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Table of Contents Market Commentary MGAM Weekly Economic Update …………………………………………………………………………

Page 3

MGAM Tactical Dynamic Allocation Strategy…………………………………………………………

Page 5

Guggenheim Macro View………………………………………………………………………………………

Page 7

The Argentus Outlook Should Investors Delay the Tax Bite……………………………………………………………………… .

Page 9

Thinking About Lost Decades: Japan and (Maybe) Ours…………………………………………

Page 13

Making Sense of Interest Rates……………………………………………………………………………..

Page 17

Hooked on Easy Money…………………………………………………………………………………………

Page 21

Investment Information Cash Flow Strategies ………………………………………………………………………………………….…

Page 25

Candidate List ………………………………………………………………………………………………………

Page 29

Dividend Report …………………………………………………………………………………………………..

Page 33

MGAM Moderate Focus List…………………………………………………………………………………

Page 40

Disclosures Disclosures ……………………………………………………………………………………………………………

Page 42

200 Crescent Court #657 Dallas, TX 75201 Phone: (214) 720-4400 Fax: (214) 720-4420 info@themcgowangroup.com

WEEKLY ECONOMIC UPDATE March 24, 2014 FED TAPERS, CHANGES CRITERIA FOR A RATE HIKE Last week, the Federal Reserve disclosed another $10 billion cut for QE3 in April, and a view that declining unemployment would not necessarily prompt interest rate increases. Rather than peg rate hikes on the jobless rate dipping below 6.5%, the Fed will give greater weight to inflation and other economic factors; it sees the federal funds rate at 1% by the end of 2015 and 2% by the end of 2016. Wall Street was startled Thursday by Fed chair Janet Yellen’s verbal guesstimate that the central bank might raise rates about 6 months after the presumed late-2014 end of QE3 (about 6 months earlier than many analysts presume). IHS Global Insight economist Paul Edelstein echoed the prevalent opinion, saying “this could have been a rookie gaffe on Yellen’s part.” 1 DID COLD WEATHER COOL HOME SALES? The National Association of Realtors said existing home sales fell 0.4% in February, leading to the slowest annualized sales pace since June 2012. The median sale price was $189,000, up 9.1% yearover-year. Census Bureau data showed a 7.7% rise in building permits in February, but groundbreaking decreased 0.2% last month.2,3 A MINIMAL UPTICK IN CONSUMER PRICES February saw the Consumer Price Index rise just 0.1% for the second straight month. The core CPI (minus food and energy prices) advanced 0.1% for the third consecutive month. In the past year, the headline CPI is up only 1.1% and the core CPI only 1.6%.3 STOCKS TURN NORTH A 1.37% weekly gain brought the S&P 500 to a close of 1,866.52 Friday. The Dow rose 1.48% on the week to settle Friday at 16,302.77, and the Nasdaq managed an 0.74% advance for the week to 4,276.79.4,5 THIS WEEK Wall Street will watch private-sector PMIs for China, Germany and the eurozone Monday. Tuesday offers data on February new home sales, the Conference Board’s March consumer confidence index, January’s S&P/Case-Shiller home price index, January’s FHFA housing price index and earnings from Walgreen’s. On Wednesday, the Commerce Department releases a report on February hard goods orders. Thursday brings NAR’s pending home sales report for February, the final government estimate of Q4 GDP, the latest initial jobless claims numbers and earnings from Lululemon, Red Hat, RE/MAX and Accenture. Friday offers the February consumer spending report, the final March consumer sentiment index from the University of Michigan, and Q4 results from BlackBerry. 3

% CHANGE DJIA NASDAQ S&P 500 REAL YIELD 10 YR TIPS

Y-T-D -1.65 +2.40 +0.98 3/21 RATE 0.61%

1-YR CHG +13.04 +32.71 +20.75 1 YR AGO -0.57%

5-YR AVG +24.80 +38.70 +28.57 5 YRS AGO 1.43%

10-YR AVG +6.20 +12.39 +7.04 10 YRS AGO 1.44% 5,6,7,8

Sources: USATODAY.com, bigcharts.com, treasury.gov - 3/21/14 Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.

Citations. 1 - sacbee.com/2014/03/19/6251229/yellen-speaks-clarity-weak-stocks.html [3/19/14] 2 - marketwatch.com/story/existing-home-sales-decline-04-in-february-2014-03-20-109104 [3/20/14] 3 - reuters.com/article/2014/03/18/usa-economy-idUSL2N0MF0HR20140318 [3/18/14] 4 - google.com/finance?q=INDEXDJX%3A.DJI&ei=qqwsU-C5DISsiALCKw [3/21/14] 5 - usatoday.com/money/markets/overview/ [3/21/14] 6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=3%2F21%2F13&x=0&y=0 [3/21/14] 6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=3%2F21%2F13&x=0&y=0 [3/21/14] 6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=3%2F21%2F13&x=0&y=0 [3/21/14] 6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=3%2F20%2F09&x=0&y=0 [3/21/14] 6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=3%2F20%2F09&x=0&y=0 [3/21/14] 6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=3%2F20%2F09&x=0&y=0 [3/21/14] 6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=3%2F22%2F04&x=0&y=0 [3/21/14] 6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=3%2F22%2F04&x=0&y=0 [3/21/14] 6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=3%2F22%2F04&x=0&y=0 [3/21/14] 7 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [3/21/14] 8 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [3/21/14]

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

MGAM Tactical Dynamic Allocation Strategy

Opportunistic portfolios are created during market bottoms taking advantage of lower prices and higher cash flows. 2002 and 2009 are excellent examples.

As equity markets rise, the goal becomes scaling back risk toward a more moderate portfolio.

Following major stock market rallies, the goal is to protect gains by moving to a more conservative portfolio. 1999 and 2007 provided opportunities in more conservative fixed income instruments as the Federal Reserve tightened interest rates.

Tactical allocation provides a planning tool for adjusting portfolios for the economic cycle, but does not eliminate risk or assure future performance. McGowanGroup Asset Management, Inc is a Federally Registered Investment Advisory Firm. Securities offered through independent firm, Spire Securities, LLC., a Registered Broker/Dealer and member FINRA / SIPC. McGowanGroup and Spire only transact business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. 02/2014 6

3/20/2014

Macro View: The Song Remains the Same | Guggenheim Partners

The Song Remains the Same MACRO VIEW

EMAIL ALERTS

FOLLOW SCOTT

MARCH 19 2014

The noisy journey from winter to spring in the United States may mask the underlying strength in the U.S. economy. The risk-on environment should remain intact, despite international tensions. Global CIO Commentary by Scott Minerd Edging into spring, we should expect a bumpy and rather noisy journey as weak U.S. economic data caused by a severe winter shows up in economic reports. In fact, the U.S. Federal Reserve on Wednesday retooled its forward guidance on the path of interest rates to give it more flexibility to react to shifting data as needed. However, I believe the underlying U.S. economy is in good shape. As the Chilean poet Pablo Neruda once said, “You can cut all the flowers, but you cannot keep spring from coming.” While a spring rebound should help U.S. markets climb higher, international tensions remain elevated. Relations between the West and Russia have sunk to levels not seen since the Cold War. Russia’s annexation of Crimea confirms that President Vladimir Putin does not respond to threats, so we can expect ongoing instability from the region which is likely to keep U.S. interest rates subdued. Chinese economic growth has slowed, prompting Beijing to soften its growth forecasts. Interestingly, the People’s Bank of China has widened the renminbi’s official trading band. Increased volatility can now be expected, as policymakers have greater flexibility to depreciate the currency in an effort to boost exports and maintain employment levels. Abenomic’s “three-arrows” approach to stimulating more robust economic growth in Japan has stalled. Growth momentum is slowing and Abenomic’s third and most important arrow -- undertaking structural reforms -- is not hitting its target. The Bank of Japan may have to do more to stimulate the economy to offset the headwinds from April’s sales tax hike, Japan’s first major tax hike in 17 years. Now, a couple of months before many investors will start wondering if they should “sell in May,” we remain in a risk-on environment -- U.S. stock prices should go higher, credit spreads should tighten, and any interest-rate increases should be muted. The rumblings in Crimea, China and Japan have done little to change that outlook. In fact, potential Chinese renminbi and Japanese yen devaluations could export deflationary pressure into the United States, potentially pushing 10-year U.S. Treasury yields lower. On balance, for now it appears that the song remains the same. Chart of the Week Depreciating Asian Currencies Could Ease U.S. Prices

With China’s economic growth slowing, the People’s Bank of China has widened the official trading band for the renminbi, a sign that Chinese policymakers are willing to accept further depreciation of the RMB, which has fallen 2 percent against the U.S. dollar over the past month. RMB depreciation could set off a round of competitive devaluation in Asia, as Japan and other Asian countries try to keep their exports competitive. This would ultimately benefit the United States, as the strength of the dollar is closely tied to import prices and thus, overall price levels.

BROAD TRADE WEIGHTED U.S. DOLLAR AND IMPORT PRICES

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3/20/2014

Macro View: The Song Remains the Same | Guggenheim Partners

Source: Bloomberg, Guggenheim Investments. Data as of 2/28/2014.

Economic Data Releases U.S. Economic Activity Begins to Rebound, but Weak Spots Remain

Retail sales were better than expected in February, rising 0.3 percent after a revised 0.6 percent drop in January. The rebound was spread across most categories, with strong gains in sporting goods and online retailers. The NAHB housing market index inched up to 47 in March after plunging in February. Expectations for future sales fell for a third straight month. Housing starts were mostly flat in February at 907,000, following an upward revision in January. Building permits were encouraging in February at 1.02 million, the highest since October. Multi-family permits jumped over 24 percent, while single-family permits declined slightly. U.S. industrial production had a large rebound in February, rising 0.6 percent. Manufacturing output rose by the most in six months as auto production surged. University of Michigan consumer confidence fell from to 81.6 to 79.9 in March, the lowest level since November. The decline was unexpected and led by more negative expectations. Initial jobless claims continued to fall for the week ended March 7th, reaching 315,000, the lowest amount since November. The consumer price index dropped from 1.6 percent year-over-year to 1.1 percent in February. Goods prices fell, while housing and medical costs continued to rise. The U.S. producer price index unexpectedly fell in February, decreasing to 0.9 percent year-over-year due to a large decrease in services costs. Chinese Data Calls Grow th Target into Question

Germany’s ZEW survey of investor expectations dropped lower than expected in March, falling for a third consecutive month to 46, the lowest level in seven months. Chinese industrial production dropped from 9.7 percent year-over-year to 8.6 percent in February, the lowest since 2009. The weak number calls into question whether China will meet the government’s growth target of 7.5 percent. Retail sales in China fell sharply in February, to 11.8 percent from a year ago. The growth rate is the lowest in nine years. Japan’s exports were below expectations in February, rising 9.8 percent from a year earlier vs. 9.5 percent in January. Imports continued to outpace exports for the 20th consecutive month.

EMAIL ALERTS

FOLLOW SCOTT

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

© 2014 GUGGENHEIM PARTNERS, LLC. ALL RIGHTS RESERVED. GUGGENHEIM AND GUGGENHEIM PARTNERS ARE TRADEMARKS OR REGISTERED TRADEMARKS OF GUGGENHEIM CAPITAL, LLC. *ASSETS UNDER MANAGEMENT ARE AS OF DECEMBER 31, 2013 AND INCLUDE CONSULTING SERVICES FOR CLIENTS WHOSE ASSETS ARE VALUED AT APPROXIMATELY $36 BILLION.

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ARGENTUS OUTLOOK

THE

INVESTMENT SOLUTIONS THAT FIT TODAY’S GLOBAL ECONOMY

Should Investors Delay the Tax Bite?

March 2014 • Volume 3, Issue 3

By W. Michael Cox and Richard Alm Small Talk Uncle Sam sometimes gives taxpayers a choice: Pay • Bankrupt nation. Boston University me now or pay me later. Investors can sock away a

To learn more about deciding whether economist Laurence Kotlikoff estimates to defer taxes, use our calculator: portion of their savings in tax-deferred investment America’s true national debt at $205 trillion. http://argentusoutlook-66096.hibustudio.com/newsletter/1238573 vehicles—traditional IRAs, Roth IRAs, 401ks, 403bs, He starts with the $12 trillion in existing debt $1,000 would grow when sheltered from taxes—if he in the hands of the public. Then he adds up all Simplified Employee Pension (SEP) plans, Keoghs, fixed the future obligations to pay for Social faces lower tax rates in retirement. After 41 years— and variable annuities and the like. Security benefits, Medicare, Medicaid and the Smith will be 67—he’d have $17,597 after taxes if Financial advisors usually urge clients to take routine functions of government. Projected tax he anticipates an income tax rate of 25 percent in advantage of these tax breaks, often to the max. revenues fall 60 percent short, leaving the retirement (see chart below ). Delaying taxes is usually a good deal. Just how good nation $205 trillion in the hole. The government Smith worries about the federal government’s huge depends on investment returns, current tax rates, disguises this massive debt with accounting fraud far worse than anything perpetrated by fiscal deficits and unfunded promises. Future taxes may anticipated future tax rates and years until retirement. Bernie Madoff or Enron. “So the country really is be higher, not lower, especially for wealthy Americans. If To show how these factors interact, we conjure bankrupt and nobody sees it because of the Smith continues to pay taxes at a 40 percent marginal up a 21st Century Adam Smith. He’s 26 years old, a bookkeeping,” Kotlikoff said. rate into his retirement, his after-tax gain would be Harvard-educated lawyer earning enough to put him in • Regulatory beat. Using the Internet to help reduced to $14,077. the top tax bracket. Smith needs to decide whether to startups raise capital, equity crowdfunding How does this compare with a scenario where Smith defer taxes on his retirement savings. gives small investors a chance to get in on pays taxes on his savings every year? The tax bite starts Tax Rates, Returns and Time the ground floor of what might be the Next with his current income at 40 percent, reducing his Smith projects an annual return of 8 percent—close Big Thing. The Securities and Exchange initial investment to $600. to the long-term average for U.S. stocks. Facing a Commission proposes to limit the size of investments, mandate specific disclosures Each year, he’d pay the taxes due on his investment marginal tax rate of 40 percent, each $1,000 he puts in and require SEC-registered intermediaries.To income—40 percent if earned as interest or nona tax-deferred account would save him $400 in current raise between $500,000 and $1 million, fees qualified dividends, a 20 percent base plus 3.8 percent taxes but create future tax liabilities. and compliance costs would range from Medicare surcharge if earned as qualified dividends Smith wants to see how the after-tax value of $76,660 to $151,660. “The SEC must avoid costly, paternalistic requirements on Continued on page 2 crowdfunding that have the effect of keeping the status quo and locking ordinary investors Longer Time Horizons, Lower Taxes Magnify Gains from Deferring Taxes out of startup capital,” said John Berlau, senior fellow for the Competitive Enterprise Institute. $18,000

