance Is Equally Weighted As of: July 8, 2015 REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

4

THE GLOBAL INVESTMENT PULSE July, 2015

Source: The Leuthold Group, LLC, Perception Express, July 8, 2015, http://leuth.us/market-internals


HISTORICAL VALUATIONS, GROWTH VERSUS VALUE U.S. LARGE, MID AND SMALL CAP STOCKS Growth Stocks Offer More Potential Than Value Median Price-ToEarnings (P/E)

Historical Averages 1982 to Date

Percent Above/Below Historical Average Valuation

Today’s

Historical Average

2000 Extreme

Growth Stocks

Value Stocks

Growth Stocks

Value Stocks

Growth Stocks

Value Stocks

G/V* Ratio

G/V* Ratio

G/V* Ratio

Large Cap

20.8x

12.9x

19.8x

10.7x

5.0%

20.0%

1.61

1.97

5.80

Mid Cap

24.4x

14.4x

23.4x

11.9x

4.0%

21.0%

1.69

2.09

9.30

Small Cap

30.0x

14.2x

27.5x

11.9x

9.0%

19.0%

2.11

2.45

12.50

Growth stocks have narrowed the valuation gap since the last half of 2014, but remain relatively cheap. * Growth To Value As of: July 8, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, July 8, 2015, http://leuth.us/market-internals REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

SMALL CAP PREMIUM JUMPS TO 12.0%

By Phil Segner, CFA, Research Analyst, The Leuthold Group, LLC Small Capitalization stocks are now selling at a 12.0% valuation premium (12.0% more expensive) relative to Large Capitalization stocks, using non-normalized (non-averaged) trailing operating earnings (See the chart “Small Cap to Large Cap Historical P/E Ratio” below). Superior Small Capitalization performance during the month of June pushed the Small Capitalization premium above its contem-

porary 5.0% to 10.0% habitat. Both tiers had roughly the same earnings growth for the first quarter. Using 2015 estimated operating earnings, the Small Capitalization premium also expanded to 12.0% versus 8.0% last month. Source: This article was excerpted from “Stock Market Internals…Small/Med/

Large”, by Phil Segner, CFA, Research Analyst, The Leuthold Group, LLC, (Perception Express, July 8, 2015), http://leuth. us/market-internals COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

SMALL CAP TO LARGE CAP HISTORICAL PRICE TO EARNINGS (P/E) RATIO Small Caps Are More Expensive But Barely So

120

Based on Non-Normalized Trailing Operating Earnings

Small Cap P/E Premiums Small Cap P/E > Large Cap P/E

120

110

110 Median Premium of 4.0%

100

100

90

90

80

80

70

70 Small Cap P/E/ Discounts Small Cap P/E < Large Cap P/E

60

60 1983

1985

1987

1989

1991

As of: July 8, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: The Leuthold Group, LLC, Perception Express, July 8, 2015, http://leuth.us/market-internals REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

THE GLOBAL INVESTMENT PULSE July, 2015

PULSE 5


“Do You Want A Second Opinion?” To see if your investment portfolio is built to navigate the pitfalls and opportunities ahead, call us today for a “Free Second Opinion” at (412) 635-9210.

www.legend-financial.com 6

THE GLOBAL INVESTMENT PULSE July, 2015


SEARCHING FOR GROWTH IN EMERGING MARKETS Highest/Lowest Growth: Health Care Leads

By Jun Zhu, CFA, Senior Analyst, The Leuthold Group, LLC Let’s take a look at the most recent trailing 12-months, focusing on profit growth. The chart “EPS (Earnings Per Share) Growth By Sector (Emerging Market versus U.S.) The Latest Fiscal Year”, below, shows last year’s median growth rate among equity sectors in Emerging Markets (EM) (dark columns) and in the U.S. (grey columns).

Emerging Market Health Care companies’ Earnings Per Share (EPS) grew by 13.8% on average, and IT grew by 13.3%. On the other end of the spectrum, Energy EPS decreased by 16.3%, and Telecom was down by 4.4%. Compared to U.S. sectors, Emerging Mar-

ket Telecom had the best relative results followed by Health Care, Utilities, Materials and IT. The other five Emerging Market sectors lagged their U.S. counterparts over the last 12-months. Hence based on that perspective, Emerging Markets certainly did not live up to their “Growth” expectations.

