November 3, 2014

Dear Friends,
The sharp price changes in the S&P index last month created challenging opportunities for
investors. The index rose modestly during the first few days of the month, then turned down
and within 10 days fell 8 percent, the most severe short term drop in many years. The index then
rebounded from its low point, recovered its losses, and surprised everyone we know by closing
the month at a record all-time high.
When the S&P started to fall, speculation began as to what could have brought on the sharp
downward movement. Two plausible factors were mentioned: first, the Federal Reserve was
about to end its QE 2 bond buying program. This could enable interest rates to rise and bring
about a drop in bond and stock prices. Second, the money supply had been rising for years. If
individuals and corporations began to spend the money they had accumulated, inflation could
occur, real estate and commodity values would likely rise and stock and bond prices could fall.
Neither of these two speculations came to pass; in fact an opposite set of events occurred. First,
when the Federal Reserve announced that it was ending its bond buying program, it also stated
that it would take steps to keep interest rates low until at least the middle of 2015.
Second, the fighting in the Ukraine and the Middle East over the past year, as well as the
political uncertainty in Argentina, Brazil and Asia drove people from all over the world to search
for a safe place to hold their money. America was the worlds choice, and the strong demand for
dollars drove up the price of our currency relative to other currencies. The dollar became
stronger. As a result, the price of imported commodities became cheaper. The price of oil, for
example, fell from over $4 a gallon at the pump to its present price of $3.00 to $3.35 a gallon.
Other commodities such as copper and iron also fell, lowering both manufacturing costs and
producer prices. As imports became cheaper the expectation began to grow that consumer
prices were more likely to fall than rise. Deflation, rather than inflation, can become the new
watchword on Wall Street.
What are the implications of these developments for your portfolio? How should you respond
to the likelihood that interest rates can remain low for some time in the future and that the prices
of goods and services can remain relatively low because of the strong dollar?
We believe that one consequence of these events can be that investors may increase their
preference for a strong and steady stream of income rather than searching for stocks with erratic

and volatile stock prices. If this comes to pass, the demand for bonds and high dividend paying
common stocks may increase, and the allocation to these securities should increase. In addition
companies that depend upon exports could see the demand for their securities begin to slow,
their profits decrease, and their stock prices lag behind the companies flexible enough to take
advantage of the new opportunities provided by lower import prices. Firms that remain rigid
and are unable to adjust to the changing market environment brought on by the stronger dollar
are likely to find impediments to their profits.
We would like to discuss these ideas with you. We invite you to call for an appointment so we
can review your portfolio, and talk about your financial position as well as your current and
future financial needs.
Sincerely,

Eugene Lerner
Managing Director, Partner