• Borrowing again. The financial crisis battered American households and left them leery of debt. According to the Federal Reserve Bank of New York, total household debt peaked at nearly $12.7 trillion in the third quarter 2008. In subsequent quarters, Americans owed less than they did a year earlier—a pattern that held for the next five years. Now, the great deleveraging has ended—at least temporarily. With households willing to buy cars and houses and use their credit cards, debt surged $241 billion in last three months of 2013, creating a four-quarter increase of $180 billion in outstanding debt. Total household debt was $11.5 trillion. Fed Watch and Chart Topper: Page 3

$17,597 Defer Taxes

$16,000 Pay as You Go $14,077

$14,000 25% Tax Rate in Retirement $12,000

40% Tax Rate in Retirement

$10,000

$8,904 $8,000 15% Tax Rate $6,789 on Capital Gains $6,000 23.8% Tax Rate on Capital Gains $4,000 Initial Investment of $1,000, 8% Annual Rate of Return

$2,000 $0

After-Tax Value at the End of N Years

Source: Authors’ calculations

THE ARGENTUS OUTLOOK Continued from page 1

or capital gains. At 23.8 percent, the after-tax value of Smith’s $600 would be $6,789 at the end of 41 years—a bad deal compared to the tax-deferred plan. Until 2013, the tax rate on long-term capital gains and qualified dividends was 15 percent. At 41 years, raising the tax rate to 23.8 percent reduced the after-tax value of each $1,000 from $8,904 to $6,789. For each $1,000 held 41 years, not deferring taxes cost Smith $10,808 at the 25 percent tax rate and $7,288 at the 40 percent tax rate. A quick calculation reveals Smith’s average annual after-tax returns—7.25 percent for the taxdeferred account, 4.78 percent for the pay-now approach. To Defer or Not Defer No fool with money, Smith decides to put his savings into a tax-deferred account—not just that first $1,000 but many additional $1,000s, every year throughout his legal career. He expects to retire with a nest egg of millions of dollars. The exercise taught Smith some valuable lessons. The payoff from delaying the tax bite will increase with higher tax rates on current income, lower tax rates on retirement income or higher investment returns. Perhaps most important, Smith came to appreciate the miracle of compound interest—the great value of time in reaping rewards from tax-deferred investing. At a 25 percent tax rate in retirement, the gap between deferring taxes and paying 23.8 percent each year widened with each passing decade—$535 at 10 years, $1,536 at 20 years, $4,006 at 30 years and $10,808 at 41 years. Can our Adam Smith ever find it better to pay taxes now rather than delay them? It’s not likely on wage and salary income facing the top marginal rate—the initial tax hit’s just too big. The answer’s different if the initial funds come not from income but from assets not

burdened by tax liability. If Smith’s considering shelter these assets’ future gains through a tax-deferred plan, he’ll face a tradeoff between the pay-now tax rate and his time horizon (see chart below ). Shorter time horizons and lower tax rates favor paying taxes every year (orange area ). The decision shifts toward deferring taxes when money has more years to grow and capital gains taxes go up (green area ). At various combinations of tax rates and years, the choice between paying Uncle Sam now or later would be a coin flip—if Smith’s annual rate of return stays at 8 percent (arced line ). Now, Smith can see another impact of the recent hike in the long-term capital gains tax. At the 15 percent rate, it took 19 years for deferring taxes to gain an edge over paying annually. Now that he’s taxed at 23.8 percent, deferring taxes will start to pay off in just two and a half years. A final thought. Most portfolios include a variety of financial assets—stocks, bonds, mutual funds, etc. For tax purposes, some holdings are short term and taxed as regular income at 40 percent, some are long term and taxed as qualified dividends and capital gains at 23.8 percent. This complicates the calculation of an investment tax rate. Suppose Smith holds only growth stocks that pay no dividends and takes his gains every 10 years, paying taxes at 23.8 percent. His equivalent annual tax rate would be 18.3 percent. Now, suppose Smith derives his investment income in equal thirds from interest, dividends and capital gains. Half of the dividends and capital gains are short term, facing the 40 percent rate. His equivalent annual tax rate would be 33.8 percent.

With Higher Capital Gains Taxes, Deferring Money Makes More Sense 30%

Capital Gains Tax Rate

At an 8% rate of return and a capital gains tax rate of 23.8%, you’re better off investing inside a tax-deferred plan if your time horizon exceeds 2½ years.

25%

20% Better Off Being in a Tax-Deferred Investment Plan 15%

At an 8% rate of return and capital gains tax rate of 15%, you’re better off paying taxes as you go if your time horizon is less than 19 years.

10%

Better Off Paying Taxes As You Go

20 Years of Tax Deferment

What It Means for Your Clients By breaking down the influences of investment returns, today’s tax rates, tomorrow’s tax rates and investment time horizons, Dr. Cox adds some important nuances to decisions about tax-deferred investing. For example, it will pay off even if your clients don’t face lower tax rates in their retirement years. That’s good to know. It’s no longer safe to assume that the U.S. government won’t raise tax rates in the future—with wealthy households the likely target for tax hikes. Another important conclusion: the case for putting off taxes has become even stronger now that the government no longer taxes qualified dividends and capital gains at just 15 percent. Once again, that’s good to know. By April 15, many of your clients will be filing their first federal income tax returns subject to the 23.8 percent rate. For the most part, tax-deferred investing has been synonymous with 401k plans and similar accounts. Not all your clients will have the option of saving in a 401k; others’ saving needs may exceed the annual limits on 401k contributions. The financial industry offers a variety of ways to meet their needs. For example, your clients might consider putting aftertax money into fixed or variable annuities that delay the tax bite. Today’s higher capital gains tax rates may make investors more receptive to this option. Among fixed annuities, indexed products are better than traditional ones in today’s market, where interest rates have nowhere to go but up. In some cases, annuity balances are protected from the claims of creditors, another advantage over other forms of savings. By Argentus Partners, LLC

Source: Authors’ calculations

About Michael Cox

Richard Alm

W. Michael Cox is director of the William J. O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business. He is chief economic advisor to Argentus10Partners, LLC.

Richard Alm is writer in residence at the William J. O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business

THE ARGENTUS OUTLOOK

W. Michael Cox’s Fed Watch: For years now, the Federal Reserve has tried to fuel growth and reduce unemployment by keeping interest rates low and pumping money into the economy through securities purchases. The policies haven’t delivered as promised, largely because banks chose to hold excess reserves rather than make loans. You could say shame on the banks—but the Fed brought this upon itself. It made four policy mistakes that contributed to the banks’ hunkering down. First, the Fed started paying interest on reserves. Lending offers low interest rates and high risks. Holding reserves allows banks to make low returns without taking any risks. Second, the Fed heaped on added bank regulation, often taking its sweet time. The new rules raised costs of lending, and the delays created uncertainty in an

already wary financial services industry. Third, driving interest rates down contributed to a “liquidity trap,” sapping the effectiveness of traditional monetary policy tools. In the trap, interest rates can’t go any lower, and lenders hang back and wait for them to rise back to normal levels. Fourth, the Fed helped big banks get bigger. While small banks were allowed to fail in the financial crisis, government policy protected the biggest banks through bailouts and mergers. The four largest banks now have 41 percent of depository industry assets, up from 38 percent in 2007. When big banks gobble up more assets, small business lending suffers, depriving the economy of a spark (see Chart Topper below ). Early on, the economy didn’t respond to the flood of money, but the Fed failed to see the error of its ways. It

just kept making the same mistakes again and again, culminating in the $85 billion a month in quantitative easing during 2012 and 2013. Even today, the Fed persists in these policies. It would be bad enough if the Fed’s misguided policies merely held back economic activity and job growth. But they created an even bigger potential problem, one that will haunt the central bank this year and beyond. The policies of the past five years have left the banking system awash in excess reserves, greatly increasing the risks of higher inflation and interest rates. In 25 years at the Federal Reserve Bank of Dallas, Dr. Cox rose to chief economist and senior vice president, advising the bank’s president on monetary policy and other economic issues.

Chart Topper Too Big to Lend Small: Largest Banks Could Be Doing More for Small Businesses Small businesses borrow for a variety of reasons—to invest in new facilities, modernize equipment, buy inputs, raise working capital, refinance debt. More often than not, they turn to small business loans, a category covering transactions up to $1 million. At America’s biggest banks, the reception has been chilly. The four largest banks—JP Morgan Chase, CitiBank, Bank of America and Wells Fargo—have 41 percent of all depository industry assets but make just 21 percent of small business loans. Most of the credit that fuels small businesses’ expansion comes from the nation’s 6,000-plus smaller financial institutions, notably the American Express bank. Rather than lending to small businesses, the banking behemoths are concentrating on other financial services, presumably ones they find more profitable. Since the financial crisis in 2008, for example, the biggest banks credit-card operations have been surging. Fearing big bank failures would cripple the economy, policy-makers doled out billions in government aid during the financial crisis. Critics gave these banks a disparaging moniker—Too Big To Fail. By not making their share of small business loans, the giant financial institutions may also be Too Big to Lend Small.

100

Percent of Small Business Loans

Share of Small Business Loans Equals Share of Assets Along Diagonal Line

90 80 70 60 50

American Express, FSB

40 30 20

Wells Fargo Bank of America

10 0

CitiBank JPMorgan Chase 0

40 50 60 Percent of All Depository Industry Assets

About The Argentus Outlook A monthly publication of Argentus Partners, LLC, the newsletter strives to deliver current economic information relevant to investing and operating in today’s complex 11 global economy.

100

Source: Federal Deposit Insurance Corp.

Chief Executive Officer: Douglas Gill, CFP® Publisher: Susanna Joiner, Chief Marketing Officer Editor: Richard Alm Contact: marketing@argentuspartners.com

THE ARGENTUS OUTLOOK

For additional information, or to subscribe to the monthly publication, please e-mail marketing@argentuspartners.com

Important Disclosures: Information herein in this newsletter and has been obtained from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. This newsletter is for informational purposes only, and should not be considered as an offer, invitation or solicitation to subscribe, purchase or sell or any securities, and is not intended to provide any specific investment advice or recommendation. You should review your personal financial situation, investment objectives, goals and risk tolerance prior to investing. All indices referenced are unmanaged and an investor cannot invest directly into any index. The economic forecasts and projections illustrated in the newsletter may not develop as predicted and there can be no guarantee or assurance that strategies promoted will be successful. All expressions of opinion reflect the judgment of Dr. Cox and his research conducted for Argentus Partners, LLC at this date and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete. This research material has been prepared by Argentus Partners, LLC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that Argentus Partners, LLC is not an affiliate of and makes no representation with respect to such entity.

ARGENTUS OUTLOOK

THE

INVESTMENT SOLUTIONS THAT FIT TODAY’S GLOBAL ECONOMY

Thinking About Lost Decades: Japan’s and (Maybe) Ours

February 2014 • Volume 3, Issue 2

Small Talk By W. Michael Cox and Richard Alm • AWOL investors. Stock markets have been

By the 1980s, Japan was a burgeoning economic on a roll lately, with the S&P 500 rising superpower, thought to be on its way to dominating the 11percent in 2012 and 32 percent 2013. A lot of Americans made money—but many global marketplace. The country’s startling rise led to a others stayed on the sidelines. According spate of books and articles urging the United States to be the Gallup surveys, the share of Americans more like Japan. Today, there are signs that may indeed be investing in the stock market, either directly happening—but not in a way Americans should celebrate. or through retirement accounts, stood at 52 percent in 2013. Before the financial crisis With the paeans still echoing, Japan saw its economic and recession of 2008-09, the figure was miracle run aground after 1990. Now, Japan is slogging above 60 percent, topping out at 65 percent through its third lost decade, with anemic economic in 2007. After the tech bubble burst in 2001, growth and stagnant living standards. Despite a surge in stock market participation dipped but quickly 2013, Japan’s Nikkei stock market index ended the year bounced back. The financial crisis and 58 percent below its all-time peak, reached on the last recession have apparently left deeper scars. trading day of 1989 (see chart below ). • Who do we owe? When the fiscal year ended As the Nikkei sank, the Dow Jones Industrial Average on September 30, the federal government’s (DJIA) soared, reaching record levels in the waning days debt exceeded $16.7 trillion, up from $16 of 2013. For many, stock prices suggest that the United trillion a year earlier. According to a new U.S. Treasury breakdown, some big holders States isn’t yet in the doldrums that have entrapped Japan. of U.S. debt saw their shares shrink—for Looking deeper, however, we see some disquieting example, U.S. individuals and institutions, the similarities that raise questions about whether the United Social Security Trust Fund and many foreign States has entered its own lost decade—or, worse yet, countries. China’s share rose a bit. The biggest lost decades. Investors may view the similarities as a sign gain, however, came in the Federal Reserve’s share. It went from 10.8 percent to 12.8 pointing to prolonged stagnation in the United States, or percent—due to the expansive purchases of securities under the central bank’s policy of quantitative easing. The Fed purchased 58 Stock Market Peaks: Japan’s Nikkei in percent of all new debt in fiscal year 2013. Index, January 1980=100 • Companies leaving. Newly merged Fiat and Chrysler decided in January to become a British resident for tax purposes. Activis, a pharmaceutical company, left New Jersey in October to reincorporate in Ireland. All told, 13 U.S. companies have completed or announced relocations to lower-tax countries in the past two years. Both Democrats and Republicans have proposed reducing the U.S. corporate tax rate—now the highest in the world at 39 percent. The U.S. has maintained this rate for more than 25 years. During that time, other countries cut their rates; now, the Organization of Economic Cooperation and Development average is 25 percent.

they may decide the differences between the two countries will allow the United States to escape Japan’s fate. Losing dynamism Japan’s per capita GDP grew at an annual average of 5 percent from 1960 to 1991, producing East Asia’s first miracle economy, the China of the times. Over the next 22 years, though, Japanese per capita GDP growth bogged down, averaging less than 1 percent a year. The dismal performance led to talk of Japan’s lost decades. The United States had its ups and downs from 1960 to the end of 2007—but per capita GDP grew at an average of 2.6 percent a year, good for a mature developed nation. In the past six years, through a steep recession and weak recovery, U.S. growth has been essentially flat—and total employment has yet to return to its pre-recession levels. America is now more than halfway through a lost decade. In its lost decades, Japan has been working less. Employment as a share of the population fell from 64 percent in 1999 to 58 percent in 2013 (see chart next page ). Since 1988, the average workweek fell by more than seven hours; now, a typical Japanese puts in fewer hours than an American. Continued on page 2

1989, America’s Dow in 2013

1600 Dow Jones Industrial Average

800

Nikkei 225

400

200

Fed Watch and Chart Topper: Page 3 100

50 1980

1984

1988 13

1992

1996

2000

2004

2008

2012

Source: Nikkei Inc., CME Group

THE ARGENTUS OUTLOOK

Continued from page 1

Americans are working less, too. The employmentto-population ratio fell from 62 percent in 1992 to 56 percent in 2013. Most of the unemployment rate’s decline in the past four years has come from decreasing labor force participation, not job creation. In its lost decades, Japan has used government largesse as a substitute for productive work and regular paychecks. Social spending as a share of GDP climbed from 11 percent in 1989 to 22 percent in 2013 (see chart below ). The United States has been doing the same, with its social spending ratio rising from 13 percent to 20 percent of GDP since 1989. In its lost decades, Japan paid for bigger government by borrowing to the hilt. Its debt-to-GDP ratio rose from 66 percent in 1991 to 243 percent in 2013, the highest among developed countries (see chart below ). Since 1988, America’s debt ratio has more than doubled, reaching 102 percent of GDP in 2013. It has now crossed the 90 percent threshold where debt becomes a drag on economic growth. The data reveal other similarities. Both countries had massive, destabilizing real estate bubbles—Japan in commercial property in the 1980s, the United States in housing in the mid-2000s. Both countries expanded government’s regulatory role. In both countries, a weak economy has kept consumer price inflation surprisingly low, even in the face of extraordinarily loose monetary policies. Similar policies, too Trying to revive slack economies, politicians in both Japan and the United States have turned to expansive fiscal and monetary policies. Their governments are running huge deficits. Their central banks have pushed interest rates to rock-bottom levels.