EARNINGS PER SHARE GROWTH BY SECTOR (EMERGING MARKET VERSUS U.S.) LATEST FISCAL YEAR (Trailing 12-Months Earnings Per Share) Dark Column: Emerging Market

Grey Column: U.S.

25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0%

As of: June 5, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

However, Emerging Market sectors’ growth prospects are expected to improve significantly in the next year. Based on consensus EPS estimates, eight of the ten Emerging Market sectors are anticipated to register double-digit growth rates (See the chart “Earnings Per Share Growth By Sector (Emerging Market versus U.S.) Next Fiscal Year”.) on the top of page 8. Energy is the only sector expected to see a decline in EPS. The fastest growth Emerging Market sectors in the coming year are projected to be Health Care, Materials and IT.

Source: The Leuthold Group, LLC, Perception Express, June 5, 2015, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

On a relative basis, the growth rate of Emerging Market sectors will beat that of U.S. sectors. The sector with the largest growth differential is Materials, where Emerging Market companies are expected to increase their EPS by 19.4% on average, versus U.S. companies’ 5.8%. Emerging Market Energy companies, despite a decline in EPS in the coming fiscal year, fare better than the whopping 15.7% decline expected for U.S. Energy companies. Other Emerging Market sectors with large growth differentials versus the U.S. are Health Care, IT and Consumer Staples.

Zoom In: Growth Pockets Among Regions/Country Sectors: Asia Leads: Here we further break down sectors into regions to identify the fastest growing pockets within the Emerging Market equity universe in the next fiscal year (See the table “Earnings Per Share Growth Rate by Emerging Market Regional Sectors (Next Fiscal Year 1)” on the bottom of page 8.). Among the four Emerging Market regions, Asia stands out from a growth perspective. Of the ten sectors, Emerging Market Asia leads in seven. Emerging Markets, continued on page 8

THE GLOBAL INVESTMENT PULSE July, 2015

7


Emerging Markets, continued from page 7

EARNINGS PER SHARE GROWTH BY SECTOR (EMERGING MARKET VERSUS U.S.) NEXT FISCAL YEAR (Based On Consensus Earnings Per Share Estimates) 25.0%

Dark Column: EM

Grey Column: U.S.

15.0%

10.0%

5.0%

0.0% -5.0% -10.0% -15.0% -20.0%

As of: June 5, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, June 5, 2015, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

EARNINGS PER SHARE GROWTH RATE BY EMERGING MARKET REGIONAL SECTORS (NEXT FISCAL YEAR 1)

* Median growth rates are not calculated for segments with less than five companies As of: June 5, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

8

THE GLOBAL INVESTMENT PULSE July, 2015

Source: The Leuthold Group, LLC, Perception Express, June 5, 2015, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Emerging Markets, continued on page 9


Emerging Markets, continued from page 8

Among these 40 Emerging Market regional sectors in the EPS Growth Rate by Emerging Market Regional Sectors table, the top five EPS growth rates are: Emerging Market Europe Consumer Staples (28.0%), Emerging Market Asia Health Care (23.0%), Emerging Market Asia Materials (21.0%), Emerging Market Asia Information Technology (20.0%), and Middle East and Africa Consumer Staples (19.0%). On the bottom of the list are Middle East and Africa Energy (-31.0%), South America Telecom (-8.0%), South America Energy (-2.0%), and Middle East and Africa Telecom (0.3%).

Since Emerging Asia is such a big block within the Emerging Market equity stock universe, we break this region down further into countries (See the table “Earnings Per Share Growth Rate by Emerging Market Asia Countries (Next Fiscal Year 1)” below.). Segments with expected growth rates exceeding 25.0% are highlighted. Notable country sectors expected to have high growth potential are: South Korea Utilities, Thailand Energy, South Korea Industrials, South Korea Materials, Malaysia IT, South Korea IT, India Consumer Staples, and China IT.

