Second Quarter 2010

Volume VII
Issue #2

The Truth to the “Flash Crash”

While Wall Street propaganda artists are blaming the Dow’s recent plunge on a “fat finger” and/or a technical
computer glitch (the flash crash) the dirty secret is that approximately 70% of the average daily volume remains
high frequency trading. For those of you that have not read my newsletter in the past 12 months, I hold the very
strong belief that high frequency trading is nothing more that a type of legal front running.

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com
According to Wikipedia, high frequency trading (HFT) is defined as “algorithmic trading” or the use of
computer “algos” deciding on aspects of the order such as the timing, price, or quality of the order. High
Frequency trading firms represent 2.0% of the approximately 20,000 firms operating today, but account for 70%
of all equity trading!

In a recent issue of The Financial Times it was reported that only 3% of stock market trading is retail investors.
Tradebot (a high frequency trading firm) in Kansas City, Missouri, holds stocks for an average of 11 seconds. It
made money every day for four years. (Speedy New Traders Make Waves Far From Wall Street, “New York
Times, May 16, 2010”)

HFT is nothing more than gambling. I do not gamble with my money and I certainly do not gamble with my
client’s money. The stock market has been hijacked by computers designed to “front run” legitimate orders by
fractions of a cent. This activity is being disguised and blessed by the authorities as a legitimate market activity
designed to add “liquidity” to the system.

In my opinion, what we saw in April were computers simply going on a rampage to find a buyer. This may have
been a “glitch” in some sense of the word but in reality there simply was no buyer to be found. Why? Well
because there are very few legitimate investors left in the stock market. It is sad that we have come to this but
we have and that is the reality that we must begin to face and deal with as investors.

These so called high frequency trading algos are also called “predatory trading algos” and for a very good
reason. HFT algos act much like the old casino thugs that took you out back if you were winning too much.
These programs are designed to block the retail investor from making successful trades against the house (Wall
Street) and often times prevent retail investors from obtaining fair prices in the execution of trades in numerous
financial markets.

It’s time for the regulators to put a stop to this type of trading activity.

In an article in the New York Times on Thursday May 13th, Mary Schapiro said in Congressional testimony,
“Automated trading systems will follow their coded logic regardless of outcome, while human involvement
likely would have prevented these orders from executing at absurd prices”. So far nothing has been done to curb
this abuse and to prevent future occurrences.

Investing in stocks has become a zero sum game. For the time being, I think investors should forget about
building wealth over time with the usual diversified portfolio of mutual funds indexed to the stock market.

Most investors have been convinced by their broker that all they need to do is “buy and hold” and that time is
on their side. Baloney…not in this market! The returns for the buy and hold investor in the “stock market” for
the last ten years have been zero!

When we look at clients’ portfolios and are asked to give a second opinion, it appears to us that along with the
usual advice from their old fashioned Wall Street broker, “hold on and time will be on their side”, many
investors are still holding the same investments (usually in-house proprietary mutual funds) that they held for
years. Never mind that most of their brokers’ products have never outperformed their indexes and yet they still
charge a lot more than an index fund would. Why do investors continue to own these things? The mutual fund
companies and your broker get rich while you make nothing?

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com
We recommend almost no mutual funds and when we do it’s because they are doing “something” to add value
like active hedging or taking high conviction short positions in individual stocks.

So what do you do?

Well for one thing, we have been building positions in many clients’ portfolios in downtown Class A and other
Class A commercial real estate. Very few investors have the ability to own a downtown skyscraper or a Home
Depot on their own. We can make available to our clients a divided interest in such properties. While it may be
true that we have not yet hit bottom in the real estate market, that does not necessarily mean that there are not
good buys out there. In 2008 and 2009 during the height of the credit crisis many institutions were selling
everything they could just to stay afloat. We don’t believe that the credit crisis is over and may yet still worsen
thereby creating some more potential good buying opportunities in this sector.