All the so-called stimulus hasn’t stimulated much. Japan has kept its central bank’s lending rate at less than 1 percent since 1995. It has quadrupled the national debt by spending on infrastructure and social programs. Low interest rates and big deficits haven’t revived the U.S. economy either. Yet, governments in both countries persist in the delusion that stimulus will work—a policy parallel that most likely helps explain many of the unfortunate similarities in economic performance. Neither country has been willing to try a heavier dose of capitalism as a remedy for economic malaise. The Economic Freedom of the World report measures the degree to which 144 countries allow markets and individual choice to guide their economies. Japan ranked No. 11 in 1990 but tumbled to No. 32 in the ensuing two decades. The United States stood second in the world in economic freedom in 2000; it sank to No. 19 in the latest reading. A final thought. Japan and the United States are different in ways that could affect the trajectories of their economies. The United States is more individualistic, diverse, optimistic, entrepreneurial, and open to change. Our country is becoming energy-rich again, thanks to “fracking” technology. Japan faces a rapidly aging population. Rigidities still beset its labor market. We shouldn’t ignore these differences. Nor should we use them to concoct scenarios where the lessons of Japan don’t apply to the United States. The most important lesson, of course, centers on the futility of Keynesianstyle economic policies. Already halfway through one lost decade, America can escape the fate of Japan by curtailing government and freeing the private sector to produce growth, jobs and wealth.

On Similar Paths: Working Less, Spending More, Going Deeper Into Dept Social Spending-to-GDP Ratio

Employment-to-Population Ratio 66%

24%

64%

Japan

22% Japan

62%

Debt-to-GDP Ratio 250%

200% Japan

20%

60%

150%

18% 58% United States

16%

56% 54%

14%

100% United States United States 50%

52%

12%

50%

10%

1980 1985 1990 1995 2000 2005 2010

What It Means for Your Clients After two years of outsized stock market gains and some reports of an improving economy, many investors are probably feeling more confident. Dr. Cox delivers a sobering slap: the U.S. economy is already more than halfway through a lost decade. Not many Americans will look at it that way. It’s a disturbing thought—but investors shouldn’t ignore unpleasant realities. One of The Argentus Outlook’s recurring themes has been the importance of the economy’s overall performance to investing. The macroeconomics of investing dictates the microeconomics of it. No investment strategy fits all times and circumstances. In making investment decisions, your clients should forge expectations for economic growth, inflation, interest rates and the policies that influence them. In addition to these macroeconomic staples, investors should look for data that’s not on everyone’s radar screen. Sampling a variety of indicators and a range of sources is a good idea. That’s what Dr. Cox did in comparing Japan and the United States. He looked at stock markets, economic growth, interest rates, inflation, labor trends, spending trends, public debt and an intriguing measure of economic freedom. John Maynard Keynes famously said: “In the long run we are all dead.” But investors shouldn’t become strictly shortterm creatures, fixated on the latest Fed meeting and blind to the longer-term prospects of economies and policies. We may not know whether the United States will follow Japan into a decades-long stupor, but we should at least consider the possibility. At least some of your clients may want to incorporate that bit of information into their investment decisions. By Argentus Partners, LLC

Source: Bureau of Labor Statistics, Organization for Economic Cooperation and Development, St. Louis Fed

About Michael Cox

Richard Alm

Richard Alm is writer in residence at the William J. O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business

THE ARGENTUS OUTLOOK

W. Michael Cox’s Fed Watch: The Federal Reserve’s long-anticipated “tapering” has finally begun. In December and again in January, the central bank lopped $10 billion off its monthly purchases of securities. So quantitative easing shrunk from $85 billion in November to $65 billion in February. The recent actions will create expectations of further tapering. Sometime this year, quantitative easing should be done—perhaps by summer’s end. At the depths of the financial crisis, the Fed had good reason to pump money into an economy gasping for liquidity. The Fed’s early quantitative easing helped the economy avoid a huge contraction in the money supply, massive deflation and an even worse recession. The policy just went on for way too long. The next few months aren’t likely to be smooth, even if the Fed reduces its asset purchases in an orderly

fashion. On its own, passing the Fed gavel from Ben Bernanke to Janet Yellen will create uncertainty; new leadership always does. The jitters will be compounded by the phase-out of quantitative easing. What’s more, quantitative easing’s end is only one step toward returning Fed policy to pre-financial crisis normalcy. Yellen and her colleagues still have a lot of work to do. Most important, they will have to decide the timing and pace for selling assets accumulated during quantitative easing. The Fed’s balance sheet grew from $800 billion at the end of 2007 to more than $3.5 trillion today. Selling too fast will drive down asset prices, spiking interest rates. Going too slow will leave too much money in the system, bringing higher inflation followed by higher interest rates.

America has no place to hide from rising interest rates. They’re as inevitable as death or taxes. The rates are already at or near all-time lows, government debt is piling up and past Fed policies have left a mess to clean up. For years, Fed watching has been an obsession for investors and the financial gurus. The end of quantitative easing won’t change that. All eyes will remain on the Fed. Monetary policy is still far from normalcy; in fact, the Fed may now be moving on to the most difficult part of extricating itself from the policies of the recent past. In 25 years at the Federal Reserve Bank of Dallas, Dr. Cox rose to chief economist and senior vice president, advising the bank’s president on monetary policy and other economic issues.

Chart Topper Texas Twosome: Houston, Dallas Stand Out Among Top 15 MSAs 700,000 27% 600,000 500,000

Job Gains Since Trough Job Gains January 2000 to Trough Net Job Gains January 2000 to November 2013

18% 5%

400,000

17% 15%

300,000

18%

12%

200,000

4% 13%

1% -1%

-17% Detroit

San Francisco

Boston

Minneapolis

Seattle

Chicago

-400,000

Los Angeles

-300,000

Atlanta

Phoenix

Miami

Washington, D.C.

-200,000

New York

-100,000

DFW

Philadelphia

100,000

Houston

In the nation’s 15 largest metropolitan areas, employment bottomed out some time between January 2008 for Houston and July 2011 for Phoenix. From each city’s low point, job gains have been greatest in New York at 396,541, Los Angeles at 390,567, Houston at 352,130, and the Dallas-Fort Worth (DFW) area at 344,634 (green in chart ). For years, residents of New York and Los Angeles have been hearing about Texas’ great job growth. So they’ve finally got their chance to puff out their chests—but they shouldn’t get too carried away. The Texas cities can offer a solid rebuttal. As a share of employment, Houston leads in post-recovery gains at 12.7 percent, followed by DFW at 11.2 percent. The recession was relatively mild in Texas, and the DFW and Houston areas didn’t suffer as much as other big cities. In the past three years, their employment growth was more about adding new jobs than recovering lost jobs. Going back to January 2000, Houston leads the nation by adding 690,826 jobs, a 26.6 percent gain (green plus red in chart ). DFW comes in second with an increase of 541,959, or 18.3 percent. Houston and DFW had strong job growth both before and after the recession. Not many other places can match that. Washington, D.C., comes the closest—but it’s not exactly a bastion of free enterprise.

-500,000 -600,000

Source: Bureau of Labor Statistics

Chief Executive Officer: Douglas Gill, CFP® Publisher: Susanna Joiner, Chief Marketing Officer Editor: Richard Alm Contact: marketing@argentuspartners.com

THE ARGENTUS OUTLOOK

For additional information, or to subscribe to the monthly publication, please e-mail marketing@argentuspartners.com

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THE

INVESTMENT SOLUTIONS THAT FIT TODAY’S GLOBAL ECONOMY

Making Sense of Interest Rates

January 2014 • Volume 3, Issue 1

By W. Michael Cox and Richard Alm Small Talk What a year for investors! The Dow Jones Industrial Average and S&P 500 both soared by more than 26 • Movin’ on up. With a new year, the meter

percent in 2013, ending the year at record highs. The of annual income resets to zero—so everyone’s equal for a few seconds. Then the NASDAQ index did even better—a 38 percent gain. race begins again. In December, the Internal The Federal Reserve’s low interest rates provided Revenue Service released new data, covering most of the fuel for the stock market’s joy ride. 2011, that suggest it will take something During the year, the raging bulls shrugged off a like $120,136 to make the top 10 percent so-so economy, Washington’s budget battles and of income earners. The top 5 percent starts at $167,728. Both are record highs. The warnings of a stock market bubble. Just about the only cutoff for the top 1 percent is $388,905, persistent downer was the anxiety over whether higher down from a peak of $426,439 in 2007. interest rates would spoil the fun. As stock indexes Making it into the most exclusive club—the inexorably climbed, investors couldn’t shake the worry top 0.1 percent—takes at least $1,717,675, that the Federal Reserve would tap the brakes by or quite a bit less than the $2,251,675 in 2007. tapering off on its money-creating bond purchases. • Infinite tax rates. The tax on long-term The Fed, however, kept the pedal to the metal until capital gains rose from 15 percent to 23.8 mid-December. Only then did it take a first tentative percent a year ago. The Tax Foundation’s step toward tapering off its money-creating bond Kyle Pomerleau says the burden will be purchases, announcing it would pare the program higher for shares bought in the past and sold in 2013. The analysis starts with the from $85 billion to $75 billion a month. average return on the S&P 500, then takes The decision didn’t represent much of a change in inflation into account. Pomerleau calculates the Fed’s mind-set. The taper’s small size suggests the real effective tax rate, finding it exceeds the central bank doesn’t really believe the economy the statutory rate for stocks bought in every can stand on its own. The policy keeps interest rates year since 1950, sometimes by a lot. For most years, the real effective rate was low and continues to flood the economy with new between 26 percent and 38 percent. The average from 1950 to 2012 was 42.5 Interest Rates: Still Low But Starting percent. Low returns and inflation created some shocking outliers—309 percent for 20% 1998, 286 percent for 2001, 93 percent for 2004. Most shocking of all, negative real 18% returns made the effective tax rate infinite for stocks bought in 1999, 2000 and 2007. •

Deeper in debt. President Obama’s supporters are trying to cast him as a champion deficit cutter, pointing to the reduction of the federal red ink from $1.4 trillion in 2009 to $972 billion in 2013. The rest of the story: The national debt has risen from $10.7 trillion when Obama took office to $17.7 trillion at the end of 2013— so 40 percent of the nation’s debt came on this president’s watch. And he’s not done yet. Projected deficits over the next three years will total more than $1.8 trillion.

16%

money. So in 2014, investors will remain fixated on when interest rates will rise and by how much. Financial markets provide some clues. Looking at today’s interest rates tells us something about what investors think will happen to future interest rates—not just over the next few months but far beyond. Assessments will change as markets move forward and incorporate new information; however, the start of this year is a crucial time for investors to take stock of interest rates. Rates drifting up Markets set interest rates on a wide array of borrowing and lending—mortgages, corporate bonds, government debt, business loans, credit cards and new cars, to name just a few. For simplicity, we’ll focus on the federal funds rate, set by the Fed, and the interest rates the U.S. Treasury pays on its bills, notes and bonds, the assets with the lowest risk. In recent years, these interest rates have sunk to historical lows (see chart below ). At the top, 30-year Treasury bonds have started to push toward 4 percent. At the bottom, the fed funds rate and three-month Treasury bill are still scraping along just above zero. In between are issues of other maturities, lining up in descending order from longer to shorter. Continued on page 2

to Bounce Back at the Long End Yield Curves 4.0% 3.5%

December 5, 2013

3.0% 2.5%

14%

2.0%

May 2, 2013

1.5% 1.0%

12%

0.5%

Interest Rates on Treasury Debt

10%

0% 0.5

12 14 16 18 Years to Maturity

8% 30 Year 20 Year 10 Year 7 Year 5 Year 3 Year 2 Year 1 Year 3 Month Fed Funds

Fed Watch and Chart Topper: Page 3 4% 2% 0% 1977

1981

1985

1989

1993

1997

2001

2005

2009

2013

Source: U.S. Treasury

THE ARGENTUS OUTLOOK

Continued from page 1

The pattern is typical. Longer-term commitments carry greater risk of unanticipated events, either individual or economy-wide, that affect borrowers’ ability to repay. In addition, the longer rates include a premium for expected inflation, a compensation for the erosion of the dollar’s buying power. A cross-section of rates at various maturities gives us the time structure of interest rates—the yield curve, familiar to most investors. In early May, with the economy wobbling and the Fed buying securities, long rates were depressed, and the yield curve topped out at 2.82 percent (see inset chart ). By December, long rates were on the rise, creating a steeper yield curve, with the 30-year Treasury at 3.92 percent. From there to the end of the year, the yield curve stayed relatively unchanged. Short rates stayed at rock bottom, while the 30-year Treasury ended December at 3.96 percent. Forward interest rates Gaps of up to five years in Treasury maturities affect the shape—and the meaning—of conventional yield curves. We created a more precise measure that will give investors better information on what interest rates are telling us. It rests on a pure term structure theory of interest rates, which assumes that markets keep rates at levels where lenders are indifferent between holding securities of various maturities. Simply put, all arbitrage opportunities have been exhausted. We then infer forward interest rates at one-year intervals—all the way out to 30 years. The results for early December suggest investors expect interest rates to remain very low in the near

term—just over a tenth of a percent at one year out (see chart below ). Then there’s a sharp spike, and interest rates rise to 4.4 percent at the seventh year. After that, they level out through the 30-year mark. May’s rate structure was lower, with a kink upward starting at the 20-year mark. How does this compare to the conventional view? Interest rates don’t begin to increase any sooner—but, once they start upward, they rise faster and farther. Investors expect the Fed to maintain current policies for the next year or so, suggesting any tapering off of the central bank’s bond buying will be gradual. Inflation will stay exceptionally low, most likely because a sluggish economy will limit pricing power in the short term. After that, sentiment shifts markedly. The quick runup in interest rates suggest that investors have little confidence that the Fed can continue to keep a lid on inflation. So they’re demanding sharply higher interest rates three to five years out. In 2013, we saw how the interest rate structure shifted upward from May to December. Markets will adjust as investors see how the economy and Fed perform in the new year, with additional upward movement in forward interest rates a real possibility. A final thought. Take another look at the chart showing Treasury interest rates. In a few places, shortterm rates pop up above long-term ones—most recently in 2006-07 and, before that, in 2000-01. It’s more a matter of short-term rates rising than long ones falling. The Fed, concerned about inflation, raises the federal funds rate, which dampens economic activity. Inverted yield curves are signs of pending recessions.