Source: This article was excerpted from “Searching for Growth in Emerging Markets”, by Jun Zhu, CFA, Senior Analyst, The Leuthold Group, LLC, (Perception Express, June 5, 2015), http://leuth.us/ at-random COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

EARNINGS PER SHARE GROWTH RATE BY EMERGING MARKET ASIA COUNTRIES (NEXT FISCAL YEAR 1)

* Median growth rates are not calculated for segments with less than five companies ** China stocks including Hong Kong listed Chinese companies and companies listed on domestic exchange but open to foreign investors As of: June 5, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, June 5, 2015, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

PULSE THE GLOBAL INVESTMENT PULSE July, 2015

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2015 PERFORMANCE YEAR-TO-DATE January 1, 2015 to June 30, 2015 (6 months) Year-to-Date Total Return Consumer Price Index (Inflation)*

1.63%

90-Day Treasury Bills Index-Total Return*

0.01%

Barclays Aggregate Bond Index-Total Return

-0.10%

HFRX Global Hedge Fund Index

1.27%

S&P 500 Index (U.S. Stock Market)

1.23%

MSCI EAFE Index (Developed Foreign Equities)

5.94%

MSCI Emerging Market Index (Equities)

3.06%

Newedge CTA Index (Managed Futures)

-2.30%

Dow Jones–UBS Commodity Index-Total Return (USD)**

1.57%

Dow Jones U.S. Real Estate Index-Total Return (USD)**

-5.42%

Gold Bullion

-1.04%

Compound and Total Returns include reinvested dividends. Newedge Index is equally-weighted. * Performance is through June 30, 2015 due to monthly reporting ** USD = U.S. Dollar Source: Bloomberg Investment Service

As of: June 30, 2015

COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC. ® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ®

Improving Stock Portfolio Returns, continued from page 1

Strategy 2: Sell Those With Negative Earnings Surprises: As soon as earnings disappointments are announced, it is best to sell it immediately, even if it is for a substantial loss. Why? It’s always better to take a 5.0%-10.0% loss in the short run than a 20.0% to 40.0% loss in the long run. A little knowledge of how earnings estimates are created is important. Company executives and brokerage analysts are doing their best to create conservative estimates that the company should easily beat. However, when actual earnings fall short of those low estimates, one of two problems exist: a. Industry conditions have deteriorated and as a result forecasts were missed. Also, the problem, in most cases, will most likely not correct itself in the near-term, which leads to further earnings disappointments. b. Company management is not good at estimating their own earnings. c. Another reason is that the strategies for growth are not sound. 10

THE GLOBAL INVESTMENT PULSE July, 2015

In short, sell the stock now and move on to greener pastures. Strategy 3: Understanding The Logic Of Earnings Estimates Consider the following chain of logic: a. Earnings estimates originate from brokerage firm stock analysts which are based upon statements made by company management. b. Estimates that are too high would send the stock price lower, if not met, and the performance on some analysts’ stock ratings would be poor (leading to lower compensation). c. As earnings season gets closer, the more accurate the information will be. Accuracy of estimates should go up. In summary, as earnings estimates rise or fall as the earnings announcement date nears the appropriate action should be taken. COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

PULSE


SECULAR BEAR MARKET WATCH April 1, 2000 to June 30, 2015 (15 years and 3 months) Annual Compound Return

Total Return

Consumer Price Index (Inflation)

2.20%

39.39%

90-Day Treasury Bills Index-Total Return

1.72%

29.68%

Barclays Aggregate Bond Index-Total Return

5.44%

124.48%

HFRX Global Hedge Fund Index

2.75%

51.34%

S&P 500 Index (U.S. Stock Market)

4.09%

84.42%

MSCI EAFE Index (Developed Foreign Equities)

3.56%

70.42%

MSCI Emerging Market Index (Equities)

7.22%

189.89%

Newedge CTA Index (Managed Futures)

5.31%

120.09%

Dow Jones–UBS Commodity Index-Total Return (USD)**

0.27%

4.23%

Dow Jones U.S. Real Estate Index-Total Return (USD)**

10.80%

377.83%

9.88%

320.91%

Gold Bullion

SECULAR BEAR MARKET WATCH (CONTINUED)

* Compound and Total Returns include reinvested dividends. MSCI Indexes do not include dividends prior to 2002. Newedge Index is equally-weighted. ** USD = U.S. Dollar Source: Bloomberg Investment Service As of: June 30, 2015

