4th Quarter 2010 Commentary

7/31/2019 4th Quarter 2010 Commentary

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EcoNoMic ovErviEW

Another Wild Ride in the Markets in 2010

In January 2010, the Dow Jones Industrials lost 430points in two days on news o increasing jobless claims,poor earnings rom IBM and Microso t and Chinasdecision to tighten credit to reign in economic growth.I you nd it di cult to recall that loss, you are in goodcompany. This was another year o gut-wrenching vola-tility in the stock market, which closed December 21with the S&P 500 above the level it was the day be orethe 2008 nancial crisis began (when Lehman Brothersdeclared bankruptcy).

In between these two dates, we saw the ollowing: a1,000 point gain or the Dow between February andMarch, the Flash Crash on May 6, when the Dowwas down over 1,000 points mid-day yet closed downonly 348, and deep worries over the sovereign debtcrisis which resulted in the bailout o Greece by theEurozone and the IMF. On July 2, the market closedat the years low. In July, some resolution o the Greekdebt crisis, including the countrys decision to raise pensioneligibility rom age 50 to age 65, plus good news romUS companies, resulted in a 7% gain. However, the

market was back in the doldrums again in August, witha 4.5% loss. September began with a 255 point gain onthe 1st and, as i it had put all its worries behind it, theDow had gained 1,000 points by the end o October.

In early November, Ben Bernanke, Chairman o the FederalReserve, announced that there would be a second roundo quantitative easing (known as QE2), and theRepublicans swept the House races, resulting in a recordgain o over sixty seats. QE2 is another round o massive

FoUrTH QUArTEr 2010QUARTERLYCommentary

Inside this IssuecoNoMic ovErviEW

: Another Wild Ride inthe Markets in 2010

EATUrED sTocK

: Expeditors International

AssET MANAGEMENT

: Alls Well ThatEnds Well

WEALTH MANAGEMENT

: The 2010 Tax Relie Act

NvEsTMENT THEMEs

: A Primer on RareEarth Elements

www.nelsonroberts.com | 650.322.400

money creation by the Fed and in November the marketseemed to worry about the infationary implicationso this and the political implications resulting romthe change in control o the House. The stock marketeventually concluded that these were positive and postedgains in December beginning with a 255 point rise onthe rst day o the month.

In 2009, market gains were led by stocks that had beencrushed in the crisis market o 2008. Better earningsreports were driven by companies success in achievingexpense reductions. As we explained last year, in orderor gains to continue into 2010, companies needed tostart demonstrating sequential revenue growth. Ourstock selections ocused on companies that we believedwere likely to be able to do this. This strategy causedour equity port olios to outper orm the market. Theoverall market price to earnings ratio has trended down

iNDEX PErForMANcE Q410 YTD

Dow Jones Industrials 8.04 14.10

Standard & Poors 500 10.76 15.09

EAFE (international stocks) 6.69 8.44

Russell 2000 (small stocks) 16.25 26.87

Barclays Interm. Gov/Credit -1.44 5.89

Barclays Municipal -4.17 2.38


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......lend short, borrow long and that have the leverage to pass cos

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EcoNoMic ovErviEW

Another Wild Ride in the Markets in 2010 (contd)

These commodity price increases are inconsistent withthe reported infation statistics. At last report, the CPIwas up just 1.1% on a year over year basis. Yet we are

seeing infation building, which demands an answer tothe question o how to handle it when it does arrive.

The concise answer is: lend short, borrow long and investin appreciating hard assets and businesses that havethe leverage to pass cost increases on to customers.Consequently, we are keeping our bond port olios shortand strongly recommend that you have xed long-termmortgages. In our stock port olios, we will ocus onasset values and pricing leverage or products made bythe companies we hold.

We look orward to a prosperous, and hope ullysomewhat calmer, 2011.

rom 23.5 at the beginning o the year to 15.9 currently.We anticipate that this will continue, with corporateearnings rising aster than stock prices in 2011 and the

P/E o the market declining modestly.

Turning to the bond market, prices there topped out inOctober. Following the announcement o the secondround o quantitative easing, bond prices are allingand bond und redemptions are rising. We believe thisis due to increasing infation expectations. Commodityprices are clearly on the way up:

Corn prices haveclimbedfrom$450 to$609 perbushel.

Wheat has risen 61% from $508 to $818 per bushel.

Copper prices have gone from $340 to $428 per

pound, up 25%. Gold is up 22.7%.

Gasoline at the pump has risen 16% since last year.

11601.50

2010 Bloomberg Finance L. P.

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

2010

10000

9500

10500

11000

11500

January 4, 2010 December 29, 2010INDU INDEX

DAY SESSIONLAST PRICE

HIGH ON 12/29/10 11618.90

AVERAGE 10661.41

LOW ON 07/02/10 9614.32

11601.50


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vest in appreciating hard assets and businesses ncreases on to consumers.