What It Means for Your Clients For most of 2013, your clients heard financial gurus predict that interest rates would be going up. The warnings were dire: investors would end up poorer as rising interest rates drove down the prices for stock and bonds. Interest rates rose less than expected, and stocks surged upward, largely because the Fed decided against backing off on its stimulus. If nothing else, your clients should now understand the difficulty of forecasting interest rates, particularly in these uncertain times. Still, we need to try—they’re too important to ignore. Investors should arm themselves with factual information, rather than relying on market chatter. Dr. Cox’s analysis makes use of the term structure of interest rates, based the actual market decisions of millions of investors in Treasury securities. For interest rates, the question isn’t what direction; it’s how fast and how far. Dr. Cox shows that interest rates started inching upward during the year—and signs point to further increases in 2014.

What the Markets Say—Implied One-Year Forward Interest Rates 4.5%

December 5, 2013

However, the data suggests the threat of a sudden jump in interest rates seems remote. Investors will probably want to make changes in investment strategy as interest

4.0%

rates move upward. But they will have

3.5% May 2, 2013 3.0%

time. Getting too worried about rising interest rates and pulling the trigger too

2.5%

Interest rate projections based on pure term structure theory of interest rates

2.0%

soon could cost them money—certainly that was true in 2013. Dr. Cox wisely cautions that the

1.5%

message in the Treasury rates will change

1.0%

with new information on the economy and Fed policy. Your clients should pay close

0.5%

attention and be ready to act when the

0% 0.5

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Years in the Future Source: U.S. Treasury, authors’ calculations

time’s right. By Argentus Partners, LLC

About Michael Cox

Richard Alm

Richard Alm is writer in residence at the William J. O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business

THE ARGENTUS OUTLOOK

W. Michael Cox’s Fed Watch: Transitions at the Federal Reserve Board are rare. A new chairman has taken over just six times since 1951. By comparison, a new president has moved into the White House 12 times in those 60-plus years. Only once has monetary policy changed radically— when Paul Volcker replaced G. William Miller in August 1979. Inflation had surged in Miller’s brief tenure, going from 6.6 percent in March 1978 to 11.6 percent the month he stepped down. Volcker’s mandate was to tame inflation. Under his leadership, the Fed siphoned off the excess money that had fed the rise in prices; interest rates spiked and the economy tanked, not once but twice. By 1983, Volcker’s Fed had inflation down to 3.2 percent. Other Fed transitions were far less eventful, particularly in recent decades as Alan Greenspan

replaced Volcker in 1987 and Ben Bernanke replaced Greenspan in 2006. For the most part, the face changed but policies didn’t—at least not by much. This thumbnail of Fed history is relevant now because Janet Yellen, a Fed insider, takes the central bank’s helm at the end of this month. She inherits Bernanke’s mandate as well as his title—first and foremost, do whatever it takes to bring down an unemployment rate that’s still too high. I’m not going to judge Yellen on those terms. My research tells me that unemployment doesn’t respond to Fed stimulus, and the past five years have only reinforced my judgment. The most expansionary monetary policy in history has yielded a pace of job creation so slow that we’ll never return to the full employment conditions of 2007.

For me, Yellen will succeed as chairman if she returns the Fed to normalcy. For five years now, the Fed has been living on the edge, conducting monetary policy in crisis mode. This can’t go on. What’s normalcy? It means easing the danger of a burst of inflation by reducing the bloat in the central bank’s balance sheet. It means letting interest rates return to their historical norms. It means getting the economy off the drug of stimulus and allowing the private sector to drive growth, employment and investing. In 25 years at the Federal Reserve Bank of Dallas, Dr. Cox rose to chief economist and senior vice president, advising the bank’s president on monetary policy and other economic issues.

Chart Topper Homeowners Rebuilding Equity—But They Still Have Long, Long Way to Go A double whammy hit the nation’s housing wealth over the past seven years. Inflation-adjusted equity per home-owning household declined at the same time as the homeownership rate. In 2006, an average home equity peaked at $202,278. Households spent a big chunk of their equity just trying to hang on during the financial crisis and recession, driving equity down to $85,433 in 2009. As the economy and stock market began to recover, the housing continued in the doldrums, and equity bottomed out at $81,663 at the end of 2011. During the hard times in housing, the home ownership rate declined from 69 percent to 65 percent of households. Home prices have begun to recover recently, but households’ real estate wealth remains depressed. After accounting for overall inflation, homeowners now have an average of $120,135 in equity, or 40 percent less than in 2006. The Federal Reserve conducted its detailed survey of household wealth in 2013. When released later this year, the data will provide additional information on American homeowners’ debt and equity.

70% $202,278

$200,000

69%

$180,000

$160,000

68%

$140,000

Home Ownership Rate

67% $120,135

$120,000 Inflation-Adjusted Real Estate Equity Per Home-Owning Household

66%

$100,000

$60,000 2005

65%

$85,433

$80,000

$81,663

64% 2006

2007

2008

2009

2010

2011

2012

2013

Source: Federal Housing Authority

Chief Executive Officer: Douglas Gill, CFP® Publisher: Susanna Joiner, Chief Marketing Officer Editor: Richard Alm Contact: marketing@argentuspartners.com

THE ARGENTUS OUTLOOK

For additional information, or to subscribe to the monthly publication, please e-mail marketing@argentuspartners.com

ARGENTUS OUTLOOK

THE

INVESTMENT SOLUTIONS THAT FIT TODAY’S GLOBAL ECONOMY

December 2013 • Volume 2, Issue 12

Hooked on Easy Money

By W. Michael Cox and Richard Alm Small Talk Going into 2013, the Federal Reserve had kept interest rates at rock bottom for five years and bought a • Taking stock. The press gushed as

net $2 trillion in financial assets—the most aggressive stampeding bulls pushed the Dow Jones Industrial Average and S&P 500 to record monetary policy in its 100-year history. All it got for its highs in November. As trading closed the day efforts was an economy slogging ahead with growth too after Thanksgiving, the Dow had gained 149 slow and unemployment too high. percent from its recessionary low in March Despite the poor results, the central bank held 2009; the S&P bounced back 150 percent. doggedly to its stimulus policies throughout 2013, Going back to pre-recession highs reached in 2007, however, the bulls seem to be keeping interest rates low and adding another $1 trillion moseying rather than stampeding. The to its stockpile of financial assets. The same policies increases were just 13.3 percent (2.2 delivered the same results—another year of sluggish percent a year) for the Dow and 16.1 percent growth and disappointing job creation. (2.7 percent a year) for the S&P. Today’s bull Going into 2014, we’re just about where we were market has a long way to go to match the epic 1,750 percent surge from 1982 to a year ago. Growth is weak. Unemployment is high. 2007—an average annual gain of nearly Interest rates are low. Inflation is tame. And the Fed 14 percent, dividends included. faces the same conundrum—how long to continue stomping on the monetary policy accelerator. • Privacy worries. The National Security Agency’s monitoring of phone calls and email Investors spent most of 2013 trying to read the Fed’s messages has received a lot of attention, but intentions. The guessing game will continue into 2014, Michael Mayfield and John Berlau of the focused on the same questions. Will the Fed’s massive Competitive Enterprise Institute raise a red monetary buildup unleash a burst of inflation? Will the Fed flag about snooping on Americans’ financial finally begin to taper off, allowing interest rates to rise? records. The Consumer Financial Protection Bureau, a creature of the Dodd-Frank legislation, One thing will change in 2014. If confirmed, Janet has collected financial information on more Yellen will take the Fed’s helm on February 1, replacing than 10 million consumers. The CFPB told Congress it intended to monitor 80 percent of all credit card accounts—more than 900 Pumping Up Base Money: Raising the million in all. The agency says the data are anonymous—but Mayfield and Berlau remain Billions (Base Money) $3,520 skeptical of this invasion of privacy. • Tallying redistribution. Looking at taxing and spending policies of federal, state and local governments, the Tax Foundation finds a total transfer of more than $2 trillion a year from the top 40 percent of the income distribution to the bottom 60 percent. Looking at annual benefit per household on the spending side, the second quintile receives the least at $30,052 and the top quintile the most at $35,141. The small gap suggests most redistribution takes place on the taxation side. An average household in the bottom 20 percent paid only $6,331 to all three levels of government; the top 20 percent shelled out $122,217.

Annual Monetary Policy Review Ben Bernanke, the chairman since 2006. As a Fed insider with a Keynesian bent, Yellen will probably stick with the stimulus—but, for investors, the transition only adds to uncertainty about the Fed and the economy. QE on the QT After pushing its policy rate close to zero, the Fed continued its stimulus through quantitative easing (QE), or buying securities to inject money into the economy. Since the financial crisis of 2008, the Fed has conducted three rounds of QE, the latest being the $85 billion a month that investors tracked in 2013. Getting from QE to an inflation threat starts with base money—bank reserves plus currency held by the non-bank private sector. Before the financial crisis, increases in base money ran roughly parallel to growth in M2, a closely watched money supply measure. Five years of QE have expanded base money far ahead of M2 (see chart below ). M2 growth minus GDP growth nearly matches inflation from 1959 to 2013—so a bulge in base money, with its potential to pump up M2, is cause for alarm. Continued on page 2

Risk of Higher Inflation Billions (M2)

$25,180

QE3

$3,020

$20,180 $2,520 QE2 $15,180

$2,020

$1,520

$10,180

QE1 $1,020

Fed Watch and Chart Topper: Page 3

$5,180 M2

$520

$20 1959

Base Money 1965

1971 21

1977

1983

1989

1995

$180 2001

2007

2013 Source: Federal Reserve

THE ARGENTUS OUTLOOK Continued from page 1

So far, huge increases in base money, with its potential to pump up M2, haven’t accelerated M2 growth. To understand why not, we need to look at the relationship between base money and M2—as defined by the money multiplier, or M2 divided by base money. In normal times, the ratio has been steady in the 8-9 range. Recently, it’s slipped into the 3-4 range, keeping base money from expanding M2 for the time being at least. What’s going on? Rather than expanding lending, banks have built up their reserves—to a staggering $3.5 trillion, up from $800 million in 2007. Low interest rates and financial instability have driven people toward liquidity and safety, increasing money demand. A weak economy also helps keep inflation tame by subduing the demand that starts prices rising. So don’t interpret today’s low inflation as a strong Fed commitment to price stability. Quite the contrary, low inflation may have merely allowed the Fed to pursue easy-money policies that in other circumstances would be regarded as irresponsible. On methamFEDamines The Fed’s balance sheet provides one measure of recent policies’ recklessness. Before the financial crisis, the Fed had held about $900 billion in assets for years. After three rounds of QE, the Fed has nearly $4 trillion in assets, with most of the recent buildup focused on mortgage-backed securities (see chart below ). The Fed could relieve potential inflationary pressures by shrinking its bloated balance sheet—a quantitative easing in reverse, selling securities to take money out of the economy. The Fed wavered and waffled, hinted and hesitated, but in the end it decided to persist in adding to a dangerous, inflationary balance sheet bulge. In effect, the Fed has the economy hooked on easy money—methamFEDamines, if you like. As with any

addiction, the good effects come first—notably, the stock market’s 150 percent surge since March 2009. The bad effects come later—in this case, perhaps higher inflation and slow growth in the future. When trying to kick an addiction, the bad effects come first, the good ones later, usually after enduring the pain of withdrawal. Once the Fed ends the stimulus and interest rates begin to rise, firms could cut back on borrowing, spending and hiring. Homebuyers could grow cautious, deflating a revived housing market. The stock market’s bubble could burst, leading consumers to pull back. The Fed wants none of that; nor does it want to rebuff the enablers lurking just outside its offices. For Congress and the Treasury, low interest rates make it easier to borrow and spend. The federal housing agencies like cheap mortgages and Fed support in the market for mortgage-backed securities. The Fed can’t keep the economy hooked on easy money forever. Everyone knows this, including Janet Yellen. Yet, the Fed persists, driven by hope that administering the drug a little longer will make the economy stronger, and allow for an end to addiction with minimal withdrawal pains. Investors shouldn’t count on it. Bad monetary policy rarely turns out well. A final thought. The Treasury benefits from the Fed’s hyped-up wheeling and dealing. Every year, the Fed turns a profit from buying and selling securities. After covering its expenses, the Fed’s remits what’s left to the Treasury. Before the financial crisis, the total ran between $18.1 billion in 2004 and $34.6 billion in 2007. The transfer has gotten a lot bigger—$81.7 billion 2010, $75.4 billion in 2011, $88.4 billion 2012. The Treasury can expect another windfall when the books close on 2013.