April 1, 2000 to June 30, 2015 (15 years and 3 months)

COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC. ® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ®

Note: During Secular Bear markets U.S. Stocks have historically returned a little more than inflation or a little less than inflation—plus or minus 1.50%—and generally last between 15 to 25 years. The last Secular Bear market (1966 to 1982) lasted 17 years and underperformed inflation by approximately one-half of one percent per year. The other Secular Bear markets since 1900 were 1901 to 1920 and 1929 to 1949. In both cases, the U.S. Stock market outperformed inflation by approximately 1.50% per year. All of the aforementioned performance numbers are pre-tax. The performance of the U.S. Stock market so far in the current period (April 1, 2000 to the present) certainly appears to indicate that we are in a Secular Bear market. Long-term returns (over the next 10 years) for the S&P 500 will probably be slightly worse than the last 15 years and 3 months. Current 10 year normalized P/Es (long-term valuations) indicate approximate annual compound returns of slightly less than 3.00% over the next 10 years. Of course during the next 10 years, returns during various periods will be significantly higher and lower than the expected return. For example, the more the stock market rises in the near term, the less returns after that period will be and vice versa. THE GLOBAL INVESTMENT PULSE July, 2015

11


RISK INCREASED SLIGHTLY

MONTHLY RISK AVERSION INDEX (RAI) Note: The Risk Aversion Index combines ten market-based measures including various credit and swap spreads, implied volatility, currency movements, commodity prices and relative returns among various high- and low-risk assets.

4

4

3

3

2

2

1

1

0

0

1980

1982

1984

1986

1988

1990

As of: July 8, 2015

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Source: The Leuthold Group, LLC, Perception Express, July 8, 2014, http://leuth.us/bond-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Why Does Gold Keep Falling, continued from page 1

est rates in the world which is good for the U.S. Dollar. 2. Budget Deficits/Surpluses: Small government budget deficits are good for a country’s home currency. Surpluses are even better. In the U.S., the annual budget deficit has grown significantly smaller than the $1 trillion plus deficits of 2009 - 2011. In fact the budget deficit for fiscal year 2015 should fall in the $300 to $400 billion dollar range. Given the problems of most other countries around the world, this would mean that the U.S. Dollar would perform significantly better than most other currencies.

12

3. Trade Deficits: Similar to the budget deficit, large trade deficits create problems for home currencies while smaller trade deficits and surpluses drive up the home currency. In the situation that the United States is currently in, trade deficits have decreased significantly in recent years especially due to lower oil prices. This has been another factor for the U.S. Dollar’s recent rise. Although, the three major factors mentioned above usually drive the price of a currency relative to other currencies, in the U.S. Dollar’s situation, there is one overriding factor that will drive up the price of the Dollar relative to other currencies. That factor simply is a worldwide panic of

THE GLOBAL INVESTMENT PULSE July, 2015

some sort such as the worldwide liquidity crisis of 2008. In that type of situation, investors run for cover to a safe haven such as the United States. For now, the U.S. Dollar is expected to continue to rise, albeit at a slower pace than the rapid increase in the fall of 2014. Eventually, the U.S. Dollar will reverse course but probably not for several years. So long as the U.S. Dollar continues to increase, it is very unlikely that gold will. COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.® PULSE


U.S. DOMESTIC EQUITY MARKET PERFORMANCE 2015 YEAR-TO-DATE AS OF JULY 29, 2015 Style

Capitalization Size

Value

Blend

Growth

Large-Cap

0.56%

0.76%

10.32%

Mid-Cap

0.20%

3.39%

7.44%

Small-Cap

-3.25%

1.82%

7.87%

All performance based on Morningstar U.S. Style Indexes

EUROPEAN EQUITY MARKET PERFORMANCE 2015 YEAR-TO-DATE AS OF JULY 29, 2015 STYLE Capitalization Size

Value

Blend

Growth

Large-Cap

In Local In Local In Local In USD: In USD: In USD: Currency: Curreny: Currency: 9.83% 1.94% 5.72% 14.22% 7.11% 10.52%