FEATUrED sTocK

Expeditors International

on aircra t and ships at a discount. It earns money byreselling portions o its shipping containers at a pro t.Its customers can ship at a signi cant discount to whatthey would pay to ship on their own. Additional revenuecomes rom customs brokerage services, which rangerom documentation to managing shipments as they

cross borders.EXPDs corporate culture is a key actor in its success.Bonuses rom Roses on down are tied to operatingper ormance at the unit level. Every employee is alsoa salesperson and cost manager. Roses single-mindedocus on running the business as he sees t coupledwith the entrepreneurial culture he has cultivatedhave resulted in remarkable per ormance over time.Roses disdain or the opinions o the nancial marketschattering classes is also quite re reshing.

We always look orward to reading CEO Pete Rosesanswers to shareholder questions when Expeditors Inter-national (EXPD) publishes its quarterly 8-K. The companydoes not hold quarterly con erence calls because Rosebelieves that his time is better spent on sales calls todevelop new business. In an August 2009 interview with

Seattle Business, he described his job: My job is simple.Dont do anything stupid. Its the egomaniacal CEOwhose idle hands do the devils work. The companymade no layo s and lost no customers during theeconomic downturn.

Expeditors International is the world leader in providinginternational shipment processing (also known as globallogistics services) to customers worldwide. It has over250 o ces and continues to grow, with plans to add,or example, 20 more o ces in China to the 50 it alreadyhas. EXPD owns no assets; it purchases bulk shipping

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2010 Bloomberg Finance L. P.

January 4, 2010 December 29, 2010

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

2010

35

40

45

50

EXPD US EQUITY

DAY SESSIONLAST PRICE

HIGH ON 12/16/10 56.96AVERAGE 41.3458

LOW ON 02/12/10 32.87

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AssET MANAGEMENT

Alls Well That Ends Well

An economic recovery nally seems to be underway,although one that is moving orward in ts and starts.The stock market ended the ourth quarter and the

year on a high note, with the Dow Jones IndustrialAverage rising 8.05%, the S&P up 10.75% and theNASDAQ ahead 12.34% in Q4. For the year, the indicesreturned 14.10%, 15.09% and 18.16%, respectively.Given all the economic turmoil roiling the markets inthe last two years, it is somewhat surprising that thestock market has produced two years o back-to-backdouble-digit returns.

Our two best-per orming stocks in 2010 were Akamai(up 85.82%) and Lindsay Corporation (up 56.40%). Thetwo equities in Nelson Roberts port olios that per ormedthe worst were Adobe Systems (down 16.31%) andCisco Systems (down 15.50%). This is consistent withthe general outper ormance o smaller cap stocks.

Port olio activity in the ourth quarter was ocusedon reducing our exposure to healthcare, revising ournance holdings and enhancing our exposure to theconsumer discretionary sector. In November, we soldour position in Gilead Sciences (GILD), a biotech rmand leading seller o HIV medicines. The companysgrowth is slowing as new cases o HIV slowly decreaseand it is struggling strategically to gure out whereand how to ocus on new products. Government reim-bursement or HIV treatment is also declining, whichwill negatively a ect pro ts in coming years. We soldat $40, realizing a small pro t. In early December, weexited a pro table position in Becton Dickinson (BDX)

a ter buying the stock in August 2009. While thecompanys product lineup is solid, we were notimpressed with the management teams ability to

articulate a clear growth plan.

We sold State Street Corporation (STT) a ter havingowned the stock since the mid-1990s. State Street hasbeen a great name or us, but the stock underper ormedin recent years due to the companys mismanagemento its balance sheet during the credit crunch. With over$16 trillion in assets under custody, STT will also beincreasingly challenged to achieve solid organic growthin the uture. We replaced STT with Invesco, Ltd. (IVZ),a global asset management rm with $600 billion undermanagement. Invesco provides investment managementservices or both institutional and individual investors.The company has good international exposure, withalmost one-third o revenues coming rom outside theUS. The rm recently acquired Morgan Stanleys retailmutual unds and rebranded them as Invesco unds.The Morgan Stanley und purchase enhanced Invescosproduct mix and distribution network, making it a morecomplete rm and a stronger competitor. The stock paysa 1.9% dividend.

Finally, we initiated a position in Colgate-Palmolive (CL),the maker o some o the most recognized consumerproducts in the world, including Colgate toothpaste,Irish Spring soap and Speedstick deodorant. Thecompanys market share or toothpaste and tooth-brushes rose this year to a record 44% o the worldmarket, led by gains in Brazil, China, India and Venezuela.It also pays a nice dividend o 2.7%.

Vv a l u e How do we measure value?By producing it in the growth o assets, in how our clients view us,in how we create partnership.[val yoo] n. a quality having intrinsic worth


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: : Long-lasting economic policies based on a long-term strategy work; temporarypolicies dont. Temporary policies create uncertainty that dampens economicoutput as market participants, unsure about whether and how policies mightchange, delay their decisions.George P. Shultz, Michael J. Boskin, John F. Cogan, Allan Meltzer and John B. Taylor,in a Wall Street Journal editorial from September 10, 2010

WEALTH MANAGEMENT

The 2010 Tax Relie ActIn the closing weeks o 2010, Congress passed the Tax Relie , Unemployment Insurance Reauthorizationand Job Creation Act o 2010 (or the 2010 Tax Relie Act, or short). This legislation extends key provisionsrom the Bush-era tax reductions and provides additional estate tax relie . Some provisions will a ect nearlyevery taxpayer. You should be aware o the ollowing items:

1. Capital Gains and Dividend Tax Rates: quali ed capital gains and dividends will retain their 2010 Federaltax level, with a maximum rate o 15%. Capital gains tax will remain at 0% or taxpayers in the 10%and 15% income tax brackets.