A Bloated Balance Sheet: How Will the Fed Unwind It? $4,000

$1,000

on the verge of tapering its securities purchases and letting interest rates rise. In the end, the long-awaited policy shift never happened because the central bank worried the tepid recovery might falter without continuing stimulus. Your clients no doubt found Fed watching a frustrating enterprise this year. They’ll probably head into 2014 in a quandary about what to expect from the Fed. Dr. Cox portrays a central bank with no good options. It can continue current policies—but the inflation risk will only worsen. It can finally begin throttling back on its stimulus—but higher interest rates may squeeze a weak economy. Policy uncertainty has become a fact of life in our times. Your clients can’t just throw up their hands. To meet their financial goals, they have to make judgments about what the Fed will do— and what it will mean for the economy. In fact, these assessments should come before investment decisions. They will to

In sorting out macroeconomic prospects the help they can get. Even then, your clients will sometimes be wrong about the

Other

Agency Securities Maiden Lane II and III, AIG

direction of the economy or the timing and

Mortgage-Backed Securities

impact of policies. They should be ready to

Currency Swaps PDCF Maiden Lane (Bear Sterns) Discount Loans

revise their judgments as new information points to changes in the outlook and the appropriate investment strategy.

TAF

Investing can’t be put on autopilot—

Securities/Repos

not in these times.

$500 $0 2007

quite a while. By August, the Fed seemed

and policies, today’s investors need all

$3,000

$1,500

to higher inflation have been in place for

put their money.

$3,500

$2,000

Easy money policies that could lead

a large extent determine where investors

Billions

$2,500

What It Means for Your Clients

By Argentus Partners, LLC 2008

2009

2010

2011

2012

2013

Source: Federal Reserve

About Michael Cox

Richard Alm

Richard Alm is writer in residence at the William J. O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business

THE ARGENTUS OUTLOOK

W. Michael Cox’s Fed Watch: Young princes supposedly had whipping boys. When the prince misbehaved, the unfortunate lad would step in and take the punishment, presumably corporal. Princes and whipping boys are anachronisms, but the Federal Reserve has become a whipping boy of sorts for the transgressions of politicians and policy-makers. When their excess spending and economic meddling lead to calamity, they either blame it on the Fed or expect the Fed to fix it. Like a good whipping boy, the Fed never complains. Our central bank has resorted to extreme measures as it tried to manage financial crises, restore a stable economy, pump up stock prices and help out troubled industries. I see this taking place all over the world. In some parts of the European Union, politicians borrowed to the hilt to pass out goodies to voters. The countries ended up deep debt, their economies in tatters.

Now, the European Central Bank finds itself taking extreme measures as it tries to keep the crisis from getting even worse. The ECB has become the primary buyer of the distressed debt of Greece and other countries. It has taken on the job of recapitalizing banks on the brink of insolvency. Hoping to rev up the economy, the ECB last month dropped its policy interest rate to the lowest level ever. After 1990, Japan struggled through two decades of dismal economic growth. Massive government spending did little beyond saddling Japan with the developed world’s highest debt-to-GDP ratio. So the politicians shifted the burden of economic recovery to the Bank of Japan, which has, of course, now resorted to extreme measures. Its policies look a lot like the Fed’s—historically low

interest rates, supplemented by quantitative easing on an unprecedented scale. In April, the Bank of Japan announced that it planned to buy $1.4 trillion in bonds through the end of 2014. Being the whipping boy isn’t good for central banks. They don’t have the personnel or mandate for crisis management and industrial policy—and they’re unlikely to succeed. Extreme measures carry huge risks, including inflation. Worst of all, central banks compromise their independence by getting sucked into addressing problems that are essentially political rather than monetary. In 25 years at the Federal Reserve Bank of Dallas, Dr. Cox rose to chief economist and senior vice president, advising the bank’s president on monetary policy and other economic issues.

Chart Topper Laboring Under False Pretenses: How Far Has Unemployment Really Fallen? The U.S. unemployment rate stood at 7.3 percent in October—still high by historical standards but down almost 3 percentage points in the past four years (black line ). Just about all the gains, however, have come from a shrinking labor force rather than creation of new jobs. The labor force participation rate tells us the share of Americans who are either working or actively looking for a job. Before the country plunged into recession at the end of 2007, labor force participation hovered around 66 percent. Since then, it has steadily declined, reaching a low of 63.2 percent in October (blue line ). Many Americans have given up hope of finding work—so they are without jobs but no longer counted as unemployed because they’ve left the labor force. What would unemployment look like if all the discouraged workers were still in the labor force—that is, looking for work? It would mean the labor force participation rate would return to around 66 percent. If so, the unemployment rate would still be above 11 percent, hardly budging at all during the past four years (red line ). As the economy improves and unemployment benefits run out, many of those on the sidelines are likely to resume their job hunts. Unemployment will rise again—unless the pace of job creation picks up substantially from the average of 127,000 in the past 18 months.

12%

67%

Recalculated Unemployment Rate 10%

66% Official Unemployment Rate

65%

64% Labor Force Participation Rate

4% 2004

63% 2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Bureau of Labor Statistics

Chief Executive Officer: Douglas Gill, CFP® Publisher: Susanna Joiner, Chief Marketing Officer Editor: Richard Alm Contact: marketing@argentuspartners.com

THE ARGENTUS OUTLOOK

For additional information, or to subscribe to the monthly publication, please e-mail marketing@argentuspartners.com

CASH FLOW STRATEGIES Growth with Income (Aggressive) Senior Loan/Preferred/ Taxable Bond Funds 20%

MLP's, Royalty Trusts, Pipelines 10%

Discount Closed End Funds 30%

Global Dividend Companies 30%

Cash 10%

Disclosures: The allocation shown above is hypothetical in nature and for illustrative purposes only. It does not represent the actual account of any particular client. This material has been prepared and is distributed solely for informational purposes and is not a solicitation or an offer to buy any trading security or instrument or to participate in any trading strategy. Additional information is available upon request. Market values of both equity and fixed income investments will fluctuate due changes in market condition and other factors. Asset Allocation and diversification cannot eliminate the risk of fluctuating prices and uncertain returns. Stocks of small and mid-cap companies are typically more volatile than stocks of larger companies. They often involve higher risks because they may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions. Global/International investing may involve risks such as currency fluctuations, political instability, uncertain economic conditions, different accounting standards, and other risks that are not typically associated with domestic investments. Fixed income investments are subject to default and interest rate risk. High-yield, non-investment grade bonds are only suitable for aggressive investors willing to take greater risks, which could result in loss of principal and interest payments. Stock dividends are not guaranteed. Please contact us to discuss an appropriate allocation for your situation. McGowanGroup Asset Management 200 Crescent Court Suite 657 Dallas, TX 75201 (866) 550-8008 McGowanGroup Asset Management, Inc. is a Federally Registered Investment Advisory Firm. Securities offered through Spire Securities, LLC an independent broker-dealer, member FINRA/SIPC

CASH FLOW STRATEGIES Cash Flow (Moderate)

Municpal Bonds 37%

Discount Closed End Funds 36%

Global Dividend Companies 24%

Cash and Limited Duration 3%

CASH FLOW STRATEGIES Conservative

CD's, MTN's, MTP's 25% Insured Municpal Bonds 50% Cash 25%

CASH FLOW STRATEGIES Ultra Conservative

Cash 50%

Insured Municpal Bonds 50%

Cash Flow Strategy Closed End Funds US Bond Funds

CLOSED END FUND ADVENT CLAYMORE CVT SEC& INC NUVEEN PREFERRED INCOME OPPO NUVEEN CREDIT STRATEGIES INC FLAHERTY & CRUMRINE DYNAMIC DOUBLELINE INCOME SOLUTIONS FIRST TRUST INTERMEDIATE DUR BLACKROCK CORPORATE HIGH YIE INVESCO DYNAMIC CREDIT OPPO DWS HIGH INCOME OPPORTUNITIE BLACKROCK CREDIT ALLOCATION

02/28/14

YIELD

MARKET PRICE

NET ASSET VALUE

DISCOUNT/ PREMIUM

NAV YTD RETURN

NAV RETURN INCEPTION ANNUALIZED

SHARE PRICE BEST YEAR %

SHARE PRICE WORST YEAR %

SYMBOL

ASSET CLASS

12/31/13 NAV VALUE

AVK

CONVERTIBLE/HIGH YIELD

$20.38

5.98%

$19.01

$20.97

-9.35%

3.84%

7.40%

55.84%

-47.04%

JPC

CORPORATE/PREFERRED

$9.88

8.22%

$9.27

$10.27

-9.74%

5.26%

5.66%

84.27%

-51.74%

JQC

CORPORATE/PREFERRED

$10.24

6.84%

$9.61

$10.34

-7.06%

2.05%

5.36%

78.60%

-49.30%

DFP

TAXABLE INCOME-PREFERREDS

$22.46

8.76%

$21.91

$23.47

-6.65%

N/A

4.35%

N/A

DSL

TAXABLE INCOME-MULTI-SECTOR

$22.45

8.35%

$21.55

$23.00

-6.30%

N/A

2.31%

N/A

FPF

TAXABLE INCOME-PREFERREDS

$23.19

8.33%

$22.12

$23.96

-7.68%

N/A

5.54%

N/A

HYT

CORPORATE-HIGH YIELD

$13.02

7.72%

$12.51

$13.43

-6.85%

3.78%

9.86%

92.56%

-38.43%

VTA

TAXABLE INCOME-SENIOR LOAN

$13.71

6.98%

$12.94

$13.82

-6.37%

1.91%

3.79%

91.12%

-49.58%

DHG

TAXABLE INCOME-HIGH YIELD

$16.37

7.02%

$14.63

$16.70

-12.40%

3.07%

-2.59%

65.62%

-65.50%

BTZ

TAXABLE INCOME-INVESTMENT GRADE

$14.84

7.16%

$13.50

$15.33

-11.94%

3.86%

2.27%

57.51%

-43.95%

02/28/14

12/31/13 NAV VALUE

YIELD

MARKET PRICE

NET ASSET VALUE

DISCOUNT/ PREMIUM

NAV YTD RETURN

NAV RETURN INCEPTION ANNUALIZED

SHARE PRICE BEST YEAR %

SHARE PRICE WORST YEAR %

$12.08

9.14%

$10.35

$12.11

-14.53%

0.25%

2.17%

22.94%

-14.02%

$14.89

8.07%

$14.84

$15.17

-2.18%

2.57%

12.05%

94.90%

-31.02%

$19.11

8.45%

$17.19

$19.37

-11.25%

2.64%

8.62%

53.55%

-20.62%

$13.48

8.46%

$12.19

$13.84

-11.92%

2.67%

12.82%

67.36%

-26.94%

Global Funds

CLOSED END FUND NUVEEN DIVERSIFIED CURRENCY ALLIANCEBERNSTEIN GL HI INC WESTERN ASSET EMERGING MARKE WESTERN ASSET EMERGING MARKE WESTERN ASSET GLOBAL HIGH IN FIRST TRUST ABERDEEN GLOBAL MORGAN STANLEY EMERGING MARK

SYMBOL

JGT AWF ESD EMD

ASSET CLASS GLOBAL HIGH YIELD/INVESTMENT GRADE GLOBAL HIGH YIELD/INVESTMENT GRADE Non-US/Other-Emerging Market Income Non-US/Other-Emerging Market Income

EHI

Non-US/Other-Global Income

$13.25

9.37%

$12.36

$13.41

-7.83%

2.68%

8.47%

71.25%

-30.71%

FAM

GLOBAL HIGH YIELD/INVESTMENT GRADE

$15.32

9.58%

$14.02

$15.18

-7.64%

0.82%

6.83%

74.64%

-29.82%

EDD

GLOBAL INVESTMENT GRADE

$14.77

12.29%

$12.91 13

$14.37

-10.16%

-2.71%

4.43%

42.03%

-28.97%

Cash Flow Strategy Closed End Funds Municipal Bond Funds

CLOSED END FUND NUVEEN BUILD AMERICAN BOND NUVEEN BUILD AMERICA BOND OP BLACKROCK BUILD AMERICA BOND GUGGENHEIM BUILD AMERICA BON NUVEEN DVD ADVANTAGE MUNI FD NUVEEN MUNI ADVANTAGE FUND NUVEEN QUALITY INCOME MUNI NUVEEN MUNI MKT OPPORTUNITY BLACKROCK MUNICIPAL INCOME I BLACKROCK MUNIHOLDINGS QU II BLACKROCK MUNIHOLDINGS CA QU BLACKROCK MUNIYIELD NY QUALI

02/28/14

SYMBOL

ASSET CLASS

12/31/13 NAV VALUE

YIELD

MARKET PRICE

NET ASSET VALUE

DISCOUNT/ PREMIUM

NAV YTD RETURN

NAV RETURN INCEPTION ANNUALIZED

NBB

MUNICIPAL NATIONAL

$20.34

7.12%

$19.34

$21.26

-9.03%

5.69%

9.73%

20.32%

9.88%

NBD

MUNICIPAL NATIONAL

$21.40

6.69%

$20.36

$22.46

-9.35%

6.05%

11.29%

25.08%

6.46%

BBN

MUNICIPAL NATIONAL

$20.54

7.92%

$19.86

$21.80

-8.90%

6.79%

11.40%

32.81%

14.83%

GBAB

MUNICIPAL NATIONAL

$21.49

7.97%

$20.69

$22.29

-7.18%

5.04%

11.88%

26.43%

14.96%

NAD

MUNICIPAL NATIONAL

$14.05

6.58%

$13.50

$14.84

-9.03%

6.71%

6.62%

45.78%

-20.44%

NMA

MUNICIPAL NATIONAL

$13.66

6.15%

$13.08

$14.53

-9.98%

7.38%

7.07%

47.34%

-21.92%

NQU

MUNICIPAL NATIONAL

$13.79

6.17%

$13.30

$14.71

-9.59%

7.70%

6.72%

28.78%

-23.80%

NMO

MUNICIPAL NATIONAL

$13.44

6.26%

$12.80

$14.24

-10.11%

6.98%

6.72%

38.86%

-20.56%

BAF

MUNICIPAL NATIONAL

$14.28

6.01%

$13.64

$15.03

-9.25%

6.24%

6.17%

47.20%

-21.07%

MUE

MUNICIPAL NATIONAL

$13.18

6.65%

$12.71

$13.89

-8.50%

6.49%

5.41%

46.84%

-16.73%

MUC

MUNICIPAL SINGLE STATE

$14.62

6.09%

$14.02

$15.39

-8.90%

6.27%

6.08%

46.80%

-24.57%

MYN

MUNICIPAL SINGLE STATE

$13.06

6.40%

$12.66

$13.65

-7.25%

5.58%

6.03%

45.39%

-26.21%

SHARE SHARE PRICE PRICE BEST WORST YEAR YEAR % %

Cash Flow Strategy Closed End Funds Equity Funds 02/28/14

02/28/14

YIELD

MARKET PRICE

NET ASSET VALUE

DISCOUNT/ PREMIUM

NAV YTD RETURN

$30.54

$28.46

7.31%

11.14%

02/28/14 NAV RETURN INCEPTION ANNUALIZED 11.23%

SHARE PRICE BEST YEAR %

SHARE PRICE WORST YEAR %

116.73%

-64.88% -69.28%

CLOSED END FUND

SYMBOL

ASSET CLASS

12/31/13 NAV VALUE

KAYNE ANDERSON ENERGY DEVELO

KED

ENERGY GROWTH/INCOME

$28.46

6.56%

CUSHING MLP TOTAL RETURN FUN

SRV

ENERGY GROWTH/INCOME

$7.02

11.07%

$8.17

$6.67

22.46%

-1.78%

-3.25%

120.35%

TORTOISE MLP FUND INC

NTG

ENERGY GROWTH/INCOME

$28.29

6.11%

$27.63

$27.95

-1.14%

0.25%

11.05%

18.64%

1.67%

BLACKROCK INTERNATIONAL GROW GABELLI DIVIDEND & INCOME TR EATON VANCE TAX ADV GL DVD O EATON VANCE TAX-ADV DVD INC JOHN HANCOCK T/A DVD INCOME