Mid-Cap

In Local In Local In Local In USD: In USD: In USD: Currency: Curreny: Currency: 8.60% 8.35% 8.74% 14.01% 13.97% 14.02%

Small-Cap

In Local In Local In Local In USD: In USD: In USD: Currency: Currency: Curreny: 14.50% 11.25% 11.38% 19.75% 16.40% 16.59%

All performance based on MSCI EUROPEAN Style Indexes THE GLOBAL INVESTMENT PULSE July, 2015

13


2.50 The Leuthold Group Copyright ® 2015

Earnings Reports For Apr-Jun 2015 (Q1 2015 Results)

EARNINGS ADVANCE/DECLINE RATIO All Three Months Of Each Quarterly Period Based On Reported Earnings

2.25

2.00 SOFT LANDING

1.75

SOFT LANDING

AVERAGE 1.52

1.50

1.25

1.00 RECESSION

RECESSION RECESSION

0.75

The Earnings Advance/Decline Ratio Falls Into Lower Ranges For The 2015 First Quarter

0.50

0.25 83

84

85 86

87

88

89 90

91

92 93

As of: July 8, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

94 95

96

97 98

99 00

01 02 03

04 05

06

07

08

09 10

11 12

13 14

Source: The Leuthold Group, LLC, Perception Express, July 8, 2015, http://leuth.us/market-internals REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

BARCLAYS U.S. HIGH YIELD BOND MINUS TREASURY BOND YIELD High Yield Bonds Move Upward In Price Thereby Decreasing Their Yield Advantage 20

Differential Median: 5.08

15

10

Jun-15: 5.09% 5

1987

1990

1993

As of: July 8, 2015

14

THE GLOBAL INVESTMENT PULSE July, 2015

1996

1999

2002

2005

2008

2011

2014

Source: The Leuthold Group, LLC, Perception Express, July 8, 2015, http://leuth.us/bond-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC


LEGEND FINANCIAL ADVISORS, INC.® AND EMERGINGWEALTH INVESTMENT MANAGEMENT, INC.’S SUMMARY OF MUTUAL FUND CONFERENCE CALLS AND MEETINGS JUNE 1, 2015 THROUGH JUNE 30, 2015 As part of our due diligence responsibility, Legend’s Investment Committee participated in conference calls with the following fund management teams: Ticker

Investment Management Private Meetings

Date

1.

Aristotle Capital Management

Various

June 8, 2015

2.

ARC Global, LLC

Various

June 17, 2015

3.

Montage Investments

Various

June 22, 2015

Investment Management Private Conference Calls/Webcast 1.

Clearbridge Aggressive Growth

SAGYX

June 19, 2015

2.

AMG Yacktman

YACKX

June 24, 2015

As of: June 30, 2015

COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC. ® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ®

Federal Reserve Interest Rate, continued from page 1

Four Key Points: 1. The Stock Market Has Interest Rate Increases Baked In The Cake. The discussion of the timing of interest rate hikes has been ongoing for two plus years. Janet Yellen, since she became the Fed Chairperson, has stated that interest rate increases would be signaled far in advance and gradual. In short, no surprises here, at least so far. 2. When Interest Rates Were Increased In Recent Years, The Stock Market Did Well. The chart below indicates that during the last three cycles of when interest rates were increased by the Fed, U.S. stocks did fairly well. Inherently when the economy is doing well, the Fed will raise interest rates so that inflation does not become a problem. Therefore, when the economy is strong, generally, corporate profits will rise which is good for stocks. Please note that this thought process works most of the time, but not all.

3. The Pace of Interest Rate Hikes Will Probably be Measured and Small. In fact, recent thinking is that the Fed may raise interest rates initially 0.10% (a tenth of a percent) at a time – not even at the normal 0.25% increases of the past. What should matter to market investors is the entire expected trajectory of interest rate increases. Slow, gradual increases, spread out over long periods of time, possibly even over years, gives the stock market and economy time to adjust. On the other hand, quick-paced, large changes in interest rates can create chaotic financial markets with wild swings up and down. Then, of course, is damage that will be done to our slow growth economy that we will need to deal with. 4. Despite Continued Problems in Greece and China, Earnings and Global Economic Growth Should Continue. Greece has settled down to some extent for the moment. China’s stock market continues to be volatile despite the Chinese officials’ attempts to minimize the