2. Individual Tax Rates: The individual income tax rates that were scheduled to revert rom the current ratesto higher levels a ter December 31, 2010 will instead be extended or two years.

3. Payroll Tax Cut: The legislation reduces the employee share o Social Security taxes rom 6.2% to 4.2%in calendar year 2011 on earned wages up to $106,800. Starting on January 1, 2011, workers will see aslight bump in their take-home pay with this reduction in withholding.

4. Estate Tax: Though Congress was still unable to achieve long-term clarity on how estates will be taxed,there are signi cant changes resulting rom the legislation. The 2010 Tax Relie Act establishes a higherexclusion amount and lower tax rate than had been previously been in e ect. As o January 1, 2011,the maximum estate tax rate will be 35% with an exclusion o $5 million.

5. Estate Tax Option or 2010: The Act gives estates o decedents dying a ter December 31, 2009 butbe ore January 1, 2011 the option to either apply the 2011 exclusion and tax rate OR the no estate taxand modi ed carryover basis provisions rom 2010.

6. Reuni ed Gi t Tax: For gi ts made a ter 2010, the gi t tax is reuni ed with the estate tax at a tax rateo 35% and an exclusion o $5 million. Generation Skipping Trust trans ers are also adjusted to the$5 million exclusion.

The legislation is disappointing because the long-term clarity that both individuals and businesses needin order to make nancial decisions was not achieved. Many o the new legislations provisions sunset atthe end o 2012, shortly a ter the next Presidential election, putting all o these temporary xes intoplay once more.


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1950 University Avenue, Suite 202East Palo Alto, CA 94303tel 650-322-4000web www.nelsonroberts.comema l [email protected]

Past per ormance is not necessarily a guide to uture per ormance. There are risks involved in investing,including possible loss o principal. This in ormation i s provided or in ormational purposes only and doesnot constitute a recommendation or any investment strategy, security or product described herein. Pleasecontact us or a complete list o port olio holdings.

For additional in ormation on the services o Nelson Roberts Investment Advisors, or to receive ourNewsletters via e-mail or be removed rom our mailing list, please contact us at 650-322-4000.

2011 Nelson Roberts Investment Advisors

Few o us remember the rare earth elements rom high school chemistry since they received little attention backthen. The term rare earth elements (REEs) is a misnomer, since the seventeen elements, including all teenlanthanides, plus yttrium and scandium, are actually not rare. The lanthanides make up Group 3 o the periodictable and have similar atomic structures and chemical characteristics. They are ound in relatively high concentra-

tions in the earths crust; however, the problem is that they are all mixed up together, both with each other ando ten with radioactive ores, making them di cult and dirty to extract and puri y. In the US, REE mining wasdiscontinued in 2002, due to the mines inability to meet stringent environmental regulations.

REEs are divided into two groups: heavy and light. Light are those with atomic numbers 57-62 and are the vastmajority (97-99%) o deposits. Heavy REEs account or the balance and are in higher demand. These relativelyunknown elements have become critical to the manu acture o many o the technological marvels we have cometo depend on, as well as technology that is o interest in the uture. They have intriguing properties, the mostimportant o which is high magnetic strength per unit weight. Ironically, they are essential or many current andupcoming environmentally riendly applications, yet as re erenced earlier, mining and processing them is a dirty,environmentally un riendly process.

Applications are legion, and include the use o REEs in electric motors (like those used in hybrid cars), wind turbines

(the REE neodymium is essential to the manu acture o the most e cient and largest wind turbines), MRI scanners,LEDs, glass, ceramics, aerospace and consumer electronics. There are REEs in your iPods, monitors, hard diskdrives and cellphones! REEs are also critical to the manu acture o key de ense products, including missile-guidance systems, lasers and radar.

In 1990, ourteen countries had REE mines, with the largest located in the US, in Cali ornia. Today, China accountsor 97% o world production, which has been cause or signi cant concern as the Chinese have recently limitedexport o REEs. China has overlooked the environmental damage rom REE mining or decades and purports tonow be changing how business is done.

Chinas restrictions have led to heightened interest in developing mines in other countries. According to JohnKaiser o Kaiser Bottom-Fish Online, a newsletter ocusing on Canadian mining stocks, the problem o supplyis easily solved. It just takes three to ve years and billions o dollars. We are in the process o investigatingwhether any o the companies gearing up or REE mining would be good investments or our clients.

iNvEsTMENT THEMEs

A Primer on Rare Earth Elements

Investment TeamBrooks Nelson, CFABrian Roberts, CFA, MBASteve Philpott, CFP, MBADennistoun Brown, MDAnn Oglesby, MD, MBA

Documents

4th Quarter 2010 Commentary