BGY GDV ETO EVT HTD

US EQUITY COVERED CALL EQUITY TAX ADVANTAGED EQUITY TAX ADVANTAGED EQUITY TAX ADVANTAGED EQUITY TAX ADVANTAGED

$9.18 $24.18 $26.35 $21.30 $20.02

8.11% 5.50% 7.43% 6.66% 6.78%

$8.37 $21.98 $24.46 $19.46 $19.50

$9.36 $24.13 $26.63 $21.77 $21.67

-10.58% -8.91% -8.15% -10.61% -10.01%

1.96% 0.55% 2.23% 3.24% 8.81%

0.79% 8.23% 10.93% 8.00% 8.71%

63.67% 44.59% 49.68% 50.42% 42.82%

-41.95% -45.75% -53.56% -53.43% -35.26%

EATON VANCE T/A GL DVD INCM CALAMOS GLOBAL DYNAMIC INCOM MACQUARIE GLOBAL INFR TOT RT

ETG CHW MGU

GLOBAL EQUITY INCOME GLOBAL GROWTH & INCOME GLOBAL INFRASTRUCTURE

$18.09 $10.24 $25.24

7.30% 8.21% 6.02%

$16.99 $9.13 $23.36

$18.28 $10.49 $26.31

-7.06% -12.97% -11.21%

2.21% 3.08% 4.24%

6.88% 3.00% 8.25%

44.72% 53.56% 51.16%

-55.63% -47.34% -56.67%

MACQUARIE/FT GL INT/UT DV IN

MFD

GLOBAL INFRASTRUCTURE

$17.12

8.21%

$17.13

$17.52

-2.23%

4.40%

9.38%

36.92%

-55.60%

ALLIANZGI NFJ DIVIDEND INTER EATON VANCE TAX MAN GLBL BR EATON VANCE TAX-MANAGED GLOB

NFJ ETW EXG

US EQUITY COVERED CALL US EQUITY COVERED CALL US EQUITY COVERED CALL

$18.57 $13.13 $11.12

9.97% 9.73% 9.61%

$18.18 $12.12 $10.23

$18.77 $13.13 $11.21

-3.14% -7.69% -8.74%

1.08% 1.50% 2.30%

5.57% 5.99% 4.20%

31.66% 59.66% 49.28%

-37.77% -33.23% -30.87%

ING GLOBAL EQUITY & PR OPPT

IGD

US EQUITY COVERED CALL

$10.04

10.18%

$9.08

$10.05

-9.65%

0.90%

4.19%

48.24%

-32.23%

LIBERTY ALL STAR EQUITY FUND CALAMOS STRAT TOT RETURN FD H & Q HEALTHCARE INVESTORS

USA CSQ HQH

US EQUITY GENERAL EQUITY US EQUITY GROWTH & INCOME US EQUITY-HEALTH/BIOTECH

$6.71 $12.29 $26.29

6.76% 7.60% 7.18%

$5.99 $11.15 $30.12

$6.70 $12.48 $29.75

-10.60% -10.66% 1.24%

1.35% 2.14% 15.14%

8.11% 6.39% 12.38%

57.28% 56.82% 68.07%

-43.89% -49.28% -37.59%

H & Q LIFE SCIENCES INVSTRS

HQL

US EQUITY-HEALTH/BIOTECH

$21.14

7.03%

$24.37

$23.93

1.84%

15.14%

10.19%

80.78%

-36.09%

COHEN & STEERS INFRASTRUCTUR

UTF

US EQUITY INFRASTRUCTURE

$23.43

6.70%

$21.62

$25.03

-13.62%

6.83%

18.41%

68.53%

-57.19%

BLACKROCK UTILITY AND INFRAS

BUI

US EQUITY- UTILITIES

$20.70

7.75%

$18.75

$21.25

-11.76%

4.44%

12.64%

7.93%

-3.50%

DUFF & PHELPS GLOBAL UTILITY

DPG

US EQUITY- UTILITIES

$21.46

7.29%

$19.44

$22.13

-12.16%

3.12%

12.67%

21.95%

0.64%

ALPINE GLOBAL PREMIER PROPER

AWP

GLOBAL REAL ESTATE

$8.11

8.46%

$7.18

$7.99

-10.14%

-0.24%

-3.13%

78.59%

-63.64%

COHEN & STEERS REIT & PR

RNP

US EQUITY-REAL ESTATE

$17.88

7.08%

$17.02

$19.50

-12.72%

9.06%

8.21%

91.15%

-60.58%

COHEN & STEERS QUAL INC RLTY

RQI

US EQUITY-REAL ESTATE

$10.53

6.91%

$10.44

$11.68

-10.62%

10.92%

8.64%

80.59%

-68.43%

Performance data quoted reflects past performance which cannot guarantee future results. Current performance may be lower or higher than quoted. Investment return and principal value is subject to fluctuations with changes in market conditions such that shares may be worth more or less than original cost when sold. Returns are calculated by subtracting the value of a share at the beginning of the period from the value at the end and dividing the difference by the initial value expressing the result as a percentage change. The calculation assumes that all distributions during the period have been reinvested on the payable dates, at NAV or at market price according to how the returns are labeled. The returns do not reflect broker sales charges or commissions. Net asset value (NAV) is total assets less total liabilities divided by the number of shares outstanding. Pease see final page fopr important information on risks of investing in these funds and other important disclosure.

Exchange Traded Bonds/Preferreds As of 02/28/2014

MUNIFUND TERM PREFERRED SHARES TICKER SYMBOL

RATING

INDUSTRY

PRICE

PAR VALUE

PERCENT DISCOUNT

% YIELD AS OF 02/28/2014

COUPON RATE

CORPORATE WEBSITE

Nuveen Az Dvd Adv Muni 3

NXE2.9

Aaa AAA

Financial

$10.04

$10.00

0.40%

2.94%

2.95%

http://www.nuveen.com/CEF/MTPPrices.aspx

Nuveen Md Premium Inc 2

NMY2.9

Aa2 AAA

Financial

$10.10

$10.00

1.00%

2.87%

2.90%

http://www.nuveen.com/CEF/MTPPrices.aspx

Nuveen Texas Premium Inc

NTX2.3

Aa2 AAA

Financial

$10.03

$10.00

0.30%

2.29%

2.30%

http://www.nuveen.com/CEF/MTPPrices.aspx

Nuveen Ma Dvd Adv Muni

NMB2.6

Aa2 AAA

Financial

$10.03

$10.00

0.30%

2.59%

2.60%

http://www.nuveen.com/CEF/MTPPrices.aspx

Nuveen Oh Div Adv Muni 2

NBJ2.35

Aa2 AAA

Financial

$10.00

0.00%

2.85%

http://www.nuveen.com/CEF/MTPPrices.aspx

TICKER SYMBOL

RATING

INDUSTRY

PRICE

PAR VALUE

PERCENT DISCOUNT

% YIELD AS OF 02/28/2014

COUPON RATE

CORPORATE WEBSITE

$25.27

$25.00

-1.08

7.42%

7.50%

$25.43

$25.00

-1.72

7.25%

7.38%

DESCRIPTION

Watch List DESCRIPTION Ford Motor Co Ally Financial Inc

F7.5 ALLY7.375

Baa3 BB+ B1 B+

Consumer Discretionary Financials

Yields and market value will fluctuate so that your investment, if sold prior to maturity, may be worth more or less than its original cost.

http://www.ford.com/ http://www.gmacfs.com

EQUITY OPPORTUNITIES as of February 28, 2014 Mining, Materials, and Chemicals Company Natural Resource Partners Lp Pvr Partners Lp Quimica Y Minera Chil-Sp Adr Potash Corp Of Saskatchewan Southern Copper Corp United States Steel Corp Aluminum Corp Of China-Adr

Ticker Symbol NRP PVR SQM POT SCCO X ACH

Sector

Price

Mining Mining Chemicals Chemicals Industrial Metals & Mining Industrial Metals & Mining Industrial Metals & Mining

15.12 26.84 30.80 33.29 30.51 24.22 8.93

Sector

Price

Fixed Line Telecommunications Fixed Line Telecommunications Fixed Line Telecommunications Fixed Line Telecommunications Fixed Line Telecommunications Fixed Line Telecommunications Fixed Line Telecommunications Gas, Water & Multiutilities Electricity Electricity Fixed Line Telecommunications Electricity Electricity Fixed Line Telecommunications Mobile Telecommunications Gas, Water & Multiutilities Fixed Line Telecommunications Mobile Telecommunications Industrial Engineering General Industrials

1.52 4.88 31.26 10.42 15.22 30.25 31.93 18.98 25.41 14.38 47.58 44.06 35.47 39.23 41.57 23.51 18.65 19.37 39.35 43.90

YTD % Chg -24.83% 0.26% 20.52% 2.24% 6.13% -18.56% 2.41%

Price/ Earnings 9.73 44.83 16.28 16.20 15.90 15.54 28.27

Current Yield 9.26% 8.20% 4.94% 4.21% 1.57% 0.83% 0.00%

Dividend Frequency Quarterly Quarterly Semi-Annual Quarterly Quarterly Quarterly Irregular

Annual Dividend 1.40 2.20 1.52 1.40 0.48 0.20 0.00

YTD % Chg -7.55% 4.41% -2.39% 9.86% -8.29% -3.10% -9.47% 13.69% -3.45% -12.12% -3.54% 8.79% -0.79% 9.54% 1.90% 0.43% -3.90% -17.67% 11.91% -0.12%

Price/ Earnings 10.76 19.57 19.21 13.83 11.82 17.72 12.75 41.11 15.53 16.64 16.70 43.81 6.81 16.81 15.96 23.64 12.24 10.15 23.25 7.09

Current Yield 9.18% 8.20% 6.91% 6.44% 6.19% 5.87% 5.76% 4.91% 4.88% 4.73% 4.46% 4.13% 3.78% 3.74% 2.82% 2.76% 2.19% 1.75% 1.30% 1.00%

Dividend Frequency Irregular Quarterly Quarterly Semi-Annual Semi-Annual Annual Quarterly Annual Quarterly Semi-Annual Quarterly Quarterly Annual Irregular Semi-Annual Quarterly Irregular Semi-Annual Quarterly Quarterly

Annual Dividend 0.14 0.40 2.16 0.67 0.940 1.78 1.84 0.93 1.24 0.68 2.12 1.82 1.34 1.47 1.17 0.65 0.41 0.34 0.51 0.44

Telecom/Utilities Company Oi Sa-Adr Frontier Communications Corp Centurylink Inc Telecom New Zealand-Sp Adr Telefonica Sa-Spon Adr Chunghwa Telecom Ltd-Adr At&T Inc Veolia Environnement-Adr Hawaiian Electric Inds Cpfl Energia Sa-Adr Verizon Communications Inc P G & E Corp Huaneng Power Intl-Spons Adr Telekomunik Indonesia-Sp Adr Vodafone Group Plc-Sp Adr California Water Service Grp Telefonica Brasil-Adr America Movil-Adr Series L Xylem Inc Itt Corp

Ticker Symbol OIBR FTR CTL NZTCY TEF CHT T VE HE CPL VZ PCG HNP TLK VOD CWT VIV AMX XYL ITT

EQUITY OPPORTUNITIES as of February 28, 2014 Business Development Corportations & Financials Company Prospect Capital Corp Ticc Capital Corp Apollo Investment Corp Ares Capital Corp Compass Diversified Holdings Triangle Capital Corp Main Street Capital Corp Cheviot Financial Corp Westwood Holdings Group Inc California First Natl Bancor

Ticker Symbol PSEC TICC AINV ARCC CODI TCAP MAIN CHEV WHG CFNB

Industry

Price

Equity Investment Instruments Equity Investment Instruments Equity Investment Instruments Equity Investment Instruments Financial Services Equity Investment Instruments Equity Investment Instruments Banks Financial Services Banks

11.04 10.40 8.56 18.03 18.74 28.11 35.10 10.36 56.91 14.98

Industry

Price

Oil & Gas Producers Chemicals Oil & Gas Producers Oil & Gas Producers Oil & Gas Producers Oil & Gas Producers Oil Equipment, Services & Distribution Industrial Transportation Oil & Gas Producers General Retailers Oil Equipment, Services & Distribution Oil Equipment, Services & Distribution Oil & Gas Producers Oil & Gas Producers Oil Equipment, Services & Distribution Oil Equipment, Services & Distribution Oil & Gas Producers Oil Equipment, Services & Distribution Oil Equipment, Services & Distribution Oil Equipment, Services & Distribution Oil Equipment, Services & Distribution Oil Equipment, Services & Distribution Oil Equipment, Services & Distribution Oil & Gas Producers

80.50 25.47 19.99 31.87 26.40 35.08 49.92 18.82 13.24 43.08 27.52 74.27 26.25 49.61 41.67 55.53 50.84 28.44 53.11 63.85 36.60 30.89 67.11 45.57

YTD % Chg -1.35% -0.19% 2.83% 1.01% -4.84% 1.52% 6.94% 0.60% -8.58% -2.05%

Price/ Earnings 8.59 12.90 6.53 11.01 12.97 11.23 19.21 49.34 23.85 19.21

Current Yield 12.01% 11.15% 9.35% 8.43% 7.68% 7.68% 5.64% 3.47% 3.09% 2.67%

Dividend Frequency Monthly Quarterly Quarterly Quarterly Quarterly Quarterly Monthly Quarterly Quarterly Annual