wild swings in their equity markets. Yet the global economy continues to expand at a consistent rate of growth. Europe is improving as they implement their own version of Quantitative Easing (QE). In spite of China’s problems, their GDP is still expected to grow at 7.0% in 2015. Also, as stated earlier, the United States’ GDP growth rate will probably fall between 2.0% and 3.0%. Economic growth is usually good for corporate earnings growth, so U.S. stocks will probably grow in price as well. The Bottom Line For Investors: Since we are already at such high priceto-earnings (P/E) valuations (The Shiller P/E is at 27.1 – the third highest in history), it is unlikely that stock prices will grow much beyond earning growth rates of earnings for each stock. COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

S&P 500 Performance During Past Interest Rate Increase Cycles Date Range of Hikes

Number of Rate Hikes

Compounded S&P 500 Performance

1994-1995

7

18%

1999-2000

6

5%

2004-2006

17

16% THE GLOBAL INVESTMENT PULSE July, 2015

PULSE 15


LEGEND FINANCIAL ADVISORS, INC.® & EMERGINGWEALTH INVESTMENT MANAGEMENT, INC.’S INVESTMENT MANAGEMENT SERVICES Legend Financial Advisors, Inc.® (Legend) and EmergingWealth Investment Management, Inc. (EmergingWealth) offer Personalized Investment Management Services to individuals and institutions. Investment portfolios are developed to match the client’s return and risk requirements, which are determined by the clients’ completion of a Risk Comfort Zone Questionnaire, with the guidance of a Legend Wealth Advisor or EmergingWealth Advisor, respectively. Each type of investment portfolio is managed to achieve the short, intermediate and long-term investment objectives of the client, as may be applicable.

INVESTMENT PROCESS Investment Portfolios: Unlike most financial advisory firms that offer one style of investment or portfolio type, we offer a wide array of investment portfolios that usually fit with the large majority of client needs. If necessary, we will create customized solutions as well. For the types of investment portfolios, please see our Investment Portfolios, Potential Return and Risk Spectrum Chart on the next page. For a detailed description of our portfolios, please contact Louis P. Stanasolovich, CFP®, founder, CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at legend@legend-financial.com. Investment Research: Our Investment Committee performs extensive research to identify opportunities, mitigate risks and structure investment portfolios. Emphasis is placed on developing portfolios that maximize the potential return relative to the amount of risk taken. In-depth due diligence including face-to-face interviews in many instances with portfolio managers for open-end mutual funds is performed on each investment we select for a portfolio. Factors (both from a qualitative and quantitative standpoint) that we conduct a thorough analysis of each investment include, but is not limited to, liquidity (including the primary investment and/or the underlying investments, if utilizing pass through vehicles such as openend mutual funds or exchange-traded products), income taxation, all related costs, return potential, drawdown potential (historical declines from peak-to-trough), volatility and management issues (Anything having to do with the management team of a stock, open-end mutual fund or an exchange-traded product.). All portfolios for EmergingWealth are subadvised by Legend. Client Education: Education is very important to us. We are dedicated to educating each client about the different investment portfolio types and how they relate to market volatility, time horizons, and investment returns. It is our goal to ensure that the client understands and agrees with our investment philosophy. Furthermore, we assist each client in selecting a risk tolerance level with which they are comfortable. Ultimately, an investment portfolio is designed to meet the client’s objectives.

PERFORMANCE REPORTING Many investment firms only offer monthly brokerage statements, which provide minimal information; typically only account and investment balances. We, on the other hand, provide detailed quarterly reports that outline performance, income and management fees (among other items) in a simple, easy-to-read report. In addition, each performance report is sent with an extensive index page that illustrates the investment environment during the reporting period.

FEES To find out more about the fees for either Legend or EmergingWealth’s Investment Management services, please contact Louis P. Stanasolovich, CFP®, founder, CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at legend@legend-financial.com. 16

THE GLOBAL INVESTMENT PULSE July, 2015


THE GLOBAL INVESTMENT PULSE July, 2015

17 © 2014 Legend Financial Advisors, Inc. ® All Rights Reserved

The Global Investment Pulse, July 2015 Issue