Quarterly Market Updates

MARKET UPDATE AND OUTLOOK : April 2011

What’s new at J.P. King Advisors, Inc.?

We begin by welcoming the four new clients who joined our firm this quarter. We’re pleased to welcome you aboard and look forward to partnering with you for many years to come. We appreciate all of the introductions to friends and family we receive, thank you for continuing to think of us.

Looking back

2011 has begun with a continued strong up trend in U.S. Stocks, with the S&P 500 Index gaining just under 6%. This occurred despite significant political unrest in the Middle East and North Africa, as well as the tragic earthquake and tsunami in Japan. Not surprisingly, the divergence between U.S. stock performance and International stock performance continued, with International stocks returning just under 3%. Emerging markets did slightly worse, returning less than 2%. Many emerging market countries are facing significant inflation, driven by rising commodity prices. Their central banks have already begun raising interest rates in an attempt to slow down this inflation, creating a headwind for stocks. The events in Japan most significantly impacted our Asia regional fund, the Matthews Asia Dividend Fund. The fund’s performance was slightly negative for the quarter, down less than ½ percent. History suggests that natural disasters tend to have surprisingly small long term economic impacts, (Hurricane Katrina, 2006; BP Oil Spill, 2010). In fact, short term dislocations often generate investment opportunities.

Bonds had their second weak quarter in a row with the Total Bond Market Index returning only 0.23% for the quarter and a negative 1% return over the past six months. This was not surprising to us. Last year we positioned portfolios for a weaker U.S. Bond environment. We are now clearly seeing better performance results because of those changes. Our largest bond holding is Templeton Global Bond Fund, which returned 2.2% for the quarter. Virtually all of our individual bond fund investments out-performed the Total Bond Market Index. Because of that, our more conservative, income oriented portfolios performed considerably better than U.S. Bonds did.

In the Alternatives space Commodities did very well, increasing over 6% for the quarter. Gold marched higher, gaining just over 2%. Within our Long/Short funds, the Marketfield fund gained a bit over 1%, while the Hussman Strategic Growth fund lost over 2%. In the Market Neutral space, the Merger Fund and AQR Diversified Arbitrage Fund did well gaining 2.4% and 1.4% respectively.

For our more growth oriented portfolios, overall portfolio performance lagged a small bit when compared to the Global Stock Index this past quarter, which is not surprising given the strong performance of stocks and our traditionally diversified approach. Over longer time periods, such as 1 and 2 years, our relative portfolio performance continues to be very strong. We remain focused on delivering results over longer time frames.

Looking forward

Recent economic reports confirm that the U.S. economy continues in recovery mode so far in 2011, and is likely to continue to do so through at least the next few quarters. While this is good news, many concerns from the recession linger: stubbornly high unemployment (though slowly declining), real estate market stagnation and debt hangover, consumer debt burden, and cautious corporate hiring/spending. There’s also growing concern over fiscal (federal) deficits and state and local budgetary shortfalls, as well as rising commodity prices and interest rates. In addition, corporate profit margins are at or near record highs. On the surface that sounds good; however, this is a metric that is classically mean-reverting; meaning, at these elevated levels the next move is likely lower, not higher (a negative for stocks). Add to these concerns increasing global political instability, especially in the Middle East; continuing EU (European Union) debt crises and bailouts, and overheating emerging market economies (the largest being China), and there’s no dearth of things to worry about. Still, to some degree, that’s always the case. There’s good reason for the old saying, “the stock market climbs a wall of worry”.

Despite all these concerns, global stock and bond markets have advanced significantly over the past two years since the low point in March, 2009. Having done so, however, it will be more difficult to continue such strong performance in the near future. While the trend has been our friend since then, we expect a moderation in all markets over the next few quarters. For these reasons we will be making some changes to our portfolios. You have received, or soon will receive, our Investment Bulletin detailing these proposed adjustments.

We look forward to working with you and ensuring that you are appropriately invested. As always, we would enjoy discussing any of our comments in greater depth with you. We encourage you to call with any questions you may have or to schedule an appointment for a more thorough review of your situation. We thank you for your trust and confidence.

James P. King, CFP^®, Scott Horton, CFP^®