We also like many commodities. In my research, I have been able to determine that many of the money center
banks and other oligarchs have been building positions in commodities. These positions are not just paper assets
like futures, but the actual commodities themselves. Part of the reason has to be that the government may be
about ready to limit the “commodity leverage” many financial institutions may own but I think it’s more than
that. With the central banks around the world printing money hand-over-fist with no end in sight…it should not
take a genius to figure out that unless this stops, the paper currencies of the world will become worth much less
and “hard” assets like commodities will become more valuable.

We believe that gold is another opportunity. As our clients know, we have owned gold in their portfolios for
some time but perhaps not for the reasons many might expect. In my opinion, the conventional wisdom is
wrong to believe that gold is a commodity. Gold is a currency. So because gold is a currency the price of gold is
simply a reflection of what paper currencies are not worth. Our target price for gold in the next 12 months is
$1,500 per ounce.

In addition, China holds just 1.6% of its currency reserves in gold compared to the U.S. which holds 70% and
Germany which holds 60%. This makes no sense what-so-ever and we expect China to increase its gold
holdings over the next several months. I think it’s pretty certain that no one will know that China is buying until
way after the fact.

Speaking of gold and printing presses, remember that the definition of inflation is too much money chasing too
few goods. To my knowledge, you cannot print money endlessly and not have inflation.

So if we are proved to be correct (and this time is not different than every other time like it in the history of the
world) treasury prices should go down and yields should go up, perhaps a lot. We are on record of saying that
the treasury market is the mother of all bubbles. If this thesis proves to be correct our clients will benefit. Will
you?

According to Moody’s Investors Services “The U.S. government’s AAA bond rating will come under pressure
in the future unless additional measures are taken to reduce projected record budget deficits” (published on
Bloomberg on May 25th).

If the U.S. credit rating comes under pressure the cost of borrowing will go up and that means bond prices will
fall. As I have pointed out in the past, a lot of corporate debt is currently less expensive to buy than the U.S.

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com
government debt. Who would have imagined that debt backed by the full faith and credit of the U.S.
government could be more expensive than some corporate debt! Remember, the higher the risk the more the
issuer has to pay to sell their bonds.

It is generally believed that the U.S. government will never default on its debt, no matter how much red ink it
generates or how onerous servicing that debt might become. For now, it seems that investors are happy to loan
the U.S. government money despite the fact that they are getting paid almost nothing for the loan. I believe the
reason for this is that the Fed has clearly telegraphed its intention to print as much money as needed to buy up
debt that remains unsold. While this seems to be the case for now at some time it seems likely to us that
investors will demand higher interest rates to compensate them for the equally obvious increase in risk as the
currency debases.

I remember years ago the pitch for investing in global markets was that they were not highly correlated with the
U.S. market. I never did sign off on that premise but now it should seem clear to even the casual observer that
the financial markets are inter-connected on a global scale. Euro-Zone finance chiefs and central bankers are
trying to stamp out brush fires in Greece from spreading into Portugal and Spain, but so far, with little success.
The fires are spreading and smaller European banks might begin to buckle under their sovereign debt holdings.
In the complex system that is our financial world, instability might cross borders and oceans, especially with
China tightening liquidity.

Just like here in the U.S., behind the scenes huge amounts of public funds are to be handed over to the
oligarchic bankers who control Greece’s debts. In exchange, Athens, Lisbon, Madrid and other European
governments will be expected to extort massive social concessions from the working class, including an
austerity program of slashing wages and lifting taxes – a toxic cocktail for any economy.

How can Greece, a nation of 11-million citizens, with only 2.5 million workers, possibly repay 400-billion
Euros of debt, when Greek workers are being asked to accept a 20% reduction in their wages, and a 2% increase
in the VAT tax to 23%? While making sure that the investors that made these loans in the first place are
indemnified against any losses! This is an ethical abomination and will not go unpunished.