Annual Dividend 1.33 1.16 0.80 1.52 1.44 2.16 1.98 0.36 1.76 0.40

YTD % Chg 1.75% -2.13% -0.39% 3.90% -6.32% 1.44% -1.51% 15.20% 2.82% -7.48% -7.80% -7.77% 0.50% -2.25% -2.20% -3.09% 1.17% -0.14% 0.84% -2.71% 1.02% 11.16% 1.31% -8.33%

Price/ Earnings 9.32 18.44 135.07 39.49 29.98 23.15 51.83 25.50 15.76 27.15 62.59 22.14 463.00 29.10 15.10 61.17 13.22 n/a 22.88 238.30 21.75 84.52 24.16 12.15

Current Yield 12.56% 10.76% 9.86% 9.10% 8.94% 8.79% 8.77% 8.50% 8.31% 8.12% 7.90% 7.32% 7.24% 7.20% 6.64% 6.63% 6.42% 5.98% 5.50% 5.39% 4.92% 4.66% 4.17% 2.63%

Dividend Frequency Quarterly Quarterly Monthly Monthly Quarterly Quarterly Quarterly Quarterly Monthly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Monthly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly

Annual Dividend 10.11 2.74 1.97 2.90 2.36 3.08 4.38 1.60 1.10 3.50 2.17 5.44 1.90 3.57 2.77 3.68 3.26 1.70 2.92 3.44 1.80 1.44 2.80 1.20

Royalty Trusts, Pipelines, & Transportation Company Bp Prudhoe Bay Royalty Trust Calumet Specialty Products Breitburn Energy Partners Lp Linn Energy Llc-Units Legacy Reserves Lp Ev Energy Partners Lp Nustar Energy Lp Ship Finance Intl Ltd Permian Basin Royalty Trust Suburban Propane Partners Lp Enbridge Energy Partners Lp Kinder Morgan Energy Prtnrs Regency Energy Partners Lp Williams Partners Lp Teekay Lng Partners Lp Energy Transfer Partners Lp Sabine Royalty Trust Cheniere Energy Partners Lp Oneok Partners Lp Markwest Energy Partners Lp Golar Lng Ltd Crosstex Energy Lp Enterprise Products Partners Hollyfrontier Corp

Ticker Symbol BPT CLMT BBEP LINE LGCY EVEP NS SFL PBT SPH EEP KMP RGP WPZ TGP ETP SBR CQP OKS MWE GLNG XTEX EPD HFC

EQUITY OPPORTUNITIES as of February 28, 2014 Medical/Health Care Company Pdl Biopharma Inc Omega Healthcare Investors Universal Health Rlty Income Astrazeneca Plc-Spons Adr Health Care Reit Inc Glaxosmithkline Plc-Spon Adr Healthcare Realty Trust Inc Sanofi-Adr Eli Lilly & Co Pfizer Inc Merck & Co. Inc. Johnson & Johnson Teva Pharmaceutical-Sp Adr Healthcare Services Group Quest Diagnostics Inc Amgen Inc Steris Corp Covidien Plc St Jude Medical Inc Stryker Corp Unitedhealth Group Inc Aetna Inc Humana Inc Atrion Corporation Shire Plc-Adr Dentsply International Inc Doctor Reddy'S Lab-Adr Cantel Medical Corp Perrigo Co Plc Cigna Corp Valeant Pharmaceuticals Inte Salix Pharmaceuticals Ltd Actavis Plc Mylan Inc Alexion Pharmaceuticals Inc Regeneron Pharmaceuticals

Ticker Symbol PDLI OHI UHT AZN HCN GSK HR SNY LLY PFE MRK JNJ TEVA HCSG DGX AMGN STE COV STJ SYK UNH AET HUM ATRI SHPG XRAY RDY CMN PRGO CI VRX SLXP ACT MYL ALXN REGN

Sector

Price

Pharmaceuticals & Biotechnology Real Estate Investment Trusts Real Estate Investment Trusts Pharmaceuticals & Biotechnology Real Estate Investment Trusts Pharmaceuticals & Biotechnology Real Estate Investment Trusts Pharmaceuticals & Biotechnology Pharmaceuticals & Biotechnology Pharmaceuticals & Biotechnology Pharmaceuticals & Biotechnology Pharmaceuticals & Biotechnology Pharmaceuticals & Biotechnology Health Care Equipment & Services Health Care Equipment & Services Pharmaceuticals & Biotechnology Health Care Equipment & Services Health Care Equipment & Services Health Care Equipment & Services Health Care Equipment & Services Health Care Equipment & Services Health Care Equipment & Services Health Care Equipment & Services Health Care Equipment & Services Pharmaceuticals & Biotechnology Health Care Equipment & Services Pharmaceuticals & Biotechnology Health Care Equipment & Services Pharmaceuticals & Biotechnology Health Care Equipment & Services Pharmaceuticals & Biotechnology Pharmaceuticals & Biotechnology Pharmaceuticals & Biotechnology Pharmaceuticals & Biotechnology Pharmaceuticals & Biotechnology Pharmaceuticals & Biotechnology

8.57 31.96 42.58 67.76 58.74 55.94 23.97 51.84 59.61 32.11 56.99 92.12 49.89 26.93 53.00 124.02 46.15 71.95 67.32 80.24 77.27 72.71 112.46 289.43 165.15 45.38 45.90 32.35 164.44 79.59 144.86 107.92 220.82 55.57 176.80 332.50

YTD % Chg 0.95% 6.77% 6.39% 12.38% 9.31% 4.31% 11.83% -5.37% 16.25% 4.70% 13.00% 0.13% 23.12% -6.24% -0.88% 8.62% -4.02% 5.32% 8.47% 6.24% 2.42% 5.18% 9.06% -2.78% 16.17% -6.89% 10.09% -6.19% 6.22% -9.72% 21.89% 19.58% 30.45% 27.67% 32.06% 23.56%

Price/ Earnings 5.10 21.79 41.38 15.77 881.77 15.02 119.15 14.28 13.41 13.88 16.25 16.74 11.02 38.55 14.17 16.95 22.37 18.18 17.79 19.05 14.02 12.32 15.13 21.85 17.51 20.00 22.56 31.32 38.27 11.66 16.48 48.94 50.50 30.01 122.94 89.50

Current Yield 7.00% 6.13% 5.87% 5.61% 5.41% 5.36% 5.01% 3.68% 3.29% 3.24% 3.09% 2.87% 2.73% 2.54% 2.49% 1.97% 1.82% 1.78% 1.60% 1.52% 1.45% 1.24% 0.96% 0.88% 0.62% 0.58% 0.53% 0.28% 0.26% 0.05% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Dividend Frequency Quarterly Quarterly Quarterly Semi-Annual Quarterly Quarterly Quarterly Annual Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Semi-Annual Quarterly Annual Semi-Annual Quarterly Annual Irregular None None Irregular None None

Annual Dividend 0.600 1.960 2.500 3.800 3.180 2.998 1.200 1.910 1.960 1.040 1.760 2.640 1.360 0.685 1.320 2.440 0.840 1.280 1.080 1.220 1.120 0.900 1.080 2.560 1.016 0.265 0.245 0.090 0.420 0.040 0.000 0.000 0.000 0.000 0.000 0.000

EQUITY OPPORTUNITIES as of February 28, 2014 Global Growth Leaders & Technology Company Invesco Mortgage Capital Cedar Fair Lp Southern Co/The General Electric Co Mcdonald'S Corp Sturm Ruger & Co Inc Seagate Technology Coca-Cola Co/The Procter & Gamble Co/The Kohls Corp Lyondellbasell Indu-Cl A 3M Co Caterpillar Inc Dell Inc Apple Inc Home Depot Inc Intl Business Machines Corp Oracle Corp Hewlett-Packard Co Dover Corp Qualcomm Inc Altera Corp Broadcom Corp-Cl A Marvell Technology Group Ltd Emc Corp/Ma Joy Global Inc Infosys Ltd-Sp Adr Whole Foods Market Inc Visa Inc-Class A Shares Arm Holdings Plc-Spons Adr Titan International Inc Roundy'S Inc Weight Watchers Intl Inc Cirrus Logic Inc Corelogic Inc Zillow Inc-Class A Mwi Veterinary Supply Inc Wageworks Inc Broadsoft Inc Cerner Corp Darling International Inc Netflix Inc Fossil Group Inc Tempur Sealy International I

Ticker Symbol IVR FUN SO GE MCD RGR STX KO PG KSS LYB MMM CAT DELL AAPL HD IBM ORCL HPQ DOV QCOM ALTR BRCM MRVL EMC JOY INFY WFM V ARMH TWI RNDY WTW CRUS CLGX Z MWIV WAGE BSFT CERN DAR NFLX FOSL TPX

Sector

Price

Real Estate Investment Trusts Travel & Leisure Electricity General Industrials Travel & Leisure Aerospace & Defense Technology Hardware & Equipment Beverages Household Goods & Home Construction General Retailers Chemicals General Industrials Industrial Engineering Technology Hardware & Equipment Technology Hardware & Equipment General Retailers Software & Computer Services Software & Computer Services Technology Hardware & Equipment Industrial Engineering Technology Hardware & Equipment Technology Hardware & Equipment Technology Hardware & Equipment Technology Hardware & Equipment Technology Hardware & Equipment Industrial Engineering Software & Computer Services Food & Drug Retailers Financial Services Technology Hardware & Equipment Automobiles & Parts Food & Drug Retailers General Retailers Technology Hardware & Equipment Support Services Real Estate Investment & Services Support Services Support Services Software & Computer Services Software & Computer Services Food Producers General Retailers Personal Goods Household Goods & Home Construction

16.83 53.20 42.35 25.47 95.15 63.74 52.19 38.20 78.66 56.19 88.08 134.73 96.97 13.73 526.24 82.03 185.17 23.64 29.88 78.23 75.29 36.31 29.71 15.29 26.37 55.00 61.67 54.05 225.94 50.20 18.96 6.14 21.26 19.25 32.60 83.60 162.92 59.15 30.01 61.37 20.18 445.63 114.91 51.87

YTD % Chg 15.46% 5.55% 2.92% -10.52% -2.50% -13.52% -7.46% -7.84% -4.35% -1.44% 9.14% -5.21% 5.89% -5.63% -1.48% -2.02% 1.40% 5.75% -1.85% -0.12% 11.10% 0.76% 7.10% 4.16% -6.58% 6.77% -7.19% 0.29% -9.63% 4.67% -38.84% -35.68% -5.65% -8.19% 0.89% -4.47% -2.00% 9.04% 9.04% -4.17% 20.08% -5.83% -4.17%

Price/ Earnings 8.24 23.05 15.67 15.16 17.02 11.29 11.55 18.42 19.47 13.74 12.84 19.58 17.49 14.79 13.13 21.63 11.23 17.60 9.58 15.00 18.88 26.56 23.55 23.20 18.90 9.66 22.73 35.78 28.45 41.19 36.16 7.48 5.47 10.44 16.10 1585.77 31.65 93.95 20.54 48.24 21.00 184.74 17.09 25.87

Relative Strength 0.12 0.05 0.05 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.01 0.01 0.01 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

EPS Growth % -65.74 7.14 -30.37 6.47 3.33 56.10 -26.04 -3.00 24.69 -2.63 35.93 6.72 -32.61 -28.42 -10.33 24.75 3.65 15.08 n/a 22.88 27.07 -21.26 -42.64 18.18 6.11 -30.62 13.16 16.08 140.06 -35.82 -71.14 n/a -14.52 57.04 14.17 n/a 16.98 44.44 n/a 0.00 -18.02 522.58 17.05 -25.29

50-Day Moving Avg 15.60 50.47 41.31 26.19 95.40 74.10 54.41 39.04 79.30 53.19 80.69 133.71 92.22 13.70 537.36 79.41 182.38 37.50 28.80 75.62 74.11 33.15 29.61 14.76 25.17 55.24 58.53 54.11 221.68 49.29 17.63 8.51 28.70 19.15 33.96 83.56 171.77 60.37 28.53 56.63 20.21 389.61 117.46 49.85

Exchange Traded Funds Sectors 2/28/2014

2/28/2014

12/31/13 NAV

Current % Yield

MARKET PRICE

2/28/2014 YTD MARKET RETURN

2/28/2014

5 YR MKT RETURN

10 YR MKT RETURN

EXP. RATIO

ETF

SYMBOL

ASSET CLASS

FUND INCEPTION DATE

Financial Select Sector Spdr

XLF

Financial

12/22/98

21.71

1.49

21.70

-0.73

25.39

-1.01

0.17

SSgA Funds Management Inc

Consumer Discretionary Selt Consumer Staples Spdr Industrial Select Sect Spdr Energy Select Sector Spdr Health Care Select Sector

XLY XLP XLI XLE XLV

Consumer Discretionary Consumer Staples Industrials Energy Health Care

12/22/98 12/22/98 12/22/98 12/22/98 12/22/98

66.79 42.33 52.08 87.60 59.41

1.17 2.44 1.70 1.74 1.43

66.84 42.35 52.06 87.65 59.44

0.02 -1.47 -0.38 -0.97 7.22

32.71 19.08 27.70 18.41 23.30

9.06 8.90 8.97 13.17 8.46

0.17 0.17 0.17 0.17 0.17

SSgA Funds Management Inc SSgA Funds Management Inc SSgA Funds Management Inc SSgA Funds Management Inc SSgA Funds Management Inc

Materials Select Sector Spdr

XLB

Materials

12/22/98

47.09

2.04

47.08

1.86

22.39

8.31

0.17

SSgA Funds Management Inc

Technology Select Sect Spdr Utilities Select Sector Spdr

XLK XLU

Technology Utilities

12/22/98 12/22/98

36.23 40.43

1.69 3.64

36.35 40.45

1.71 6.53

22.79 14.40

7.22 9.18

0.17 0.17

SSgA Funds Management Inc SSgA Funds Management Inc

2/28/2014

Current % Yield

MARKET PRICE

2/28/2014 YTD MARKET RETURN

2/28/2014

12/31/13 NAV

5 YR MKT RETURN

10 YR MKT RETURN

EXP. RATIO

MANAGER NAME

Indexes ETF

SYMBOL

ASSET CLASS

FUND INCEPTION DATE

Ishares S&P Small-Cap 600 Va Vanguard Mid-Cap Etf Ishares S&P Mid-Cap 400 Valu Ishares Core S&P 500 Etf

IJS VO

Small Cap Mid Cap

07/28/00 01/30/04

112.38 82.77

0.30 0.10

112.32 113.90

0.95 3.53

27.20 27.19

14.04 9.90

0.30 0.10

BlackRock Fund Advisors Vanguard Group Inc/The

IJJ IVV

Mid Cap Large Cap

07/28/00 05/19/00

119.37 187.39

0.27 0.07

119.34 187.34

2.68 0.91

26.02 22.82

9.52 7.09

0.27 0.07

PRF

Large Cap

12/19/05

83.22

0.39

83.25

0.37

27.57

n/a

0.39

PID

International

09/15/05

18.35

0.56

18.36

-0.33

21.21

n/a

0.56

BlackRock Fund Advisors BlackRock Fund Advisors Invesco PowerShares Capital Management LLC Invesco PowerShares Capital Management LLC

EEM EFA

Emerging Markets International

04/11/03 08/17/01

39.77 67.58

0.67 0.34

39.48 67.51

-5.54 0.62

15.26 17.71

9.15 6.38

0.67 0.34

BlackRock Fund Advisors BlackRock Fund Advisors

DIM EZU

International International

06/16/06 07/31/00

60.36 42.18

0.58 0.50

60.54 42.01

2.38 1.52

19.66 17.09

n/a 5.82

0.58 0.50

WisdomTree Asset Management Inc BlackRock Fund Advisors

Powershares Ftse Rafi Us 1K Powershares Inter Dvd Achiev Ishares Msci Emerging Market Ishares Msci Eafe Etf Wisdomtree Intl M/C Dvd Fund Ishares Msci Emu Etf

MANAGER NAME

CASH FLOW ALLOCATION STRATEGIES

ALLOCATION %

SAMPLE PORTFOLIO STRATEGIES GUIDED TRADING PORTFOLIO GROWTH WITH INCOME (AGGRESSIVE) CASH GLOBAL DIVIDEND STOCKS DISCOUNT CLOSED END FUNDS MLP'S, ROYALTY TRUSTS, PIPELINES SENIOR LOAN/PREFERRED/TAXABLE BOND FUNDS

10.00% 30.00% 30.00% 10.00% 20.00%

TOTAL

100.00%

************************************************* CASH FLOW (MODERATE) CASH AND LIMITED DURATION GLOBAL DIVIDEND STOCKS INSURED MUNICIPAL BONDS DISCOUNT CLOSED END FUNDS

3.00% 24.00% 37.00% 36.00%

TOTAL

100.0%

************************************************* CONSERVATIVE CASH CD'S, MTN'S, MTP'S INSURED MUNICIPAL BONDS

25.00% 25.00% 50.00%

TOTAL

100.00%

************************************************* ULTRA CONSERVATIVE CASH INSURED MUNICIPAL BONDS

50.00% 50.00%

TOTAL

100.00%

McGowanGroup Asset Management, Inc. 02/28/2014 UPDATE

Closed End Fund Disclosures This is not a complete list of available closed-end funds. Depending on your needs, objectives, goals, time horizon, and risk tolerance there may be other investment products that are more suitable for your particular situation. The listed funds may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Additional information is available upon request. Prices and yields are as of the date indicated only and are subject to availability and market fluctuation/change. Closed -end funds, unlike open-end funds, are not continuously offered. After the initial public offering, shares are sold on the open market through a stock exchange. Holding municipal bonds within a closed-end fund could result in taxable capital gains. An insured fund guarantees only the timely payment of interest and principal on the bonds in the fund's portfolio. Insurance or escrow does not guarantee the market value of the municpal's securities or the value of the fund's shares Global/International investing involves risks not typically associated with US investing, including currency fluctuations, political instability, uncertain economic conditions and different accounting standards. Investments in high yield, non-investment grade securities are generally only suitable for aggressive investors willing to take greater risks, which could result in loss of principal and interest payments. Investing in Closed-End Funds may also involve the following risks: Market Risk - General stock market fluctuations and volatile increases and decreases in value as market confidence in and perceptions of the issuers change. Investor perceptions can be based on various and unpredictable factors including expectations regarding government economic, monetary and fiscal policies, inflation and interest rates, economic expansion or contraction and political climates. The value of any security can rise or fall and when liquidated , may be worth more or less than the original investment. Price Risk - Refers to the fact that shares of closed-end funds frequently trade at a discount from their net asset value. Interest rate risk - The risk that arise in interest rates will cause the value of an investment to decline. Credit Risk - Refers to a bond issuer's ability to meet its obligation to make interest and principal payments, or a decline in the market's assessment of the issuer's ability to pay. Generally, lower rated securities provide higher current income but are considered to carry greater credit risk than higher rated securities. Leverage Risk - The risk of higher share price volatility and that the cost to a fund of its leveraged capital, such as preferred stock or debt, will exceed the earnings on the related assets. These securities are not suitable for all investors and should not be purchased on the basis of yield alone. The market price of these securities may decline. Dividend yields are not guaranteed and may be reduced, which may negatively impact the price of the security. Price changes may be amplified by portfolio leverage. The performance provided is past performance , which does not guarantee future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value will fluctuate when sold and may be worth more or less than the original cost. Visit www.cefconnect.com and www.morningstar.com for more current monthly performance information. This and/or the accompanying information was prepared by or obtained from sources that McGowan Group Asset Management, Inc. believes to be reliable, but McGowan Group Asset Management, Inc. does not guarantee its accuracy or completeness. The material has been prepared and is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. McGowan Group Asset Management, Inc. is a Federally Registered Investment Advisory Firm. Securities offered through Spire Securities, LLC an independent broker-dealer, member FINRA/SIPC.

MGAM Moderate Focus List CATEGORY:

Growth with Income

24%

INVESTMENT STRATEGY: Symbol PFE

Description Pfizer Inc

Medical Yield 3.28

Last 31.71

INVESTMENT STRATEGY: Symbol MBT

Description Mobile Telesystems Ojsc

Description Omega Healthcare Invs Inc Medical Pptys Trust Inc New York Cmnty Bancorp Inc Starwood Ppty Tr Inc

Yield 5.99

Last 16.78

Description Enterprise Prods Partners L P El Paso Pipeline Partners L P Energy Transfer Prtnrs L P Linn Energy Llc Qr Energy Lp

Yield 6.04 6.67 6.16 8.13

Description Golar Lng Partners Lp Teekay Lng Partners L P

Yield 4.07 8.61 6.81 10.04 10.61

Description Compass Diversified Holdings Triangle Cap Corp Apollo Invt Corp

CATEGORY:

Last 32.46 12.59 16.24 23.62

Last 68.81 30.2 54.07 28.88 18.38

Yield 7.11 7.01

Last 29.39 39.48

YTD % Change -22.40%

% Change -1.50% -2.30% -0.20% -0.80%

MTD % Change 1.60% -4.50% 1.60% -1.70%

YTD % Change 8.90% 3.00% -3.60%

% Change 0.00% -1.30% -0.90% -1.30% -0.60%

MTD % Change 2.50% 0.50% -2.60% -9.40% 4.80%

YTD % Change 3.80% -16.10% -5.60% -6.20% 7.40%

% Change -1.30% -1.30%

MTD % Change -2.70% -5.30%

YTD % Change -2.80% -7.60%

MTD % Change -4.00% -7.80% -2.60%

YTD % Change -8.40% -6.20% -1.60%

Business Development Companies Yield 8.00 8.33 9.59

Last 17.99 25.93 8.34

% Change 1.10% -1.00% 0.50%

High Cash Flow

INVESTMENT STRATEGY: Symbol EVT UTF CHW CSQ KED AWP RQI IGR RNP IQI NMA NMO NQU NAD NQP JPC DFP FPF DSL

MTD % Change -2.60%

Infrastructure and Materials

INVESTMENT STRATEGY: Symbol CODI TCAP AINV

% Change 0.60%

Equity - Energy

INVESTMENT STRATEGY: Symbol GMLP TGP

YTD % Change 3.50%

REITS & Finance

INVESTMENT STRATEGY: Symbol EPD EPB ETP LINE QRE

MTD % Change 1.20%

Telecom & Utility

INVESTMENT STRATEGY: Symbol OHI MPW NYCB STWD

% Change -0.70%

Description Eaton Vance Tax Advt Div Incm Cohen & Steers Infrastructure Calamos Gbl Dyn Income Fund Calamos Strategic Totl Retn Fd Kayne Anderson Energy Dev Co Alpine Global Premier Pptys Fd Cohen & Steers Quality Rlty Fd Cbre Clarion Global Real Estat Cohen & Steers Reit & Pfd Incm Invesco Quality Muni Inc Trst Nuveen Mun Advantage Fd Inc Nuveen Mun Mkt Opportunity Fd Nuveen Quality Income Mun Fd Nuveen Divid Advantage Mun Fd Nuveen Pa Invt Quality Mun Fd Nuveen Pfd Income Opprtny Fd Flaherty & Crumrine Dyn Pfd First Tr Inter Dur Pfd & In Fd Doubleline Income Solutions Fd

CATEGORY:

43% Closed End Funds

Yield 6.6 6.85 8.23 7.59 6.6 8.58 7.19 6.51 7.16 6.64 6.22 6.3 6.23 6.62 6.69 8.25 8.78 8.37 8.47

Discount -10.50% -14.80% -12.90% -11.20% -12.50% -9.80% -12.30% -14.70% -9.30% -10.80% -10.20% -10.00% -9.20% -11.90% -10.90% -7.80% -9.00% -6.50%

% Change -0.50% -1.10% -0.20% -0.50% -0.80% -1.80% 0.60% -0.80% -0.50% -1.10% -0.70% -0.50% -0.70% -0.70% -0.80% -0.60% -0.30% -1.00% -0.70%

Safety and Income

INVESTMENT STRATEGY:

NAV YTD % Change 0.50% -0.10% -1.00% -0.80% -0.70% -2.60% 1.20% -1.20% -1.50% -1.00% -1.10% -0.20% -0.80% -0.60% 1.10% -0.60% -0.20% -1.10% -1.30%

Price YTD % Change 2.80% 4.90% 0.80% 1.60% 8.40% -2.80% 11.50% 4.70% 6.80% 5.60% 6.30% 6.40% 7.80% 6.60% 6.10% 3.80% 6.50% 2.90% 0.80% 33%

Safety and Income

33%

Description Investment Grade Municipals Limited Duration Bond Package Operating Cash CATEGORY: CATEGORY: CATEGORY: PORTFOLIO TOTAL:

Growth with Income High Cash Flow Safety and Income

24% 43% 33% 100% MGAM Investment Committee

Updated 03/19/2014

The preceding list of candidate investments is not constructed to guide portfolios outside of MGAM. Deletions and additions occur without notice and the actively managed portfolios of MGAM will vary from the preceding list. Prices and yields are as of the date indicated only and are subject to availability and market fluctuation/change. Closed -end funds, unlike open-end funds, are not continuously offered. After the initial public offering, shares are sold on the open market through a stock exchange. Performance data quoted reflects past performance which cannot guarantee future results. Current performance may be lower or higher than quoted. Investment return and principal value is subject to fluctuations with changes in market conditions such that shares may be worth more or less than original cost when sold. Returns are calculated by subtracting the value of a share at the beginning of the period from the value at the end and dividing the difference by the initial value expressing the result as a percent change. The returns do not reflect broker sales charges or commissions. Net asset value (NAV) is total assets divided by the less total liabilities number of shares outstanding. Holding municipal bonds within a closed-end fund could result in taxable capital gains. An insured fund guarantees only the timely payment of interest and principal on the bonds in the fund's portfolio. Insurance or escrow does not guarantee the market value of the municipalâ&#x20AC;&#x2122;s securities or the value of the fund's shares. Global/International investing involves risks not typically associated with US investing, including currency fluctuations, political instability, uncertain economic conditions and different accounting standards. Investments in high yield, non-investment grade securities are generally only suitable for aggressive investors willing to take greater risks, which could result in loss of principal and interest payments. Investing in Closed-End Funds may also involve the following risks: Market Risk - General stock market fluctuations and volatile increases and decreases in value as market confidence in and perceptions of the issuers change. Investor perceptions can be based on various and unpredictable factors including expectations regarding government economic, monetary and fiscal policies, inflation and interest rates, economic expansion or contraction and political climates. The value of any security can rise or fall and when liquidated, may be worth more or less than the original investment. Price Risk - Refers to the fact that shares of closed-end funds frequently trade at a discount from their net asset value. Interest rate risk - The risk that arise in interest rates will cause the value of an investment to decline. Credit Risk - Refers to a bond issuer's ability to meet its obligation to make interest and principal payments, or a decline in the market's assessment of the issuer's ability to pay. Generally, lower rated securities provide higher current income but are considered to carry greater credit risk than higher rated securities. Leverage Risk - The risk of higher share price volatility and that the cost to a fund of its leveraged capital, such as preferred stock or debt, will exceed the earnings on the related assets. These securities are not suitable for all investors and should not be purchased on the basis of yield alone. Dividend yields are not guaranteed and may be reduced, which may negatively impact the price of the security. Price changes may be amplified by portfolio leverage. This and/or the accompanying information was prepared by or obtained from sources that Spire Securities, LLC believes to be reliable, but Spire Securities, LLC does not guarantee its accuracy or completeness. The material has been prepared and is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. McGowan Group Asset Management, Inc. is a Federally Registered Investment Advisory Firm. Securities offered through Spire Securities, LLC an independent broker-dealer, member FINRA/SIPC.

200 Crescent Court #657 Dallas, TX 75201 Phone: (214) 720-4400 Fax: (214) 720-4420 info@themcgowangroup.com

Thank you for listening to NetWorth Radio with Spencer McGowan on 570 KLIF! If you need anything in addition to the materials or have any questions, please give us a call at (214) 720-4400. Also if you missed any of the show or would like to listen to past shows, we now have podcasts available on our site at www.themcgowangroup.com If you would like to meet the team and upgrade your investment plan, please call us at (214) 720-4400. The consolidation process is surprisingly easy and we will walk you through every step. Schedule your 2014 planning meeting today! Our minimum consolidation is $500,000 per family. Please remember that if you are out of range of the station, you can listen live via the KLIF website at www.klif.com. Just click the green listen live icon and you should be connected.

McGowanGroup Asset Management, Inc is a Federally Registered Investment Advisory Firm. Securities offered through independent firm, Spire Securities, LLC., a Registered Broker/Dealer and member FINRA / SIPC McGowanGroup and Spire only transact business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. All the materials presented in this guide are meant to be informational and used for educational purposes. Each situation is different and requires customization based on individual goals and risk tolerance. We recommend meeting with a financial professional before any action is taken. All articles used with permission. All trademarks are the property of their respective owners. No part of the information in this guide can be redistributed, copied, or reproduced without prior written consent of McGowan Group Asset Managemen and JPMorgan Asset Management.

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