Opinion polls show increasing anger among ordinary Greeks who feel they are being made to pay the price of
their country’s crisis while tax evasion and corruption go unpunished.

We have been increasingly alarmed by a potential housing bust in China with average home prices jumping
11.7% last year and 45% in some of China’s biggest cities.

Such a “bubble popping” would deal a sharp blow to the world’s economic locomotive and could rattle the
satellite Asian tigers, such as South Korea, Hong Kong, Taiwan and commodity giant – Australia.

China must turn the corner and build a stronger domestic economy which I think they are well aware of. This of
course will take years and in the meantime the global economic slowdown could be a major problem for them.
We believe this is why the Chinese government extended a record 9.6 trillion Yuan ($1.4trillion) in new loans
in 2009.

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com
Conventional wisdom says that the Chinese will be forced to float the value of their Yuan to get more in line
with the dollar. We disagree. We feel the better case is for the Chinese to devalue their currency so that their
exports can stay competitive with the other Asian economies, America and now Europe.
The risk is of course that we are wrong. I have said many times that I do not try to predict the future, just
understand the present. Therefore, I have no better idea as to what the market may do than you.

We have also said that as long as Fed rates remain at zero (or near zero) and the oligarchs are allowed to belly
up to the public trough (The Fed) and be indemnified against risk (by the American taxpayer) short term it
seems that it would be hard for the market to sustain any meaningful downward risk as these speculators will
continue to buy the dips (with their flash computer algos) knowing that they can’t loose.

Of course we don’t have the same guarantees, so it seems only prudent to us to take the necessary steps to
participate in the upside potential of stocks while also taking steps to limit at least some of the downside risk
through the use of various hedging techniques. The 20% or so that we have currently allocated in our portfolios
to U.S. stocks are fully hedged. This does not mean that we will not lose money if the U.S. stock market goes
down or crashes but it should mean that we may lose a lot less in this asset class. The option is to be completely
out of stocks and that requires perfect market timing skills that neither we (nor anyone for that matter) possess.

Summary

We remain very bearish on the economy and the capital markets and see more downside potential than upside in
the stock markets of the world. We also see the stock markets being very subject to “market shocks” and
“headline risk” that could send the markets down to levels that could wipe out any paper gains investors have
made over the last 14 months.

I want to stress as much as possible that while we are very bearish on the global economy and the capital
markets around the world, that we are very bullish on our portfolios and see many opportunities to invest.

I have been advised by my in-house editors that many of our readers may not fully understand many of the
alternative asset classes that we are currently using and whether or not these investments may be suitable for
them. I am not surprised that most investors have had little exposure to these types of investments mainly
because most brokers don’t have access to these types of investments. I can only say that what we try to do with
this newsletter is not only to offer our opinions on the economy and the capital markets but to also discuss ways
to profit from the current market environment.

If you have questions about these types of investments, please feel free to give me a call. We would be more
than happy to give you an unbiased, no obligation opinion on your current portfolio.

As always, let me take this opportunity to thank our current clients for all of their confidence and trust.

Michael K. Chrysler
Managing Partner - Planning Resources
mchrysler@planningresources.com

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com
Michael K. Chrysler is a managing partner at Planning Resources Corp., with accounts held at Raymond James & Associates, Inc., member New York Stock
Exchange/SIPC and Fidelity Investments, Member NYSE, SIPC. All expressions of opinion reflect the judgment solely of Michael K. Chrysler as of this date.
Information herein has been obtained from sources considered reliable, but not guaranteed to be accurate or complete. Planning Resources, its affiliates, officers, or
directors may in the normal course of business have a position in any securities mentioned in this report.
Securities & Investment advice offered through fsic, member FINRA/SIPC.

Planning Resources | 700 NE Multnomah, Ste. 274, Portland, OR 97232

Ph. 503-227-7744 Toll Free 800-931-0049 | www.planningresources.com